Lessons on Retail and Wholesale Broadband Models from Europe, Asia, and the U.S. - Episode 505 of the Community Broadband Bits Podcast

Benoit Felton (00:08):

You know, a decade ago we were all trying to figure out what might the best model be for the countries that haven't really gone forward, blah, blah, blah. We know all that. Now, if you're not doing it, it's because you don't want to do it. I mean, that, that's ultimately what he comes down to.

Christopher Mitchell (00:25):

Welcome to another episode of the Community Broadband Bits podcast. I'm Christopher Mitchell at the Institute for Local Self-Reliance in St. Paul, Minnesota, and today I'm speaking with a longtime friend Benoit Felton, an independent consultant who works at a firm he calls Diffraction Analysis is, and you can find a lot of great papers from him over the years. Welcome back to the show, Benoit.

Benoit Felton (00:51):

Thanks for having me.

Christopher Mitchell (00:53):

It's really great to, to be seeing you again. just catch people up for a second. I feel like, you know, just you, you started off doing a lot of work in Europe and, but you've always been focused on the world spent some time in Asia and China, and now you're back in France. But what's you been doing?

Benoit Felton (01:09):

Yeah, lots of different things. I mean, that's the life of an independent consultant is you can be working on one topic one day and then a completely different one the next day. my focus over the years, any early years, like a decade ago was, you know, 99% fiber and, and fiber related stuff, fiber broadband. Over the years, it's, it's expanded a little bit. I really feel that the convergence memes that were never really true or finally becoming a little bit more of a reality. So that's kind of forced me to get a little bit more involved into like 5G and all that kind of stuff to try and understand in a sense how this affects our broadband experience and business models going forward. There's a lot of unrealized potential in what I'm gonna say is that what I would like to be doing more is more of what you do with it and a little bit less of how do you make it happen.

(02:18):

Now that makes sense in Europe because a lot of the, how do you make it happen is already in progress or, or even achieved. I, I feel like there's a dearth of thinking around the transformative power of broadband. I think the, the pandemic was an eye-opener for a lot of people. Like suddenly, oh my God, upload is useful. And, you know, all, all this kind of stuff that we've been saying for, you know, 15 years, you and I, and, and you know, suddenly people realize suddenly service providers actually start advertising upload speeds and, and you know, things like that. but that's just like, that's level zero of what are you gonna do with it. and I still think, to me, the most fascinating questions are, you know, what are we gonna do with it? And there's a, a really interesting thing at the core of technology evolution right now, which is that we're, we're, we have in sight, this may seem weird from a US standpoint, what I'm gonna say, but what we have in sight a technical world where a gigabit is a baseline speed for, for anything you do mm-hmm. <affirmative>.

(03:34):

And the technology is certainly there and it's ready and it's affordable and all of that. And yet, if you look at what service providers are offering, it's just the same old, same old. I just recently did a benchmark of, of 20 different operators looking at their offerings. And I was like, oh my God, this is old boring stuff. And these guys all say that, you know, innovation is at the heart of our mission. It was like, bloody hell. This where's the innovation <laugh>.

Christopher Mitchell (04:07):

Yeah. I feel like we are in a time where people feel like we have this like limitless ambition where anything's possible. And at the same time, I feel like people don't realize that our ambitions are totally small, right? Like, this is not a time where we can imagine establishing a library system, right? Like for the first time, the idea of giving out everyone access to free books is, it gets cra we don't see that, you know, happening in terms of like free internet access. the idea of making massive investments in the US to, to achieve a similar goal of a gigabit being a gigabit symmetrical being a base level. I just feel like people's ambitions are, are quite small. While there's this feeling of, of innovation is right around the corner and there's all this possibility. I think the possibilities there, but I also, I don't know, like I feel like I'm not maybe able to articulate what I'm seeing, which is that there's so much more possible than people realize. And I, they don't even realize what, what is, what that gap is.

Benoit Felton (05:02):

No, I agree. And, and I mean, to be fair, there are trade-offs in a lot of these kind of disruptive worldviews. and I think that's also something that's a little bit hard to grasp, especially at the time, at the same time that we're, we're tackling so many global and, and local issues all around the world as well. Long story short, that's what I'm been working on or what I've been hoping to work on.

