TABLE OF CONTENTS

The incredibly rapid boom of the Internet use, development of on-demand services and multimedia applications have forced the telecommunications industry to create solutions to increase bandwidth and provide faster access to various networks, enabling more efficient use of various applications. In Finland, the customer segments, who are longing for faster and more reliable access, include residential Internet heavy-users, large businesses with branch offices and telecommuters. At the moment, solutions provided for those customers are analog modems, ISDN and cable modems. However, in the near future, a new technology, namely xDSL, is likely to replace the existing ones. This report provides an analysis of the potentiality of xDSL in the Finnish market. The viewpoint of the analysis will be that of telephone operators and equipment manufacturers.

In Finland, the number of telephone lines is fairly high: according to OECD, there are 55 telephone lines per 100 people. The existing copper twisted-pair network is optimal for xDSL technology, which does not require expensive infrastructure upgrading as e.g. cable network.

ISDN is already available and it provides adequate access with its 128 kbps data rate. However, the number of ISDN connections is still quite low: according to Statistics Finland, there were 5,962 basic rate ISDN connections (2B+D) and 454 primary rate ISDN connections ( 30 B+D) in Finland in 1995. The cable TV penetration, on the other hand, is fairly low, covering only 40 % of Finnish households.

The Finnish telecommunications market is among the most liberalised in Europe. In Finland, the telecommunications operations have been gradually opened to competition since 1985 and the latest Telecommunications Market Act is from 1997.

Finland, known for its innovative touch to technological development and early utilisation of technical advances, will be one of the major players in the sharp global competition in the 21st century, too. Taking this into account, it is likely to be one of the first ones to utilise the new xDSL technology.

The demand for high speed access is not very high yet, because there is not enough content requiring high-speed connections. For example, Video-on-Demand is a service for which xDSL would be a perfect access technology. Furthermore, where xDSL would make a big difference for videoconferencing. According to Tietoviikko, the market size of videoconferencing equipment is currently FIM 15 million and growing rapidly.

The Finnish market structure of xDSL can be seen in the figure below:

As can be seen from Figure 1.,Finnish market for xDSL can be divided into three major parts. Equipment manufacturers enable operators (Internet Service Providers, teleoperators, both Local Exchange Carriers and Inter-exchange carriers, as well as Competitive Access Providers, to provide their customers with xDSL. End-users can be divided as follows: large companies with branch offices, telecommuters, residential users, and small business/home offices (SOHOs). The analysis of this report concentrates on the operators, as the technology, at the moment, is push oriented - the manufactures are the origin of the market push.

The major players in the field of fast access technology in Finland can be divided in two groups: equipment manufacturers and access providers. This chapter describes briefly the major xDSL equipment manufacturers and the network access providers in the Finnish market.

Ericsson Finland is one of the most important R&D centres of the Sweden based Ericsson Group. Approximately 600 people are working in product development, which is targeted mainly at the global market. In addition, the unit conducts basic and applied telecommunications research, often in co-operation with customers. The most important R&D areas are Internet solutions, signalling, and mobile systems.

Ericsson offers Finnish operators products as well as services for developing and expanding fixed public and mobile networks. These products include exchanges, transmission technology, intelligent network services and network management systems.

Ericsson has launched a product line called Cobra (Copper Broadband Access) and is now offering a range of products for business and home mainly based on ADSL technology.

The main strength of Ericsson in Finland is that it has a subsidiary located in Finland and thus, an established position in the Finnish telecommunications market. Ericsson has good relations with major Finnish telephone operators.

The main weakness of Ericsson might be that it has mainly concentrated on ADSL, even though other xDSL technologies could be deployed more easily in Finland.

The US based Motorola is one of the world's leading providers of wireless communications, semiconductors and advanced electronic systems, components and services. Major equipment businesses include cellular telephone, two-way radio, paging and data communications, personal communications, automotive, defence and space electronics and computers. Motorola manufactures semiconductors power communication devices, computers and several products.

Motorola has introduced a full ADSL product line called CopperGold.

Motorola's strength is its size. It has large turnover and substantial profits, and thus it has an ability to take risks. Motorola's main weakness, on the other hand, might be its lack of knowledge of the Finnish market. In addition, it has no subsidiaries located in Finland.

