15Sep/140

Alain Le Diberder, Arte:”The video game industry is facing a deep shift of its main business model”

Published in COMMUNICATIONS & STRATEGIES No. 94

 

alain-lediberder-arte
Alain Le Diberder - ARTE,
Managing director 
and head of programs, Strasbourg, France

Conducted by Laurent MICHAUD, IDATE, Montpellier, France

 

 

C&S:How do you see the video game industry today?
Alain LE DIBERDER: The industry is facing a deep shift of its main business model. It’s not a problem of overall market size. Even if the macroeconomic environment is rather dull, even if the new mobile market works with very low price levels, most of the firms are able to adapt themselves to the new revenue framework. Instead the main issue is the changes needed in the corporate organizations. Yesterday, AAA products were king and the sales department was king of the AAA market. Today the whole process starting from an idea and ending in an actual consumer needs to be reshaped. Unfortunately marketing, technology and price policy are far more flexible than human behavior.

C&S:Video games are reaching their full potential online with multiplayer or massively multiplayer, social, viral, flash and ubiquitous components. What do these developments inspire for you?
A.L.D: All these technologies are impressive and improving very quickly. But I’m not sure that they actually drive the industry to a new era. Videogamers were “social” from the start, and videogames were “viral” far before Facebook or Tweeter. Even in the Eighties, schools and universities were an effective “social media” in which gamers and game reputations were debated, built and destroyed. And they still are. The new phenomenon is that the “social” dimension is now included in the code. And there are opportunities to make money with it. But the videogame industry, for the moment, is not able to catch the main part of this market, which is dominated by “transversal” companies like Facebook, Twitter, Apple and so on.

C&S:What are the effects of globalization on the creation of content, on the creators?
A.L.D:The videogame industry is probably the first entertainment business being born global. The movie industry was partly global relatively soon (say around 1910), but even today national and regional components remain important. It’s the same for music industry. The reason why the videogame industry is different is quite simple: during the first ten years of its history, there was barely no text inside the games. Remember Pong, Pacman, Space Invaders, or even the first Mario. Without any words the only text to be translated was the cartridge sleeve or the instruction sheet on the arcade cabinet. The need for text and localization only came with PC games in the eighties, but it was too late for local cultures: the industry DNA was definitively global. Even the word “localization” tells the truth. The industry can’t be more global than it was at its birth, and the only thing that could happen in the future is less globalization, not more. But it probably won’t.

C&S:Hardware vs. software: are home consoles set to disappear in favor of streamed games? More generally, won't hardware be reduced to a "stupid” screen?
A.L.D:I don’t believe that the console industry holds a strong future. Consoles are expensive, non-durable and challenged pieces of hardware. Competition from set-top boxes and mobile devices is stronger and stronger. But hardware won’t be reduced to a stupid screen. There is a bright future for hardware if you compare the specifications (and price) of a present smartphone to those of a home computer or a home console from ten years ago. Hardware is more and more smart, not stupid. In fact the new hardware standards and the telecommunication networks live together in an ecosystem in which smart networks need smart home equipments, not dumb.

C&S:Oculus Rift, Google Glass, holographic technology ... what do you think the next disruptive gaming experience will be?
A.L.D:I can’t see such a thing as a disruptive technology in the videogame history. Technology is an additive process in the videogame industry not a subtractive one. For instance when the home console began, in 1974, the arcade market didn’t disappear. The computer games started slowly at the end of the seventies and added their sales to the console market. When the PC market was mature, in the beginning of the nineties, the console market exploded too in the 16 bits era. Online games began to be popular before the web. I remember having wasted many hours playing Microprose Grand Prix on line in 1992 with a 14.4kbs modem. Today the online market is strong, but more than 20 years after, between 60 and 80% of the overall market, depending on what you consider as a videogame « sale » is still offline. We could also think of 3D games, Virtual reality helmets, streamed games and so on. But the truth is that during 40 years many technologies have been introduced, many have failed (especially with 3D, beware Oculus!) and many have contributed to the Harlequin suit in which the videogame industry is dressed.

C&S:What are the issues in which the French industry still needs to progress?
A.L.D:There are French developers, French magazines, excellent French videogame schools, some French companies, but the “French industry” doesn’t exist. Of course there is Ubi Soft. But Ubi began to develop games in Asia or Morocco 25 years ago, and regarding the workforce, is more a Canadian company than a French one. Vivendi invested in big US companies but they remained American companies reporting to French shareholders. And Vivendi sold the main part of the shares to Activision. Infogrames bought many British and American companies and the glorious brand of Atari, but it failed. From the beginning, the golden era of Ere Informatique or Loriciels, the French (little) companies have always sold more than 80% of their products in the world market. Almost all the titles, such as “Another World” or “Alone in the Dark” were in English, even in the French market. Many French guys have succeeded in the videogames industry, but as it’s a global industry, they were and still are involved in a non-national world. A national videogame industry is a nonsense, except maybe in Asia.

C&S:What remains for us to (re) invent in terms of gaming experience?
A.L.D:Maybe the next frontier could be the physical experience. The Wiimote and the Ki-nect were a first step, and now the “connected object” is blooming. It will probably take time, but I feel that the gamification of personal care is a strong trend.

Alain LE DIBERDER holds a Ph.D. in Economics. After advising French Minister of Culture Jack Lang (1989-1991), he moved to France Télévision under CEO Hervé Bourges (1991-1994) and then on to Canal + as Head of New Programmes (1994-2000), while he contributed to establishing several landmark cultural portals. He created Allociné TV, a channel devoted entirely to cinema, in 2010, and joined Arte as Head of Programmes on 1 January 2013. He has published several books and papers on digital technology and the media.

29Aug/140

Interview with Daniel KAPLAN, Business Developer Mojang, Stockholm, Sweden

Published in COMMUNICATIONS & STRATEGIES No. 94, 2nd Quarter 2014

Video game business models and monetization

 

Daniel-Kaplan-Business-Developper

Daniel KAPLAN, Business Developer at Mojang

Conducted by Peter ZACKARIASSON, University of Gothenburg, Sweden

 

 

C&S:  Minecraft is, by any standard, a very successful game. How much of this success do you ascribe to your business model?
Daniel KAPLAN: I think it played quite a big role since it was discounted for quite a long time. The game was discounted from day one, since it was “released” during very early development. The whole idea was to release it early to see if there was an interest and to see if the project could bear fruit. A lot of people who bought it initially, I think, felt that they had somewhat invested into the project and the ones who were on from the beginning made quite a good deal.

C&S: Do Minecraft exploit any specific previous business model, or has it paved its way with a unique model to generate profit?
D.K.: There are other games that were the inspiration for this model, Mount and Blade from TaleWorlds for instance. They also released their game before it was finished for a discounted price and continued the development with the community.

C&S: Today Minecraft has become a phenomenon that is not only tied to the game itself, but there are many physical product spin-offs. How important is this brand extension for Mojang?
D.K.:We are still a game company but it definitely helps. I think there is a fine line in between how much you can do with a brand before it feels too stretched. We try to create merch/products that we would like to have ourselves, rather than try to fill gaps with our brand with various products. It is sure a fine line and I think a brand can be too exposed and become too stretched.

C&S: Is it possible to become too successful? That is, having produced Minecraft – is it possible to repeat that success? What about the next game of Mojang?
D.K.: I think the problem with becoming too successful is that you will always be compared with your success, regardless of what you produce after that. It is important to not lose focus and continue to deliver things regardless of what they are so you don’t stagnate.

I think that it is almost impossible to create a success like Minecraft again. A lof of the “cred” Mojang got was because it was an up and coming company/person during the initial development of Minecraft, and the whole story around Notch (the founder of Mojang) was a classic David and Goliath story, which we can’t reproduce anymore. We have a whole different starting point now in comparison from where we started.

The next game we are working on, Scrolls, is already profitable and was released in a similar manner to Minecraft. We are super happy about the game being profitable even though it is not close to the success of Minecraft. It is a bit silly to try to compete/compare our projects with Minecraft to be honest.

C&S: What directions do you see the video games industry taking when it comes to generating sustainable business models? Last year Minecraft was one of the two pay per play games in the US top 20 mobile games. Not adopting a free to play business model, is it a conviction or the best way to be different within a serious competitive framework?
D.K.:
I don’t know what will happen in the future. You see different trends all the time and you see companies not following the trends and they are successful. I think that the mobile business will continue growing and will continue to have different business models for various types of games or apps. I think it is hard to say that everything will be x or y. Considering the widespread presence of mobile devices, it allows for more niche products too which will let you create products that don’t follow the trends and can still be successful.

Biography
Daniel KAPLAN is Mojang's business developer since October 2010. He was born and raised in Skövde, Sweden. He founded ludiosity.com

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COMMUNICATIONS & STRATEGIES
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Discover our issue Video Game business models and monetization on this subject.

