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.
Increased competition, a forced rethink of pricing models and the devastating impact of the economic crisis have weakened Europe’s once thriving telecoms sector
Europe’s telecommunications sector has been the stage for a growing number of merger and acquisition deals in recent months. Deals that are clearly posing a conundrum for regulators and anti-trust authorities, resulting in especially long investigations, and controversial “remedies” for those deals that have been given the green light.
Despite which, virtually all of the parties have by now reached the conclusion that consolidation is inexorable, if not desirable. The sector’s main players have never fully recovered from the aftermath of the Internet bubble and the debt levels that ensued. The increased competition ushered in by new entrants, pricing models that have been destabilised by the arrival of Internet companies offering rival (voice, messaging and video) products, the devastating impact that the economic crisis has had on the countries of southern Europe since 2008… together have weakened Europe’s once thriving telecoms sector. In concrete terms, this has meant a 12.5% drop in revenue for the top five European markets over the past five years, a dramatic decrease in EBITDA (earnings before interest, tax, depreciation and amortisation) and, quite naturally under these conditions, in lower per capita spending on new generation access networks (fibre, LTE) than in the United States.
So consolidation appears to be a natural response to the situation, a way to put an end to the price wars and stabilise margins. Infrastructure sharing schemes may precede or be part of this consolidation, but unlikely to take its place. If these schemes can provide an interesting means of reducing costs, they can also allow price wars to drag on. Unfortunately, most of these consolidation deals are taking place inside national markets.
Once the dust from these mergers has settled, European telcos’ margins improved, and the harmonisation of regulation progressed as Mr Junker has said he hopes it will, it is not hard to imagine that the next stage of market consolidation will be cross-border and beyond. We need to remember that one of the arguments put forth when opening the telecommunications sector up to competition was the ability to create a single European market, and to enable the emergence of a handful of pan-European carriers. The stakes here are high: even if the synergies to be had from a cross-border merger are less obvious, size alone will no doubt have an impact on operators’ efficiency and their ability to invest and innovate. We should also emphasise that the creation of a large handful of telcos operating in most EU markets – replacing today’s one hundred or so national telcos, but also competing against a number of operators that target a very particular clientele – will in no way reduce the choice available to consumers. So we should probably just accept the fact of having fewer national operators, and in turn enjoy more meaningful competition – in a vaster, European-scale marketplace – which extends beyond merely price points.
Indeed, the real challenge for operators is not to engage in a game of industrial Monopoly and to grow and grow just for the sake of it. Instead, they need to ready themselves as best they can to handle three difficult and dramatic changes. The first is one that must force telcos to continue to improve their productivity and agility, to be able to respond to a fast-changing environment. Even if price wars are currently a trap, it is nevertheless also true that the telecom sector is among those most able to pass digital-driven productivity gains onto consumers, and to generate the means to sustain needed investments. The second change is an accelerate rate of convergence between fixed and mobile infrastructures, spurred by the advent of superfast access. The mobile Internet of tomorrow will be fibre networks’ biggest client. The third game changer is a major one. Namely the increasing influence of software and data on the sector, which will require operators to control quality of service parameters and customer relations in real time.
If the effervescence of the digital ecosystem is today characterised above all by innovative over-the-top (OTT) start-ups, the telecoms sector should not be viewed as the last dinosaur standing, or something akin to CDs being made obsolete by streaming. Regardless of how the future plays out, money will still need to be spent on the networks and the access link in the Internet value chain, with a solid profit outlook in the offing. Something that Europe, which today has no major global Internet platform to its name, would be unwise to overlook.
Julien GAUDEMER, Consultant at IDATE
The volume of NFC transactions is estimated by IDATE at 4.6 billion EUR in 2014 to reach 53.8 billion in 2018
In its latest report, IDATE provides an overview of the mobile and online payment market. It provides the main figures for each market segment (in-store payment, carrier billing, remote online payment). The latest market trends are analyzed, as well as the position and evolution of the main players (especially Telcos and internet Players).
Mobile payment markets are still nascent for the most part, the technical aspects are mature and plenty of commercial offers exist. However, the majority of online and mobile payments are still made by debit or credit card while in-store payments are still made by cash, cheque or payment card.
• IDATE estimates that e-commerce is a 1,145 billion EUR market generating 34.8 billion transactions (according to CapGemini) in 2014. M-commerce has generated 115 billion EUR in revenues, through 29 billion transactions including about 13% of alternative payment systems (other than payment cards).
