[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
Head of Research, Telecoms Business Unit, IDATE
From less than 40 EUR to more than 100 EUR per month for 100 Mbps access
IDATE’s latest report focuses on the services offered by telecom and cable operators via their FTTx infrastructures. It analyses the various speeds offered, the services included in the offering, pricing tiers and also highlights disparities between regions.
The speed race has not yet reached the finish line
Over the past few months, many operators have announced the launch of new offerings with even higher speeds, thanks to their FTTH/B networks. In the space of six months, no fewer than five operators in Europe have launched 1 Gbps offerings! Up until then, 100 Mbps was considered the norm for ultra-fast broadband (UFB), but now there are many offerings with 300, 400 or 500 Mbps speeds. These are not always very visible and are sometimes not even available as part of a bundle (this is the case with Verizon's 500 Mbps offering, which is only available as a stand-alone service). However, this strategy allows telecom operators using FTTH to differentiate themselves better from cable operators whose peak speeds are normally around 150 to 200 Mbps.
Segmentation of services: speeds and TV/video services prioritised
UFB players do not always go for strong segmentation based on available speeds. As a general rule, plans are built around 3 to 4 speeds, but for some, the offering is limited to 1 or 2 speeds, continuing on from the positioning they adopted in the traditional broadband market.
As for TV and video services, segmentation is sometimes stronger due to providing customers with themed packages (sports, movies, kids), especially for players from English-speaking countries. Generally speaking, telecom and cable operators from English-speaking countries have a very specific approach because they mainly promote video services and TV channels. Speed is only a secondary selling point. Their offerings are characterised by an increasing number of plans available with the ability to customise bundles (or, for more pragmatic players, to help select a pre-configured bundle).
In other regions, the approach seems more pragmatic, with fewer bundles and a more limited choice for end users.
With a lack of innovative services, prices are remaining stable
None of the players studied here offers a particularly innovative service. Most bundle add-ons, such as new set-top box features, cloud-based storage, antivirus, etc., are systematically added to the basic offering. Therefore, operators are unable to differentiate themselves from each other. A very small number of players, such as Altibox in Norway and HKBN in Hong Kong, are exploiting the technical characteristics of FTTH networks to offer genuinely differentiated services with symmetric upload/download speeds. In the short term, it seems very likely that speed (including symmetry, guarantees, faster speeds) will remain the main area to exploit for UFB operators.
This should impact prices offered, which have remained relatively stable in each of the major regions over the past year.
Jacques Bajon, Head of "Video Distribution" Practice
Cloud TV solutions being developed in a new video consumption environment that is having a profound effect on distribution modes.
In its latest report published in its monitoring service “Cloud & Infrastructure”, IDATE analyses Cloud TV solutions the advantages and the issues that still remains.
The cloud TV phenomenon is part of the massive changes taking place in our TV and video viewing habits and, by extension, in video distribution. This cloud-based approach to distributing TV programming refers to the fact of offering services from a central platform connected to the Web, and which can serve any user device.
A cloud platform can be operated by OTT (over the top) content providers who deliver their solution directly over the Web, or by telecom operators who use their own networks. In this second instance, the service is typically not assimilated with the cloud per se, even if we will include it in our field of analysis.
What cloud TV brings to the industry
• It is above all a response to a growing demand among consumers to have access to TV everywhere.
• It paves the way for more personalised video viewing and targeted advertising.
• The fact of centralising the solution enables more flexible rollouts and the abilty to offer a broader array of services.
• The growing move towards virtualisation allows vendors to achieve more cost-effective capital and operating expenses for their video distribution business.
• And brings vendors one step closer to deploying concept of TV as a service, so creating ties with users, or of operator as a service, for distributors looking to achieve more operational flexibility.
But certain unknowns remain
In addition to increasing quality of service (QoS) to meet users’ demands, the gradual switch to cloud-based video solutions will no doubt also generate a sizeable increase in traffic on the Internet and managed networks, and with it the inevitable challenges of maintaining a steady level of quality.