The Finnish Nokia is a leading international telecommunications group. Nokia is strongly positioned in all key growth areas of the telecommunication business, such as network solutions for the telecommunications industry, and it continuously expands its market share. Nokia runs focused R&D programs in Europe, Asia-Pacific and the United States.

Nokia has not published any information concerning the deployment of xDSL products, but according to Helsinki Telephone Company, Nokia is supplying xDSL technology, namely ADSL and HDSL, for their Helsinki Arena 2000 multimedia service (see more below in the HPY section). The Information Networking Systems division of Nokia's telecommunications unit develops, implements and markets Internet-technology based systems for telecommunications operators.

Nokia is a Finnish company, which certainly is strength in the Finnish market. However, Nokia's weakness is that it has not yet launched any xDSL products, whereas its competitors have.

Table 1 presents some key financial aspects regarding the three xDSL technology manufacturers.

*2 FIM=USD 4,6398

*3 Motorola's per cent of net debt to net debt plus equity is 13,4 %.

The three companies are already competitors in other fields of telecommunications industries (e.g. mobile phones) in Finland as in other countries. Although Motorola clearly is the biggest one of them, they are nevertheless all quite similar in many ways. For example, they all operate in several countries around the world and in several fields of telecommunications industries, they are all quoted in Stock Exchange in their home countries, and none of them have any rules on foreign ownership.

The Finnet Group is a consortium, comprising of 46 private local telephone companies owned by their customers. The Group has expertise in the entire range of telecom services, from the fixed network through data services to mobile telephony. The global dimension in operations is guaranteed by co-operative agreements signed with leading international operators.

Helsinki Telephone Company (HPY) is the largest local private telephone company in Finland and forms a cornerstone of the Finnet Group. HPY owns about 25% of the Finnish subscriber lines, and in Helsinki area their market share is around 90%.

HPY has initiated Helsinki Arena 2000 consortium project in collaboration with the City of Helsinki. The project aims at developing a Virtual Helsinki into the Cyberspace and the project has received a widespread support of business and public organisations. As already mentioned, Helsinki Arena 2000 multimedia network will be integrated by HPY to public telephone line with xDSL technology supplied by Nokia and also with ISDN. HPY is targeting ADSL and HDSL technologies for both small and medium sized companies and residential users.

According to Risto Linturi, technology manager of the Helsinki Telephone Company, HPY expects to have about 10,000 xDSL users within their network area by the year 2000. These potential customers will include households requiring high-speed connections as well as enterprise telecommuters.

HPY has also participated in a Diamond research project of the RACE program funded by the European Commission. Purpose of the project was to test video program transmitting via telephone lines with ADSL technology. Families taking part in the field trial could use remote control and screen menu facilities to select video programs, which are then transmitted to the family television set via the telephone line. Viewers could rewind or stop the video the same way as a normal video cassette. The phone itself could be used as normal for outgoing and incoming calls during viewing. According to interviews, 80% of test users wanted to get the service, when it is commercially available. Naturally, they required that the service would be reasonably priced, and the number of services provided by the system would be large. Furthermore, the field trial was successful from the technical point of view. Further investigation and trials will be conducted to collect more experiences from the field.

HPY as well as the entire Finnet Group own 70 % of the access lines, which is its major strength. Minor weakness of Finnet Group is that it does not have wide international connections. In addition, HPY has invested fairly heavily in ISDN and might wish to defer deployment of xDSL if possible.

Telecom Finland, the country's largest telecommunications company, is owned by the State of Finland. It is the leading operator in the market (mobile, wireline, etc.), holding over 50% market share of all telecommunications and over 60% of corporate communications.

Telecom Finland is currently researching the potentiality of xDSL technologies. However, it has already invested in cable network. In September 1996, Telecom Finland was the first in the world to bring fast Internet services for households: the cable TV households in the city of Lappeenranta can subscribe to the cable data service and get data transmissions at a speed of 4 Mbit/s. This has been a very interesting service For Internet heavy users. Moreover, the transmission capacity makes the use of interactive and multimedia services easier and far more enjoyable. And it also leaves the telephone line free.

Telecom Finland provides European cable operators with the whole concept of cable data based services including fast Internet and local server with related content. They also provide customer service, subscriber management systems and marketing support.