• Regarding in-store payment with NFC mobile solutions, IDATE estimates that 278 million NFC-enabled mobile phones will be used in 2014, and 28 million users are likely to use their NFC phone to make mobile payments. The volume of NFC transactions is estimated by IDATE at 4.6 billion EUR in 2014 to reach 53.8 billion in 2018. All these figures have to be compared with the few hundred trillion USD of global payment transactions per year. If the figures show differences between these markets, other stakes need to be taken into consideration to better understand the overall market payment ecosystem.
• Regarding carrier billing systems, this market is estimated by IDATE to reach 18 billion EUR in 2014, with about 30% of direct online carrier billing.
From the user point of view, the mobile wallet battle focuses on ease of application and added value compared to payment by debit card. Most mobile wallets currently available are no easier to use than a debit card, and do not have the critical mass to be used at a large scale.
Julien Gaudemer, Project leader of this report, says “The main added value is the other services included in the wallet: loyalty programmes and offers management.” However, some players try to reduce the overall payment process in-store: Apple initially developed iBeacon technology for in-door geolocation but it could be used to automatically pay for goods when leaving the store. Alternatively, PayPal has developed payment during ordering (e.g. for the Mc Donalds application) to avoid the in-store payment step.
• Mobile wallet applications can now manage various payment cards, loyalty programmes and offer coupon storage to make them more attractive than traditional payment systems. These features allow service providers to get users’ purchasing habit data in order to provide targeted advertising and offers. In addition, players that are already involved in the advertising market (like Google) are able to increase advertising prices due to a better targeting technique
• Internet giants and new mobile payment players are trying to change the traditional payment ecosystem to gain more revenue. The payment market itself does not bring as much in revenues globally, which is why they are especially trying to bypass all intermediaries between themselves and the user’s money. For instance, Paypal wants to avoid payment systems (like Mastercard and Visa), banks and telcos. Google uses its mobile operating system Android to provide an integrated payment system (using NFC) and a mobile wallet, avoiding telcos and other related intermediaries (like Trusted Service Management services). From the merchants’ perspective, payment service providers need to convince them to adopt their solution: transaction commissions and interchange fees are therefore the key stake as, if they are too high, merchants will not use them. Besides, the recent development of the virtual currency “BitCoin” has been seen as an innovation for some observers but as a threat for the financial sector by others. Many small players have developed new services around the new currency to convert it into traditional currencies or use it on a mobile device or in-store.
Software-defined networking (SDN) market is estimated at €816 million in 2014 projected to reach nearly 7 billion by 2019
IDATE publishes a status report on Software-defined networking/Network functions virtualization standardisation efforts, which explores telco and equipment suppliers’ positioning on future network architecture concepts. This analyses the strategies and degree of involvement of the ecosystem’s various stakeholders. It also provides SDN/NFV market figures.
SDN and NFV associated with cloud computing at the core of telcos’ and equipment suppliers’ strategies
SDN (software-defined networking) and NFV (network functions virtualisation) are seen as the main upcoming technological disruptions in networking architectures. They allow a network to be more programmable, open and scalable.
Entire ecosystem invested in standardisation
The telecoms and IT industry is involved in the standardisation initiatives taking place around SDN and in the work being done by ETSI on NFV.
Traditional equipment manufacturers, and especially the top suppliers of switches and routers – Cisco,
Juniper, Alcatel-Lucent, Huawei – are the players most actively involved in this area.
The top telecom carriers are more interested in NFV, and are involved both in standardisation efforts and in conducting proofs of concept.
Virtualisation in telco networks making progress, but more slowly than in datacentres
The first available SDN equipment was designed for datacentres, and was thus installed by companies operating in that field and cloud service providers. Pioneer SDN and NFV products for telco networks are now available as well. The carriers that are the frontrunners in this area – including AT&T, Deutsche Telekom, NTT and Telefónica – have all announced plans for a large-scale transition to a new networking architecture.
The global SDN and NFV market in 2014 is estimated at €816 million. Telcos still account for only a sliver of the market: 5% in 2014. But as more and more carriers make the transition, this share is forecast to grow to 19% by 2019 .
The SDN and NFV market (million EUR)
Source: IDATE, SDN and NFV for telcos, June 2014
Head of the Telecom Strategy Business Unit
Mobile growth still strong with 6.6 billion subscribers worldwide at the end of 2013 and forecast to reach more than 8 billion by the end of 2018
IDATE, partner analyst at the LTE World Summit 2014 (23 to 25 June 2014 in Amsterdam) reveals the findings of its World telecom services watch.
After the trough of 2009 and hesitant growth in 2010, the global market has been growing at a moderate pace since 2011. Growth in 2013 stood at 2.4% “we have observed that, by and large, telecom services are recovering more slowly than the economy as a whole,” reports Didier Pouillot, head of IDATE’s Telecom Players & Markets Business Unit.