New challenges are arising as barriers to entry into video distribution are being lowered, through expansive platforms that are not subject to any network coverage, device compatility or geographical imperatives.
• We could thus see an acceleration in the rise of independent video offerings, which could include libraries of self-distributed content. This type of configuration could result in telecom operators being cut out of the loop and losing control of consumers.
• In addition, service providers and broadcasters will be going head to head with their TV Everywhere applications, offering potentially identical content but being delivered by pay-TV providers and TV networks, for instance.
• The traditional TV distribution industry runs the risk of being marginalised by these developments. But it has developoled its own solutions to meet some of viewers’ new demands and, above all, has begun to integrate these new options into its own environment.
• And, finally, cloud TV represents a major gateway for the Internet giants that are currently competing against pay-TV providers and programme aggregators for a foothold in this new market.
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Co-Head of Satellite Practice
For single aisle, short-haul planes, IDATE believes that in the short term – i.e. up to 2016 – the market will remain very marginal in terms of connected aircraft, as the shortness of the flights (90 minutes on average) will keep airlines from investing too heavily in the segment.
Towards hybrid inflight connectivity?
The high cost of equipping airplanes for in-flight connectivity is proving a major obstacle to the systems’ technical progress. Airlines are nevertheless exploring various avenues with their high-speed access providers.
Ku-band based solutions are thus likely to continue to play a substantial role, especially at sea (due to a lack of Ka-band coverage) and because of the advantages they offer for TV programme reception. The Ka-band is nonetheless expected to start to make real strides in 2015, thanks in particular to the launch of global systems like Inmarsat GX and, further down the road, the gradual rollout of the Ka-band alliance whose members include ViaSat, Eutelsat, NBN Co., Yahsat and Telesat.
As a result, for all transoceanic and transcontinental flights, LTE is not likely to prove a major threat to satellite which will continue to be the technology of choice for providing passengers with in-flight access.
For single aisle, short-haul planes, IDATE believes that in the short term – i.e. up to 2016 – the market will remain very marginal in terms of connected aircraft, as the shortness of the flights (90 minutes on average) will keep airlines from investing too heavily in the segment. It is more probable that an ATG/LTE type solution will be adopted to provide users with in-flight connectivity on this type of aircraft, provided upcoming regulatory decisions on spectrum allocations allow.
As for trips over landfield, LTE is to take the lead, aircrafts devoted to international trips are likely to be equipped with hybrid mobile/satellite systems in a near future. Gogo in the USA is currently the most innovative vendor in the area of hybrid devices. A few months back it announced that it would be rolling out its GTO (Ground to Orbit) solution in Q3 2014, using a hybrid antenna developed by an American equipment manufacturer called ThinKom. Gogo has been innovative in the sense that, even if the system still uses two antennae – one air to ground (ATG) and one to the sky (satellite), the operator has designed the most integrated dish possible, with a single box that hands over automatically between ATG and satellite signals. With the coming launch of dedicated global systems in the Ka-band, IDATE anticipates future hybridization strategies between both ATG and Ku/Ka satellite bands.
Telstra and AT&T launch LTE-based inflight-connectivity solutions
May 2014 has been an interesting month for the inflight connectivity market: Both AT&T and Telstra announced plans to launch LTE-based inflight connectivity solutions using an air-to-ground architecture. Historically based on satellite, the inflight-connectivity market is being increasingly challenged by terrestrial projects using ATG architectures. The first player to introduce such a solution on the market was Gogo in the USA several years ago. Thanks to pioneering this market, Gogo was able to grab a significant market share on the US market.
Besides the latest plans announced by AT&T and Telstra, other players have expressed their interest for this market: Qualcomm in the USA, ZTE and Huawei in China, Deutsche Telekom and Alcatel-Lucent in Europe.
All these projects also raise the question of spectrum allocation. In Europe, the hunt for a suitable spectrum is still in discussion with the European Commission. In the USA, the spectrum bands have been found but led to a struggle between Qualcomm and the satellite operators community. In Asia too, strong uncertainties remain as to what spectrum will be used for such services.