Telecom Finland has the strength of being the leading telephone operator. However, Telecom Finland owns only 30 % of the local loops.

Telivo also is conducting research on xDSL as well as running trials and pilots in Sweden. Vesa Ruokonen from Telivo Finland believes that xDSL will be launched in Finland in a couple of years if access to local loops is granted.

Telivo's strength is that it has not yet made any investments in ISDN or cable access, and its major weakness is that it currently has no access to local loops.

This chapter presents some key financial information. The figures are based on the companies’ 1996 Annual Reports.

Telecom Finland is clearly the leading telephone operator in Finland. Its turnover totaled FIM 6,421 million, whereas the turnover of the Finnet Group (which consists of 46 regional phone companies) was FIM 5,120 million. However, most Finnet companies are very small: the turnover of the biggest Finnet company and Finland's second biggest telephone company, Helsinki Telephone Company, amounted to FIM 2 695,7 million and the turnovers of the rest of the Finnet companies are well below FIM 400 million. Telivo's turnover and its market share are quite small. Telivo can, however, become an important competitor for Telecom Finland and for Finnet companies in the local access market, as it is already well established in Finland.

Since most of the Finnet Group companies have a turnover of FIM few hundred million or considerably less, it is supposed that they do not invest heavily in R&D. Thus, there are only two Finnish companies conducting research and development activities; Telecom Finland and HPY.

There are two major Internet Service Providers in Finland: Finland based Scifi and Eunet, a subsidiary of the multinational Eunet International. There is no data available concerning their market shares or financial positions, and thus, they are excluded from this analysis.

Technological advances in and increased utilization of telecommunications and information technology have had a significant impact on business operations. Increased networking has required further training and investments on information technology and telecommunications networks. For example, some of the advertising agencies use the Internet as a part of the normal planning, and they implement it either themselves or through partnership companies. A great deal of the agencies have established their own companies to carry out digital communications.

In recent years, new media industry has become the fastest growing industry in Finland. It is estimated that the net sales of new media companies will double in 1997, totalling to almost FIM 500 million. At the moment, there are about 300 new media companies operating in Finland, which are mainly content producers for digital media and information networks. Characteristics of the new media industry are the small size of companies, rapid growth (375% in 1995-1995) and annual net sales of less than FIM 2 million. The strengths of the Finnish new media industry can be found in the technical know-how, strong infrastructure and the flexibility of companies due to their small size. New markets will open up for the new media companies, as the problems of the electronic money, standardisation and security, are solved. New media industry will undoubtedly become a major competitor to the traditional TV, movie and video production.

There are only few companies licensing the technology needed in xDSL products. Companies involved in the xDSL development can be divided into the following categories: semiconductor companies, modem suppliers, access network suppliers, network/service providers and consultants. Due to the availability of various technical applications and market’s early stage, a lot of emphasis has to be concentrated on customers’ easy access to new technology. Thus, many companies are co-operating and forming strategic alliances across categories.

The exact size of the xDSL market in Finland is not known, since the technology has not yet been commercially launched. However, it is possible to estimate the potential growth by considering the substantial growth figures of telecommunications sector.

As already pointed out in Section 1.1 the number of telephone lines is fairly high in Finland: according to OECD, there are approximately 2,8 million telephone lines, thus, in the long run, the theoretical market size for xDSL is 2,8 million subscribers.

Accordingly, the penetration of PCs in 1995 was 25 per 100 people and, in 1995, there were 9 modems per 100 people. Thus, the size of the access line market is approximately 1,4 million subscribers.

Moreover, the number of Internet hosts was 62 per 1,000 people in January 1997. Internet usage has grown extremely rapidly during the past two years: at the end of 1996, 419,000 Finns used Internet at least once a week. Hence, it can be expected that the demand for access lines and faster access in particular increases in the future.

The penetration of VCRs in 1995 was 61 %. On the average, only 12 % of Finns used their VCR daily in 1995. Thus, it seems that is not so common to rent video cassettes or to record movies and series from TV for later preview in Finland. Hence, it could be interpreted that there would be strong demand for VOD in the future.

The following figure (see next page), with empasis on the operators, presents the five competitive forces affecting xDSL market in Finland. Moreover, it higlights the key issues which will shape the future competition.

