How Big is the VDSL Market?

Ikanos (IKAN) sees the European market as the most promising market for 2008, with several carriers evaluating VDSL platforms powered by Ikanos’ technology. There are several factors which make Europe so attractive for Ikanos.

First, fiber penetration in Europe is not as deep as in Japan and Korea, where fiber is typically pushed very close to the customer’s home or building. In Europe, the loop lengths are substantially longer, ranging from several hundreds to several thousands feet, which calls for ADSL2+ and FTTC/N rather than FTTH/B, assuming that carriers want to minimize capex. Second, European telcos are not pressured by cable operators, as cable companies in Europe are inferior to the large European carriers such as Deutsche Telekom and Telefonica. In the US, cable companies have a very strong position and are planning to fight Verizon’s and AT&T’s triple play offers by massive upgrades, including Docsis 3.0 that can potentially deliver 160Mbps, setting a very high bar. Third, the European market is characterized by strong regulation, which forces carriers to share their infrastructure and provide unbundled access to alternative carriers. This has led numerous carriers to a direct clash with the EU regulatory body regarding network unbundling and the feasibility of network upgrades in light of existing policies. The most familiar of these clashes is DT’s dispute with the European Commission [EC] about its VDSL buildout. DT refuses to provide alternative service providers such as Hansenet and Arcor access to its VDSL network despite harsh criticism and threats from the EC. Fourth, Ikanos has a very strong partnership with Alcatel–Lucent (ALU), the most dominant access vendor in Europe. Ikanos expects most of its future sales in Europe to be derived from the partnership with Alcatel, who is currently shipping its VDSL systems based on Ikanos’ chipset to 3 customers, with additional 4-5 carriers who are in field trials. Ikanos has particularly high hopes for Alcatel’s 48-port VDSL2 line card, which was launched in the first half of 2007.

Ikanos had expected a smooth entrance to the European market after being the undisputed leader in Asia, but things turned out quite differently. VDSL made its debut in Europe in 2006 as Deutsche Telekom (DT), Swisscom and Belgacom started offering tripe play through FTTN architecture. Naturally, the DT deployment was the largest one, but Ikanos found itself supplying chips only for the other two. Both of DT’s suppliers, ECI and Siemens used Infineon’s (IFX) chips, even though both had design wins with Ikanos as well. This was indeed a major triumph for Infineon, after the defeat Ikanos had inflicted upon the German chip maker in 2003-2004 in Asia. Back then, there were two standards for VSDL: DMT (discrete multitone technique), supported by Ikanos and QAM (Quadrature amplitude modulation), supported by Infineon and Metalink (MTLK). While Metalink had some success in Korea, it failed to penetrate the Japanese market, and Infineon was pushed out of both markets by the two tiny companies. In 2004 , a decision by the ITU crowned DMT as the winning standard, further establishing Ikanos’ lead. Infineon embraced the new standard and started developing DMT based chips while Metalink decided to abandon the VDSL market in favor of 802.11n wireless chips. Infineon’s exclusivity at DT was a sweet revenge, with over half a million VDSL2 lines deployed by the end of 2007.

2006 didn’t end too well for Ikanos in Europe as it had 2 FTTN deployments (Swisscom and Belgacom ) and one small FTTB deployment in France (Erenis). However, it had high hopes for additional carriers, especially Telefonica and Telecom Italia (TI) to join the VDSL party during 2007. Unfortunately, both TI and Telefonica expressed their intention to deploy VDSL throughout 2007, but neither actually reached mass deployments.

