Valérie CHAILLOU Head of Research, Telecoms Business Unit, IDATE
Accelerated growth in FTTH/B coverage from incumbents and enhancement in competition from new entrants, even in mature markets
In 2014, the dynamism of European markets (EU-35) was impressive: the number of subscribers reported the highest growth since end 2010 (nearly 55% increase). In terms of coverage, the increase reached 43%. This dynamism is led by countries such as Spain, where players have clearly played an important role and finally overpassed their initial objectives. There were nearly 14.6 million FTTH/B subscribers and more than 59 million homes passed in the EU-35 at end 2014.
In Spain, the incumbent Telefonica has decided to accelerate its rollouts aiming at covering 10 million households at end year, compared to less than 4 million at end 2013. This impressive growth and associated commercial strategy had a concrete impact on the Spanish market where, during the year, there were nearly 800,000 new FTTH subscribers.
Another noteworthy country is Romania where the leading players have decided to change their strategy and finally deploy FTTH/B when they were firstly focused on FTTx/LAN architecture in previous years. Therefore, the number of subscribers has considerably increased taking into account a total churn from end users. Those countries are followed by France, Turkey and the Netherlands (where, respectively, 25%, 24% and 39% of FTTH/B subscribers are new 2014 subscribers).
Elsewhere, Sweden still devotes to be highlighted: the latest trend in the country is to focus more and more on the single-dwelling units market which was not the first target of players involved in FTTH/B. The demand is steadily increasing since 2013 and, even if more complex and costly to deploy, FTTH to single-dwelling units is becoming a commodity. This is even truer for local fibre network players, involved in local scale rollouts, which have devoted half of their investments in targeting single-dwelling units in 2014. The Swedish incumbent was also very active in 2014, with more than 300,000 new Homes Passed yoy and an increase of around 31% in terms of FTTH/B Broadband subscribers. Then, the competitive landscape is also moving thanks to the involvement of smaller players that have strong ambition and get involved by acquiring local fibre networks previously owned by municipalities. Such trend should help Sweden keep a leading position on the European FTTH/B market.
On other markets, FTTH/B subscriptions also increased significantly. A part from Spain, the most performing country in 2014, we can mention the Netherlands where the number of FTTH/B subscribers has increased by 65%. France, Portugal, Turkey and Switzerland have also shown steady growth, in line with the trend we had already noted in 2013, with between 32 and 79% growth rate in the subscribers basis.
In terms of players involved in FTTH/B projects, alternative carriers are still leading the way, representing a 45% of the total homes passed in EU35 at end 2014 (67% considering EU39, which shows the important role of those players in Russia and Ukraine!). Among them, we can note this year the interesting role of recently entered players in countries considered as mature such as in Sweden and the Netherlands. Most of those players are backed with investment funds that help them strengthen their FTTH/B strategies.
The number of local authorities launching FTTH/B rollout projects on their territory has decreased a little bit in 2014 but they still represent only 9% of homes passed in EU35. Few new projects have been concretely launched by local authorities noted during 2014. There are some interesting rollouts in France, still in the context of the national program for superfast broadband, but most of them are still in the very beginning of the process. They represent some 600,000 homes passed end 2014.
Then, of course, incumbents are important players in all European countries. They represent 46% of HP in EU35 at end 2014, +3% compared to 2013. Several incumbents have considerably accelerated their rollouts in 2014. As in 2013, the most dynamic is Telefonica in Spain, but with a much more impressive growth: from 1.7 new Homes Passed in 2013, Telefonica reached more than 6 million new Homes Passed in 2014. Then come Orange in France (+897,000 HP), TeliaSonera in Sweden (+416,000 HP), KPN/Reggefiber in the Netherlands (+312,000 HP) and Turk Telekom in Turkey (+300,000 HP). It is also very interested to note the quite recent involvement of Bezeq in Israel, which decided to upgrade its infrastructure to FTTB: more than 1 million homes are now passed with FTTB but no services are available yet on the network. The operator is still focused on providing VDSL2 based services to end users for the moment, but it is betting on the need for higher speed rates in the near future and it is preparing itself to be able to provide required solutions very rapidly.
Number of FTTH/B subscribers per country in Europe (countries with more than 200 K subscribers)
Source: IDATE for FTTH Council Europe
Number of FTTH/B homes passed per country in Europe (countries with more than a million homes passed)
Source: IDATE for FTTH Council Europe
When enlarging the analysis to EU39, Russia and Ukraine are still very specific markets. Their respective demographic characteristics are so different from other countries that the comparison is not always very relevant. However, both markets are quite dynamic, with respectively +50 and +15% in terms of subscribers basis.
Regarding the technology deployed, Ethernet is still players’ first choice across the EU-39, and represented 66% of all FTTH/B rollouts at end 2014.
As concerns network architecture, most new deployments concerned FTTH which now represent 41% of homes passed at end 2014 (vs 34% one year ago). However, FTTB is still the favourite configuration as it allows them to avoid the issues that come with installing fibre on private property, and especially MDUs – i.e. having to negotiate with each property owner.
1 The term EU-35 refers to the EU-28 countries –Cyprus + Andorra, Iceland, Israel, Macedonia, Norway, Serbia, Switzerland and Turkey.
The EU-39 refers to the EU-35 + the four CIS Countries: Belarus, Kazakhstan, Ukraine and Russia.