 

 

25Jun/140

[ITW] Yves GUILLEMOT, Co-Founder and CEO Ubisoft, Paris, France

Published in COMMUNICATIONS & STRATEGIES No. 94, 2nd Quarter 2014

Video game business models and monetization

Yves-guillemot-Ubisoft

Interview with Yves GUILLEMOT Co-Founder and CEO UBISOFT

 

Conducted by Philippe CHANTEPIE
French Ministry of Culture and Communication;
Associate researcher, Innovation & Regulation Chair, Paris

 

C&S:  We have entered the 8th generation of consoles. Do you consider it likely that this will upset the market positions of publishers and console manufacturers?
Yves Guillemot:  This new generation of consoles brings many changes, incorporating all the innovations from parallel markets and multiplying their potential through technological power. These platforms reach an unparalleled high level of performance, immersion and opportunities which allow us to create even more powerful game experiences. Each generation of consoles has large implications for publishers who need to invest heavily to maximize power and be able to seize the great opportunities that arise.
On the other hand, the strong growth in mobile and PC markets, driven by social games, permanently connected and free access, is a challenge for traditional industry players, with new economic and editorial models that differ from more traditional games. These models started being introduced at the end of the previous generation of consoles. New platforms like the Playstation 4 or Xbox One have fully integrated these developments and allow us to put the player at the center - before, during and after the game experience - and to give him/her an increasingly active role in changing content.

C&S: Casual gaming has grown rapidly and has already started occupying a predominant position. Do you think it is likely that this will continue to increase?
Y.G.: Casual gaming is not a new phenomenon. In 2006 the Nintendo Wii had taken a big step towards attracting video games and a new audience, part of which is now plays more traditional games. The rise of social networks, mobile games and online greatly amplified this phenomenon and globalised the supply and the audience to which it is intended. The video game market today encompasses nearly 2.5 billion players, compared to 500 million previously. This is a pool of significant growth for our industry. For example, one of our flagship brands Just Dance is a dance game first released on the Wii, which has sold 49 million copies since 2009. It was particularly popular during the Christmas season.

C&S: We are witnessing significant changes in revenue models. Are these new models mature enough and able to renew the game console segment?

Y.G.: These new models are growing dynamically and also continue to evolve. Some examples or experiences have shown us the difficulty of maintaining high market shares and good consistent results. Without a miracle, renewal is necessary to adapt to a changing marketplace. Ubisoft deploys and uses these models, while consolidating and diversifying a portfolio of original brands for which we control the entire creative and commercial process. Beyond the video game, our goal is to increase the visibility and attractiveness of our franchises by being increasingly present on new media such as television, with the Raving Rabbids TV series, and soon the cinema with the adaptation of franchises like Assassin's Creed or Splinter Cell. The Raving Rabbids Futuroscope theme park attraction, open for several months, is also a success.

C&S: Do you consider that the development of competition in the video game industry will lead to transform the production system of game publishing and how?

Y.G.: In recent years, production of video games has become considerably more professional. Our industry is constantly evolving: our businesses, the technologies we use, as well as the habits and customs of the consumers, such as being permanently connected with their phones. These changes are revolutionizing the way we design our games. We must constantly renew and adapt to propose the most innovative and immersive creative experiences. For example, a game like Watch Dogs allows our players via mobile applications connected to the game console, to play anywhere and anytime; it also allows their friends who do not have game consoles to help them progress in the game. Our mission is to provide our players ever stronger and enriching experiences while finding technical solutions allowing us to reduce our costs and therefore our risk. To remain agile and ready to face these challenges, we actively invest in R & D in France and abroad.

C&S: Which factors do you think are the most disruptive of the game economy factors present or future: free to play, an actor like Steam, etc.?

Y.G.: The free-to-play model was born in Asia to circumvent the problems of piracy of the PC game business model. This model has experienced significant growth in recent years in Western markets. By removing entry barriers, it allows players to experience games and be free to invite their friends and invest if they like the content. This model has now gone beyond the sphere of casual games in which it was previously embedded to move towards more traditional experiences and platforms such as consoles. Ubisoft has been present in this segment for some years with games like Settlers Online, Howrse, and more recently with Trials Frontier, and The Mighty Quest for Epic Loot.

C&S: The Montreal studio set-up seems to be a supporting model of this industry. What elements of this support do you consider are the most strategic to strengthen the ecosystem of this sector?

Y.G.: Canada, but also other territories around the world, has been able to highlight craft, creativity and innovation as a driver of economic development. These territories were able to discern the many benefits that the digital creation industry and jobs with high added value could bring. In addition to the direct incentives, education is also specialized in these areas to form a diverse pool of talents. Two key factors in this success that are important in the eyes of the gaming industry are the unique efforts and the simplicity of public procedures.

 

Biography

Yves Guillemot founded Ubisoft in 1986 with his four brothers, and was named CEO of the company in 1988.  Starting off by importing and translating video games from England, Yves and his brothers immediately used the distribution business to fund the creation of games, starting with Zombie in 1990 for Atari ST.  Yves has overseen the phenomenal growth of Ubisoft into an internationally renowned and respected creator of quality video games with 29 studios, distribution in 55 countries and with more than 9,200 employees around the globe. For the 2013-2014 fiscal year it generated sales of 1.007 billion euros.
Born in Brittany of France's west coast, Yves grew up in a family of entrepreneurs.  All five Guillemot brothers worked summers in the family agriculture supply business.  Later, Yves attended business school in Paris, formalizing his education in the creation and sustenance of an enterprise. Yves is married and enjoys playing video games with his three children.

Published in  COMMUNICATIONS & STRATEGIES No. 94, 2nd Quarter 2014

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COMMUNICATIONS & STRATEGIES
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Managing Editor
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23Jun/140

[ITW] Wolgang KOPF, Senior Vice President for Group Public and Regulatory Affairs Deutsche Telekom AG

Published in COMMUNICATIONS & STRATEGIES No. 93, 1st Quarter 2014

 

Re-thinking the EU telecom regulation

wolfgang_Kopf

Interview with
Wolfgang KOPF
Senior Vice President
for Group Public and Regulatory Affairs
Deutsche Telekom AG
Conducted by Ulrich STUMPF WIK-Consult GmbH
C&S:  What is your vision of the single telecoms market in Europe in terms of market integration, services, players and competition?

Wolfgang KOPF: We need to understand two things: the ICT sector is of strategic importance for Europe's competitiveness and future well being, and the sector is subject to increasing global competition. To stay competitive, we have to exploit synergies and achieve scale in-country as well as cross-border. Competition authorities must refrain from imposing excessive remedies that undermine merger synergies and scale advantages, preserving an artificially fragmented market that hurts the global competitiveness of Europe's economy on the long term. In this context, policy makers should recognize realities of global competition. Instead of welcoming quasi-monopolistic competition coming from outside Europe it would be better to focus on the competitiveness of European ICT Industry. A more global approach to competition would benefit end-users with more investment and superior quality.
On the sector specific regulatory side, Europe suffers from a patchwork of 28 different regulatory environments compared to other economic regions of the world. A harmonized regulatory framework and cross-border competition will constitute major building blocks of a true Single Market. The current level of fragmentation cannot be good for an industry so much dependent on scale as ours. Further harmonization providing for a less complex and more predictable regulatory regime and its consistent application in all member states are necessary for a single telecoms market in Europe. This does not mean to offer the same service at an equal price across Europe as countries differ e.g. with regard to topology, population density, purchasing power etc. Therefore a single market approach has to cater for the still existing differences which include diverse product and pricing schemes for consumers across Europe.

C&S:  The Draft Connected Continent Regulation introduces a more Eurocentric model of regulation based on stronger Commission powers. Do you believe that ultimately a single market requires a single EU regulator?
W.K. : When looking at the regulatory oversight in Europe, one thing is absolutely clear: The current institutional three layer setting that involves national regulatory authorities, BEREC and the EU Commission in virtually all regulatory decisions is far too complex, leads to lengthy proceedings and uncertainty and is definitely not a sustainable model in such a fast moving sector. We would prefer a clear allocation of tasks and competences between the EU level and Member State level in order to provide for faster, more stream-lined proceedings and more predictable decisions.
This does not necessarily mean that we need to build up a new bureaucracy at a time when we are considering significantly reducing the level of asymmetric regulation. The more we reduce the amount of complex regulation, the easier harmonisation will be. In such a dynamic market less bureaucracy is usually more conducive for innovation and investment.

C&S:  Many responses to the Commission's single market proposals point out the lack of an impact assessment and underline that the proposals have little chance of achieving their stated targets. Do you share these criticisms?
W.K. : First of all, we share the Commission's analysis of the state of the telecoms sector in Europe and agree that framework conditions have to change to put the European digital economy back on track and support more investment in high-speed broadband networks. The objective of a policy reform for the sector was also confirmed by European heads of state and government at their Summit in October. The Single Market Regulation could become a key element to help the EU ICT sector to regain its former strength.
The announcement of the Single Market initiative by Commissioner Kroes in February 2013 raised high expectations in the sector as well as in the investors' community and discussions with the Commission were indeed promising. However, the proposals presented by the Commission in September struck a difficult balance between pro-investment elements and additional burdens for the European telecoms sector.
While we particularly welcome the Commission's proposals for a better coordination of spectrum management in the EU, we believe that proposals in the draft Regulation that further undermine the revenue base and investment capacity of the sector, such as on roaming and international calls, should be removed. A stronger emphasis should be put on fostering new investments in NGA infrastructures and establishing a level playing field for EU telecoms companies to enable them to better compete with global companies in the Internet value chain. On open internet regulation, a full harmonisation at EU-level could, if appropriate and future-proof, provide for legal certainty and support more investment and innovation in the sector. Here it is essential to provide for more commercial freedom for new business models. This would also be in the interest of other sectors of the economy as well as consumers who would benefit from a higher variety of service offerings.
Now the Regulation is in the hands of the European legislator and it remains to be seen whether the intended goal, i.e. to strengthen the European telecoms sector, can be achieved. Recent draft amendments seem to worsen the whole package further.