With over 7 million broadband subscribers (in Italy), Telecom Italia (TI) is talking about its network revamp plans for more than 2 years, without any real actions. One of the causes for the delay was the changes of ownership and reorganization process TI was going through. Nevertheless, it seems like under the newly appointed CEO, the long awaited network upgrade will finally start in 2008. Last month, another obstacle was removed after the company and Italy’s telecommunications regulator reached an agreement regarding granting alternative operators access to TI’s network. On the access side, the carrier plans to upgrade its broadband infrastructure using both FTTC and FTTB for download speeds of 50Mbps and 100Mbps respectively. The target is reaching 5% and 65% of the general population by 2009 and 2017 respectively. This is certainly not the most aggressive plan out there, but it still represents an important opportunity. For instance, a TI executive recently presented plans that include the deployment of half a million VDSL lines in 2008 alone, even though it wouldn’t surprise anybody if actual numbers this year are lower.

Telefonica ended 2007 with almost half a million IPTV subs, most of them are served by ADSL/2. The company already announced Alcatel-Lucent as its ADSL/VDSL supplier in late 2006. However, due to harsh disagreements with the European regulator, the carrier decided to delay the network buildout until regulatory issues are resolved. It is still unclear how the situation will unfold in 2008, as both sides seem to stick with their original positions. The EC certainly isn’t happy with the competitive landscape in the Spanish broadband market . Telefonica chose to postpone the network upgrade, in contrast to DT, who decided to carry on deploying VDSL2 across Germany despite the disagreement with the EC. For now , it seems like Telefonica’s customers are the big losers in this battle.

KPN is another carrier Ikanos’ management has been mentioning for over a year. It started trialing FTTC+VDSL2 in late 2006, but still haven’t deployed substantial amounts of VDSL lines. In recent conferences, the Dutch incumbent announced FTTH as the ultimate goal but it plans to deploy FTTH only in new buildings, using FTTC+VDSL2 in the majority of cases. Tim Poulus provides great insight about KPN’s strategy in his Communications Breakdown blog. In its Q3 conference call, KPN made its commitment for mass VDSL2 deployments in 2008 very clear. Although relatively small, KPN, with over 2.5M broadband users, is still significant for Ikanos for 2008.

Telenor, Norway’s incumbent, is also planning mass deployment of VDSL using FTTN architecture during 2008. The deployment is part of an overall network upgrade that includes FTTH as well as Wimax. Last year, Alcatel-Lucent announced it was chosen by Telenor as the preferred supplier for the FTTN and the FTTH deployments. Since in the press release Alcatel mentions the 48-port VDSL2 line card, it is safe to assume this deployment will be powered by Ikanos’ technology as well. In the end of Q3 Telenor had 750 thousand DSL subscribers, so the overall potential is relatively small. Nevertheless, the VDSL deployment is expected to be extended to other Telenor affiliates, almost doubling the potential market for Ikanos.

France Telecom is another strategic customer for 2008, even though it does not intend to deploy VDSL. FT, with over 7 million broadband subs in France alone has been offering its IPTV services over ADSL for over 2 years, deploying Sagem’s ADSL2 residential gateways. Sagem, which has the majority of FT’s gateway business , is using Ikanos’ technology (acquired from Analog Devices (ADI)). Last year, the incumbent announced its intentions to deploy FTTH, similarly to its competitors Iliad and Neuf. The loop lengths in France are longer relatively to Germany, which makes FTTN/C less attractive. Ikanos has been working with Sagem on residential gateways that can support both ADSL and FTTH, and expects substantial orders from FT for its gateway product, even though it won’t involve VDSL.

On the FTTB side, Ikanos added two European customers in 2007, Netcologne in Germany and an unnamed European alternative carrier. These operators are much smaller than the large incumbents Ikanos hopes to get as customers, but on top of the financial value, the company hopes the success of the smaller operators with FTTB will lead larger operators to deploy FTTB as well.

In summary, although there was a lot of trials and pr activity in 2007, VDSL deployments in Europe were quite modest. KPN and Telenor are very likely to join Belgacom and Swisscom on Ikanos’ customer list, but Ikanos still needs a deployment with one of the larger incumbents in order to see real growth in Europe.

For anyone who wants to keep track of the latest developments in triple-play deployments worldwide, I warmly recommend TelecomView’s website, which is one of the best sources of information out there.

Disclosure: Author is long IKAN / seekingalfa.com