Now in a recovery phase, telecom markets in advanced countries are proving somewhat resilient, whereas in fast-developing markets the underlying momentum is coming from volume. This phenomenon is telling of a mature industry now driven more by demographics than economics. In Africa/the Middle East, for instance, the drop in regional GDP in 2009 (-6%) and its rebound in 2010 (+16%) had very little impact on telecom services growth rates which remained very high both years: +8% and +9%, respectively.
Revenue from telecom services
According to IDATE, global telecom services revenue will increase from €1,186 billion in 2013 to €1,341 billion in 2018, representing an average annual growth of 2.5%.
• Revenue from mobile services will grow by 17% between 2013 and 2018 (+3% a year on average), reaching €826 billion in 2018.
• Revenue generated data transmission and Internet access will enjoy more substantial growth (+24% between 2013 and 2018, i.e. an average +4% per annum), to reach €338 billion in 2018.
• Fixed telephony revenue will continue its sharp decline: -15% between 2013 and 2018, i.e. dropping by an average 3% a year, down to €177 billion in 2018.
More mobiles, more users
According to IDATE, the number of mobile customers worldwide should top the 8 billion mark by the end of 2018 (+21% in 5 years).
• The number of fixed Internet subscribers will grow more slowly (+18% between 2013 and 2018, +3% a year on average). The one billion mark is not expected to be reached before 2020.
• Traditional landlines continue to loose ground as VoIP and mobiles gain.
The spread of broadband
According to IDATE, the number of fixed broadband subscribers is expected to reach 858 million worldwide by 2018, for a penetration rate of 12% of the global population. The number of LTE customers is shooting up, and LTE-Advanced users are expected to increase swiftly in early adopter countries.
IDATE forecasts more than 1.3 billion LTE subscriptions worldwide by the end of 2017, generating a total €400 billion in revenue
Two major factors will work in broadband’s favour:
• The success of bundled offers (fixed telephony, VoIP, TV, mobile telephony) and the appetite for video applications.
• Telcos’ investments in migrating their infrastructures to mobile or fixed broadband.
Scalability of operators
• European operators are still in trouble, with a growth momentum that is running out of steam, despite strong investment needs
• North American telcos are benefiting from a solid growth rate at home, especially in the mobile market.
• If several major telcos from emerging countries continue to enjoy swift growth rates of close to or above 10% (Bharti Airtel, China Mobile, China Telecom, China Unicom), a number of them saw their growth flatten and tumble to virtually nil in 2013 (America Móvil, MTN, Oi, Vimpelcom). But margins remain high: EBITDA margins of between 30% and 40%, and even higher in some cases. Several of these operators are widely engaged in international expansion strategies.
[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
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.
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
Behind the mega-mergers…
The mega-mergers that are in the works in the United States offer an interesting way to explore the “natural” paths of markets.
I am talking about two deals that, if green-lighted, would result a) in the merger of the country’s number one (Comcast) and number two (Time Warner Cable) cable companies, which includes a side deal to transfer a large number of customers to Charter (making it the number two player if the deal goes through) and b) in the merger of DirecTV – America’s biggest satellite TV provider and second biggest pay-TV provider behind Comcast – and AT&T, the country’s largest landline telco and second largest mobile operator in terms of revenue, behind Verizon.
For the moment, then, we will set aside the situation in Europe where rumours abound over possible mergers and acquisitions, but where there are still no solid answers over how to put an end to the checkerboard of 28 national markets without severely affecting the state of competition.
So what should we know about these potential mega-deals over in the US?
The Comcast merger is an interesting case on several fronts:
• Because it would accelerate cable market concentration, with all of the classic benefits that the expected economies of scale will bring in helping to amortise technical developments (set-top boxes, TV everywhere; Internet infrastructure).
• Even though it would lump together close to a third of the country’s subscribers, the deal would not directly reduce consumer choice in the cable market, as cablecos in the US rarely compete against each other in individual local markets.
• Comcast is already the country’s leading ISP, and the new entity would be by far the leading provider of triple play bundles in the residential market.
• Comcast recently acquired TV network NBC and owns a number of channels, including local sports channels which are a major drawing card for pay-TV packages. In addition to the assets these holdings represent, the size of the newly-formed conglomerate will no doubt influence future negotiations with channels and studios. So the operation is a source of concern not just for Hollywood, but also for other distributors (DBS, cablecos, telcos, internet companies).
• And, finally, Comcast heads up a consortium of operators that is investing massively in Wi-Fi, which have roaming agreements with one another and which, some day soon, will either adopt MVNO status or work towards a merger with Sprint or T-Mobile (if the two have not already merged beforehand).