This article is an extract from the "On-board connectivity market report" published in May 2014 by IDATE. This report explores the leading on-board connectivity markets: aircraft, ships and trains, providing usage and market data, along with insights into the key issues and challenges at hand. It also examines how much of a threat LTE poses, and how satellite can prepare to take on this new rival.
Director of Wireless Business Unit
By the end of 2018, we forecast that overall LTE-Advanced subscriptions will represent 45% of LTE subscriptions worldwide, representing more than 927 million subscriptions.
IDATE’s latest report details what LTE-Advanced brings to Mobile Network Operators and how it will help overcome the challenges of providing higher throughputs to more users. After detailing operators’ deployment strategies, it presents the different features of LTE-Advanced and its roadmap before dealing with what 5G could look like. Operators’ strategies are evaluated as well as the benefits and challenges which the features of LTE-Advanced help to overcome.
LTE-Advanced is way richer than just carrier integration, but implementation and deployment will take more time
• While 2013 only saw early LTE-Advanced deployments in South Korea, 2014 should see more and more operators jumping on the bandwagon, motivated by the improvements which LTE-Advanced brings to both operators and users.
• Carrier aggregation is the main feature advertised and LTE-Advanced is often boiled down to, or mistaken for, carrier aggregation, although it is just one of the many features LTE Release 10 and later bring. LTE-Advanced improves spectrum efficiency: 1.4 to 1.6 times better than on LTE Release 8.
• In a spectrum-constrained environment for operators, carrier aggregation enables operators to bring more throughput and capacity by just reusing available spectrum. Services enabled by carrier aggregation are Cat 4 throughput, i.e. throughputs up to 150 Mbps in the downlink but no improvement for the moment in the uplink.
• Cat 4 throughput in itself is not specific to LTE-Advanced, since it can also be reached by just using 20 MHz of contiguous spectrum. In South Korea, the service is called ‘Wideband LTE’ and is not to be confused with carrier aggregation which only starts with LTE Release 10.
• In most advanced markets, 2014 will even see the beginning of services based on the aggregation of two sub-carriers of 20 MHz each and enabling Cat 6 throughput in the range of 300 Mbps in the downlink and still 50 Mbps in the uplink. Basebands and devices will be available shortly on the market. As early as 2015, carrier aggregation of 3×20 MHz sub-carriers will be achieved to provide throughputs of 450 Mbps.
• In the end, carrier aggregation will most probably be adopted quite rapidly by operators.
• Other important features of LTE-Advanced are designed to mitigate interference in small cell scenarios, increase performance at the cell edge, increase spectral efficiency through beamforming and higher-order MIMO. Those features have been trialled by some operators and should be deployed little by little, essentially as densification of the network via small cells is undertaken by operators.
Other features such as Relay function or Device-to-Device will be partially implemented in Release 12 but the real gist of these two functions will rather be found in Release 13, which is expected to be frozen by 3GPP (stage 3) in December 2015. Those functions are essentially meant to enable services for public safety forces that are looking to transition from specific TETRA and TETRAPOL networks to latest mobile broadband technology but with critical mission capabilities.
Yves Gassot CEO, IDATE
IDATE, Europe’s premiere digital economy think tank, maps out the changes at work in the telecoms, Internet and media industries. The DigiWorld Yearbook 2014 is out.
IDATE has published the 14th edition of its DigiWorld Yearbook, the international reference for the current state of the digital world, including key data, the latest developments and insights into the telecoms, Internet and digital media markets.
This year’s Yearbook answers questions such as:
• How are the key digital sectors such as telecom, digital media or Internet of things evolving?
• Can Europe’s ailing telcos turn things around?
• What does the future hold for content industries?
• What forces will influence the Internet’s development towards 2025?
IDATE Chairman François Barrault, points out that, “The DigiWorld Yearbook has become a report of reference for obtaining a concise understanding of what makes the digital ecosystem tick – identifying the chief game-changers of mobility, cloud and big data, the top players’ strategies and the changes at work along the value chain.”