At the moment, the market is technically developed and there are not many content providers. Thus, the market is push-oriented. However, in the near future, when the number of services and applications requiring high speed connections increases the market is moving towards pull-orientation.

The legal and regulatory issues concerning to xDSL technologies and their deployment relate very closely to those of telecommunications industry.

In Finland, liberalization of the telecommunications industries began in the 1980s. The last step in the liberalization process was taken in 1996, as the local call markets were opened up to competition. As a result, there is a lot of competition in all sectors of the Finnish telecommunications market with the exception of the local access sector. The 46 regional phone companies, which each operate in a different city or region, hold monopolies in their operating areas. However, competition in local access markets has potential to increase in the future. Network operators have obligation to lease free sections of the network to all telecommunications companies on impartial and reasonable conditions independent of the service to be provided. Nevertheless, the local companies are well established in the operating areas and supposedly people especially in rural areas prefer local businesses. Therefore, the competition in local access is not bound to increase as much as it has in other sectors of Finnish telecommunications industry.

It has been estimated that PCs capable of handling high quality multimedia applications will be available to consumers by the beginning of the next century. Such a PC would have a processor speed of hundreds or thousands of MIPS, several hundreds of MB memory and mass memory of dozens of GBs.

New types of terminals are also being developed: for example, inexpensive networked terminals will probably expand the market for Internet access as they will be affordable to a larger number of consumers than traditional PCs. In addition, Internet usage and the demand for residential Internet access is expected to grow substantially, as businesses start to offer more on-line services and deploy Electronic Payment Systems (EPS).

Currently, Internet data rates are mainly 45 Mbps. However, data rates of 155 Mbps and 622 Mbps are already deployed in some parts of the network and they will become common in the near future. Moreover, fast routers and switches are under development, and their deployment will remove most of the volume based bottlenecks of the Internet backbone. Thus, the need for high-speed access lines will increase, as slow data rate local loops remain as the major bottlenecks.

This section describes xDSL technology in terms of other access technologies and deals with the strategic gains xDSL can generate.

The data rate of xDSL line is up to 51.84 Mbps (VDSL), whereas the data rate of the fastest existing analog modem is up to 56.6kbps. Compared to analog modem xDSL provides more possibilities for network content providers to create new services due to the high speed of xDSL in transferring data. Considering analog modem versus ISDN, some ISPs prefer high-speed analog modems that can be installed without the local telco supporting the service contrary to ISDN.

As the number of ISDN connections have risen drastically in the past few years, it can be assumed that the need for high-speed access exists. There have been some problems concerning the implementation of the ISDN technology. Accordingly, there have been rumours that Telecom Finland would skip the whole ISDN and instead concentrate on xDSL and solutions based on cable. As can be seen from Table 3. and Figure 3. below, Tele is pricing its ISDN connection well above its competitors. The difference in pricing might be due to hard competition in urban Helsinki area where HPY operates.

Moreover, not all Internet Service Providers offer ISDN access, even though the local telephony company would provide ISDN. Although the Finnish telecom market is highly developed, the number of ISDN connections is still quite low: according to Statistics Finland, there were 5,962 basic rate ISDN connections (2B+D) and 454 primary rate ISDN connections (30B+D) in Finland in 1995. Figure 4, presents the development in the number of ISDN connections from 1993 to 1995. Despite the set-up problems ISDN has faced, the growth of the market has been remarkable.

Certainly, fibre optic is the way of transferring data in the future, but it is still too expensive to install everywhere. On the contrary, in order to create a connection with xDSL modem, the whole neighbourhood does not have to be cabled with fibre optics.

Wireless digital TV networks is capable of providing very high data rates. However, the equipment required for upstream transmission are very expensive and will be out of the reach of consumers for several years. Thus, the applications suitable for wireless digital TV networks will be ones that demand data transmission only downstream or that allow upstream transmission to be done through telephone networks.

Terrestrial digital TV networks could also provide high speed data transmission. Nevertheless, the digitization of TV networks will begin only in 1998-1999 and hence, it is estimated that majority of Finnish households will have digital TV by the year 2004.

The cost of deploying satellite networks make prices relatively high compared with terrestrial options. Moreover, a satellite loop is not meant for replacing the existing local loops, but should be seen as complementary to mobile local loops. Approximately 160,000 Finnish households had a satellite antenna in 1995; i.e. the penetration of satellite TV was 10 % of all households.

