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Vodafone gets into German pay TV through Deutsche Telekom

Vodafone is set to make its first major foray into pay TV through an alliance with Germany’s incumbent Telco Deutsche Telekom (DT).

The deal will give Vodafone, the world’s second-largest mobile operator after China Mobile with about 450 million subscribers, access to Europe’s largest TV market through DT’s broadband infrastructure. This currently reaches about 12.5 million households, with plans to extend to 24 million by 2016.

The tie-up has to clear two regulatory hurdles, the first being the German Federal Network Agency, which is unlikely to oppose the move as it has tended to approve similar alliances in the past. However, the European Commission may be harder to get past because it will be concerned over broader implications for competition in bundled services, given that the partnership brings together Germany’s two biggest mobile operators, running almost neck and neck with around 35 million cellular customers each. The commission will want reassurance that this will not stifle competition from smaller broadband providers.

While Vodafone gets access to the German broadband and IPTV market, and DT gets a large undisclosed amount of cash, it was the bundling potential that made the deal particularly attractive to both parties. Vodafone risked losing out to competitors, especially DT itself, if it failed to secure a foothold in Germany’s broadband market, because it would not be able to offer tripe or quad play services. This was why Vodafone had been courting Germany’s biggest cable operator Kabel Deutschland and even considered taking it over, in order to have access to its DOCSIS 3.0 broadband network.

"Our agreement with Deutsche Telekom will greatly enhance our ability to offer our German customers a range of competitive, high-speed broadband and TV services," confirmed Philipp Humm, Vodafone's chief executive for northern and central Europe.

At the same time, DT will gain from the deal by having a large and powerful partner with a clear TV strategy that will bring in extra revenues it will get a share of. This is not a conventional, full, unbundled deal in which the Telco just sells off broadband circuits on a wholesale basis to resellers offering Internet and perhaps IPTV services. Instead, the deal involves “unbundling lite," often called bit-stream access, where the incumbent Telco retains control of the link and the installation on the customer premise, then makes it available to third parties. The third party has no access to the network, which gives the incumbent scope for boosting revenues by increasing performance and expanding the catchment area for premium multi-channel HD services.

In this case, the emergence of DSL vectoring technology played a significant part in the deal and may have been the reason Vodafone appeared to switch partners from Kabel Deutschland to DT, given that the Telco only received conditional regulatory approval to deploy it across its copper network in April 2013. Vectoring is a technique for substantially increasing the performance and reliability of ADSL circuits by reducing or almost eliminating the impact of crosstalk interference between neighboring wires. Vectoring works more effectively when one party has complete control over the whole access network, because then the process can be coordinated over all the wires in a binder serving a local residential area, increasing the gain in bit rate over a given distance. It encouraged DT to seek a bit-stream arrangement with a single partner, enabling it to employ vectoring efficiently across whole bundles of wires in a binder.

Vectoring is a big deal not because it is an ultimate solution but an essential step for telcos in their progression to the end game of fiber to the home (FTTH), enabling them to be competitive with cable operators in the meantime. It works best over shorter copper loop lengths around 1000ft or less, when crosstalk becomes a proportionally greater impediment as bit rates increase. This means that vectoring, combined with VDSL2, dovetails well with penetration of fiber close to the home to reduce copper lengths to around 1000ft.

At that distance, vectoring not only increases bit rates up to 2X over and above VDSL2, but also reduces the dependency on the quality of the copper. At 1000ft, VDSL2 without vectoring typically delivers between 45Mb/s and 60Mb/s, depending on quality of the copper, while with vectoring the range is a tighter 90Mb/s to 95Mb/s. This makes it much easier for a Telco to offer guaranteed headline bit rates, rather than having to provide each user with separate bit-rate estimates after testing the relevant copper pairs in the immediate vicinity of that home.

Like many other telcos, DT has given up on immediate plans for large scale FTTH in favor of fiber to the cabinet (FTTC) in the medium term, because the cost per foot of fiber deployment increases dramatically over the last few hundred feet as the network branches out towards the home. For now, DT will home in on copper lengths around 1000ft, enabling 100Mb/s downstream and 40Mb/s upstream, but over the next few years aims to push fiber closer to perhaps around 100m (330 feet) and boost bit rates to 200Mb/s down and 90Mb/s up, with an eye perhaps on multi-channel 4K services over VDSL2.

A significant aspect of the deal concerns Wi-Fi offload, which will reduce the strain on Vodafone’s cellular infrastructure by taking some of the mobile traffic onto DT’s broadband network. This will initially be confined to Vodafone’s 3.5 million subscriber homes, which will become "homespots" for offload. Over time, though, the two operators could pool their respective networks of homespots and also combine these with public hotspots to integrate Wi-Fi with emerging 4G/LTE cellular networks to deliver coherent national quad play services including mobile TV.

DT itself is already heading this way with its WLAN TO GO offering in partnership with Fon, Europe’s largest provider of shared homespots. Under this arrangement, DT’s broadband customers share their home Wi-Fi with other users in return for access to Fon’s seven million hotspots worldwide free of charge.