More Hybrid Digital Infra Coming?

Virgin Media O2 has begun construction of the XGS-PON network that will replace its hybrid fiber coax network. The move is perhaps notable for a few reasons. It is one of the world’s largest cable companies to adopt FTTH when expanding service beyond its current footprint. 

Some might see the move as a swap of FTTH for HFC. That is not the case. Virgin Media O2 is staying with HFC where it already is operating networks. 

But it will use FTTH to build a new wholesale FTTH network in areas it does not presently serve. In those areas, Virgin Media O2 will be an anchor tenant on a wholesale network half owned by InfraVia Capital Partners. 

Liberty Global and Telefónica will share ownership of half the venture. The new wholesale facilities will serve up to seven million premises that will not overlap with VMO2’s existing network. 

The new move is a continuation of the hybrid philosophy: both HFC and FTTH; copper and optical media; facilities-based competition but also facilities sharing; network ownership versus wholesale. 

As the cost of continually upgrading access facilities--mobile or fixed--continues to climb, there are likely to be additional efforts to “go hybrid,” and rethink the value of owned and leased capabilities. 

Traditionally, network ownership has been seen as a source of competitive value. Expensive access facilities provide business moats. These days, the capital investment required in a competitive setting increases the amount of risk for investing in fully-owned facilities. 

In markets where competition means a reduction in potential revenue by 40 percent or more (two facilities-based contestants), or in markets where a single wholesale network is available to all contestants, the value of facilities ownership is diminished. 

A monopoly provider might reasonably expect to get take rates close to 95 percent or more. Two competent facilities-based contestants will tend to split the market, each getting 40 percent to 50 percent of the installed base. Share in wholesale-based markets will be even more dispersed. 

Under those conditions, even if ownership confers some advantages, the magnitude of the advantage diminishes rapidly when two or more facilities-based providers compete. 

In the decades to come we might see even more of a shift to “facilities light” forms of competition, as service providers tweak their business models to protect profit margins. Along the way, new perceptions of what drives the highest value might develop. 

Already, the traditional business value of facilities ownership seems to be lessening.