IDATE CEO, Yves Gassot comments, “A bumper crop of events unfurled in 2013 and the early months of 2014, hinting at what the future might hold for digital industry markets. Mobility, the cloud and big data are,, the core issues up for debate amongst digital ecosystem stakeholders.”
DigiWorld markets reported a slight uptick in growth in 2013: going from 2.8% in 2012 to 3.2%, generating close to 3,500 billion EUR in revenue.
DigiWorld Yearbook’s editor-in-chief, Didier Pouillot, commented “This modest improvement is a reflection, first, of the ongoing healthy momentum in key sectors and, second, a still bleak economic climate, especially in Europe”.
The first trend is driving a continual rise in consumption, traffic, and a steady rate of device (smartphones, tablets, smart TVs) replacement and upgrades, and is forcing hardware suppliers to work hard to keep up with demand. The second trend is tempering the first as businesses and consumers are feeling the pinch and being careful with their spending. Suppliers too are being cautious about their investments, especially since, in a number of instances, the current state of the market and competition are cutting into their revenue and more importantly, their margins. Ultimately, it is the balance between these two opposing forces – inflationist in terms of volume and conservative in terms of value – that creates the biggest challenges for the ICT industry today.
• Internet services are clearly enjoying the strongest rate of progress at present – reporting growth rates of around 20% a year. At this pace (we expect it to slow slightly: to 16% in the coming years), online services’ weight in the equation compared to core DigiWorld markets will increase from 5% in 2012 to 10% in 2017. In addition to a shift in the balance of power between the two sides, the markets are also being changed from the inside, from both a sectoral and geographical standpoint.
• Equipment: global growth in core DigiWorld markets in 2013 varied from segment to segment: ranging from +6.2% for telecommunications hardware to -5% for consumer electronics. Between the two, computer hardware markets grew by 4.2% last year.
• Internet services: taken as a whole, Internet services enjoyed double-digit growth during this same period, but we can also distinguish several sub-groups. Social media sites, mobile apps and OTT video are the most dynamic today: all reporting over 30% growth in 2013 – and more than 40% and even 50% for social networking sites, on average, over the past three years. Together, they account for around 20% of OTT markets. The cloud is another source of growth, with revenue rising by close to 30% per annum, and singlehandedly accounts for more than a quarter of online revenue, followed by search and e-commerce which are growing by around 20% a year.
• Telecom and TV services: telecom services continue to linger on the bottom, with a growth rate that has been shrinking for the past five years and dropping to +2.5% in 2013. The other two services segments performed virtually on par: +4.5% for IT and software and +4.4% for TV services.
Telecoms: the three challenges
A long journey still lies ahead for Europe in its bid to achieve a single telecommunications market. To be successful, the regional consolidation that now appears to be properly underway will need to rise to three main challenges:
• price wars that threaten telcos’ ability to invest in new generation infrastructure;
• a single European telecoms market, which includes cross-border deals and the creation of truly pan-European players;
• achievement of the margins and critical mass needed to reinvent the telco business model, in an environment being dictated by powerful Internet companies.
Over-The-Top (OTT) making the rules
Any discussions about the future of the digital economy must focus on coming up with business models that are compatible with an all-IP value chain that places most applications and services outside the network. Despite the balance of power being obviously tipped in favour of the top Internet platforms, we believe the future is still relatively open for the taking.
Will TV go full OTT?
Despite its demise being announced on a near daily basis, linear television will be with us for some time to come – not least because it generates more than 90% of all TV revenue. But profound changes, which are putting tremendous pressure on industry players, are redrawing the global TV landscape. These changes include:
• the swift development of on-demand services, and notably SVOD;
• the gradual disappearance of the technical distinction between distribution on managed networks and online distribution, which will open the way to increased competition for control of retail distribution;
• the IPTV model being called into question, and cord-cutting leading to the emergence of broadcast + OTT solutions.
The DigiWorld Yearbook was launched in three European capitals - Paris, Brussels and London. The London event took place on 3rd June, opening with a keynote address by Rt Hon. Edward VAIZEY, MP, Minister for Culture, Communications and the Creative Industries. IDATE experts along with those from the industry were also on hand to debate the DigiWorld themes during the course of the evening.