Table 4. compares various access techonologies in terms of traffic, speed, connection and availability. Table 5 (see next page), on the other hand, presents a comparison between Finland and the EU in terms of different access technologies.

Although xDSL is one of the most promising alternatives for remote access, it will not immediately replace competing access technologies. At the moment, it is still quite difficult to estimate the size of the market for xDSL. Nevertheless, telcos are preparing themselves for high demand and wider deployment will most likely occur in couple of years, perhaps in 1999 or year 2000.

It is highly likely that xDSL will become widely adopted particularly among high-speed Internet "power users", telecommuters as well businesses requiring fast access to various networks, provided naturally that the prices come down. Large companies are likely to start using xDSL first, followed by SMEs and residential users. xDSL deployment will certainly take place in Finland and elsewhere in Europe, as the replacement of copper lines with fibre takes too much time to provide a remedy or panacea for scarce bandwidth. Accordingly, the cable network especially in Finland does not support broadband cable modems at the moment and its coverage is only about 40%. xDSL technology offers a viable interim solution to the bandwidth problem while fibre optic cables are being installed. The potential of xDSL technology and its advantages can be summarised with the words of Rick Gilbert, President at the ADC Kentrox.

Consequently, it will be of great interest to see how and to what extent the major operators in the market will deploy xDSL technology. Basically, the "battle" will occur between two major players, namely Telecom Finland and Finnet Group: both have the resources and infrastructure to be the future winners. On the one hand, Telecom Finland might make the decision not to deploy xDSL, since it has already invested quite heavily in its cable network and is likely to continue investing. However, Telecom Finland will face sharp competition from Helsinki Television, who can provide content and services, whereas Telecom at the moment can only provide network. Therefore, Telecom Finland might decide to compete with Finnet Group and other smaller players in the xDSL field, especially as it is already in the process of leasing local loops and will acquire local telephone companies, if some of them decide to sell.

Finnet Group and HPY in particular is highly likely to adopt xDSL on larger scale to existing and new telecommuter customers (large companies, freelancers, etc). Moreover, due to the large project of Helsinki Arena, Finnet Group will utilize xDSL and promote it to its customers. Finnet Group companies have the advantage of owning large share of local networks. Finnet Group use xDSL as competitive edge over cable modems and especially against Telecom Finland, as high usage of xDSL lines will not block other telephone traffic, and thus get congested. Cable network, on the other hand, is likely to be blocked when the number of users increases.

Future competition between xDSL manufacturers is likely occur between Ericsson and Motorola. Both have production lines up and running, but Ericsson has existing clientele in Finland to support the sales of xDSL and wide knowledge of Finnish market. Nokia can change the competitive setting in the future, but at the moment it is not viable competitor for Ericsson and Motorola.

On the basis of the brief analysis conducted in this report, the potential winners of the future seem to be Finnet Group from the operating side and Ericsson from manufacturers respectively.

"Alternative local loop technologies" A Review, OECD Paris 1996, OECD/GD(96)181

Annual Report 1996, Helsinki Telephone Company

Communications Outlook 1997, OECD

"DSL Internet Access at ISDN Prices", http://www.kentrox.com/news/022497b.pr.html

Joukkoviestinnän talous ja rakenne 1996, Tilastokeskus ("Economy and Structure of Mass Media", Statistics Finland

Linturi, Risto: "HPY tarkentaa multimediaverkon hinnoittelua", Letters to the Editor/Tietoviikko 21 February, p. 7 1997 ("HPY Conducting Price Checks on Multimedia Networks", Information Technology newspaper)

Mainostoimistojen liitto MTL: "Lehdistötiedote 12.6.1997" (Press Release by the Finnish Association of Advertising Agencies)

Tilastokeskus (Statistics Finland)

"The new Telecommunications Market Act will increase competition further in

Tiedolla tietoyhteiskuntaan 1997, Tilastokeskus ("Information Way to the Information Society", Statistics Finland)

"Uusmediateollisuudesta Suomen nopeimmin kasvava ala", Kauppalehti May 5, 1997 ("New Media Industry the fastest growing Sector in Finland")

xDSL Primer, p. 4,