ANALYSIS: The end of European IRUs?

19 November 2012 | Guy Matthews


As a number of IRUs come to an end in the coming months, could the dynamics of the European fibre market be about to radically change?

  

The telecoms world has moved on considerably since the heady days of the late 1990s.

Back then networks were springing up all over Europe as the internet started to boom, and as deregulation carved open monopolistic markets, paving the way for the launch of competing services of all kinds.

This was the era when, for the first time, operating a network didn’t necessarily mean you had to build it yourself. In fact you didn’t have to build anything at all.

A pan-European network could be created, or certainly supplemented, through one or more Indefeasible Right of Use (IRU) agreements with the owner of a physical fibre asset, granting temporary ownership of a portion of that fibre’s capacity. The new service provider could use that IRU to assure their customers of international service on a long-term basis.

The IRU was a quick way to get the job done, when there was a lot of pressure to get a network finished quickly and into lucrative service: “In the 90s, when there was lots of money going around, networks were being built all over Europe,” said Lucy Woods, CEO of VTLWaveNet, part of the Viatel Group, which operates a fibre route spanning the UK, the Netherlands, France, Germany, Belgium, Switzerland and Italy.

“People were signing long-term IRUs of maybe 15 or 20 years. It was trendy to be virtual, like a Vanco.”

But Woods believes that with a slew of these agreements imminently up for renewal, a potential iceberg lies ahead that few have figured out how to navigate. It is unclear at this stage exactly how willing the owners of the fibre in question will be to resolve the issue by simply extending existing terms.

They may at one extreme decide that the end of the IRU is their cue to stop selling fibre altogether. One or two instances of this would be scarcely noticeable, but if, on a large enough scale, the value of all this leased network capacity reverts back to its owners, the telecoms landscape in Europe would surely be affected.

“Of course a lot of networks are part-owned and only part-dependent on IRUs, with much intertwining between them, so we might see some mutual back scratching when the time comes,” said Woods.

A number of European IRUs will have made provision for title to pass on expiry of the term to the leasing operator, for a nominal payment, points out Stuart Blythe, partner with law firm EdwardsWildman which advises several network operators: “But even so, and dependent on the specific circumstances, the operator may still need to negotiate ongoing access and other rights in order to be able to maintain and otherwise operate the fibre.”

Or to put it another way, is a ‘stranded’ asset of any value to anyone?

The pressure is not exclusively on the virtual side of the network. Many owners of fibre have been enjoying handsome revenues from IRUs for the past decade and a half, but may not be able to count on their leaseholders wishing to take this arrangement forwards.

When sold, the OAM side of the deal was generally a percentage of the IRU, and thus most likely appears quite expensive by today’s standards, said Jonathan Wright, VP, service provider with European network operator Interoute.

“When it’s time to renew, this could be just one catalyst for service providers to ask if they want to upgrade, or move out,” he believes. “If you don’t want to run your own network any more, it could be time to review the situation and maybe outsource instead.”

Some IRUs, he thinks, may default to monthly leases at a fraction of the prices of 15 years ago: “I’d say 15 years of operations, administration and maintenance (OAM) at those prices is very nice revenue, a useful stream that could go away for fibre owners,” he concludes.

There is the additional consideration that much of the relevant fibre is at least 15 years old, and arguably may not therefore be fit for purpose for the next 15 years. The 100G era demands good fibre, ideally fibre laid after 2000 or so. “We’ve got the newest of those old fibre networks and we’re benefitting from that now,” said Wright. “Some old fibre will fall by the wayside.”

Legal potholes may lie in wait even for owners of relatively modern fibre, believes Blythe: “Some of the underlying owners of the fibre may themselves also need to be considering renegotiation and possibly renewal of third party agreements, for example rights of way” he points out.

The best hope for all these potential impasses is that a sensible negotiated agreement can be found. After all, we’re not in a climate where a whole load of new European fibre networks are going to be built any time soon, so a solution must be found to use those we have.