C&S:  By the time the single market regulation can be approved, it will likely be just one year away from the next review of the regulatory framework. To what extent could the provisions set out in the Draft Regulation of the Commission be postponed and taken up in the next Telecoms Package Review?
W.K. : Time is of essence in this fast moving sector. The analysis clearly shows that Europe has been falling back in the last decade and that the framework conditions are part of the problem. In time of crisis it is not the best idea to postpone. If we see a chance to have some quick fixes we should grasp every opportunity to improve the situation for the European industry.
To postpone until the next telecoms package review would not mean just a year of delay as suggested by the question. We expect the Commission to presents proposals for a complete review of the telecoms regulatory framework not before mid 2015. Then we will have a full legislative process, possibly concluded by 2018 with implementation in 2020 by Member States when using the typical instrument of a Directive. I have sincere doubts on whether we can afford to wait another five years until we see a new framework to become effective.

C&S:  The telecoms operators deplore the lack of a level playing field given the far less formalised regulatory environment for OTT players. In what areas to you believe is the most urgent need for action and what is your view on the Draft Regulation with regard to these concerns?
W.K. : Since the time of adoption of the EU regulatory framework in 2002 the communications market has significantly changed. Today, the migration to all IP in electronic communications networks is increasingly diminishing the distinction between traditional telecommunications services and IP based communications services. Much text, voice or video communication is increasingly substituted by equivalent internet based services, e.g. software applications and social networks. Convergence is already a reality. From our industry point of view it is not acceptable that we have to play by different rules for comparable services. From a consumer protection point of view it is neither understandable why consumers need less protection when the like services are provided by an internet company or a handset manufacturer. To ensure consistent application, the rules established for traditional telecommunications services must also apply for equivalent and functionally substitutable IP-based communications services.
Furthermore, well established principles in the telecoms sector like transparency, interoperability, non-discrimination and the right of switching providers need to be transposed to all players in the broader internet market. Why are you not allowed to switch all your Apps when you switch from Android to IOS and vice versa? What is the difference to number portability? A level playing field and symmetric rules, applicable to all market players along the value chain, will help keeping markets open for competition and protect consumers irrespective of the underlying technology over which services are provided. This is a key requirement to provide for competitive framework conditions for the European ICT industry.
The Commission has recognised the need for action (see Communication COM(2013) 634/4) and intends to address the level playing field between telcos and OTT players in the next telecoms review.

C&S:  An important part of ex ante regulation provided for by the current EU framework is triggered by Significant Market Power. To what extent can regulators take account of the competitive constraints imposed by OTT services in the current framework when defining markets and assessing market power?
W.K. : The asymmetric sector-specific price and access regulation of incumbent operators was established once to promote competition after the liberalisation of the telecoms markets in Europe. Today's telecoms markets are characterised by very strong and widespread infrastructure based competition in the fixed and mobile markets. Therefore, it is time to remember under which caveats the current regulation had started. It was subject to a near time sunset. Furthermore, the industry faces intense competition by global OTT players, such as Apple, Facebook, Google, and Microsoft. For example, the volume of daily OTT-messaging traffic is already twice the volume of SMS traffic and growing fast (estimation by Informa, May 2013). In 2012, $23.2 bn. of mobile network operators' SMS revenues have been lost due to the enormous popularity of OTT messaging services ($54.4 bn. in 2016, estimation by Ovum, Sept. 2012).
Since those players use different pricing schemes (consumers pay ‘only' with their data), traditional market analysis tools fail to completely capture the level of the competitive pressure on traditional telecoms services. Furthermore, regulatory and competition authorities continue to rely on partly obsolete market definitions. Competition policy needs to find a way to how the competitive pressure of OTT services can be measured and thus the markets defined according to market realities.

C&S:  Competition concerns have led antitrust regulators to approve mergers and infrastructure sharing agreements only under strict conditions (divest activities, hand back or sell off rights to use spectrum). Do you believe more consolidation is required in the European telecoms industry and do you see major flaws in the application of competition law?
W.K. : The European telecoms industry needs to operate on an efficient scale in order to meet the NGA investment challenge. High amounts of sunk fixed costs, long-term amortization periods and the need to continuously adopt new technologies and upgrade infrastructures make scale an inevitable and critical requirement for European telecoms to be able to provide competitive, state of the art networks.
A combination of in- and cross-country consolidation is required to exploit available economies of scale and density. For example, Boston Consulting Group (BCG) estimates that moving from 25 percent to 30 percent average market share per mobile network operator would yield a cumulative €30-45 bn. of additional free cash flow until 2020.   As a result of the pooling of existing customers and networks which occur in a merger and intensified utilization of networks, it can become economically viable to increase network coverage to certain rural areas that previously could not be served economically. In order to achieve the objective of a true Digital Single Market, it is necessary to eliminate inefficiencies and to establish operators that can sustain a pan-European footprint.
European policy makers and merger control should adequately take into account the advantages of consolidated operations, in particular acknowledge the value of superior network quality and changing consumption patterns in the light of technological convergence and abstain from artificially reversing market-driven developments. Competition is best safeguarded by competitors that operate on an efficient scale. Market entry that simply relies on preferential treatment by competition authorities is inherently inefficient and unsustainable. Spectrum reservation and exclusive wholesale access amounts to a subsidisation of entrants that distorts competition and investment incentives.
Competition authorities still mainly focus on short term price effects and underestimate dynamic efficiencies, long-term investments and quality implications. This leads to less favourable market outcomes. One striking example is the H3G/Orange merger in Austria: The EU Commission had concerns that the elimination of one out of four mobile network operators in Austria could have led to less competition and higher prices. Thus, the approval was tied to the implementation of structural remedies, such as the provision of wholesale access for MVNOs and a fourth entrant spectrum reservation. Nonetheless, no network operator entered the spectrum auction. The reason is the intensive price competition in Austria which questions the return on investment.
During the T-Mobile/Orange merger proceedings in the UK the Commission abstained from a new entrant remedy and thus chose a far more moderate approach. Mobile customers in the UK still benefited from post-merger price declines and a significant quality increase due to the widespread rollout of 4G networks.
These examples show that we need a comprehensive analysis of the price-quality ratio (so called quality adjusted prices) instead of an isolated focus on short term price effects. Competition policy must apply a new approach concerning dynamic efficiencies which are so important for investment intensive industries such as the telecom industry.

C&S:  Which cross-border synergies do you expect for European network operators?
W.K. : Cross-border scale economies typically exist on a higher level of the value chain, namely services. The main driver to capture the full potential of cross-country synergies for telcos is to integrate IT applications and network management platforms across countries. Harmonized rules and procedures  could help to allow pan-European telecom operators to realize additional synergies. The BCG study estimates that the basis for potential cross-country synergies for European network operators theoretically adds up to about €95 bn. a year and a cumulative €840 bn. through 2020.   However, such synergies are expected to be reaped only over a period of 10 or more years, since the realization depends on lengthy replacement cycles of the existing network and IT infrastructure. In this context, we have to make sure not to mix-up harmonisation with additional, non-proportionate burdens for the industry.

C&S:  Do you expect that the reform of the EU regulatory environment brought about in 2013-14 will provide the stimulus required to achieve the roll-out objectives of the Digital Agenda?
W.K. : In July 2012 Commissioner Kroes announced to realign the European regulatory policy in order to enhance the broadband investment environment. The Recommendation on consistent non-discrimination obligations and costing methodologies, adopted in September 2013, was the first tangible result of the announced policy change. It provides for price stability of the unbundled local loop, and allows more flexibility for the pricing of NGA wholesale products where infrastructure competition and effective non-discrimination are present. The Recommendation is an important political signal that certainly helps promoting confidence in the regulatory policy in Europe. However, this was only a first step in the right direction and further steps are needed to promote a healthy European telecoms sector, able to ensure investments in future broadband networks. As I see no alternative to this route, I am confident that we will make further progress to re-establish the competitiveness of this strategically important sector.

Biography

Wolfgang KOPF (49) has been Senior Vice President for Group Public and Regulatory Affairs at Deutsche Telekom AG since November 2006. He is responsible for Regulatory Affairs, Competition and Media Policy, Spectrum Strategy and Public Affairs. Wolfgang Kopf joined Deutsche Telekom Group in 1995 where he held various senior positions since. He studied Arts and Law at the Universities of Mainz and Speyer, specializing in European and International Law. He also holds a Master of Laws (LL.M.) degree from the University of London. During his training as a lawyer, he worked for a leading international law firm and the European Commission. Wolfgang Kopf is a Board Member of GSMA. He is also a Member of the Foundation Board of the International Charlemagne Prize of Aachen and a Board Member of the Brussels based Economic Think Tank BRUEGEL. Furthermore, he is the co-editor of two German Law Journals.