Christopher Mitchell (05:28):

Excellent. So let's start with within Europe. I, I feel like when we talked before on this podcast years ago you know, I wanted to get a sense of what's Europe really like, is I feel like people hear a story about how Europe has solved this and the US is embarrassing in lagging so far behind. And, and I wanna sort of get a sense of what is life like in European cities as well as if you have a big sunflower field outside some small town in, in rural France. so, so just give us a broad picture if you could,

Benoit Felton (06:05):

Broadly. I think that that reading is correct, right? So broadly Europe has solved this individually. Some countries and not necessarily the ones you would expect are more aware the US is right? in particular, that's where the UK and Germany are. UK and Germany haven't solved this and things are happening in both of those countries, but it's still very slow growing. So, so I'd say there are seven to 10 years behind in terms of both figuring out the policy and actually making it happen.

Christopher Mitchell (06:44):

So they both have limited next generation high quality networks and they pay too much for service broadly. Is that the I dunno if the second part is necessarily true, but the first part certainly is we'd have to agree on what we mean by next generation, blah, blah, blah. Mm-hmm. <affirmative>, but in a nutshell, both the incumbents in both those countries resisted as hard, as hard as they could in, in every way possible to fiber deployment. And once they finally came to the conclusion that they didn't have a choice in the uk things accelerated quite fast. In Germany, they're still a little slow going, I think, but by and large I apologize for the background. I

(07:32):

Was gonna say, are you, are we keeping you from a birthday party,

Benoit Felton (07:34):

<laugh>? No, no, you're not. But I work in a co-working space that is above a restaurant <laugh>.

Christopher Mitchell (07:39):

So unfortunately there's a birthday celebration there. Now if, if you look at the rest of, of, of Europe, France the Nordics Spain, Portigal very much sorted in the sense of, you know, coverage is 70% plus and of the population and there are with fiber

(08:04):

Service,

Benoit Felton (08:05):

With fiber service and, and competitive fiber service, I should say. And and there are programs in place to cover maybe not the entire country, but like 95%, 90 to 95% of the population. That's kind of where we are at. Just to give you a very personal example, I came back from China in December moved into a rent house in the suburbs of Knot, which is a small, well by US standards, certainly a small city in France, it's about 300,000 people. I'm in the suburbs about 15 kilometers from the city center. I checked online, had eight gig service available. <laugh> subscribed. Installation process was a bit a bit clunky because the house had not been pre connected by the previous tenants. but I finally got it sorted, just meant they had to come twice instead of just once.

(09:13):

And that was that. Now for some reason, the eight gig service doesn't seem to work at eight gig. It works at a gig. I haven't pursued that with the provider because my current status, it's enough and it's the same price anyway. Mm-hmm. <affirmative>, but but it's just to give you a sense of how easy it's become, I mean, compared to 10 years ago before I left is just, yeah, it's there now. My parents' country house is bang in the middle of a four home village in d they don't have fiber. The fiber cables are actually, have been deployed these last few months. They've seen the deployment happen on the local polls. So it's just a matter of weeks or months before it actually becomes commercially available. I mean, that's not to say everything is perfect, but I think that's the experience of all of the countries that I listed more or less.

(10:14):

Germany and UK are way behind. Italy is also a little bit behind, but Italy has a a very interesting national open access player who's now very aggressively deploying in the market. So I'd say Italy is probably somewhere in between Germany and, and France or Spain. In terms of how, how advanced or Eastern Europe also very much connected. The models tend to be a little bit different. there's a lot of large multi-tenant buildings in, in, you know, dwellings tend to be either that or rural. I don't think rural broadband is a thing there. I think you still struggle to get anything if you have sunflowers or wheat or whatever mm-hmm. <affirmative>. But in the cities, certainly, yeah, it's very much, very much available. Tends to be fiber to a building instead of full fiber to the home. But you still get, you know, gigabit speeds very easily and very cheaply as

Christopher Mitchell (11:13):

Well. Now what's the case in like, if you're in Paris for instance? Cuz I think, I feel like we all hear about free and the, the com, the service that really I think created new models, lowered the price dramatically for either double or triple play services. But I feel like years ago the wrap on them was that they would promise you high speeds and then they would, a lot of the services you'd go to would be congested at some point in their network.