The AT&T-DirecTV merger appears to have been a reaction to Comcast – and possibly to a potential merger between DirecTV and Dish. This is probably what led AT&T to abandon its plans to capitalise on Vodafone’s various operations in Europe by taking control of the biggest mobile operator on this side of the Atlantic.
• Why? AT&T is more involved in residential landline calling than Verizon. It operates a larger number of phone lines, and is overhauling its infrastructure over a larger footprint – opting for a hybrid technology (fibre +VDSL boosted by vectoring) in its U-Verse service areas. It has more than 5 million triple play customers, with a monthly ARPU of 170 USD.
As the second largest provider of triple play bundles, behind the new Comcast behemoth, AT&T can hope that its merger with DirecTV (and its 25 million pay-TV customers) will give it substantial clout when it comes to negotiating with channels and over programming, along with the capabilities to produce its own programmes, in the same vein as Netflix. But AT&T is also a national operator, thanks to its mobile networks – and, like Verizon, owns a powerful national and international fixed infrastructure. Combine this with the fact that TV viewing is becoming an increasingly individual pastime, and video accounts for a growing percentage of mobile internet traffic.
• So by reading between the lines of press releases pertaining to the deal we infer, on the one hand, that acquiring a major pay-TV provider could help the telco monetise its investments in superfast mobile systems, and give it access to locations not currently covered by U-Verse using hybrid solutions that combine DBS (live channels) and LTE (high-speed internet).
• This is also the impetus behind Verizon’s acquisition of Intel’s OTT video technology: namely creating a common platform for its FiOS fibre networks (with over 6 million video customers) and its national LTE network.
We would be wrong, however, to see this deal as a simple vertical integration strategy. The future could be full of surprises. The real departure would be to see Comcast begin selling its TV and video plans to users other than its own customers. Ditto for AT&T and Verizon.
I’ll wrap up by inviting you to delve further into these issues by picking up a copy of the 2014 DigiWorld Yearbook. Just released by IDATE, the Yearbook provides readers with vital industry figures and invaluable insights into our tumultuous digital world.
Head of Research, Telecoms Business Unit, IDATE
Telcos have ambitious Vectoring rollout plans, with some aiming to have between 25% and 30% of VDSL2 lines covered by 2017.
Vectoring and bonding are starting to be deployed in certain countries, even if the technical and regulatory constraints would seem to point to only small-scale rollouts. G.Fast is the next generation standard being examined today. The report we released provides readers with an update on the latest technological developments in VDSL2.
VDSL2 & Co: ever more promising technological developments
VDSL2 has begun to be implemented, and several telcos have based their ultra-fast broadband strategies squarely on copper infrastructure right up to the customer premises. If VDSL can deliver theoretical speeds of around 50 Mbps near the exchange or cabinet, Vectoring, which consists of reducing noise among the lines, makes it possible to double that speed to 100 Mbps. Bonding, meanwhile, consists of using several copper pairs, either to double speeds for users in the vicinity of the exchange, or double the distance at which a 50 Mbps connection is available. In both cases, however, performances are very quickly affected by the subscriber’s distance from the exchange or cabinet.
G.Fast, which is the future standard currently under examination, and due to be approved in
2014, offers a theoretical speed of 1 Gbps, but noise cancellation capabilities are even stronger.
Growth of VDSL subscribers worldwide between December 2010 and June 2013 (million)
Still only small-scale implementation of VDSL2 and its successors
In mid-2013, customers subscribing to a VDSL2 ultra-fast broadband service represented 19% of the world’s FTTH/B subscribers. The vast majority of deployments have been performed by AT&T in the United States, which is reporting 26 million VDSL2-ready households and more than 9 million subscribers. AT&T continues to bank on these solutions, and is now offering pair bonding to eligible customers.
Western Europe is the second biggest VDSL market, accounting for 35% of the world’s subscribers as of mid-2013.
Will this drive a shift in the ultra-fast broadband market?
VDSL2 and its successors have a clear set of advantages, starting with savings on rollouts. Telcos would not need to deploy optical fiber from end to end, and can use the existing last mile of their networks. They would also save on customer premises installations, which cost them a great deal of time and money.
The performances offered by these new solutions appear to be coming more and more in line with those delivered by FTTH (at least in its current iteration), but only under optimal conditions. So this is not a solution that can be made available to everyone. Plus, VDSL Vectoring does not enable physical sub-loop unbundling, in which case bitstream remains the only option for sharing access to the network – something that not all market players want, as is the case in France, for instance.
As a result, even if the development prospects for the VDSL market remain optimistic for the coming years, we do not expect it to cause a major upheaval in the ultra-fast broadband hierarchy, with FTTH/B continuing to be the architecture of choice.