Published in COMMUNICATIONS & STRATEGIES No. 93, 1st quarter 2014

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COMMUNICATIONS & STRATEGIES
Sophie NIGON
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19Mar/140

[ITW] Roberto VIOLA, Deputy Director General European Commission DG CNECT

Published in COMMUNICATIONS & STRATEGIES No. 93, 1st Quarter 2013


Re-thinking the EU telecom regulation

Summary of this issue: It is in a complex environment combining economic crisis, a growing gap between the performances of European operators and those of the US leaders, questions about Europe'sability to meet its objectives in NGA terms ("2020 Digital Agenda targets") and preliminary signs of the appetite of non-European operators to gain a foothold in the markets of the EU, that the Commission announced the publication of its proposal for a "Connected Continent" Regulation to the Parliament and the Council. This was accompanied by a few key reports, which are well represented in this issue of Communications & Strategies. The papers which have been selected provide a deep insight into the issues of European telecom policy addressed in the current "Connected Continent" proposal of the European Commission and that will be at the core of the forthcoming review of the regulatory framework. They are supplemented by two exciting interviews with key personnalities from Deutsche Telekon and the European Commission-DG Connect.

Roberto VIOLA<br />
Deputy Director General<br />
European Commission,<br />
DG CNECT
Exclusive:
Interview with Roberto VIOLA
Deputy Director General

European Commission,
DG CNECT

 

Conducted by Giovanni AMENDOLA,
Head of Relations with International Authorities,
Telecom Italia
& Yves GASSOT
CEO, IDATE-DigiWorld Institute

 

C&S: Could you explain why Mrs. Kroes' draft regulation aims at accelerating the creation of a single market for telecoms?

Roberto VIOLA:
Europe desperately needs to tap into new sources of innovation and growth. Today ICT constitutes half of our productivity growth, and every economic sector today increasingly depends on good connectivity to be competitive: the solution lies in applying the single market philosophy also to the telecoms networks that underpin those connections.
The fact is, European telecom companies cannot afford to remain trapped in 28 national markets; and Europe cannot afford it either. Europeans are enjoying single market freedoms, and telecoms are an increasingly important part of that: as businesses want to use new services like cloud computing, connected cars and mobile health.
If we allow those barriers to remain, we starve the digital economy of the raw materials it needs: connectivity and scale. When supported, the digital ecosystem can grow and create jobs fast; 794,000 were created in the app economy alone in just five years, even with a wider economy in recession. And across the economy, digital tools stimulate business, through higher productivity, efficiency and revenue.
Europe needs to recapture its global lead in ICT – a lead we once had, but lost. The missing link in this digital ecosystem is a telecoms single market. The European single market with 500 million customers will be one of the largest and the wealthiest of the world.

What are the likely characteristics of a single telecoms market in Europe?

A genuine single market in telecommunications is a market that looks at the evolution of internet and data services where consumers and businesses can obtain the best services from any EU operator, where operators can competitively offer services outside their home Member State, and market them anywhere in the EU; and where there are no excessive charges for cross-border communications or for roaming. It is where telecoms companies can have the ambition to expand on a continental scale – and every European benefits from choice and seamless data service. The Connected Continent is the underpinning infrastructure of the future European digital economy.

Do you think that the benefits of national competitive markets can be combined with the benefits stemming from the emergence of pan-European operators?

Our vision is for a dynamic, competitive market where pan-European providers compete alongside regional or local players, more local and more tailored. Such a market will promote competition and increase choice for consumers: with fewer barriers and greater economies of scale, companies will only succeed by offering the best deals at the best prices.
Until now in Europe we have had national markets. The result is significant fragmentation and a lack of dynamism: in particular if you compare Europe with its global competitors. As a result we are losing out on growth and jobs. This is not acceptable any longer. Operators should be able to easily provide their services in any country where they see a market opportunity, without facing unnecessary restrictions – that is what a single market means.

The draft regulation introduces a much more Eurocentric model of regulation based on stronger Commission powers. In addition, the Commission has also stressed that a genuine single market will ultimately require a single EU regulator. Can you explain the new institutional model of regulation proposed by the Commission?

The Commission proposal does not establish new bureaucracy or regulatory bodies at EU level: it levers on the existing bodies and keeps institutional change to the minimum necessary to enable the single market. On Spectrum we would like to increase the role of the Radio Frequency Policy Group as an advisor to the Commission and we want to make sure that Member States enhance their cooperation when assigning and licensing spectrum for broadband applications.
Another important element of our proposal is the enhanced role set out for BEREC in ensuring consistency of regulation.
As we explained in the Communication that accompanied the presentation of the legislation, the enhanced cooperation model we have proposed does not preclude a future review of the regulatory framework, considering all options and selecting the most cost-effective one in light of the market scenario as it then stands. In such a future scenario, it is possible that in a completed genuine single telecoms market we would need tighter links among National Regulators by means of an EU regulatory body responsible both for spectrum and telecom markets in charge of interpreting and implementing a harmonised legal framework. But this is hypothetical; and not covered by the proposal now under discussion.
At the same time, a single telecoms market with lower barriers to entry and more effective competition should over time normally lead to less regulation - shifting responsibility from regulatory to competition authorities as is the case in other economic sectors. Some regulatory tasks will always remain linked to the national or local level. It would therefore be important to assess the possible tasks of an EU regulator, as and when this option might be considered in future.

To what extent could the provisions set out in the draft regulation of the Commission be postponed and taken up in the next Telecoms Package Review?

A fully fledged telecom review is a complex task and it could take years to be completed. Apart from some countries, we witness a very slow development of fast broadband and lack of investment in Europe. We cannot wait for the situation to worsen. As our Commissioner, Vice-President Kroes, has put it: with the economy where it is, with technology where it is, with the rest of the world marching on quickly, we need to act, now, urgently. As we have said on many occasions, this cannot be a piecemeal approach: only the package taken as a whole can bring us towards the single market we need.
In parallel with the work on the Regulation – but not instead of it – we should of course prepare the ground for the next Commission and a future review of the telecoms framework. Indeed in September 2013, we set out how we are preparing such a review, looking at issues like enhancing consistency, a single regulator, the level playing field, and audiovisual convergence. It's right to start preparing for that. Such a review will take time. And we cannot wait that long before acting.

How do you interpret the critical reactions from the BEREC, operators and even a number of governments?

When the proposal was presented there were initial mixed signals, which is quite normal considering the issues at stake. This proposal is designed to have a real impact, it is not a minimum common denominator to make every interest group happy. Some operators favour some aspects but combat hard against others: short termism leads to fighting the end of roaming, for example. But we continue to regard all aspects as integral to the objective, not separable from each other. Besides the telecom providers the reactions from all industrial and service sectors have been generally very positive showing how single market counts for the future of Europe. Also the reaction of the investor community was in general favorable.
The immune system of Regulators is programmed to guarantee stability and to be prudent about change. I remember back in 2007 when many National Regulators were initially opposed very vehemently to the idea of establishing BEREC. An initial critical reaction from National Regulators was to be expected. However in a number of points the opinions of the Commission and of BEREC are convergent.
However many things have changed since the presentation of our proposal. Heads of States and Government in the European Council of October 2013 have welcomed the single market proposal. The Parliament is working very constructively and at full speed towards adopting its opinion on the proposal.
Although in some areas differences of point of view remain, we are now engaging in a constructive dialogue with BEREC which I am sure will bear fruits.

What would you say to telecoms operators who consider that there is too much discrepancy between the very strict sectoral regulatory framework to which they have to submit (ex ante and ex post) and the far less formalised OTT environment?

It is a recurring question but is probably not the right question. Telecom operators are infrastructure providers and "over-the-top" internet players ("OTTs") by definition are not. It's the same difference that you can observe between passenger services and transport industry. The telecom world is becoming data centric. The telecom infrastructures have to evolve towards this new paradigm. For telecoms operators, OTTs are an important driver of connectivity demand and consumption. In other words without OTT's there would not be a telecom industry future and vice versa. Recent trends have shown the increasing interrelation between telecoms operators and OTT's. This trend will be continuing in the future. It is also clear that when analysing competitive pressure all service providers have to be taken into account. What counts is the nature of the service not who is providing it. We also have to recall that there are different kinds of OTT services, not only those competing with transmission and communications services but also those which may fall under the audiovisual media services directive.
Now, it is clear that the close relationship between telecoms and OTT players poses opportunities and regulatory and competition issues that need to be examined carefully, also possibly in a future review of the telecoms framework. These challenges, however, are not confined to this framework, but include other issues that will need to be addressed at European and at the international level.

How do you account for the difference in growth of the telecommunications service market on each side of the Atlantic in the last five years?

Investment, investment and investment! The differential in investment for example in 4G networks is rather remarkable and probably explains it all. The size of the market is also an important element. Fragmentation into small national markets means European telecoms operators have little incentive to expand and reach the scale of some of their American counterparts. We want to enable European telecoms operators to find business opportunities across Member States, and reap the benefits of a market of 500 million consumers.

Do you believe that the Digital Agenda objectives for 2015 and 2020 can be achieved by most of the European countries? Do you also envisage a need to reset the objectives by introducing more ambitious targets?

Having clear targets since the DAE was launched in May 2010 has to enable progress in Europe to be measured. Many national and regional authorities have adopted their digital agenda with the same objectives. In the annual Digital Agenda Scoreboard, we make data openly available so everyone can assess and compare performance and progress country by country.
Basic broadband internet is now everywhere in the EU, but data shows that more effort is needed to achieve the 2020 DAE targets. Fast broadband now reaches over half the population – as 54% of EU citizens have broadband available at speeds greater than 30 Mbps. Internet access is increasingly going mobile - 48% of EU citizens can access the internet via a mobile network from their smartphone, portable computer or other mobile device. However, only 2% of homes have ultrafast broadband subscriptions (above 100 Mbps), far from the EU's 2020 target of 50%. This is very alarming. Before setting new targets we have to use every policy instrument to make sure that we can meet the existing ones. If there is a remedy above all for such an alarming situation then this is called the single market.