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The global Real Time Bidding market to grow to 17 billion EUR by 2018, up from an estimated 4 billion EUR in 2013.
Soichi NAKAJIMA, Senior Consultant
IDATE forecasts the global Real Time Bidding (RTB) market to grow to 17 billion EUR by 2018, up from an estimated 4 billion EUR in 2013, representing a Compound annual growth rate (CAGR) of 36% from 2013 to 2018. RTB is a form of programmatic buying, and forms a part of the display-advertising market.
It is complementary to targeted advertising which is refined through the use of personal data, where RTB gives this targeted advertising the real-time added value. RTB was the fastest-growing segment within the advertising market in 2013.
The growth is RTB is driven by several factors, the most obvious being the increase in ROI which RTB brings for both advertisers and publishers. From the publisher point of view, they see an increase in eCPM, since RTB can provide better-targeted advertising space in real-time, which is more effective than traditional inventory. From the advertiser point of view, the increase in eCPM means that they have to pay more to advertise in that inventory. However, the use of RTB means that the advertisers have access to much more targeted, relevant, and thus effective inventory, which compensates for the increase in eCPM.
Today, RTB is used almost exclusively for indirect inventory. IDATE estimates that in 2013, at least half of all indirect display inventories were sold though RTB technology, and that by 2018 the leading countries will see almost full RTB penetration for indirect inventory. But it is also expected that RTB will expand into direct, premium inventory sales, in conjunction with increased personal data use (targeting) to further increase the premium value of the inventory. This is already starting to happen with the concept of guaranteed upfront sales entering RTB. The concept here is to trade direct, premium inventory on an RTB platform, whilst giving publishers a high amount of control and also advertisers the trading real-time benefits of RTB. This is done by the buyers (typically DSPs) sending a request for certain types of inventory, typically audience demographics (such as age, sex, income or place) and allocated budget to SSPs. The SSPs then provide the buyers with a packaged premium offer aggregating various publishers to meet the buyer request. This is different to standard indirect RTB trading, as indirect inventory is sold as spots rather than packages. The buyers then purchase this package upfront, together with guarantees from the publisher.
Another growth driver for RTB is how big brands have embraced the technology. In display advertising Google and Facebook are number one and number two respectively, and by a long way, and that RTB has been embraced by these two juggernauts has certainly helped spread the technology in the market. The Facebook launch of FBX was arguably a defining moment, adding inventory and thus liquidity into the market. This also meant increased competition in RTB, and more urgency for other large brands to embrace the technology, either as publisher or RTB provider. Also notable are commercial giants Amazon and eBay who have started to provide RTB on their sites, and the acquisition of MoPub by Twitter in September 2013. The leading specialist players along the display- advertising value chain, such as DSPs, SSPs and ad exchanges are also all embracing RTB, to maintain their value within the ecosystem.
From the perspective of personal data use, RTB does not in itself increase the use of personal data. However, it does provide real-time and further automation capabilities within the display-advertising value chain, and thus used as a tool, RTB is expected to further increase the use of personal data for targeted advertising. Since RTB is also provided as a single interface, this also means potential disintermediation of the middlemen within the value chain, especially those such as ad networks who have traditionally worked in the non-automated environment. Market consolidation may also follow, with increased competition and maturity.
Global RTB revenues and regional breakdown, 2012-2018 (million EUR)
Source: IDATE, Real Time Bidding, April 2014
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 the Telecom Strategy Business Unit
En 2013, les marchés du DigiWorld ont enregistré un léger rebond de croissance, avec une progression de 3,2 %. Résumé tirés du tout nouveau livre DigiWorld Yearbook 2014.
« Cette modeste amélioration traduit, d’un côté, l’effervescence continue dans ces secteurs clés, de l’autre, le maintien d’un contexte économique tendu, plus particulièrement en Europe », résume Didier Pouillot, Responsable du DigiWorld Yearbook à l’IDATE.