Benoit Felton (11:39):

It's partly true or it was partly true. It's, it's a complicated issue. Basically free decided a long time ago that they would play by their own rules. And one of the things that they didn't like, despite their image for, you know, openness and innovation and blah blah blah, is they, they didn't like the idea of their networks being hogged by a small number of very large players. So in particular they had beef with YouTube and they refused to pure properly like a decade ago. I have no idea where this is now, all I can tell you is as a free user, I'm not seeing any particular issues. so I don't know if these problems still exist somewhere or not, but what you have to understand is that we have four, roughly four national providers and they're all available everywhere. So all of these networks in, in Paris and a, a few of the very large city centers, they have basically each has their own network with just the in building part being shared and everywhere else you have single networks that are wholesale. So I could get any of the four operators at my home and I can switch from one to the other if I'm not happy, but they will be on the same physical network.

Christopher Mitchell (13:14):

And then I think the last question I have for you about Europe, unless you wanna point on anything that I'm missing is I'm, I'm curious about the dynamics where one of the things we see, or at least I think we see an open access networks as well as in areas that have competition, is that people aren't constantly shopping around. They find something they, like, they're paying a reasonable price and they just go on autopilot, they don't care. and if someone comes into the market, you know, it's offering a lower price, they're not tempted, they're just happy to keep what works as long as they feel like it's good service and they're paying what they would consider a reasonable rate. Is that a dynamic that you see? Or do people switch more when they have those robust options?

Benoit Felton (13:53):

I think what it comes down to is friction. If switching providers involves sending a letter to recent your contract and then calling another provider to get the installation done, et cetera, then what you say is largely true. in some of the Nordic open access models, you have an online interface where you just have two clicks, you're two clicks away from changing providers. there's a lot more fluidity in the market when that's the case. I actually happen to think that a little friction is a good idea, not too much, but not too little because then if, if there is no friction, if it's just you can at the flick of a switch change providers, then it becomes a, a race to the bottom on price.

Christopher Mitchell (14:45):

Yeah. That's a real danger that everyone's looking out for, I feel like.

Benoit Felton (14:47):

Yeah. So I think a little friction is okay. and I think what it comes down to is interfaces and the number of competitors that you have on a given wholesale network. And by the way, I should stress that, and I know I'm annoying there, but I use the world wholesale rather than open access because open access was a term that was used to describe forcing an established retail provider to open their infrastructure to their competitors. And it is now being used as a more generic term for wholesale. But these are two very different things. If you are serving the retail market and serving the wholesale market at the same time, your arbitrations and your incentives are very different than if you are only the network owner and you live on having successful service providers on top of you. So just to clarify the terminology, that's why I don't use the word open access to mean wholesale in general.

Christopher Mitchell (15:55):

I appreciate that and just to be I think very clear about it, I think both you and I agree that aligning those incentives is remarkably important for the, for the outcomes that we want. And so we should not have players that are doing both retail and wholesale. We should have players that are focused solely on wholesale in order to have the best outcomes.

Benoit Felton (16:13):

Yeah, ideally, I agree with you and, and that's where I think the market is going generally. I, I'm, I'm just careful to keep the terminology clear because otherwise it, it creates a little bit of fuzziness.

Christopher Mitchell (16:26):

So I want to jump over to to Asia. So, and in particular China, cuz I feel like a dominant narrative that I've heard is that China's building fiber to the home at this remarkable rate, which is not surprising when it might be the first infrastructure that's being built. Why would you build anything else? but I was curious as someone who's lived in, in China and and paid close attention to it is there are other assumptions that come along with the fact that China's doing fiber to the home with the, the necessary idea that then they are winning in the telecom and in internet efforts and sort of competition between nations.

Benoit Felton (17:06):

I'm not sure I subscribe to the idea of that competition between nations. I mean, rankings are only useful when you want to shame someone into doing something, but in practical terms, being one or five on that list doesn't really make a big difference.

Christopher Mitchell (17:22):

I like that point, yes.

Benoit Felton (17:23):

Okay. But now having 70% of your population on a fiber network and 5% that makes a difference. So that's, that's what we should focus on, not whether you're 69th or or 74th in the list. Now the reality of internet in China is that if you haven't lived there and experienced it, you can't understand it. Right. Internet in China is a closed circle. It's a massive closed circle. I

Christopher Mitchell (17:52):

Was just gonna say that, right?

