Last week I interviewed Olle Svensson who’s the product marketing guy at Zitius, a Swedish FTTH player who has a specific and interesting positioning. I first mentioned Zitius in this post here, but it turns out I hadn’t exactly figured out their value proposition and business model, so this interview sets things right!
Benoît FELTEN: Hello Olle, and thank you for agreeing to talk with us. Could we start with you telling us who Zitius is and who you are within Zitius?
Olle Svensson: OK. Zitius is a Stockholm based company who got started in 2003 in the fiber business. I’m one of the 5 original founders. I’m in charge of Product Management. Collectively, our background is from Siemens, Lucent, Alcatel, Cisco, etc.
BF: So, mostly from the equipment side of things?
OS: Yes. We all had a history of selling equipment to the City Networks in Sweden. When we saw that these players started to deploy fiber without a focus on services, we thought there was an opportunity there.
BF: When you say city networks, you mean metropolitan networks financed by local governments or municipalities, correct?
OS: Yes. Metro Networks both with government support and without. But let me explain to you first how this side of the market is organised in Sweden. Back in 1999, the Swedish government decided to financially support the laying down of fiber networks, but only for long distance and Metro Networks, not for the last mile. The guys who started building the last mile were, on the whole, large property owners who wanted to connect buildings they owned. When the Zitius project took form, we realised that our customers had to be the property owners. You see, an operator had to have connections and deals with both the metro networks and the property owners. We position ourselves as a go-between for these three parties.
BF: So, when you say property owners, these are people who own the end customer’s homes and rent them to tenants, correct?
OS: Exactly. Our biggest property owner customer owns 46 000 apartments. When we talked with the property owners, we realised that they wanted an open access network operator that would be responsible for the active equipment in the network and also provide the end customers with a portfolio of services from various providers.
BF: So these owners are actually selling the end service to their tenants, is that correct?
OS: No, the service providers (SPs) are selling their services (internet, telephony and tv) to the tenants (end-users).
BF: So Zitius saw an opportunity there and you decided to go for it.
OS: Yes. Like in many other countries, there is a strong incumbent in Sweden (Telia), and we saw an interesting mechanism there to bypass Telia through the new City Networks and the property owners.
BF: So how did you get set up?
OS: As I mentioned above, we had experience in selling equipment to City Networks and we thought we could provide them with a better service, so we created a solution, technical and business wise to attract them. We also understood that we needed volume so we started to talk to the biggest property owners in Sweden and in 2005 we signed a first large contract for 26.000 households.
BF: How exactly does your business model work?
OS: Look at the diagram here. Let’s start from the bottom. The property owner can increase the rent by providing fiber services to his tenants. He builds the last mile and the in-building network. Additionally, they get a fee from us for each active end-user.
BF: In effect, you pay them for access to the homes.
OS: Yes, but the largest income for the property owner is from the rent increase. The Swedish housing association is backing this, so there’s no legal issue with these rent increases.
BF: Let’s move up the value chain!
OS: OK. So on the metro layer, as shown here, most of the City Networks have been supported financially by the government, and we as an operator are renting the dark fiber from them at a fixed rate, just like any customer. I should add that in Stockholm the City Network (Stokab) is not funded by the government.
BF: So now we’re getting up to your layer…
OS: Yes. Just to clarify the terminology, we describe ourselves as a CO which means a communications operator, or an operator with an open access network. That’s us, Zitius. We get our income from the Service Providers.
BF: Is it a fixed income or is it revenue share? Your slide suggests the latter…
OS: It depends on the service, but normally Zitius do not earn any revenue from an SP until the first customer is active. Another important precision is that Zitius is not known to the end-user. All the relations with the end-users are the SPs responsibility.
BF: So your role is providing the SP with the pipe and QoS to serve the user. Correct?
OS: Exactly.
BF: You light the fiber, I imagine, and you provide the switching between SPs and customers?
OS: Yes. The SPs connect to us in Stockholm in a single pop and we "distribute" their service to all the end-users in Stockholm.
BF: How do the SPs know which customers are available to them? Do you provide them with details for direct marketing or geographical footprint for advertising?
OS: They receive a detailed list of all the addresses that are connected to our network. In fact, dynamically the SP can find all the available addresses in out backend system.
BF: OK. So what does the customer get out of this that's different from what a vertically integrated FTTH operator cum service provider could offer them?
OS: Freedom of choice!
BF: How fast can they switch from one provider to the next?
OS: We have better take-up rate than a vertically integrated network provider like Telia... An open access network creates very good conditions for the end-user: better prices, quicker launch of new services and also shorter contract periods: An end-user can switch from one SP to another within a month.
BF: Do you see end customers taking up more services in this model than in vertically integrated models?
OS: After 12 months of operation, we see 25% of homes passed using at least one service. After 24 months, roughly 40% of homes passed use at least one service ... So yes, service uptake is higher in our model.
BF: How about Churn?
OS: We have low churn (less then 1%). When we loose an end-user it is usually to ComHem (cable-TV) because of their strong triple-play (3P) bundles. Today none of Zitius’ TV-SPs have ISP service and vice-versa. We have realised that we need a 3P-provider to compete with ComHem. This is what we are working on right now and two of our SPs will launch a full 3P-service before the summer at a price-tag of around 400 SEK (43 Euro). This is roughly 30% lower than ComHem. With this, we will be able to attract a larger end-user segment, i.e. not only those that are primarily interested in a high quality Internet service.
BF: I think I read on your site that your customers could have several competing providers for the same service at the same time. Did I get it wrong? If that's the case, do you actually see it happening often?
OS: They can on every service, but we have only a few customers who use 2 SPs for the TV-service.
BF: OK. So how about some key figures for Zitius?
OS: Zitius currently employs 11 people and has a strong partnership with Ericsson for network management. We pass 50.000 homes, and carry the services of 14 Service Providers including incl. Telia, Tele2, Canal Digital, Viasat ...
BF: Are you profitable yet, and if not, when do you expect to be?
OS: This is of course a volume business and we should be profitable by 2008.
BF: I understand that you have a specific architecture to allow you to do what you do. How replicable do you think the Zitius model is elsewhere, and do you try and “sell” your model to other operators in other countries?
OS: Yes, we do. Today we’re working very closely with Ericsson and trying to "export" our model together with them. We do not think that we will sell the model so much as setup Zitius-like operations in other counties, either by ourselves or with partners.
BF: OK. Very interesting. Olle, thanks again for your time!
OS: You're welcome. Let's keep in touch!
