Sweden’s Growing Broandband Technology Market

by Barry Flynn

The figures aren’t in yet, but there’s a fair chance that at the end of 2001, Sweden had reached a higher proportion of high-speed Internet homes than the US.

According to a research study recently carried out by Swedish interactive media consultancy Digiscope, broadband penetration there stood at 7% in July 2001, and should have reached 11-12% by year-end.

But in the US, broadband is stalling. According to Knowledge Networks/Statistical Research’s “Fall 2001 Ownership Report,” broadband Internet access penetration in the third quarter of 2001 was around 9% in the US—exactly where it stood back in Spring 2001.

Sweden’s achievement is even more surprising when you compare its performance with the rest of Europe. The UK—despite a tradition of enthusiastic hi-tech adoption, and a still-buoyant economy—notched up a penetration rate of just 1% at the end of last year. So—just what is the Swedish broadband market like?

There are some similarities between the US and Swedish situations: there’s a high level of PC ownership and Internet usage, for instance. PC penetration is above 60 per cent, and Nielsen/NetRatings reckon that 4.5 million Swedes out of a total population of 8.9 million have Internet access—of which 3.0 million are regular users—itself one of the highest figures in Europe.

One reason for this is that since 1998 the Swedish state has effectively subsidized PCs by allowing the purchase price to be claimed against tax. This subsidy has encouraged consumers to upgrade regularly, which is one reason why the proportion of Internet-capable PCs is so high. Since, in Europe, you usually pay around one and a half times for PCs as in the US, Swedes effectively end up paying around the same as Americans.

Another similarity is high cable penetration and wide availability of ADSL. Around 70% of Swedish TV homes take cable, encouraged by the fact that, for many of them, it’s the landlord who pays, ‘hiding’ the cable fee in their monthly rental bill. The same percentage of homes can be reached by ADSL. Combine this with high PC penetration, and there is a ready universe for broadband access.

There the similarities probably end.

For a start, the Swedish broadband market is heavily fragmented, with at least 10 relatively large players fighting it out. The cable industry also is virtually unregulated, which has encouraged a plethora of small SMATV and community system operators to enter the market over the years (although they are now gradually consolidating).

The four biggest players are state telco Telia (which majors on ADSL), com.hem (Telia’s cable company, which offers cable modem access), UPC (the Liberty Media-owned cable company, which also offers cable modems), and Bredbandsbolaget (B2), which offers LAN Ethernet access (see Figure 1).

Figure 1. Swedish Broadband Market by Access Technology. Source: Digiscope estimate (www.digiscope.co.uk/interaktiva_medier/broadband_summary.html).

Between them, these four accounted for around three-quarters of the Swedish broadband access market in the middle of last year, equivalent to some 225,000 households.

Cable is the platform currently in the lead—but B2 is particularly interesting, representing a market segment that is all but non-existent elsewhere in the world (Telia also has a small percentage of LAN-based customers). Starting in 2000, B2 began building fibre-based networks to the largest apartment blocks in the major Swedish cities. Although it never realized its ambitions (it has so far passed only 300,000 of the targeted 1 million apartment dwellings), Digiscope estimates that there were around 90,000 LAN-based broadband homes in Sweden at the end of 2001, each able to upload and download data at up to 10Mbps. In a world where broadband effectively means around 500Kbps (downstream only), that is a singular achievement for a commercial offering.

Although B2 experienced financial difficulties for much of last year, in September it announced it had successfully concluded a private placement for a SEK2.4 billion (US$230 million) share issue—so it looks as if LAN is no “flash in the pan.”

The take-up rate for LAN access of around 30% is somewhat surprising in view of the price: 200 Swedish krona (just under US$20) a month. This is low even by Sweden standards (Telia’s ADSL-based broadband offering is between SEK 275-325 (US$27-32) per month). This underlines another salient fact about the Swedish market: in exactly the same way as the government has used tax credits to subsidise PC purchase, it has introduced tax incentives for companies building out broadband—particularly to rural areas. It also has encouraged Swedish municipalities to create their own regional fibre networks. This pro-broadband stance has extended to state-owned Telia and subsidiary com.hem, as well as other state utilities such as railway company Banverket and electricity grid provider Svenska Kraftnät. Between them, they have all been investing heavily in building fibre-based backbones across Sweden, a program that should mostly be complete by the end of this year.

With so much state money going into Sweden’s broadband spine, the price borne by independent operators wishing to connect their own broadband subs to it has been relatively low: this in turn has encouraged a large measure of price competition. One of the intriguing facets of the Swedish broadband access market is that, despite its lead over most other territories (only Canada and Korea are ahead of it in penetration terms), there are few dedicated broadband services available. What is being purchased by Swedish consumers is essentially an enhanced, always-on Internet surfing experience—not sophisticated services such as video-on-demand, multiplayer gaming, and so on.

Digiscope says it believes that, for the time being, plain vanilla fast Internet access is probably enough to drive demand for the early adopters, although that does mean that growth is bound to decelerate. On the basis that relatively few new broadband content services emerge in the next few years, then a 50% penetration of the online population, which is expected to be around 65-70% of the total population in 2005, is probably realistic, Digiscope thinks. That would amount to 32.5-35% penetration overall (see Figure 2). If new content-driven broadband services emerge relatively soon, that could drive penetration faster, although the company isn’t optimistic.

Figure 2. Swedish Broadband Penetration Forecast 2001-2005. Source: Digiscope estimate (2001-2002), Jupiter MMXI (2003-2005).

On the assumption that only new, dedicated broadband services will persuade consumers to spend extra, Digiscope’s broadband expenditure forecasts are conservative. It is forecasting that Swedish broadband users will spend SEK1.541 billion (US$149.8 million) in 2005, up from a paltry SEK15 million (US$1.5 million) in 2001. The 2005 figure is equivalent to just US$9 per household per month.

Lessons for the US? It’s significant that in Sweden—as in Canada and Korea, which both have higher broadband penetration than the US —government has been proactively involved in speeding the deployment of broadband access. The US has achieved its position near the top of the local broadband league without any such help, but perhaps the current flat US broadband market is an argument for government intervention. Certainly, Sweden’s success appears to be due—at least in part—to low (and indirectly subsidised) broadband prices, which suggests that recent broadband price increases in the US may prove to be counter-productive.

Meanwhile, in Sweden as in the US, it seems a lack of dedicated broadband content is holding things back. That, as Federal Communications Commission Chairman Michael Powell pointed out in a recent speech, is a matter that is currently in the hands of the major copyright holders. Somewhat paradoxically, then, the cure for a plateauing US broadband market could simply be an effective, foolproof solution to the Internet piracy problem.

Barry Flynn is a freelance technology writer and consultant. He can be reached via e-mail at barryflynn@compuserve.com.