Benoit Felton (17:53):

<laugh> No, it, but it is the

Christopher Mitchell (17:54):

Largest closed circle

Benoit Felton (17:56):

<laugh>, right? So, so in a sense, my experience of internet in China is not replicable or, or not representative of anything other than an expat trying to access stuff that's theoretically not accessible. and that's the core issue, right? So from my point of view, having a gig or five gig or 10 gig when you can't even load a simple text website because either your p n is working or when your p n is working international data capacity is throttled. it's allows the experience, but that's not what Chinese citizens will experience, right? So the the thing that I think we should understand, if that matters, and I know it matters politically in the us I don't know that it matters to the citizen in the street, is yes, by a very sizable measurable margin, Chinese citizens are getting a better internet experience than US citizens.

(19:02):

Yeah. There's absolutely no doubt about that urban China you can consider to be gigabit ready at a hundred percent no, no questions asked. Right? rural China, we're seeing numbers, we're hearing about deployments. I, I have a reasonable amount of doubts as to what if that is genuine, and what if it is vendors trying to kind of, you know, push numbers for glorification sake that, that, you know, keep increasing. in particular, one point that is important to keep in mind is that the consideration about the viability of the economics is not number one on the list. If tomorrow the Communist party says we want 100% of homes connected, 100% of homes will be connected.

Christopher Mitchell (20:04):

Right? They're not gonna, they're not gonna have a conversation with the bank about whether or not it can be financed <laugh>.

Benoit Felton (20:09):

Exactly. Exactly. Not a hundred percent. But that's how a lot of the economy works in China. The party decides what the targets are and then you execute. There is some uncertainty around how you execute. So one of the things that I have experienced personally when I was living there, and that was six years ago, so I don't want to assume that it's still the case, but it might be and I think it is probably because it's very much ingrained in how everything works, is everything is done as cheaply as possible and with no consideration for durability, right? So the metrics that Sirius state-of-the-art network operator in Europe would have in terms of I don't want to be revisiting that location in the next 10 years if I can help it. That's just not part of the equation. and labor is cheap, so it's much better to do it cheap and then send a guy to redo it three times a year.

(21:09):

At least that's the perception. this kind of long-term thinking and like sustainability, durability, all these things are not part of the equation. So yeah, to cut a long story short, China is connected, is ultra connected, right? and it's high quality broadband when it works. The only thing that might be a challenge is the kind of st what I would call stability of the connections. But apart from that, yeah, it works that it works very well. so I think arguing that, you know, oh, they must be lying. That's not true, blah, blah, blah, that's hiding behind your finger to not admit that you're not doing as well if that matters to you. But also, you know, keep in mind that like South Korea and Japan have been where China is for 10 years, if you look at this from an Asian perspective, it's not even news.

(22:07):

Even the China story is not even news. The news would be like the Indonesia story or, or the Vietnam story. So countries that, you know, people in Europe in the US would assume would never get fiber. There's surely there's no economic case for that to work there. Yeah, there is. And they're doing it. So, and, and that to me is a more interesting story because even though, I mean, there's still a lot of state intervention, state involvement. They don't follow the exact rules that we assume are the rules of most western world, but they're making it work and, and not just to go up the international rankings to actually deliver something to their citizens that they feel it has to be part of the digital life of these citizens in the 21st century.

Christopher Mitchell (23:01):

So these countries are obviously then prioritizing it over a variety of other goals, right? I mean, I mean, you're a country making the kinds of leaps and development and whatnot that these countries are making. You still have limited resources. And if they're trying to get fiber to everyone, that means to me that they're putting a pretty high priority on that.

Benoit Felton (23:19):

If I look at Indonesia, for example, I mean, most of it is done by the private market. It's not state funded, let's put it that way. It's, it's encouraged by the state, and it might be state facilitated in terms of, you know, tax schemes and, and you know, authorizations, rights of ways, whatever. But it's not state funded necessarily. I mean, it depends on a country, country basis. Vietnam is much more of a kind of doctorate economy than Indonesia is, for example. But I suppose my point is that, you know, there's a lot of countries that a decade ago in Southeast Asia were in the category of, you know, they'll never mm-hmm. <affirmative> get, right? Mm-hmm. <affirmative>, right? And they're not deploying to a hundred percent, but they are aggressively deploying fiber. And so again, you know, if, if that kind of competition and rankings matter, yeah. They're doing better than a significant number of countries in the western world. You know, a decade ago we were all trying to figure out what might the best model be for the countries that haven't really gone forward, blah, blah, blah. We know all that. Now, if you're not doing it, it's because you don't want to do it. I mean, that, that's ultimately what it comes down to is willingness as a, like, from a policy and, and, and regulation point of view.