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The 2014 digiworld summit "drawn from life" by Aurélie Bordenave, alias Léely. Discover all the strong moments. (texts are in french or in english)
Plenary: Business models, Rethinking the telcos business models in the 5G era
Keynote : Smart Glasses
Business models: Rethinking the telcos business models in the 5G era
Disruptive innovations: one step towards 5G
Smart City & Mobile living
Seminar "TV everywhere"
Seminar : "Business models: M2M & Internet of Things - Smarter objects, smarter processes"
Europe on the rebound ?
TV & facing Mobility
Le digiworld summit 2014 a réuni autour des questions de la mobilité près de 1 200 participants et 140 speakers du monde numérique. Les vidéos des moments forts de ces deux journées.
- L'interview de Laurent Solly, DG de Facebook France
- L'interview de Carlos Moreno, "La ville nous parle"
by Yves Gassot, CEO, IDATE & Didier Pouillot, Director of the Telecom Strategy Business Unit, IDATE
The 2014 DigiWorld Summit sessions devoted to telecoms gave off a certain serene, so as not to say optimistic vibe. Was it because of the huge numbers that each one trotted out, whether talking about mobile customer growth (over 9 billion users by the end of the decade), the exploding Internet of Things (80 billion connected things in 2020, according to IDATE), mobile traffic growth (triple that of wireline traffic) or the speeds expected from Advanced LTE (up to 100 times faster than 3G)...
5G needs to put Europe back on the map
So the watchwords for all of the speakers at this year’s Summit were erasing the past decade which, for a great many telcos, has been synonymous with shrinking revenue and margins in Europe’s five biggest markets (EU-5) since 2008, as underscored by Didier Pouillot, Head of IDATE’s Telecom Strategies Business Unit. Synonymous too with spending well below their counterparts in the US, and lagging behind in 4G rollouts, even though real progress has been made in terms of coverage. So the gauntlet has been thrown down: Europe needs to be back on the map, and amongst the world’s telecom hardware and service leaders by the time the 5G era rolls around, i.e. by around 2020, even if the South Koreans in 2018 and the Japanese in 2020 will be keen to show off their chops at the Winter and Summer Olympics, respectively.
From a technical standpoint, the race to superfast mobile appears to be well out of the gate. Frédéric Pujol, Head of IDATE’s Wireless Business Unit, listed the assets of LTE, which has now become a global standard, and how LTE Advanced will move things even further along with frequency aggregation, HetNets (Heterogeneous Networks) that will make it easier to manage small cells, optimised multicast protocols (especially important knowing that video is expected to account for more than 50% of traffic), eMBMS, etc. Although far from being standardised, 5G will take datarates higher still, delivering speeds in the Gigabit/s. But, as several speakers pointed out, the future will also mean multi-network access, taking into consideration the particular constraints surrounding the deployment of the Internet of Things, for instance, as not all objects are connected via cellular networks – but rather via NFC or low frequency radio networks, like the ones deployed by Sigfox.
What alternative wireless technologies can do… while waiting for 5G
There was a lot of talk about Wi-Fi in Montpellier. There was Silano Lo, CEO of Ruckus Wireless, one of Silicon Valley’s top equipment suppliers. She spoke in particular about the progress made by new generations of Wi-Fi, which will be fully integrated into telcos’ infrastructure, so subscribers will no longer have to login and enter a password. She also reminded us that Wi-Fi was a central part of
Comcast and other American cable companies’ strategies, both as way to secure customer loyalty and enter the wireless market. These strategies are also found in Europe, with companies like Liberty Global and BT, with Wi-Fi enabling wireline telcos to operate as MVNOs, combining homespots and hotspots, while minimising the amount of traffic being relayed over cellular infrastructure.
Speakers on the various panels offered nuanced answers to the question of whether high-speed and ultra high-speed mobile access will come to replace wireline access. All came together to emphasise that, in emerging economies, mobile broadband will be the main channel for Internet growth, even if Christophe Wilhelm, Senior VP Strategy & Innovation for Thales Alenia Space, did stress that satellite-based – both geostationary and in medium and low-earth orbit (MEO/LEO) – and unconventional solutions such as balloons and even drones, will also have a role to play.
The superfast revolution will require a stronger core
For Michel Combes, CEO of Alcatel-Lucent, the debate is no longer about whether fixed or mobile systems will emerge triumphant: convergent infrastructures and ultra high-speed mobile will no longer be able to avoid public and private small cell architectures, pulling optical fibre closer and closer to user premises. For Mr Combes, the revolution is not confined to superfast access but, more fundamentally, will go by way of concepts such as SDN (Software Defined Network) and virtualisation with NFV (Network Function Virtualisation), which will give network operators access to control and command functionalities that ensure the networks’ reliability and security. If the smartphone has become the measuring stick of innovation for consumers, and the cloud revolution has begun, the network revolution that connects one to the other, is still to come.
Telcos on the offensive: working to change regulation and business models
Naturally, telecom carriers also talked about how to get back on their feet. Following through on what Michel Combes had to say, Telefónica’s Global Head of Public Strategies and Regulatory affairs, Carlos Lopez-Blanco, and Deputy CEO of Orange, Pierre Louette, want to see Europe deliver a strategic action plan in the very near future. More specifically, Carlos Lopez-Blanco shared his wishlist for the new Commission:
• more relaxed regulation that leaves greater leeway for commercial negotiations;
• increased harmonisation in the application of the regulatory framework, and emergence of a European regulator;
• a level playing field that puts an end to the asymmetry in the regulation imposed on telcos and the laissez-faire attitude towards the dominant positions enjoyed by OTT companies.
