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VAS & Commoditization of Broadband Access

Across the top five Western European countries, broadband access revenues will increase from less than $17 billion in 2006, to in excess of $24 billion by 2010, according to a new market study from Understanding & Solutions.

"We're looking at a 45 percent increase in just four years," said Cesar Bachelet, a consultant and telecoms specialist with Understanding & Solutions, "but we'll see subscriber numbers increase at a greater rate over the same period, from 55 million last year to 83 million by 2010, and that's due to the increasingly high levels of competition within the marketplace."

As a result of this intense competition, broadband access is now a commodity, and broadband service providers (BSPs) are using value-added services (VAS) to differentiate their products. These include security software, home networking, VoIP, online gaming, music and video content provisioning.

Indeed, faced with the commoditization of their core broadband access revenues, BSPs are increasingly focusing on these VAS, and the average revenue per user (ARPU) increased by 25 percent between 2004 and 2005, primarily boosted by growth in VoIP and online content services.

Although this bundling of services will drive top-line revenue growth in the short term, there will be a significant increase in costs, due to services being supplied by third parties, and this will impact upon mid-term profitability. However, as well as acting as a product differentiator, these VAS offerings go a long way towards reducing customer churn.

Once customers buy into a BSP and start to use the full range of available VAS, the effort required to disconnect and move to another supplier can be greater than the perceived benefits of switching. Convergence in the marketplace is really turning things up a notch, according to Understanding & Solutions. And quad-play is also on the rise, as key players seek to add mobile to their triple-play value proposition.

Although they believe that the U.S. has led the move so far, their European counterparts aren’t far behind, as regulatory restrictions on bundling are slowly being lifted in most markets. All this commoditization, competition and investment is leading to significant consolidation within the marketplace. Smaller players just can't generate the economies of scale required to survive and larger operators can benefit from their pooled subscriber bases.

Moving forward, markets will be dominated by integrated VAS providers, with 3 or 4 key players and limited competition coming from niche providers focusing on a narrowly defined range of 'best-of-breed' services. The key competitive advantage of the integrated operator is the ability to use one product or service -- such as IPTV -- as a 'loss leader' to encourage take-up of other services.

However, to be successful, this needs to be backed up by superior quality customer service, spanning a wide range of competences. Without that broad support infrastructure, there's clearly the risk of total brand reputation collapse.

Future demand for bandwidth-hungry services like high-definition television (HDTV) is building a case for very high-speed Internet (VHSI) access. Understanding & Solutions anticipates that household penetration of VHSI access (download speeds in excess of 25 Mbps) in developed economies will range from 10 percent in Western Europe to 50 percent in Japan by 2010.

First-generation DSL offers a maximum download speed of 8Mbps, while newer implementations such as ADSL2+ offer maximum download speeds of up to 24 Mbps, and current fiber deployments can handle maximum download speeds of 100 Mbps and beyond.

Over the coming years, significantly higher growth rates in the uptake of broadband lines will be seen in emerging markets such as Latin America, Asia-Pacific and Eastern Europe. Understanding & Solutions predicts that by 2010, China will emerge as the world's largest broadband nation, with a total of 120 million lines, more than all of Western Europe combined (note, China already has more DSL lines deployed than the U.S.).

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