Christopher Mitchell (24:48):

Well, so let's, let's dig Indonesia for an example or let me know if that's not a, a good one. But as we sort of close out Southeast Asia in the conversation are they using a wholesale model and competition on top of that?

Benoit Felton (24:59):

Not massively. basically the, the leading, the leading fiber deploy is still the incumbent, but there are wholesale networks emerging in various cities. So I'm, I may be wrong because I'm not an expert on the Indonesia market specifically, but the way I read the dynamics is basically the incumbents deploying as fast as they can, but that as fast as they can. I mean, Indonesia is a country with, I can't remember, 160 million or, or, or even more maybe 260 million population, you know, as fast as they can. It's still comparatively slow because the scope of what you have to deploy. And, you know, believe me, when us policymakers say, oh, we have a very complicated geography. They've not been to Indonesia <laugh>. so, you know

Christopher Mitchell (25:50):

It's pretty wet. I hear

Benoit Felton (25:51):

<laugh> that leaves a lot of, a lot of pockets of interesting markets that by the deployment standards of the incumbent would only be getting the service in five years or 10 years or whatever. So what happens is your private investors look at that and say, well, I wanna deploy there, but I don't want to have to compete with the incumbent down the light. So the best model for me to do this is to go wholesale because it means that effectively today I can go to the incumbent and say, well, you don't have to deploy here anymore. I've done that for you. And so you get a competitive platform with various operators operating on that network, but you're not aggressively going against the incumbent who is state owned and, and has a lot of ability to mess you up if they wanted to. Mm-hmm. <affirmative>, <affirmative>, I think that kind of works in a lot of emerging economies.

(26:48):

The notion of competition is not as key to public perception as it is in western Europe. Right. Or for example, so the fact that internet would be provided by one guy and you don't really have a choice, okay, so is electricity water, I don't think that's number one priority, let's say on, on the list of, you know, now if you take a country like Malaysia, which is kind of somewhere in between in terms of economic development, somewhere in between Indonesia and Japan, right? Malaysia would be more concerned about stifling competition and, and, and stuff like that. I don't think that's the number one priority of policy in, in Indonesia, though they might publicly say otherwise. But ma making the service available is more of a priority than, you know, maintaining an even and fair competitive landscape. Sure. I, I hope they don't listen to you because they're gonna hate me saying that, but

Christopher Mitchell (27:50):

<laugh> <laugh>,

Benoit Felton (27:51):

That's my perception anyway.

Christopher Mitchell (27:53):

And for people who, who didn't get my attempt at a joke if you look at a map most of Indonesia's land is underwater, which makes it inconvenient of you <laugh> take a warped perception of it. It's, it's a series of islands <laugh>.

Benoit Felton (28:05):

Yeah. It's a series of islands Yeah. And series of mountain islands as well. So yeah, yeah, yeah. It, it is a very complicated genre.

Christopher Mitchell (28:13):

So coming to the us, which is in no way a complicated geography <laugh>, we,

Benoit Felton (28:18):

Oh, no, no, that's, that's not strictly true, but

Christopher Mitchell (28:20):

No, I know. No, I mean that, I think the joke there is that the US is terrifically complicated in certain areas you know compare West Virginia to Kansas and it's interesting, different, it's a whole different world.

Benoit Felton (28:33):

and that doesn't explain why LA doesn't have fiber. But yeah,

Christopher Mitchell (28:37):

<laugh>, you're reading my mind. I always thought that when people are like, oh, the US is so big, I'm like, oh, that's why no one invested in New York City <laugh>. so yeah, the United States I feel like you've had you know, a foot here you, you I think feel like you, you have to pay attention to it, right? Cuz we're the loudest. as we come into the us you know, tell us a little bit about the paper you did with EF f to start. I think,

Benoit Felton (29:04):

I mean, the context was this whole this whole investment bill in infrastructure. basically we've been having conversations with EF F for six or seven years about if funds were public funds were available to do broadband, what would be the best way to actually achieve stuff? Now, defraction analysis released a paper in, I think it was 2016 or 2017 in the European context where we actually measured, we, we kind of flipped the business model around for fiber deployment. And instead of saying, you know, how do you make it profitable? We said, how do you make it reach the further, like not maximizing profit, but maximizing coverage as a, as a target. And one of the parameters in that evaluation was wholesale versus retail. Why? Because the expectations of investors who are investing in wholesale are actually different because if you invest in wholesale, you're actually investing in infrastructure, you're not investing in service. And the infrastructure investment market is looking for long-term opportunities. They're looking for steady returns, and the trade-off is that they're willing to get lower returns in exchange for that long-term steady profitability.