This last demand goes beyond sector-specific regulation, however. By the same token, how the ongoing consolidation in Europe plays out is largely in the hands of anti-trust authorities. But the representatives of Telefónica and Orange did not simply express their frustration with regulatory constraints. They also sketched the future of their business models, emphasising the promise they see in the development of 4G and mobile data traffic, in the cloud and M2M, along with the potential offered by partnerships with content providers and verticals, while not excluding the possibility of offering exclusive products and their own OTT services. This was an opportunity for them to make clear that their support of an open Internet must not relegate them to the status of dumb pipe.
To go further…
The presentations :
> Didier Pouillot, Director of the Telecom Strategy Business Unit, IDATE, « rethinking the telcos business model »
> Jaehyun YEO, Senior Researcher, KISDI, "Future Networks: Challenges & Opportunities"
> Ambroise Popper, VP/GM M2M BU, Sequans Communications, "Closing Keynote "
> Carlos LOPEZ, Telefónica, "Rethinking the Telcos business models in the age of 5G "
> Soline Olszanski, VP Strategy & Innovation, Hub One, "4G Critical and Professional"
Europe’s telecommunications sector is in a major state of flux these days, due to a combination of changes in Brussels and an acceleration in market consolidation deals.
• The formation of a new Commission in Brussels, and the introduction of Junker’s investment package, which could include funding for telecoms infrastructure, although no figures or details on the allocation scheme have yet been released.
• The particular way this new Commission’s Digital Single Market project team is being structured around a vice-president and a commissioner. Many have commented on the lack of cohesion between the statements issued thus far by Messrs Andrus Ansip and Günther Oettinger.
• Questions over Ms Kroes and the outgoing Parliament’s legacy. The Recent Council of Telecommunications Ministers demonstrated how hard it will be to stick to the agenda that focused on three issues: a) net neutrality b) roaming in Europe c) coordinating spectrum management policies. Despite being substantial, the revisions to the initial text proposed by the Italian president failed to achieve a consensus, and were rejected by operators and most members.
• The launch of a new review. The Commission will also need to establish a timetable to begin reviewing the directives as planned. The process will include a review of relevant market definitions, and will probably result in the proposal of an even shorter list of markets subject to ex ante analysis of SMP.
• By replacing “European single market for telecommunications” with the “Digital single market” in Europe, the Commission is also looking to highlight telecoms-adjacent legal provisions, such as those relating to privacy and intellectual property. In another vein, it also needs to back the OECD’s efforts to put an end to OTT companies’ abusive tax evasion practices, while its antitrust powers will need to rule on whether Google is abusing its dominant position. And coming up soon are the Transatlantic Trade and Investment Partnership (TTIP) negotiations over new digital economy dossiers…
At the same time, we are tempted to say that real life goes on, and may even be accelerating
Europe’s telecom services markets are still in a slump, but many do seem to be getting back onto a more solid footing. The most striking trend is the rising M&A fever: after the finalisation of major deals in Germany (O2-Eplus) and in France (Altice/Numericable-SFR), we find out that BT, which had been displaying growing ambitions for several quarters (stepped up fibre rollout plan, combined with the launch of BT Sports and the acquisition of 4G frequencies) were also looking to take over O2 UK or EE. Hutchison (3), the smallest of Britain’s four mobile operators has said it would be willing to buy the operator that BT does not.
A veteran proponent of fixed-mobile convergence in the superfast era, Vodafone – which had already integrated Cable & Wireless in the UK, Kabel Deutschland in Germany and cableco Ono in Spain – has now set its sights on Liberty Global. Present in a dozen countries in Europe, the takeover of Liberty Global would give Vodafone majority control over Virgin Media in the UK, whose cable network covers close to 50% of British homes, full ownership of UPC-Ziggo which covers 75% of households in the Netherlands, and in its main market of Germany, control over the top two cable companies, covering close to 90% of the country’s households.
Of course, antitrust authorities will need to examine all of these deals, and may well impose certain “remedies”. We should also add that other (public) proposals are also underway, including: Orange’s bid to bolster its assets in Spain by taking control of Jazztel; Altice/Numericable’s acquisition of (the Portuguese-owned stake) in Portugal Telecom; and the possibility that Brazil’s Oi (with which the Portuguese incumbent had formed a joint venture) could merge with Telecom Italia, or its Brazilian subsidiary, TIM! Should these deals go through – or at least the major ones – they will tip the balance of power dramatically, which could well trigger another round of M&A deals in response.
Securing loans does not appear to be an issue, and the financial markets are apparently not put off by debt to EBITDA ratios of more than four or five to one. But analysts will be scrutinising the deals’ P/E multiples and the true outlook for synergies (or at least positive scale effects) being forecast for the future entities’ EBITDA.
At the 2014 DigiWorld Summit 2014, IDATE has unveiled it latest market report devoted to the Internet’s evolution over the next 10 years.
As the Web undergoes massive changes brought by ubiquitous mobility and verticalised consumption, IDATE has published a report that explores the future of the Internet, through an analysis of technological trends, user habits, business models and regulation. Using a scenario-based approach, it looks at the role each of the market players will play, and delivers qualified data for the global Internet services market up to 2025.
Vincent Bonneau, Head of IDATE’s Internet Business Unit, who oversaw this report, says that: “The Internet is a fundamental disruption for the ICT industry in general and even for other (non-ICT) industries, leading new and old players to operate with lower revenues and cost per unit. The effects of Internet have already been quite impressive, capturing 229 billion EUR in 2013 and destroying value in IT, content and telecom industries, but these are merely effects and have not yet had their full-scale impact.”