Le premier phénomène entraîne le marché vers toujours plus de consommation, toujours plus de trafic ; les parcs se renouvellent (smartphones, tablettes, téléviseurs connectés) et les industriels s’efforcent de répondre à cet afflux de demandes.
Le second phénomène tempère le mouvement, en le ramenant aux contraintes du moment : les entreprises, mais aussi le grand public, restent prudents dans leurs dépenses. Les offreurs eux-mêmes surveillent leurs investissements, d’autant que, dans nombre de cas, le marché et le jeu de la concurrence restreignent leurs revenus et, plus significativement encore, leurs marges.
C’est cet équilibre entre deux tensions, inflationniste en volume, conservatrice en valeur, qui pose les défis pour l’industrie des TIC aujourd’hui. Aujourd’hui, la dynamique des marchés est clairement du côté des services internet, qui enregistrent des croissances de l’ordre de 20 % par an. À ce rythme (nous prévoyons un léger ralentissement à… 16 % pour les prochaines années), leur poids par rapport aux marchés cœurs du DigiWorld passerait de 5 % en 2012 à 10 % en 2017. Mais au-delà des transferts de valeur entre les deux blocs, les marchés se déforment aussi à l’intérieur de chacun d’eux, aussi bien sur un plan sectoriel que géographique.
• Équipements : la croissance mondiale en 2013 varie selon les segments, entre +6,2 % pour les matériels de télécommunications et -5 % pour l’EGP. Entre les deux, le marché des équipements informatiques progresse de 4,2 %.
• Services télécoms et audiovisuel : les services télécoms restent en retrait, avec une croissance au ralenti depuis cinq ans et un niveau de +2,5 % en 2013. Les deux autres segments de services ont des performances très proches : +4,5 % pour l’informatique et les logiciels, +4,4 % pour les services audiovisuels.
• Services internet : si l’on est de manière générale sur des niveaux de croissance à deux chiffres, on peut aussi distinguer plusieurs tendances. Les réseaux sociaux, les applications mobiles et la vidéo OTT sont aujourd’hui les activités les plus dynamiques (plus de 30 % de croissance chacun en 2013, plus de 40 % voire 50 % pour les réseaux sociaux en moyenne au cours des trois dernières années). Ensemble, ils représentent environ 20 % des marchés OTT. L’autre moteur de la croissance est le cloud, dont les revenus progressent encore de près de 30 % par an et représentent à eux seuls plus du quart des revenus OTT ; derrière, le search et l’e-commerce affichent des dynamiques proches de 20 %.
Yves Gassot Directeur Général, IDATE
L’IDATE dessine les lignes de force de la réorganisation des télécoms, de l’internet et de l’audiovisuel.
Le 14e édition du DigiWorld Yearbook vient d'être publiée. Nos experts proposent une lecture fine du monde numérique. Chiffres clés, événements marquant des marchés de télécommunications, de l’internet et des médias numériques, analyses : tout y est.
Nos experts apportent leur éclairage à vos questions :
• Comment évoluent les secteurs clés de l’économie numérique ?
• Les opérateurs télécoms européens sous pression peuvent-il réagir ?
• Quel avenir pour l’industrie des contenus ?
• Quelles sont les lignes de force qui vont marquer le futur internet à l'horizon 2025 ?
« Les tensions n’ont jamais été aussi fortes entre les opérateurs et fournisseurs de solutions techniques et de contenu, même si, au-delà des affrontements, aucune plateforme et aucun acteur ne peut s'affranchir d'une certaine ouverture pour tirer parti des compétences, des standards, des clients des autres acteurs de l'écosystème numérique, comme on peut le voir aujourd'hui dans le domaine de l'innovation mobile », explique François Barrault, Président de l'Institut, dans la préface.
Une occasion pour lui d'introduire le thème du prochain DigiWorld Summit (Montpellier, 18 au 20 novembre 2014), puisque le rendez-vous annuel de l'IDATE aura lieu cette année sous le titre "Mobility reloaded".