Christopher Mitchell (30:35):

And so, if I could just pause for a second just to make sure, I think people capture that, right. If I'm investing in Comcast, I'm the expectation is that Comcast will increase its profits year after year, not that it will have steady profits, and that's a one type of investment. I feel like you, you made a face that people can't see in the audio, so you can go ahead and correct me.

Benoit Felton (30:52):

Yeah, no, no, no. I i I don't know if it's that they will increase their profits, but it's that their levels of profits will be very high every year. I think

Christopher Mitchell (31:00):

That's right. But I also think that in the United States and Wall Street, there's an expectation of, of increased profits. I think we see this from companies that are doing a good job and they just, they'll screw everything up in an effort to try to get bigger to, to get that investment. And there's a but at any rate, so let's just say that, that there's a scale of,

Benoit Felton (31:17):

Right. Let's, let's say that that's not something we factored in. What we factored in was like the level of profit expectation is higher.

Christopher Mitchell (31:25):

Sure, if I invest in Comcast, I'm expecting to get a bigger return over some period of time, although presumably over a longer period of time it might be more risky. Whereas if I'm investing in infrastructure, I'm gonna get a lower return each year, but I can count on that for 20 years, 30 years and longer or like that timeframe, right?

Benoit Felton (31:43):

So, so actually let me, let me, you, you, that's essentially right, but let me reformulate that, that slightly, right? Mm-hmm. If I'm investing in Comcast, I expect the financial and strategy guys to tell me what they're gonna do in the next three years. And that this is gonna generate, I don't know, 12% return on investment as a rough number, right? If I invest in infrastructure, I expect that they're gonna tell me that I'm gonna see no money for the first 10 years because infrastructure has a big sunk cost. And then that from year 12 or 13 onwards, I'm gonna get 6% return. Every year study is a clock, and if there's a financial crisis or whatever doesn't matter, I'm still gonna get 6% because infrastructure is something that everybody needs all the time, right? In the same way that people are not gonna stop using highways because there's a crisis going on.

(32:39):

Well, people are not gonna stop using my fiber infrastructure because there's a crisis going on. I, if, if anything, actually the pandemic showed us that highways stopped functioning, but the internet didn't. right. But at the heart of that, and I don't want to go get too technical, and in fact, you know, if, if I got too technical, I probably wouldn't explain it very well because I'm not the financial guy in the, in the team. But at the heart of it is basically a notion of financial notion called weighted average cost of capital. Wac. And, and, and WAC is used to kind of represent the amount of return that is expected of a particular business model. In a nutshell, what our model does is it looks at wholesale with a different w than retail, lower whack than retail, and a few other hypotheses like the percent of the market that you can capture.

(33:37):

So if you're wholesaler and you have several service providers operating on your network, then you are capturing effectively at a wholesale level, a a larger part of the market that each of these individual retailers is which means that you have better asset utilization. So more lines are actually generating revenues for you, and you have a lower expectation of profit from your shareholders. So you can basically generate more margin over time. That extra margin can be seen as more money in the pockets of the shareholders. Our assumption is if there is some public involvement, whether through policy or investment, et cetera, then that argument that more profit means more dividends for the shareholders can be kind of shifted into more profit needs to be reinvested into more coverage. And to be fair, even though we know that's not how it would happen, we used the same logic with the retail business model, even though we know perfectly well that more margin would be more dividends in the pockets of the shareholders, but we didn't wanna establish a comparison basis that was unfair to the retail market.

(34:57):

So anyway, we published this in 2016, 2017 with a European country and metrics being built into the model. And we came to the conclusion that basically the retail model in a, in a kind of average European geography, the retail model could still be profitable and reach up to about 60% of the market, whereas the wholesale model still in this European context could reach out to 96, 97% and still be profitable. Now that doesn't mean it happens in instantaneously, right? But it means that kind of financials show that it's effective. So what EFF asked us to do is, is a, at a kind of macro US level to replicate this and try to assess how that would play out in us and roughly, I mean, the numbers are a little bit different, but roughly the results are similar. we didn't actually study the last 10% because the cost curve just goes up so steep.