Internet-related disruptions originate from an open technical environment, leveraging many standards regarding core technologies, including those around networking technologies and leading to some form of network agnosticism. The parallel shift towards digitisation is becoming a progressive softwarisation, starting with information and data but now also reaching hardware and verticals. Business models are increasingly replicating the economics of software in being expensive to produce but cheap to reproduce; in particular, their replication of economies of scale and zero marginal cost is leading to bigger addressable markets. This ‘perfect’ picture is challenged, though, by the development of the Internet today with numerous (upper-layer) proprietary technologies, local regulations, commercial barriers and significant costs of non-software assets and marketing.
The major uncertainties around evolutions towards 2025 are concentrated around two main questions that can help to draw the lines between four very different scenarios.
• Availability and openness of data: Personal data is at the core of the business model of many service providers, but privacy and security are also major concerns for most users. Internet users and governments are facing a trade-off between (cheap) access to innovative services, requiring advanced technologies and adequate funding, and the control and sharing of the data in an overall environment of relatively limited trust.
• Ecosystems: At the same time, the development of major platforms, developing their own technologies, is challenging the open nature of the original Internet ecosystem. Local regulations and open standards could limit the influence of platforms, as well as business models more focused on hardware and physical product sales.
The most likely scenario to prevail is, broadly speaking, a continuation of today’s ‘Platform Wars’, where leading Internet and retail platforms concentrate ever more data. Leveraging their own infrastructure and a relaxed regulatory environment, they would provide the most innovative services around a mix of advertising and hardware and product sales and capture most of the 875 billion EUR market by 2025 (CAGR of 12% for 2013-2025).
The other scenarios are more extreme options. In an ‘Open Innovation’ scenario, there are no more dominant players due to an environment with plenty of interoperable solutions and stricter competition rules. Service providers combine their own technology in real time with third-party data to provide advanced innovative services, mostly based on targeted advertising, leading to a market of almost 1,077 billion EUR by 2025. In the ‘Low-cost Islands’ scenario, end users would discard services with limited privacy and focus more naturally on paid services bringing strong savings compared to traditional services without sharing personal data with third parties. Numerous services would co-exist thanks to advanced standardisation and would remain relatively unknown, not leading to higher trust level.
The low-cost centric approach would be reflected in an overall market of some 750 billion EUR in 2025. The ‘Pay per Trust’ scenario is a more radical scenario with only a few players providing enough trust thanks to advanced and expensive security mechanisms. Revenues would mostly come not from personal data, with users relying primarily on direct payment (for services, products and the like), for a grand total of some 678 billion EUR by 2025, the lowest total of all four scenarios for Internet services, but probably not for the ICT industry as a whole.
Source: IDATE, in The Future Internet in 2025, November 2014
Would you like to buy our study about Future Internet 2025 ? This way please.
Several of IDATE’s DigiWorld Institute members took a business trip to the United States on 18 and 19 September, to attend the 2014 edition of our Transatlantic Telecom Dialog in New York, an annual event that we co-host with our partner, CITI, which is headed by Professor Eli Noam of Columbia University.
This trip also provided an opportunity to prepare for the launch of a Collaborative Research Programme being conducted in tandem with our Members. This think tank will be held in Brussels and devoted to the topic, “Telecoms USA: role-model or counter-model?" Before attending the Dialog, we travelled to Washington D.C. to meet with several FCC representatives, as well as the Public Affairs and Regulation teams from AT&T, Alcatel-Lucent and Verizon.
Back home at IDATE, I wanted to share a few thoughts on three hot-button issues that are attracting a great deal attention in America’s telecommunications sector:
• Superfast broadband competition rules
• Spectrum auctions and mobile market competition
• Will the net neutrality soap opera ever end?
1. How to prevent cable from having a monopoly over the supply of superfast access in a number of locations a few years from now?
We can start by remembering that, in the early 2000s, the Republicans went a long way in defanging the Telecom Act, banking instead on intermodal competition between telcos and cablecos to sustain the construction of superfast access infrastructure. In doing so, they abandoned the idea of imposing unbundling obligations like the ones we have in Europe. As a result, the leading operators began making sizeable investments around 2005 in deploying fibre and hybrid access networks. At the same time, the cable companies that serve 90% of households upgraded their (DOCSIS 3) systems to deliver ever faster connections. But cable progressed quickly, whereas telcos soon shifted their focus to mobile network rollouts, particularly these past three years as the LTE battle has heated up. The footprint of the leading carriers’ upgraded networks has expanded very little since then. And cable’s share of the broadband access market, which today stands at 60%, continues to increase steadily. In a recent talk, the Chairman of the FCC presented and commented on this following graph that shows that 79% of households have access to a connection of 50 Mbits and up, but that only 17.6% of them are covered by more than one provider.
What trump cards does the FCC hold to “encourage” telcos to step up their superfast broadband rollouts?
• Google? Of course Google does not want to do business with a single ISP. As a result, in Kansas City and later several more cities, the company began to build 1 Gbit/s networks – under the notable condition that residents in the targeted neighbourhoods explicitly express their interest in having it. Nobody thinks that Google plans to deploy fibre across the country. But its initiative has roused the interest of municipalities, in addition to helping set 1 Gbit/s as the new threshold for high-speed access.
• What bout the municipalities? There had been a handful of initiatives from cities in the past, but several of them failed to reach their potential. Added to which a number of states considered that these city-led rollouts constituted unfair competition with the private sector, and virtually forbade them. The FCC’s new chairman now wants to review these bans.
