Utility broadband bonanza goes belly-up

June/July 2002

The news in May 2002 that UK broadband provider Lattice is up for sale throws doubt on the survival of other utilities in the broadband access market. Analysts say that the slow take-up of broadband services will drive most utilities out of retail services into wholesale services for carriers and ISPs

Lattice, formerly part of British Gas, poured £400m into broadband services and has now written off £250m of that investment. The utility, which runs the UK gas network through subsidiary Transco, may now close its telecom business unless a buyer can be found. The company’s problems were a result of poor management and a turbulent telecoms market, says Lattice chairman and acting chief executive Sir John Parker.

There are a number of ‘fairly serious players’ both in the UK and abroad interested in Lattice, and no options were being ruled out, Parker says. ‘In light of current conditions in the telecom market, the strategic options are being reviewed with a view to resolving the future of the business,’ Parker says. ‘A number of options are being considered including a sale or partial sale.’

Lattice is not the only utility that has found the going tough in broadband access. Energis, the telecoms group formed by National Grid, is also on the ‘For Sale’ list. While National Grid is attempting to acquire Lattice, it is also trying to sell its 74 per cent stake in Energis, which is labouring under debts of £1bn.

Utilised?

On paper, the utilities had a compelling advantage in the broadband market, says Mark Zohar, of Forrester Research. ‘Utilities have existing rights of way along city streets and highways, and have access to key customer sites, so it is a no-brainer for utilities to exploit this valuable asset,’ he says. In addition, because of the rights of way, utilities also own and operate some of Europe’s largest fibre networks. ‘These networks were developed for internal communications, but it’s relatively easy to re-purpose them,’ says Zohar.

Additionally, utilities have a strong track record and reputation for providing reliable, high-quality services, Zohar says. ‘Diversifying into Internet access matches the utility business model and core competencies very well,’ he says.

Scottish Power was persuaded to enter the telecoms sector when it looked at its internal networks, says Ian Russell, chairman of Thus. ‘We had an internal network that was used to send data to control the electricity network, but the idea evolved that we could use surplus capacity to cross-sell services to customers,’ he says.

186k, Lattice’s broadband business, delivered high-speed Internet access through fibre-optic cables within gas pipes. The company also took a 50 per cent stake in Urband, a joint venture with Thames Water, which offered broadband access via London’s sewage network. The company was just one of the companies offering broadband services in the UK. Scottish Power also entered the market with Thus and Demon Internet, while French telco London Electricity Group launched its broadband start-up 51° just six months ago.

Elsewhere in Europe, Italy’s largest electricity provider, Enel, partnered with France Telecom and Deutsche Telekom to create Wind, a company offering high-speed Internet services in Italy. In Spain, meanwhile, Endesa launched Retevision, a telecom and Internet service provider. In Germany, utility MVV has launched a high-speed Internet service delivered through power sockets. Perhaps the most famous utility of all in the telecoms sector is entertainment and telecoms giant Vivendi, which started out as France’s leading water supplier.

Fools rush in

The problem was that following deregulation of utilities across Europe in the 1990s, dozens of other companies rushed into telecoms and crowded the nascent market, says Jonathan Doran, an analyst with Yankee Group. ‘Across Europe, utilities saw that electricity and gas were becoming commodity products and saw telecoms as a far faster growing sector,’ Doran says. ‘It also allowed them to rapidly increase their market value and raise additional funding.’

In addition, while utilities had infrastructure, most partnered with telecom companies to offer broadband and other access services – putting them under extra pressure when the market collapsed. ‘Finding a partner in the telecoms sector who is stable, solvent and experienced is something of a challenge,’ Doran says.

Given the current challenges, the most likely scenario is that utilities will exit retail and corporate customer businesses, and focus instead on offering wholesale services to carriers and ISPs – in the same way that US utilities such as Sigecom (a joint venture between Southeastern Indiana Gas & Electric and UtiliCom Networks) have done successfully. Forrester Research recommends that European utilities follow the example of US counterparts and focus on providing fibre capacity and bandwidth exchange services.

‘Instead of integrating with traditional telcos, European utilities should be operating and selling wholesale bulk transport and switching capacity to all takers,’ says Zohar. ‘Utilities would be a natural provider to carriers and ISPs as third-party brokers of metro and long-haul bandwidth.’

Most US utilities in the broadband market have focused on wholesale services for ISPs and fixed and wireless telecom carriers, says Brownlee Thomas, a director with Giga Information Group. ‘Those offering retail services have done so through partnerships with communications specialists who are better positioned to attract and keep business customers,’ she added.

Thomas believes that only utilities, which partner effectively with carriers, cable operators or ISPs will survive the utility shakeout. ‘Utilities have a good case for offering telecoms services, but these companies have traditionally looked at long-term capacity planning and their business is driven by demand. That will not keep them going in telecoms and they need to start being supply-side focused. It is a radical shift in their corporate culture,’ she says.