Biography

Roberto VIOLA holds a doctor degree in electronic engineering (Dr. Eng.) and a master in business administration (MBA). He is Deputy Director General at European Commission - DG CNECT, with responsibilities for Electronic Communications Networks and Services Directorate, Cooperation Directorate - International and Inter-institutional relations, Stakeholders cooperation, Coordination Directorate - Growth and Jobs, Innovations and Knowledge Base, Media and Data Directorate. Since 2005 to 2012 he has been the Secretary General in charge of managing AGCOM (Italian media and telecom regulator). He has been Chairman for 2012-2013 of the European Radio Spectrum Policy group (RSPG), he was Deputy Chairman for 2011 and Chairman for 2010. He was in the Board of BEREC (Body of European Telecom Regulators). He was Chairman for 2007 of the European Regulatory Group (ERG). He served in AGCOM (1999-2004), as Director of regulation department and technical Director being in charge of, inter alia, regulation in terrestrial, cable and satellite television, frequency planning, access and interconnection of communication services, cost accounting and tariff in telecommunication and broadcasting services. From 1985-1999 he served in various positions as a staff member of the European Space Agency (ESA) in particular, he has been head of telecommunication and broadcasting satellite services.

Published in COMMUNICATIONS & STRATEGIES No. 93, 1st quarter 2014

Contact
COMMUNICATIONS & STRATEGIES
Sophie NIGON
Managing Editor
s.nigon@idate.org

22Jan/140

Cutting the Cord: Common Trends Across the Atlantic

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013


Joint Interview between Gilles FONTAINE, IDATE and Eli NOAM, Columbia Business School

Summary of this issue: "Video cord-cutting" refers to the process of switching from traditional cable, IPTV, or a satellite video subscription to video services accessed through a broadband connection, so called over-the-top (OTT) video. The impact of cord cutting will probably differ among countries, depending on the level of roll-out of digital cable, fibre optic networks, and/or IPTV, on the tariffs of legacy video services, on the quality of broadband access and on national players’ strategies.
Regulation will play a key role in this new environment, as a strict enforcement of net neutrality could prevent network operators from leveraging their access to customer base to market their own video services.

Eli NOAM<br />
Columbia Business School,<br />
New York, USA<br />
 Exclusive:

 Joint interview with

 Gilles FONTAINE, IDATE,
 Montpellier, France
 
 Eli NOAM, Columbia Business School
 New York, USA
 

C&S: How would you define cord-cutting, from a US or European perspective?

Gilles FONTAINE: Cord-cutting, in Europe, is seen mainly as a USA phenomenon, where consumers would trade-off their pay-TV subscription for over-the-top Internet services. The last years, in Europe, have rather seen the rise of powerful cable and IMPTV operators competing in the pay-TV market with legacy satellite packager.

Eli NOAM: Cord-cutting is the dropping, by consumers, of expensive cable TV subscriptions in favor of online access to TV programs and on-demand films. Drawbacks for consumers are less certain quality (bandwidth), less availability of live programming such as sports, and absence of some channels. Advantages are cost-saving, no need to pay for undesired channels, better search, less advertising, greater choice, more control. In a broader sense, cord-cutting is a transition of TV from a broadcast/cable push model to an individualized pull model. So this is not just about switching to yet another delivery platform. That's the easy part. It is much more fundamental. Looking ahead, one change will be that by going online, TV will move from a slow-moving, highly standardized technology controlled by broadcasters and consumer electronic firms to a system where multiple technical approaches compete with each other and propel video delivery into an internet-rate of change and innovation. And that's just the technology. Equally important changes will take place on the content level, and in the structure of the media industry, in the advertising and business models, and in the policy.

Do you see any evidence that cord-cutting is really happening?

Gilles FONTAINE: Cord-cutting, in Europe, is not happening, or is not happening yet. Several reasons account for this: on the one hand competition is intense in Europe between networks, and is driving Internet access and television prices down, therefore limiting the incentive to "cut the cord". On the other hand, Internet services are far from having the same level of offer as US ones, even if catch-up television is increasingly available throughout Europe. Also, the video-on-demand market is very fragmented, with still limited catalogues and interfaces that could be improved and subscription video on demand is nascent, and mostly pushed by US-bases players, even if some European players have launched first services. Finally, the penetration of connected TVs and connected set-top-boxes is probably also lower in Europe than in the USA.

Eli NOAM: In the short run, there is less cord-cutting than media reports and hype suggest. For a variety of reasons, almost all participants in the media industry have an interest in dramatizing the issue. Broadcasters are making investments in ‘second screen' distribution, partly to be prepared for change, and need to justify them. ISPs are expanding bandwidth to position themselves as providers of mass entertainment options. Telecom companies, similarly, need to upgrade their networks. New providers of bypass service to broadcast and cable, such as Aereo in the US, create buzz to their market-disruptive activities. Media cloud providers such as Amazon or Netflix present new options. And even cable TV operators, who are the ones negatively affected, have an interest in presenting the problem as a crisis, at least to policy makers, in order to gain regulatory relief.

The reality is more modest, at least in the short term, but not insignificant. According to a credible analyst, Craig Moffett, The "pay TV sector" – cable, DBS, and IPTV – lost 316,000 subscribers in a 12 month period mid-2012- mid-2013. Since IPTV has gained subscribers, cable losses must have been larger. That is a loss of about 0.3%. Another estimate for 2012 has the number at 1.08 million. In a 4-year period 2008-2011, anywhere between 3.65 and 4.75 million subscribers were lost. But that was in the midst of the Great Recession, and thus not all can be attributed to cord-cutting.

Do OTT services really challenge telcos and cablecos managed TV and video offers?

Gilles FONTAINE: Many studies seem to show that OTT services propose a better customer experience than the equivalent launched by the telcos or the cablecos. OTT services are Internet natives, customer friendly companies, with a rhythm of innovation that is difficult to compete with. Telcos and cablecos still concentrate on the "linear television model", even if they have developed their own on-demand offers, whereas OTT services specialize in on-demand services. But telcos and cablecos still benefit from a privileged access to the TV set through their TV set-top-box, a competitive advantage which is about to be undermined by low cost solutions to connect the TV set, such as Chromecast from Google.

Eli NOAM: Overall, the extent of video streaming has been quite large. In the evening hours, about two-thirds of internet traffic are video-bits. Netflix alone has added 630,000 streaming subscribers in the US in 3 months in 2013, to a total of 30 million. Thus, while the numbers of cord cutters is not huge yet, as mentioned, a steady loss of subscriptions is to be expected, and it is backed up by surveys in which cable subscribers grumble about staying with expensive subscriptions which they do not fully utilize. This is particularly true for the younger generation. 34% of the Millenials (cohorts born 1980-2000) say that they watch mainly online video and not broadcast TV. For Gen X and for Boomers the numbers drop to 20% and 10%.

With OTT available, the traditional business model of cable companies unravels. In the past, they were able to raise prices and to pass on the raises by channel providers. This becomes more difficult. Similarly, it becomes more difficult to offer only bundled channels ("prix fixe"). Similarly, the ability of channel providers to offer content to viewers directly reduces their bargaining strength considerably. If they want to keep up, they also need to develop expertise in online technology, social networking, and mobile communications.

UK cableco Virgin Media and Sweden cableco recently signed a distribution agreement with Netflix. Do you foresee any revision of the cablecos and telcos triple-play model?

Gilles FONTAINE: Building an IPTV service is not straightforward for a telco: network costs can be high to ensure a homogeneous quality of service. They also face high programming costs and the complexity of negotiating with the media world. On-demand services hardly prove to be profitable, because of the market power of Hollywood studios combined with the strong competition between telcos and cablecos, has for instance led to almost unrecoupable minimal fees to access programs. The situation can be similar for a cableco that would not have the resources to acquire exclusive, attractive content: the recent deal between Virgin Media or Com Hem and Netflix heralds a change of strategy for the smaller telcos and clablecos, which could favor to comfort their Internet access business by offering the best OTT services rather than pushing their own television packages.

Eli NOAM: Overcoming all of these challenges is possible but requires an acceleration of internal processes, major investments, and a willingness to give up some control. There are signs of change in that direction. Comcast, which has just paid $ 39 billion for NBC Universal, thus gaining vertical control from the camera lense to the eyeball, has now announced a trial of a cord-cutting offer to subscribers: if they take a Comcast broadband service (of a quality that is today an upgrade for most customers) they get at basically no additional charge HBO Go (HBO's archive of self-produced shows plus current other shows, available anywhere in the US from most devices), plus the free broadcast channels. The regular monthly price $ 70/ month, compared to a price of $ 135 for a full complement of 200 channels including HBO Go. So the viewer willing to skip regular cable channels saves a lot of money. The data cap for such a service is 300 Gigabytes. This is about 120 hours of HD viewing per month, which is adequate for single viewer but tight for a multi-device, multi-viewer household.

