For Europe’s telecommunications companies, wires are the new wireless.
Vodafone Group Plc is considering a bid for Kabel Deutschland AG, Germany’s biggest cable operator, with a market value topping 6 billion euros ($8 billion), a person familiar with the proposal said. And a week earlier, billionaire John Malone’s Liberty Global Inc. (LBTYA:US) agreed to buy Virgin Media Inc. for about $16 billion, adding 5 million subscribers in the U.K.
The growing interest in cable assets has spurred the region’s cash-strapped former telecommunications monopolies to bet on a trusted asset to keep customers from defecting: decades-old copper wires.
As the wireless business becomes increasingly crowded, Deutsche Telekom AG, Telekom Austria AG, Belgacom SA and dozens of other carriers are testing a technology that can make networks built for simple voice calls speedy enough to carry high-definition movies and music. Already available for a small number of users, the method lets the providers match the speed offered by cable and avoid spending billions of dollars to lay new fiber-optic lines.
“Phone companies understand that they need to utilize their copper networks as well as possible to stand a chance against cable providers,” said Hannes Wittig, an analyst at JPMorgan Chase & Co. in London. “While this technology may not obliterate cable, it’s the only thing they can afford.”
Dubbed “vectoring,” the technique lets carriers speed up signals by cutting interference in copper wires. The vectoring hardware has been developed by Alcatel-Lucent SA, which says dozens of carriers are testing it and nine have signed contracts for installation.
Europe’s former monopolies have reported years of sales declines as users abandon fixed phone lines and wireless tariffs fall. And many carriers face tens of billions of euros in debt after investing in wireless networks, spectrum licenses and acquisitions.
Shares of Royal KPN NV, Telekom Austria and France Telecom SA have plunged more than 40 percent on average over the past 12 months. In the same period, the Stoxx Europe 600 Index rallied almost 10 percent, while in the U.S. AT&T Inc (T:US). and Verizon Communications Inc. (VZ:US) climbed.
Though Internet connections have provided some relief for Europe’s incumbent carriers, that business is increasingly under assault as cable rivals sign up customers who want faster speeds and packages bundling TV, Internet and phone.
Liberty Global, with cable operations in five European countries and Chile, boosted revenue 7 percent in the first nine months of 2012, versus a 0.6 percent drop at Deutsche Telekom. In Germany, the largest market for both companies, Liberty Global’s Unitymedia KabelBW increased sales 10 percent, while Deutsche Telekom lost 2.6 percent of its fixed-line sales.
Kabel Deutschland provides TV, Internet and phone services to 8.5 million households on networks inherited from Deutsche Telekom. The company has boosted revenue every year since 2007, according to data compiled by Bloomberg. Sales may reach 1.8 billion euros in the 12 months through March, an increase of about 80 percent over seven years, the data showed.
Vodafone has about 3.2 million fixed-line Internet and 150,000 TV customers in Germany, some of which it could migrate to Kabel Deutschland’s network. If a takeover is approved by competition watchdogs, Vodafone could also offer those services to its mobile customers and avoid paying rental fees on copper lines to Deutsche Telekom.
The speed of data through copper is limited by electromagnetic interference among wires bundled in subterranean tubes. Alcatel-Lucent has developed a chip that measures that noise and generates countersignals to offset it, letting operators double transmission speed. Though rivals are working on similar equipment, Alcatel’s offering is the most advanced, according to JPMorgan.
“You’re basically looking at tens or hundreds of thousands of what we call disturbers -- lines that generate crosstalk and interfere with your line,” said Stefaan Vanhastel, director of fixed-access marketing at Alcatel, based in Paris. “Measuring and canceling that in real time has been the challenge.”
The vectoring technology can double a line’s maximum download speed to about 100 megabits per second -- fast enough to transfer a high-resolution movie in a minute. That would match top speeds advertised by European cable providers.
To get those speeds, phone operators need to lay fiber to a few hundred meters from customers’ homes. Where the fiber meets the copper that covers the final distance, workers install a chip that measures noise and generates countersignals.
With cable providers and even content companies such as Google Inc. building ever speedier networks, vectoring technology may only give phone companies a brief respite as customers keep consuming more video, games and music, cautions Sascha Berresch, an analyst at Hauck & Aufhaeuser in Hamburg.
Vectoring “still takes time and costs money, and the cables won’t be standing still,” Berresch said. “I’m not sure phone companies will be able to reverse the trend.”
Adding vectored lines costs operators 300 euros to 400 euros per customer, versus about 1,500 euros to extend fiber all the way to homes, JPMorgan estimates. Installation is also faster. The vectoring technology has been tested by 40 phone companies, Vanhastel said, though he declined to name them.
Telekom Austria, the former Austrian monopoly, says it’s using Alcatel’s vectoring gear in Korneuburg, a town of 12,000 near Vienna, and is now planning a wider deployment. Belgacom, which says it will introduce vectoring next year, is testing the equipment on both old and new copper cables to measure real- world performance.
Deutsche Telekom expects to offer the technology to 24 million German households through 2016 and is testing it at its Greek unit, where it’s installing the hardware in street cabinets in Athens.
“We are not leaving the turf to them,” Deutsche Telekom Chief Executive Officer Rene Obermann said in a presentation in December. “The challenges will grow and we need to do something about our network performance in order to remain competitive.”
The European Commission wants Internet providers to offer download speeds of at least 30 megabits per second by 2020, with half of homes exceeding 100 megabits per second.
Carriers can’t afford to reach that goal using fiber alone. Deutsche Telekom has estimated a complete fiber rollout in Germany would cost 60 billion euros to 80 billion euros, but the company budgets less than 10 billion euros a year for investment, including its mobile and international networks. The French government says it would cost 25 billion euros to build a nationwide fiber network -- 10 times the domestic spending of France Telecom.
“Since they don’t have sufficient funds for fiber they pimp their DSL lines,” Lutz Schueler, the CEO of Unitymedia KabelBW, said in a phone interview today. “But that wouldn’t have happened if they had not realized that speed matters. When they have 100 Mbit, we’ll have 200 Mbit.”
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