• Quid pro quo negotiations to shut down the (TDM) POTS and transition to an all IP system. This is a sensitive and legitimate part of telcos’ development strategy, but one that the states are watching very closely, and not a little warily. The FCC authorised AT&T to test two TDM network shut downs, one in rural Alabama and the other in suburban Florida. As in Europe, where stakeholders are talking openly about phasing out legacy copper systems (and switching to fibre), the goal is to test the problems encountered by the lines that outfit lifts, security systems, etc.
• The conditions that anti-trust authorities might impose on several mega-mergers that are being examined: Comcast/Time Warner Cable, AT&T/DirecTV…
• The FCC can also underline the competition aspect of 4G and 4G+ (frequency aggregation, MIMO antennae, small cells). Encouraged too by the growing number of announcements in Google’s wake of 1 Gbit/s networks being made available here and there (but especially in areas coveted by Google) in recent months by AT&T, Century Link and Cox Cable. The previous FCC chairman, Julius Genachowski, had called for the deployment of one network per state delivering a minimum 1 Gbit/s by the end of 2015. But these recent deployments do not appear to foreshadow any great increase in wireline telcos’ Capex: a market analyst in fact suggested they could be dubbed FTPR (Fiber To The Press Release) rollouts…
To finish on this point, we will underline that the gap (1) in market growth between Europe and the US, which up until now had been mainly in the mobile sector, appears to be spreading into residential wireline as well. America’s two largest carriers, AT&T and Verizon, are on the verge of putting an end to 10 straight years of shrinking revenue. This is very directly the result of an increase in triple play customers in their upgraded markets (U-Verse and FiOS) and the $150+ ARPU they generate. Provided the video services that are central to this ARPU prove profitable, telcos could decide it is in their interest to step up their spending on wireline networks, and expand their superfast access footprint. This is indeed one of the central aims of the planned mergers between AT&T and DirecTV, like the one between Comcast and Time Warner Cable (2), namely to bolster their power with the studios when negotiating programming rights.
2. How to better monetise spectrum while removing it as a bargaining chip in M&A deals?
The AWS-3 auctions will be taking place on 13 November, and will be the biggest since the 700 MHz band auctions in 2008. On the block are 65 MHz in three frequency bands: 1695-1710MHz (unpaired uplink), 1755-1780Mhz and 2155MHz-2180MHz (these last two are to be paired to provide uplink/downlink operations). The FCC has set a total reserve price of $10.587 billion. This takes into account that the bulk of the first two frequency bands are currently occupied by federal government services, including the DoD, and that it will take several years to complete the handover, or coordinate licensed shared access (LSA) (3). AT&T, Verizon, T-Mobile and Dish Networks, along with local and rural operators, have all expressed their interest in taking part in these auctions. Not so Sprint which, unlike its competitors, has no AWS-3 adjacent frequencies, so will not be taking part.
But discussions in recent months have focused especially on strengthening the competition policies that the FCC could impose on the auctions, and on the spectrum trading market. These provisions currently make up the points of review in the regulator’s 'spectrum screen'. In an order issued in June, the FCC expanded this provisos by stressing the particular value of lower frequency bands, i.e. below 1 GHz, after having recalled that the country’s two largest carriers today control more than 70% of allocated spectrum. For the upcoming AWS-3 auctions, which do not concern these frequencies but rather bands that are currently shared by a host of players, no specific conditions have been defined to limit any given company’s access to them (4). For so-called incentive auctions in the 600 MHz band, however, which are slated for 2015, a reserve of a maximum 30 MHz will be set for each market on the block. The ultimate size of this reserve will nevertheless be contingent on meeting the reserve price set by the FCC for the market. National carriers (as opposed to local and regional ones) that control more than a third of below 1 GHz-band frequencies in this market will not be able to take part in the auctions for this reserved spectrum. The FCC has also set the proviso of precluding secondary market sales of this spectrum, to ensure that parties not eligible to take part in the incentive auctions, or sales that would enable an entity to control more than a third of below 1 GHz spectrum, cannot acquire licences to the reserve frequencies during that time. It should be mentioned that these provisos did not receive unanimous support within the FCC, and that the two Republic commissioners voted against them.
It is interesting to note that while the FCC is concerned about local and rural cellular operators’ future, which probably serve less than 5% of mobile users today but can cover a much higher percentage of the physical landmass, we are seeing more and more roaming agreements being signed between the four national operators and these smaller regional carriers. In the race to expand their footprint, the big national operators are in fact leasing their spectrum to small rural operators so they can provide LTE coverage. So there is at once an agreement on the terms and conditions for leasing spectrum and on roaming prices, which has enabled one million national ISP subscribers to enjoy coverage in rural areas, while the tens of thousands of users who subscribe with local operators have access to national operators’ infrastructure. We understand that the FCC does not currently regulate these agreements. Verizon and Sprint have apparently got a head start here, having signed 21 agreements for 2.3 million PoP, including 18 for LTE in the 700MHz and AWS-1 bands, and around 30 agreements for 4 million PoP in the 2.5MHz band, respectively.
We will wrap up this quick summary of the latest news from the US mobile market by listing some of the other topics that are attracting attention:
• cable companies’ ongoing investment in Wi-Fi hot/home spots, with roaming agreements between the two, and the prospect of entering the cellular market by positioning themselves as MVNO to complete their infrastructure;
• the debate triggered by Qualcomm on using LTE (vs. Wi-Fi) on open (i.e. licence-free) spectrum;
• confirmation of the onset of, if not a price war, increasingly lively competition in the mobile market since the Sprint/T-Mobile merger was cancelled. While we were there, Sprint rolled out an unlimited voice-SMS-data plan priced at $50 a month;
• the massive queues outside the Apple store in Manhattan, and the huge boost that VoLTE could give to iPhone 6 sales.