(36:08):

And also because there's, to be frank it's been super hard for us to find reliable cost information for the whole of the US market and that last 10% in particular. So we, we decided to just not address that at all. Long story short the same logic applies and the same results apply as well with a few kind of ironies. One of them being that I think if I remember rightly, the model actually demonstrates there's a slightly higher profitable threshold for retailers than in the European context. So I think it's more like 65%, but then coverage is like 20%. So there's like, you know, the retailers could be doing money on 45% extra of the territory and they're not doing it. And yeah, and the wholesale model is something like 85, so that difference is still there. the second thing that they asked us to do, and that was a lot trickier, was to actually apply this to a much smaller geography, which was LA County.

(37:16):

It's a lot more complicated because the granular data is is not available. So we had to, you know, work with what we had and make a lot of assumptions, thankfully E F F kind of intermediated so that we could use some of the, the data that that the California FCC or whatever -- CPUC -- Yep. That's it. was, was actually using, so anyway, we, we did the model there and, and what was interesting there is that the difference is as you would expect, a lot smaller because retail can profitably cover the whole of LA County. so it becomes not a difference of models, it becomes a difference of willingness because it can, but it doesn't. So the, the issue that you get into is then where do you apportion your profit, basically? So one of the challenges I think in the US market has been that mobile was more profitable than fixed.

(38:25):

So it's not that fixed isn't profitable, it's not that there isn't a business model. That's what the telcos tell us because they can't admit that, you know what, I'd rather invest here and, and keep you with your lousy broadband. But it's not that it's not profitable, it's just that there's something else that is more profitable or more valuable to them that they'd rather invest in. And now that, you know, you actually see at and t say, oh, you know what, actually, I mean, you're just gonna shut off the fixed network entirely. You know, it's like, it's shocking. It's just

Christopher Mitchell (38:55):

For its copper networks. Yes.

Benoit Felton (38:57):

Yeah. Which, which are a huge portion of their footprint. So it, it's just, to me, it's just mind-blowingly shocking that that's not front page of the newspaper

Christopher Mitchell (39:08):

<laugh>, but well,

Benoit Felton (39:10):

It's give a shit. It's, it's like a massive dereliction of duty just on the excuse of, you know what, I'm a private company, I can do whatever I want and I dunno, but, so we'll see how that plays out. But my point is that what, what we wanted out of this piece was not just to say, Hey wholesale models are better. That's, that's not even the point. The point is, if you are gonna put public money on the table, you need to think long and hard about how best that money is to be used. Yeah. You have a duty of efficiently apportioning that money. And we know, because we've seen it not just in the US but in many other markets. And in fact, the reason the UK is in the situation it's in right now and it's 10 years behind, is that the previous massive round of funding all went to BT who didn't invest in fiber. And so we, we know how these things play out and what we wanted to do, and what EFF wanted to do is basically kind of raise awareness on the idea that you can't just funnel that money into existing vessels and hope that you're gonna get the outcome that you want. And also kind of an awareness at a smaller level, at a state level that from a policy point of view, you can actually do stuff that will encourage better, more effective models to be deployed.

Christopher Mitchell (40:38):

there's a, there's so much, and I feel like I want to make sure we get you back on again here pretty soon because I, I think there's, there's so much to talk about. but I think the final point I want to ask you about is something which is the lesson from this going forward. And, and I, let me lay out my belief, which is convenient because in the United States anywhere that we build wholesale, for the most part, there is already one or two significant fixed networks that are offering high quality speed, even if they're not entirely fiber. you know, I, the, the, the future of cable is still has significant growth in the United States to be a competitor in the minds of many of the people purchasing services. and, and I've long believed that a wholesale only network, if I could redesign the system from the ground up, I would not want to have a single set of wires.

(41:31):

I agree that it is inefficient given the amazing capacity of fiber optics to run two sets of cables to people's homes. But I also feel like what I've seen in both United States at all levels of government as well as around the world, is that when anyone has no one that that's looking over their shoulder, breathing down their neck they tend to make decisions that that result in a delaying of, of upgrades of shoddy maintenance. You know, this doesn't happen everywhere all the time. It's not a hundred percent, but in a lot of areas over enough time, I feel like a single network will not be treated in the same way that if there's competitive pressure, both at the wholesale level of at least one of those networks where you have multi-service competition on that single fiber optic network and then another wired network that may or may not also have wholesale competition, but that is providing, providing you know, just this this sense of, of urgency on both providers. do you think that I'm just fooling myself because that's where we are in the US and it's convenient to, to believe that's the best way to end up.