So this shows that cable companies are considering to embrace cord-cutting as an inevitablity. Another development in that direction is the US cable industry's considering to integrate Netflix into its operations. They are holding talks with Netflix to make Netflix an option on their set-top boxes. In such a scenario, Netflix would, in effect, become cable companies' major VOD provider and revenues would be shared. This, together with the cable MSO's own cord-cutting option, would in effect accelerate cord-cutting. However, cable companies would not be entirely bypassed. They would mitigate cord-cutting into channel cutting. Ultimately, cable companies' main asset is their transmission network. Its exploitation will undergo transformation.

TV channels also face another form of cord-cutting, as viewers may directly choose their on-demand programs. How do you see their future role, if any?

Gilles FONTAINE: TV channels, as aggregators, may lose their specific role if on-demand consumption develops significantly. However, they will evolve proposing more and more live events to continue gathering strong audiences at the same time. Moreover, there is still a need of arranging the on-demand catalogues, pushing the right content to the right viewer at the right time and on the right device. TV channels should be able to leverage their linear programming to play their aggregator role in an on-demand market. But they will need to heavily invest in IT and review their trade-off between linear and on-demand distribution.

Eli NOAM: TV channels gain and lose. They gain in bargaining power over cable and other distributors. They can deal directly with users, though more likely they will go through new types of intermediaries such as Apple and Amazon.com. In a profusion of content offerings, strong brands are a valuable way for users to search for content. And if they can identify users or user characteristics they can fine-tune and individualize advertising. The danger for channel providers is that the loss of cable MSOs hold over viewers means that they cannot share in the MSOs pricing power. Furthermore, content providers can disintermediate them by going directly to viewers. Sports leagues, for example, could deliver their events directly and cut out the networks. Most of the channels do not have major operational IT expertise, and this provides an opening for an entire industry of new service providers and video clouds.

Gilles FONTAINE's Biography

Gilles FONTAINE is IDATE's Deputy CEO and is also in charge of IDATE Business Unit dedicated to media and digital content. During its 20 years experience in the Media sector, Gilles Fontaine has become an expert of the media economics and of the impact of Internet on content. He directed numerous studies for both public and private clients, including the EC, governments and local authorities, telcos and TV channels. Recent assignments have included a participation in the future MEDIA programme ex-ante assessment, the analysis of new video internet services economics, a long term forecast project on the future of television. He has also monitored the impact of digitization and online distribution on other media, radio, press and music. Mr. Fontaine holds a degree from the highly reputed French business school, HEC (Ecole des Hautes Etudes Commerciales, 1983) and from the Institut MultiMédias (1984).

g.fontaine@idate.org

Eli NOAM's Biography

Eli NOAM has been Professor of Economics and Finance at the Columbia Business School since 1976. In 1990, after having served for three years as Commissioner with the New York State Public Service Commission, he returned to Columbia. Noam is the Director of CITI. He also served on the White House's President's IT Advisory Council. Besides the over 400 articles in economics, legal, communications, and other journals that Professor Noam has written on subjects such as communications, information, public choice, public finance, and general regulation, he has also authored, edited, and co-edited 28 books. Noam has served on the editorial boards of Columbia University Press as well as of a dozen academic journals, and on corporate and non-profit boards. He was a regular columnist on the new economy for the Financial Times online. He is a member of the Council for Foreign Relations. He received AB, AM, Ph.D. (Economics) and JD degrees, all from Harvard. He was awarded honorary doctorates from the University of Munich (2006) and the University of Marseilles (2008).

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013

Contact
COMMUNICATIONS & STRATEGIES
Sophie NIGON
Managing Editor
s.nigon@idate.org

17Dec/131

Interview with Craig MOFFETT MoffettNathanson LLC, New York

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013


Video cord-cutting

Summary of this issue: "Video cord-cutting" refers to the process of switching from traditional cable, IPTV, or a satellite video subscription to video services accessed through a broadband connection, so called over-the-top (OTT) video. The impact of cord cutting will probably differ among countries, depending on the level of roll-out of digital cable, fibre optic networks, and/or IPTV, on the tariffs of legacy video services, on the quality of broadband access and on national players’ strategies.
Regulation will play a key role in this new environment, as a strict enforcement of net neutrality could prevent network operators from leveraging their access to customer base to market their own video services.

Craig MOFFETT<br />
MoffettNathanson LLC, New York
Exclusive:
Interview with Craig MOFFETT
MoffettNathanson LLC, New York

Conducted by Raul KATZ,
CITI (Columbia Institute for Tele Information),
New York

 

C&S: Is cord-cutting affecting equally cable TV and telcos in the US?

Craig MOFFETT:

There's a fundamental difference between the cord-cutting experienced by the cable operators, which is all about video, and that experienced by telcos, which is all about voice. Video is a high bandwidth service and voice is a low bandwidth one.

Low bandwidth services are the easier target, so up to now we've seen much more aggressive cord-cutting in voice than in video. The fact that the cable operators have a more robust physical plant than the phone companies has left the telcos losing share in broadband as well as in voice, making the losses all the more painful for the telcos.

Video is such a high bandwidth service that video cord-cutting is only just beginning. By our estimates, there are now as many as 2 million households that have cut the Pay TV cord in the U.S. That's only about 2% of the market, but it is a growing segment. In these early numbers you can see the beginnings of a bigger problem.

What are the different retention strategies deployed by each type of player to prevent an acceleration of cord-cutting trends?

The telcos seem to have concluded that they are fighting a losing battle to retain wireline voice customers. The residential voice market as a standalone business is vanishing before our very eyes. Unlike in Europe, bundling wireline and wireless therefore isn't really an option. In the U.S., the telcos have regional wireline footprints but also have national wireless ones. Naturally, they are reluctant to make a compelling integrated offering for fear that it will simply reduce the competitiveness of their wireless businesses outside their footprints.

Cable operators have an advantage in that they've got the best physical plant (at least where there is no fiber-to-the-home alternative). So they've been able to bundle video and broadband, and even voice, as a retention strategy. That has proven very sticky. And by tilting the pricing of their services – higher for broadband and lower for video, at least on the margin – they can make it less and less attractive to leave.

And the cable operators have another advantage. It is easier to defend high bandwidth services than it is to defend narrowband ones. The key is whether the cable operators will be able to begin charging for broadband usage. If they can, defending against high bandwidth video streaming becomes relatively easy. Or rather, it becomes a moot point, since a carrier charging the right price for usage is economically indifferent whether video is delivered via traditional Pay TV or via internet-based OTT (over-the-top) alternatives. The question here is entirely regulatory. Whether they will meet regulatory resistance to their early trials is unclear.

Would any changes in the content arena (e.g. sports content) accelerate the cord-cutting trend?

In many ways, sports programming holds the key to how the ecosystem will evolve in the U.S. Today, sports are exclusively available via the traditional model. Cutting the cord is therefore appealing to a relatively smaller segment of the population. If the most popular sports events were to be made available over the Internet you would suddenly begin to see a much more rapid migration to video over the Internet.

Conversely, if traditional cable and satellite operators are ever able to force the unbundling of sports networks by putting them on a separate tier, they would relieve what is otherwise a tremendous pressure point on the system. In theory, that would slow down cord-cutting. Today, cord-cutting is primarily about cost, not technology. And the biggest driver of cost inflation is sports programming. Taking it out of the basic programming tier would lower the cost to non-sports enthusiasts, reducing their incentive to cut the cord.

Would you see that cord-cutting would trigger additional changes in the content value chain (e.g. backward/forward integration, M&A)?

For distributors, the key question is whether the economic value of the video transport function can be preserved in an over the top model. If it can, the distributors will fare relatively well. Even satellite operators would benefit, since the economic benefit of cord-cutting would be mostly eliminated, which would naturally slow down the migration. Again, the real questions here are regulatory, not technological or economic.

For programmers, the key question is whether cord-cutting will necessitate unbundling. Most consumers think that content bundling is driven by the distributors. It is not. It is driven by the programmers. The programmers sell bundles of cable networks to the cable operators, and their contracts require that those bundles be kept intact.

Cord-cutting is typically assumed to entail a move to unbundling, or a la carte, programming, but that doesn't necessarily have to be the case. One can imagine a model where video is delivered over the Internet in the same unwieldy bundles that are today delivered by cable and satellite operators. If things evolve that way, the implications for the programmers will be relatively modest. On the other hand, if programming is ultimately unbundled as it moves to the Internet then the value chain as we know it will be upended. Value in that model would move further and further upstream, ultimately to the actors and artists, accelerating a migration we've been witnessing in slow motion for years. The value of the media conglomerates would radically decline as their revenues declined and as their costs of content acquisition and production rose. At this point, it is too early to say whether this will happen in video. It already has in music, and the results haven't been pretty.

Biography

Craig MOFFETT is the founder of MoffettNathanson LLC, an independent institutional research firm specializing in the telecommunications, and cable and satellite sectors. Mr. Moffett spent more than ten years at Sanford Bernstein & Co., LLC as a senior research analyst. He was previously the President and founder of the e-commerce business at Sotheby's Holdings. Mr. Moffett spent more than eleven years at The Boston Consulting Group, where he was a Partner and Vice President specializing in telecommunications. He was the leader of BCG's global Telecommunications practice from 1996 to 1999. While at BCG, he led client initiatives in the U.S. local, long distance, and wireless sectors, in both consumer and commercial services, and advised companies outside the U.S. in Europe, Latin America, and Asia. He was the author of more than 20 articles about the telecommunications industry during the 1990s. He published analyses and forecasts

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013

Contact
COMMUNICATIONS & STRATEGIES
Sophie NIGON
Managing Editor
s.nigon@idate.org

3Dec/130

Interview with Terry DENSON, Verizon Communications, New York

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013


Video cord-cutting

Summary of this issue: "Video cord-cutting" refers to the process of switching from traditional cable, IPTV, or a satellite video subscription to video services accessed through a broadband connection, so called over-the-top (OTT) video. The impact of cord cutting will probably differ among countries, depending on the level of roll-out of digital cable, fibre optic networks, and/or IPTV, on the tariffs of legacy video services, on the quality of broadband access and on national players’ strategies.
Regulation will play a key role in this new environment, as a strict enforcement of net neutrality could prevent network operators from leveraging their access to customer base to market their own video services.