3. Will the net neutrality soap opera ever end?
Here again, we need to go back to the 2002 decision that classified cable modem access as an “information service” rather than a Title II service under the Telecom Act, which would make it subject to common carriage obligations – a designation that was then abolished for all access services in 2005, including telcos’ ADSL services. This decision snowballed, and the FCC’s successive bids to enforce net neutrality –Chairman Powell’s four Internet freedoms in 2004, the Internet Policy statement in 2005 and the Open Internet Order in 2010 – had to be defended in court, following law suits filed by Comcast and Verizon.
Today, and following the ruling handed down early this year by the Federal Court in Washington, there are no longer any regulatory provisions that prevent an ISP from being a gatekeeper.
It was under these circumstances that the FCC began a 120-day consultation on the future of net neutrality this past spring. It received more than 3 million responses. The ensuing debates in the blogosphere and at industry conferences are focusing on several issues.
A legal decision needs to be found that avoids disqualifying the FCC’s core principles. There are two options here: either agree to repeal the earlier decisions, and reclassify Internet access as a Title II service under the Telecom Act, or enforce Section 706 of the Telecom Act more extensively. Section 706 vests the FCC with the authority to encourage the deployment of broadband infrastructure, and eliminate the barriers to development and competition in this market.
In addition to these interpretations of the Telecom Act, approval for the Comcast-Time Warner Cable and AT&T-DirecTV mergers could carry case-by-case obligations aimed at preserving the Open Internet. It is worth remembering that the FCC used the Comcast-NBC merger as an just such an opportunity.
Alongside these somewhat technical questions, debates over the past few weeks have also focused on the following points:
• Should mobile access also be subject to net neutrality rules (which it has always managed to avoid)?
• After this summer’s polemics over the paid peering deals struck between Netflix and the top ISPs, should interconnection between content providers and ISPs be covered by net neutrality rules?
Also noteworthy is the debate that followed AT&T’s sponsored data API proposal, i.e. to have content/service providers sponsor the traffic delivered to consumers’ devices – an idea that was more less picked up by T-Mobile.
We will end by mentioning that all of these unresolved issues are fostering a certain curiosity in how things are being handled in Europe.
Perhaps because he was the head of the cable lobby, and later a CEO for mobile operators, which was pointed out repeatedly during his nomination hearings, in his many pronouncements the new FCC Chairman (5) has been keen to impress that he wants to strengthen competition policies. He has addressed all aspects of the debate relatively explicitly. While nonetheless taking the chance of dashing some of the hopes that he himself kindled, within a complicated political and institutional situation – and one where he is regularly reminded that the FCC has to answer to Congress.
1 There is also a gap in terms of market structure. Even though there are four national mobile operators in the United States, AT&T and Verizon are only very large regional residential carriers. The idea of fixed-mobile convergence, typified by merger and acquisition deals in Europe such as SFR/Numéricable and Vodafone/Deutsche Kabel-Ono, do not appear to be in the cards for the US market. Nor, as far as we can tell, are quadruple-play bundles.
2 It is not the only one. The deal would enable immediate synergies in managing bundles, including DBS for customers not covered by U-Verse. It also has an international diversification component, given DirecTV’s sizeable footprint in South American markets that AT&T is interested in.
3 Licensed Shared Access, or ASA (Authorized Shared Acess) in US. Worth noting is that debates continue ver what form ASA will take in the 3.6 GHz band.
4 If there is no reserve spectrum in the AWS-3 auctions, certain provisions, such as dividing frequency bands into 2 X 5 MHz blocks, are aimed at satisfying the needs of smaller regional operators.
5 Tom Wheeler was nominated for Chairman of the FCC by President Obama, and confirmed by the Senate in November 2013.
Head of Regulation Practice, DigiWorld by IDATE
Maturing, and putting on weight
We have examined different aspects of the 'light operator' phenomenon. Light operators and their business model are heavily influenced by sector specific regulation. The purpose is also to provide an inventory of the different points of contact between the two. We also discuss the evolution of 'light' approaches in the mobile industry, exploring the different kinds of MVNO and the wholesale operator model. Regarding the fixed sector, we examine the opportunities for light operators arising from the use of next-generation access networks and delivers examples of light operators on open access networks. Finally, we take a brief look at other forms of light operator, such as Wi-Fi operators and over-the-top players providing voice and messaging services.
The future of ‘light operators’ is therefore probably nearer the ‘medium-heavy’ point of the scale, rather than the virtually asset-less.
Light operators have often been a catalyst for change
Light operators have had a tremendous impact on telecoms markets, but their traditional business models have not turned out to be very sustainable in the long run. Light operators have often been a catalyst for change (as with low-cost models, or niche segments) but have also often failed to reap the benefits of their innovations as network operators took back their power. Light operators pursuing a pure low-cost approach will find themselves squeezed between network operators' own low-cost sub-brands and abundant bundles as well as OTT's providing 'free' voice and messaging services.
Nevertheless, light operators continue to exist in their niches catering to the needs of well-identified market segments.
The rollout of new NGA and 4G networks creates a number new opportunities for light operators, too. However, open access networks are present in a limited number of markets only, such as the Netherlands and Sweden in Europe and in the Asia-Pacific region. Sector-specific regulation also plays an important role in the market and this will continue for the foreseeable future, creating business opportunities for asset-light business models.