Benoit Felton (42:36):

So I think that's a very US-centric point of view, not in the sense of, I mean, you know, these are general kind of views on, on competition and the, and the virtues of competition. I I think in Europe there's a, a larger consensus on the idea that a regulation can be effective, which I think the US seems to have demonstrated the opposite, but

Christopher Mitchell (43:03):

Canada too

Benoit Felton (43:04):

<laugh> No, no, but that, that, that doesn't mean, I agree that's necessarily true. I mean, right. Regulatory capture, which is effectively what's happened in the US is not, is not an unavoidable situation. So, so that's, that's one aspect, right? Wholesale networks are heavily regulated and they should be because they are monopolies, facto monopolies. That's one aspect I think that's, that's important. The second aspect is, I dunno, I think we're undergoing a very painful paradigm shift where we need to think about the resources that we are using at every step of the way. No one in their right minds would argue that you need two sets of railroads to connect cities, right?

Christopher Mitchell (43:54):

In the United States where we have this regulatory capture I, I don't know. and then maybe this comes down to like whether it literally takes more energy to overcome regulatory capture or to build, you know, a million miles of rail

Benoit Felton (44:08):

That shifts the conversation somewhat. To put it another way, if we have proven regulated wholesale models around the world that are effective and have been for, I don't know, couple of decades, if you look at Singapore for example, then it becomes hard to argue that this cannot work, right? It, it's little easier to argue that this cannot work with the kind of regulation that you have in the US and that that needs to change. And that then if you go to, well, this cannot change in the US unless there's a revolution or whatever, something really extreme, fair enough. But you still looking at the kind of lesser of two evils kind of things. And I think the flaw in that argument, in the continuity of what's existing today is it kind of argues that there is competition today, which we know there isn't not effective competition anyway. So to put another way, if a wholesale network gets deployed and a retail provider who is already in that territory decides to upgrade and compete with our wholesale network, fine, that's a great model. No problem with that. I mean, from an environmental sustainability point of view might be an arguable point, but, but from a a, you know, competition point of view and customer satisfaction point of view, fine.

Christopher Mitchell (45:32):

Right? But if we're gonna move to Kansas and build a whole new city in the middle of an area where there is no infrastructure, then it would be foolish to plan on building two sets of wires to every premise.

Benoit Felton (45:41):

Yeah. Now again, because wires are not railroads, it's very easy, and in fact, this is the Swiss model, for example, right? So it's not a single network or it is physically, but in terms of who manages what, like the city owns one set of fibers and the operator who deployed, owns one set of fibers and they can each serve separately the customers. So physically you still have one network, but logically in kind of from an ownership point of view, you effectively have two networks. If you were to build from scratch, I would actually argue like double the fiber everywhere, because that costs you nothing or virtually nothing. What, what costs you money is digging the trenches and, and laying the pipes. so sure, get two sets of fiber everywhere and, and have two separate entities compete if you want. no, I have no problem with that.

(46:38):

Having guy number two, reig and, and relay a network that's hugely ineffective. Basically, the only way that you circumvent that, which is the way Spain did it, is if everything is ducted and you can actually access those ducts and reuse those ducts, then fine, you can get multiple networks deployed from, again, from an environmental point of view, an energy standpoint, it's probably not a very good idea, but from a competitive point of view, that can work. But then you need effective infrastructure sharing regulation, which you also don't have, as we've seen from poll attachments all over the us When I spoke to Utopia last year, the shocking thing that they told me was, we don't even bother with that anymore. We deploy, we trench, we deploy even if it costs us more, because at least we can do it now rather than fight for two years to get the authorizations. And I mean, yeah, that's, that's the signs of a model that simply does not work.

Christopher Mitchell (47:45):

This has been, this has been wonderful and there's so much more I'd like to talk to you about, but I feel like it's just been terrific to

Benoit Felton (47:51):

Let's do a monthly

Christopher Mitchell (47:53):

<laugh>. Yes, <laugh>. Well, thank you so much for coming on, Benoit.

Benoit Felton (47:57):

You're welcome.

Ry (47:58):

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