Terry DENSON, Verizon Communications, New YorkExclusive:
Interview with Terry DENSON
Vice President, Content Strategy & Acquisition
Verizon Communications,
New York

Conducted by Raul KATZ,
CITI (Columbia Institute for Tele Information),
New York

 

C&S: Is the telco voice cord-cutting experience at all applicable to video distribution?

Terry DENSON:

I would not necessarily agree that the voice cord-cutting experience is the salient point. I believe the applicable lesson from the transition of voice from wireline to wireless is that the wireline relationship was literally and figuratively connected to the household while the wireless relationship is personal (e.g., it is common for several, if not all, members of a household to have their own device, which is personal to them). I see a similar opportunity in video distribution: the long term winners will be those distributors who are able to develop and offer video relationships (subscription or otherwise) that are targeted toward individuals (and all of their devices) and not solely the household.

What do you believe are the Telco's key assets in facing cord-cutting (either voice or video)?

Telcos have two key assets that make them well-positioned to establish and maintain market leadership in video: 1) The best bundled broadband product; and 2) the best platform for offering consumers a wider and deeper choice of live, recorded and on-demand content across all devices on a personal basis than any OTT player.

How do you believe Telco's fare relative to cable companies to face current and future video cord-cutting trends?

I believe Telcos are in a better position to prosper (especially those with a material wireless business) because they will be better able to: 1) monetize video traffic over the networks through high speed wireless and wireline networks; and 2) deploy compelling video services based upon those networks that provide more value and choice to customers than an OTT only player.

Do you expect any changes in value creation along the chain as a result of future cord-cutting trends?

I expect two long term changes in value creation: 1) the enhanced value of owning the broadband pipe based upon consumers increased reliance on greater capacity; and 2) the expansion of the video pie based upon the proliferation of video access points on devices and increased personal relationships and subscriptions for video access on those devices.

Biography

Terry DENSON is Vice President, Content Strategy & Acquisition for Verizon Communications. He is responsible for Verizon's content strategies and acquisition across all platforms including FiOS TV, Broadband, Verizon Wireless and Redbox Instant by Verizon (Verizon's joint venture with Redbox). He previously was vice president of Programming and Marketing, a position he was named to in August 2004 when he joined Verizon. In that position, Denson oversaw the creation and implementation of FiOS TV's content packaging, pricing and marketing strategies and video content acquisitions. Prior to joining Verizon, Denson served as vice president of programming for Insight Communications where he led the acquisition of programming, in addition to the development of analog, digital, video-on-demand, high definition TV, Broadband and interactive content strategies. Previously, as director of business development for the Affiliate Sales and Marketing department of MTV Networks, a division of Viacom International, he negotiated affiliation agreements. As general attorney for ABC, he managed numerous content rights and distribution matters. A graduate of Harvard University, Denson holds a J.D. degree from Georgetown University.

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013

Contact
COMMUNICATIONS & STRATEGIES
Sophie NIGON
Managing Editor
s.nigon@idate.org

13Nov/13Off

Interview with Wilfried SAND ZANTMAN Toulouse School of Economics; IDEI

Interview Published in COMMUNICATIONS & STRATEGIES No. 91, 3rd Quarter 2013

Public-private interplay in the telecom industry

Wilfried SAND ZANTMAN (Professor and Research director at IDEI and the Toulouse School of Economics) provides an overview on public and private partnerships in the economic literature. He describes different ways to conceive relationships between public and private actors and explains the rising interest of PPPs in various sectors. He also gives his view on core factors and policy requirements for successful PPPs implementation by focusing on the telecommunications sector. Finally, he addresses the potential role of partnerships to reach the digital agenda objectives.

Wilfried SAND ZANTMAN

 

Exclusive:
Interview with Wilfried SAND ZANTMAN
Toulouse School of Economics; IDEI (Industrial Economic Institut)

Conducted by Edmond BARANES, Montpellier University, France

 

C&S: How would you define a Public-Private Partnership? Does PPP represent a unique way to conceive relationships between public and private actors? Or please describe a spectrum of possible relationships.

Wilfried SAND ZANTMAN: There are many formal definitions of a PPP that differ from country to country. Nevertheless, one can say that it is a form of arrangement by which public authorities make use of the private sector to provide public services. This arrangement can take many forms as it can concern the design, the building, the management and even the financing of those public services. One of the major features of PPP is the fact that the private sector is in general responsible for a bundle of these tasks. It can be the design and building, or the building and management of the infrastructure, and most of the time part of the financing.

Even if PPPs have been increasingly popular, they are not the only way to think of cooperative agreements between public and private actors that existed well before the idea of PPP (or PFI) emerged. Historically, States have used private actors for the management of public services (taxes collection, road management), leading to a form of franchising. In this first case, the private actors bear part of the risk but the service to be delivered is precise and well defined ex-ante. In other cases, the private sector is asked to provide the good or the infrastructure following precise instructions given the State. In contrast with procurement contracts, PPP is a global relationship involving many dimensions of a project. As with PPPs, the firm has very often some leeway to organize production, it bears some risks not only on the demand side (as in a franchise contract) but also on the technical side.

What explains the increased interest and popularity of PPPs in various sectors?

I think many reasons explain the development of PPP in the last decades but, at a general level, there has been the belief that the State cannot do everything by itself. This general statement has some practical implications.

Secondly, PPPs being more global than standard procurement methods, they allow a better coordination between the various dimensions of the project. When a firm knows that it will operate the infrastructure in the future, it adjusts the effort undertaken today on the building of this infrastructure. Bundling tasks may therefore be beneficial in terms of efficiency. To give a standard example, spending some time on the design of a prison is costly but may avoid some costs in the future as less people may be needed to manage it. Delegating both building and management to one firm will lead that firm to think properly of the design ex-ante for the benefit of that same firm.

Lastly, some projects are new and even if the State has a general idea of what it wishes to obtain, it lacks the ability to define the good precisely. The PPPs are flexible enough to allow a competitive tendering on undefined objects. The firm can therefore meet the demand with a good it is creating, on behalf of the State, and competition tends to force the firm to do it at the best price. In the case of network infrastructures, it is sometimes feasible to use the previous generation network or part of it, while in other cases it is better to start everything from scratch. To consider a telecommunication example, one can think of the amount of copper lines to be kept and the choice between FFTH, FFTB or FTTN. By setting clear objectives but leaving the firm some flexibility on the best way to reach them, PPPs are much more likely to be cost-efficient than the old command-and-control approach to public service provision.

Do you think that the economic theory of PPPs provides sufficiently robust and interesting insights for decision makers? What are success factors and policy requirements for successful PPP implementation?

The types of questions economists consider are studied at a quite general, and sometimes abstract, level. They look at the best way productive activities should be organized between the State and the market, how risk should be allocated between industrial partners, or whether different types of activities should be performed by the same firm or different ones. The answers given to those questions depend on the detail of the situation studied, which can sometimes be disappointing for decision-makers who tend to favour ready-to-use solutions. Nevertheless, economic theory is helpful to think in many real situations and provides useful insights.

Let us take for example the financial aspect and the debate on whether PPPs are more (or less) cost-effective than public management. Many large firms can borrow at better terms than governments of developing countries (or local governments of developed ones) but in general the States can better diversify their risk (both in the space and in the time, i.e. between different generations). So, for very large projects, one should not expect significant gains from using private actors to finance public infrastructures.

Consider now the technical aspects of PPP. Choosing this form of partnership, where all the tasks are bundled, can generate management overload but avoids both the coordination and communication problems when many different and independent actors must work for the project. It is then worth choosing a PPP, i.e. allocating all the tasks to a single unit (possibly through a Special Purpose Vehicle), when the different tasks display positive externality. In short, if a clever design allows saving significant management costs, a PPP bundling design and operation is the right option.

More generally, one way to maximize the chance of success of a PPP is to increase the congruence of interests between the State and the firm. The State has neither the time nor the ability to monitor all the actions chosen by the firm. But this can be done indirectly by making this firm as much as possible residual claimant of the success of the project. It means that the firms must accept to take some risks, and the State must accept to leave some success dependent rewards to this firm.

Are there some relevant specificities of PPPs in the telecommunications sector? What do you see as the key to a successful partnership in the telecommunications sector?

The telecommunications sector, and more particularly for the fibre roll-out, seems to be an adequate case to think about this sort of cooperation. First, many contracts are signed by local communities who lack financial means, in contrast to the large firms operating in this sector. It is therefore one case where using private actors for financing and a better risk allocation makes real sense. Second, rolling out and managing the telecommunication infrastructure are natural complementary activities. Bundling these two activities, as it is generally the case in PPPs, is totally in line with basic economic principles. As discussed earlier, designing and building an efficient network is costly but allows saving on cost later on. The firm designing the network is all the more likely to choose the long-term rather than the short term cost-efficient solution that it will be in charge of managing the network once in operation.