Light operators and the MVNO phenomenon
Looking at the mobile market and certain open access players, it seems that ‘light operators’ investing in their ability to differentiate their services from their host operators are faring better than their resale-focused peers. Full MVNOs such as Telenet in Belgium or Virgin Mobile in France have become serious challengers in their respective markets. The same holds for fixed ISPs of the likes of Myrepublic or Bredband2. By investing in a limited infrastructure rather than being a pure reseller, they are able to propose a service with some unique characteristics without having to go to the effort of rolling out a full network. Asset-lighter bitstream models with a handover closer to the end user than in the case of a very light ISP but still staying short of the capillarity of an access network are certainly the safest bet for challengers in the fixed market.
Yves Gassot Directeur Général, IDATE
‘‘Mobility reloaded” will be the central theme of the 36th annual DigiWorld Summit.
Following through on ‘‘Game Changers’’ (2012) and ‘‘Digital Gold Mines’’ (2013), this year’s theme will allow us to further our examination of current and future upheavals in the digital economy by exploring the issues from a specific angle: mobility and its impact on user behaviour and on the value chain for telecoms, TV, advertising, the Internet, gaming, smart cities, etc.
- What innovations can we expect from mobile Internet disruption?
- Are fixed and mobile superfast access interchangeable?
- What new players and business models will emerge from the Internet of Things and mobile advertising?
- Will mobile devices turn TV into a one-to-one business?
- How can Europe get back in the game?
IDATE Chairman François Barrault points out that, ‘If the cloud, big data and the Internet of things are clearly the major disruptions looming on the horizon, the momentum today lies in the mantra: mobility first!’
IDATE CEO, Yves Gassot, details the key points of this year’s programme: ‘What began with the swift commercial success of 4G is segueing into the spectacular technological leaps expected from LTE-advanced and, beyond that, the prospect of 5G, the widespread adoption of software-driven networking (SDN)… But questions also linger over the accelerated pace of the migration from the fixed to the mobile Internet, spurred by the massive popularity of smartphones and tablets, coupled with the surge of emerging economies. It goes without saying that a great many stakeholders are being affected by these massive changes in the landscape, which we have chosen to explore from three angles: How revenue is progressing for mobile operators and other players, from M2M to the Internet of things and beyond; How the massively mobile Internet will affect the advertising ecosystem; and how TV industry players are positioning themselves now that video accounts for an increasingly large share of mobile traffic’.
The 36th annual DigiWorld Summit will run from 18 to 20 November in Montpellier, France, and play host to a panel of international industry luminaries who will share their views with more than 1,300 participants from 30 countries. IDATE analysts will lend their expertise to the sessions that will be moderated by Digiworld Institute members.
DigiWorld Week: the DigiWorld Summit broadens its horizons
This year’s DigiWorld Summit will kick off DigiWorld Week: a new initiative from IDATE and its key partners to explore the many facets of the digital society’s core economic issues. A series of exciting events will be taking place from 16 to 21 November on either side of the core two-day Summit:
- The Connected Things Forum
- The Game Summit
- MIG (Montpellier In Game)
- Industry Oracles
- Economic Club on m-payment
> Find the latest programme updates at www.digiworldweek.com
More than 140 speakers on hand
This year, we are delighted to welcome speakers from the four corners of the globe, come to share their views on the future of mobility:
- Mikael BÄCK, Vice President Global Strategy & Portfolio Management of Ericsson will share some of the chief findings of the “Mobility report”.
- Jean-Michel FOURNIER, CEO & Co-Founder of BitGym, a San Francisco-based start-up and winner of the prestigious Auggie Award at AWE 2014, will talk about the “quantified self” phenomenon.
- Kayvan MIRZA, CEO & Co-Founder of Optinvent will unveil his approach to new generation smart glasses.
- Patrick PELATA, EVP & Chief Automotive Officer of Salesforce.com will speak with Thierry VIADIEU, New Mobility Program Director from Renault, about the future of connected cars.
- Christophe WILLEM, Senior VP of Strategy & Marketing at Thales Alenia Space, will tell us if drones, balloons and mini-satellites offer viable solutions for connecting huge swaths of the population to the Internet.
- Michel COMBES, CEO of Alcatel-Lucent will close the “Road to 5G” session, whose speakers include Selina LO, President & CEO of Ruckus Wireless, and Atsushi TAKESHITA, President & CEO of DOCOMO Communication Laboratories Europe.
- Pierre LOUETTE, Deputy CEO of Orange and Carlos LOPEZ-BLANCO, Global Head Public & Corporate Affairs for Telefonica, will discuss how telco business models will evolve in Europe, against the backdrop of market consolidation.
- Laurent SOLLY, Facebook’s Managing Director France, and Benny ARBEL, Founder & CEO of MyThings, a rising star in retargeting, will discuss the challenges that advertising faces as it makes the transition to mobile.
- Luc JULIA, VP & Innovation Fellow of Samsung and Co-authored Apple Siri's core patents, Erick TINICO, Director of Mobility at AT&T, one of the world’s most advanced telcos and Axel HANSMANN, Gemalto’s VP of M2M Strategy & Marketing, will share their analysis of new business models for M2M and the IoT.
- Fu SHENG, CEO of Cheetah Mobile, a growing mobile Internet powerhouse in China, with 340 million users.
- Abigail KHANNA, Head of Digital and Future Media Business Development at the BBC, Steve McCAFFERY, GM & SVP of sales for Europe Arris, Eric SCHERER, Director of Future Media, France Télévisions, and Valery GERFAUD, General Manager, M6 Web, will explore what the future holds for television, now that mobile devices are becoming users’ screen of choice.
- Guillaume de FONDAUMIERE, Co-CEO of Quantic Dream, Susan O’CONNOR, a writer whose script credits include the games BioShock 1 & 2, Far Cry 2, Tomb Raider and Star Wars 1313, along with Charles CECIL, co-founder of Revolution Software, creator of Broken Sword, are among our video game Oracles.
- Meng LI, Director of China Telecom’s Mobile Business Department Europe, will talk to us about the development outlook for mobile in its various forms in the world’s biggest market.
- Jean-Ludovic SILICANI will talk about his time as Chairman of France’s telecoms and postal regulator, ARCEP, and share his insights into key issues going forward.
- Vincent LE STRADIC, Managing Director of Lazard, will provide a financier’s perspective on the health of Europe’s digital economy. And…
- Axelle LEMAIRE, French Ministry of State for Digital Affairs will deliver the Summit’s closing remarks.
Iliad has made an offer for 15 billions dollars to take control of T-Mobile US at 56,6%. Yves Gassot, IDATE's CEO gives his point of view.
What is the rationale behind the deal?
This is not a typical case of generating synergies by merging two companies operating in the same national market. It will be hard to bank on swift and considerable synergies between a fixed-mobile telco in France and a mobile operator in the United States.
On the other hand, the US market is far more attractive than the French one (short of a major consolidation deal in France which, at this point in time, seems unlikely) and even more attractive than the ailing European market: 9% drop in revenue for operators in Europe’s five biggest markets over the past five years, versus 29% growth in the United States. In addition to revenue, there are sizeable disparities in margins on either side of the Atlantic, due to less fierce competition in the US and no doubt for reasons of scale as well: in each of Europe’s five biggest markets, four mobile operators are competing against each other for an average 63 million customers, compared to the 315 million users in the States. The planned takeover thus serves as a good reflection of the sorry state of Europe’s telecoms market, and the strong momentum that the US market is enjoying (albeit at the expense of American consumers to some degree).
There is also a certain similarity between T-Mobile, the smallest of the four operators in the US, and Free which is a latecomer to the French market: it is still working to catch up on rollouts, and especially on LTE coverage, and to beef up its spectrum assets. It needs to have the lowest costs to be as agile as possible, to shift price points and marketing strategies at will. Here, Deutsche Telekom’s US subsidiary is a perfect match for Free.
And, finally, because Free/Iliad is smaller in size and market valuation than its target acquisition, the deal could confirm an impressive availability of capital that the Altice/Numéricable takeover of SFR first revealed.
Will the deal go through?
At first glance, this would seem to be a financial question above all. Deutsche Telekom is the seller of an operator that it acquired in 2001, and which cost a pretty penny. And a savvy seller at that, as AT&T learned recently, and as Sprint is just now learning… T-Mobile had signed a deal to sell to AT&T, which was ultimately quashed by the FCC and the FTC but which allowed the Deutsche Telekom subsidiary to pocket 3 billion USD and a stash of frequencies, and to jump back in the game by merging with MetroPCS, stepping up its national LTE network rollouts, and engaging in an aggressive but costly marketing strategy. After having taken control of Sprint (third biggest mobile operator in the US) Japan’s Softbank (which is sometimes referred to as the Japanese Free) launched its bid for T-Mobile, and appears to have reached an agreement in principle with Deutsche Telekom. Masayoshi Son’s valuation of T-Mobile is higher and so more attractive for its owner. This is natural since it involves a consolidation (No. 3 +No. 4) which would have an immediate impact on competition, and generate substantial savings for 4G rollouts and on the sales and marketing end of things.
But money alone cannot be the only factor in play: how American authorities will interpret the acceptable limits of mobile market consolidation also needs to be considered. SoftBank/Sprint have not yet managed to persuade the FCC and antitrust authorities that reducing the market to only three national operators would be beneficial to consumers. And this despite a number of speeches from Masayoshi Son who continues to argue that a “consolidated” third operator would be in a much better position to raid the great bastions held today by Verizon and AT&T. If the authorities remain reticent, Free will have a serious opening.
But it may also have to wrangle with other investors, such as Dish Network which has acquired spectrum and which, now that DirecTV is due to be taken over by AT&T, needs to find other ways to grow its business.
Finally, should the deal go through, Free will need to accomplish what Deutsche Telekom began. This is by no means a foregone conclusion, especially when going head to head with companies like Verizon and AT&T that have more than 100 million subscribers to their name, and which post impressive profit margins on a very regular basis. Up until now, and despite its aggressiveness, T-Mobile has not yet managed to make a dent. Especially galling for Masayoshi Son is that it is Sprint which, in this ambiguous stage of it merger with T-Mobile, is the one that has supplied most of the customers that allowed the Deutsche Telekom subsidiary to grow! Free/T-Mobile could of course continue to grow, at the expense of Sprint. But, 1) Sprint, which has not engaged in a price war in recent months, could play its trump card by making a sharp turnaround and 2) there is always the possibility of an investment from Dish, this time in Sprint, and even of a merger between cable giant Comcast (which is currently in the process of merging with Time Warner Cable) and Sprint (through an MVNO agreement that would complete the cable market leaders’ impressive Wi-Fi base). The allocation of AWS3 frequencies in the autumn, and the auctions for second digital dividend spectrum (600 MHz band) scheduled for 2015 will also go some way in determining the market’s future, without us yet knowing for sure whether the FCC will give the smallest operators a leg up.