Lastly, the potential complexity for building telecommunication networks makes it difficult for the State to manage or control on a day-to-day basis. A system where some room is left for private initiative - together with some risk - fits the characteristics of this industry well.

Do you think partnership between public and private sectors is the best way to reach the digital agenda objectives?

In a world where the local authorities are generally responsible for reaching the digital agenda objective, I don't see how one could do without private actors. From a technical point of view, PPPs help in choosing a cost-efficient solution. From a financing point of view, at least when part of the area covered by the infrastructure has high enough density, the participation of private funds alleviates the constraints of the public budget. One big question is whether this cooperation should be done at the State level (like in Australia), or should it be done at the local level, and only for the areas where private initiative is very unlikely to emerge. When the partnership is organized at the global level, the society may benefit from economies of scale and from the ability national governments have to obtain good favourable contractual terms. Nevertheless, such a solution does not seem relevant for countries with heterogeneous density. Indeed, some regions of those countries already benefit from the service provided by pure private players. A national partnership will distort competition and deter further private investment. Moreover, local partnerships are more likely to attract bids from medium-size firms whereas only big players can compete at the national level. Finally, the technical solutions, and the cost associated with these solutions, are different from one area to another. Adjusting the contractual conditions to the local features is more likely to lead to cost-efficient outcomes.

In Europe several PPPs projects have been developed using different investment models, how would you explain these different ways to organize cooperation between public and private actors?

When you look at different European project projects (Cornwall, Auvergne, Milan or Asturias), it is fascinating to see the variability in the way cooperation between public and private actors is organized. One key dimension explaining these differences is the density of those areas, and therefore the private profitability of the projects. In the region of Milan (Metroweb), there is no need for public funding but public participation is helpful both to use some public infrastructure and having good support from the administration. In contrast, the Auvergne region - a mountainous area with very low population density - is not profitable for a private firm. Ownership is then totally public, even though part of the risk is born by the operator, who pays part of the investment cost and receives some annual transfer from the regional body. But other dimensions must be considered, some of them probably related to national preferences for public or private control. For example, one can see that while Cornwall and Asturias could both be considered as areas with poor private profitability, the private sector has been welcomed in the British case while the Asturias region chose to keep the total control and ownership of the project. One can also consider that those two regions had different attitudes towards risk-taking, and that the different models of partnership only reflect this taste heterogeneity.

But at a global level, all those projects were originally very clear on the objectives, the duties of all contracting parties and the intermediate targets to be reached by all the actors. This transparency and the long-term commitment of public and private actors are probably the most important elements to achieve socially efficient and economically profitable results.

Biography

Wilfried SAND-ZANTMAN is professor at the Toulouse School of Economics and research director at the IDEI. He received his Master from the ENSAE (Paris) and his Ph.D. from the University of Toulouse 1. Mr. Sand-Zantman's research focuses on industrial organization and regulation, with a special emphasis on the telecommunications sector.

NGN funding: Public/Private interplay - DigiWorld Summit 2013

DigiWorld Summit 2013
DigiWorld Summit 2013 Executive Seminar NGN funding: public/private interplay
: a half-day roundtable discussion of new broadband networks will be an opportunity to evaluate the importance and modalities of public sector actions in coordination with operators in various world regions, to examine their effectiveness, and to anticipate their impact on the future of the electronic communications sector.

Interview Published in COMMUNICATIONS & STRATEGIES No. 91, 3rd Quarter 2013

Contact
COMMUNICATIONS & STRATEGIES
Sophie NIGON
Managing Editor
s.nigon@idate.org

9Oct/13Off

Interview with Jussi HÄTÖNEN Economist, European Investment Bank.

Interview Published in COMMUNICATIONS & STRATEGIES No. 91, 3rd Quarter 2013

Public-private interplay in the telecom industry

Summary of this issue: Telecom liberalization progressively limited public intervention to the definition of a regulatory framework setting unbalanced market conditions to stimulate investments of new market players. However, a new impulse to public initiative has come from the availability and use of broadband networks with a growing set of services at disposal of public and private users. This new form of public intervention has gained ground because of strict financial constraints faced by some telecom operators and local authorities’ awareness of positive externalities due to the reduction of digital divide (e.g. economic development and social inclusiveness). This special issue aims to set the stage for a broad discussion on public-private interplay.

Jussi HÄTÖNEN, European Bank of Investment

Exclusive:
Interview with Jussi HÄTÖNEN
Economist, European Investment Bank.

Conducted by Alberto NUCCIARELLI, Cass Business School, City University, London

 

C&S: How would you define a "public-private interplay" in telecom and, specifically, in the broadband sector?

Jussi HÄTÖNEN: In its broadest form, public-private interplay, or PPPs for that matter, occurs whenever input from both parties is required. While PPPs often refer to financial, or in-kind, cooperation to deploy broadband networks, PPI can include other forms of cooperation such as sharing of information in its simplistic form. I think a good example of this is the market mapping exercise. The aim of this exercise is to identify the areas where private operators have existing infrastructure and areas in which they have no interest in deploying NGA networks in the near future – accordingly to identify the areas of market failure and therefore define the scope for further public sector involvement.

In the European broadband sector is public-private interplay a crucial pre-condition to generate investments?

We have to bear in mind that after liberalization, telecommunications is effectively a private sector driven industry, albeit a regulated one, and public sector intervention is justified only if there is a market failure. That said, looking at the recent studies and research, it seems that in developing NGA networks in Europe, the market failure is evident, particularly for more remote and rural parts of the countries. Market operators will continue to pursue selective investments in areas where unit costs are low enough to make returns for their shareholders. Wherever they cannot build a viable business case, they are not likely to invest. In these areas, PPIs are crucial for generating investment. In fact PPIs are very important, as relying only on market forces to deploy network would potentially lead to an even greater digital divide than we have at the moment. This is because market operators are investing to deploy NGA networks in areas which are already well covered by copper, cable and even by existing FTTx networks.

How much risk should the public sector be able to bear to develop a long-term interplay with private stakeholders?

This depends fully on the context and ambition. The more rural networks we want to deploy, the more risk the public sector needs to bear. Typically the private sector's risk threshold is in deployment cost of below EUR 1,000 per home passed, translating to fibre network build-outs in urban and to some extent suburban areas. If we want to deploy networks in rural areas, the public sector needs to bear the risk to the extent that private sector is not willing to take. For instance in rural areas where the cost per home passed is EUR 2,000 and more, the majority of the financial burden and thereby risk needs to fall to the public sector if we want to see these networks being rolled-out. On the other hand, the public sector has a better risk bearing capacity. For instance, while private operators seek paybacks for their investments typically within 10 years, the public sector can take a longer-term investment horizon which is more in line with the economic life of these assets.

Should a fair social rate of return for public commitment be defined?

Yes, but what this is depends again on the context. Public resources are scarce and come with an opportunity cost. This means that instead of deploying fibre, the public sector needs to decide for instance whether they would use the funds to build roads or hospitals instead. Of course, the less developed the basic infrastructure, the more you need to demonstrate the social return from investing in broadband as opposed to other opportunities.

If we consider public-private partnerships an example of interplay, can we affirm that they potentially distort or stimulate competition in the EU broadband sector?

As said before, public sector involvement and intervention is justified only if there is a market failure, i.e. the private sector is not willing to invest. Therefore if the market analysis (or market mapping in the case of broadband) is done correctly, focused public sector involvement through PPPs should not distort competition. Whether PPPs stimulate competition depends on the model, but the open and fair access principles are set to do this.

What is the way forward with the 2012 EU Guidelines on public-private partnerships?

I think the key is to understand that market forces alone will not deliver the DAE targets, but focused and well-designed public sector involvement, complementing private sector investments, is a key element in reaching these policy objectives especially in more remote and rural areas where, in fact, the social return is typically the highest. Nevertheless in my view, PPPs should be designed in a way which maximizes the private sector involvement and minimizes public sector intervention. Of course, given the complex structure of the industry, this is a difficult task.

Will public-private interplay be more relevant in the co-creation of contents and applications (e-health, e-education) in the next 5-10 years? Or will it continue to be limited to the definition of better conditions for infrastructure development?

I do not see why not. In fact PPPs play an important role in research and innovation space in Europe. These PPPs are not like the ones used to deploy infrastructure, but PPPs nevertheless combining private and public sector resources. For instance under FP7, there are several ongoing projects in the eServices domain, which combine public funding, private sector companies and public sector research institutes for instance. This is however on the R&D side, but I would not see a reason why PPPs should not be suitable for the deployment of e-service solutions in the public sector. However the prerequisite is to have first the infrastructure (i.e. networks) in place to support these services.

Biography

DigiWorld Summit 2013Jussi HÄTÖNEN will take part in the DigiWorld Summit 2013 Executive Seminar NGN funding: public/private interplay : a half-day roundtable discussion of new broadband networks will be an opportunity to evaluate the importance and modalities of public sector actions in coordination with operators in various world regions, to examine their effectiveness, and to anticipate their impact on the future of the electronic communications sector.

Interview Published in COMMUNICATIONS & STRATEGIES No. 91, 3rd Quarter 2013

Contact
COMMUNICATIONS & STRATEGIES
Sophie NIGON
Managing Editor
s.nigon@idate.org