Pour Yves Gassot, Directeur général de l’IDATE, « l’année 2013 et les premiers mois de 2014 ont encore apporté une riche moisson d’événements et de nouvelles conjectures sur les orientations des marchés numériques. Nous avons retenu de cette actualité foisonnante, qui s’inscrit dans le triangle analysé dans la précédente édition - Mobilité, Cloud et Big data - les grands enjeux qui cristallisent les débats entre les acteurs de l’écosystème numérique ».
Les trois défis des télécoms
Un premier enjeu majeur a trait à la longue route qui semble encore nous séparer de l’objectif d’un marché unique des télécommunications en Europe. Dans ce secteur, l’Europe fait figure d’exception, avec une baisse continue des revenus de 12 % et des marges depuis cinq ans. Il est donc essentiel de voir si le mouvement de consolidation qui semble s'amorcer permettra de relever les trois grands défis suivants :
• le premier est de sortir de la guerre des prix qui menace la capacité à investir dans les infrastructures de nouvelle génération ;
• le second est de reprendre la route du marché unique des télécoms en Europe, qui passe notamment par des opérations transfrontières et l'émergence d'acteurs véritablement paneuropéens ;
• le troisième est de disposer des marges et de la taille qui permettent de réinventer le modèle économique des telcos dans un contexte qui paraît dominé par la dynamique des acteurs Over-The-Top (OTT).
La nouvelle loi de l’Over-The-Top
Le second enjeu souligne précisément le nouvel ordre Overt-the-top (OTT) qui s’impose à la fourniture d’applications et aux différents acteurs de la chaîne de valeur. Les réflexions sur le futur de l’économie numérique doivent surtout s’appliquer à réinventer des modèles économiques compatibles avec une chaîne de valeur qui renvoie, dans un monde tout IP, l’essentiel des applications et des services à l’extérieur des réseaux. C’est la loi de l’Over-The-Top. Si cette loi de l’OTT s’applique à tous comme une nouvelle donne inévitable, elle n’implique pas une intégration verticale systématique ou une confusion des métiers (ce que laissent parfois entendre les réflexions sur la convergence). Elle ne préjuge pas non plus des rapports de force qui s’appliqueront au partage de la valeur. Même si des positions de force indiscutables existent au niveau des grandes plateformes des géants de l’internet, l’avenir nous apparaît comme relativement ouvert. Les géants du Net ne sont d’ailleurs pas à l’abri d’un jeu complexe d’incertitudes :
- Il y a celles qui sont relatives aux ambitions à l’international des leaders chinois - Alibaba, Sina, Baidu, Tencent - ou du japonais Rakuten.
- D’autres découlent de la dissémination du numérique dans l’ensemble des secteurs. Elle génère des opportunités mais aussi des champions sectoriels - Uber, AirBnB - avec qui il faut coexister quand ils ne sont pas prêts à se vendre.
- Il y a enfin celles qui sont relatives, plus généralement, aux scénarios du futur de l’Internet esquissés par l’IDATE autour d’un débat sur l’openess, la privacy, la sécurité et la fiscalité : une réglementation accrue pourrait limiter les volumes de données collectées et leur exploitation tandis que le développement systématique de technologies ouvertes ou standardisées pourrait générer une dynamique de marché et d’échange moins dépendante de l’intermédiation des plateformes dominantes.
La télévision « full OTT » ?
La TV linéaire, dont la fin est régulièrement annoncée, est encore là pour longtemps, avec sa part de plus de 90 % des revenus d’ensemble de la TV. Mais des mutations profondes, mettant sous forte pression les acteurs en place, sont en train de remodeler le paysage audiovisuel mondial sans toutefois remettre en cause la puissance nord-américaine, qui dispose historiquement des plus puissants groupes médias et désormais des plus grandes plateformes de distribution avec Apple, Amazon et Netflix :
- le développement rapide des services à la demande, et notamment la SVOD ;
- la distinction technique entre distribution sur réseaux managés et distribution OTT va progressivement disparaître, laissant la place à une concurrence aiguë pour le contrôle de la distribution commerciale ;
- la remise en question du modèle de l’IPTV, et l’apparition de solutions Broadcast + OTT sous l’effet du cord-cutting.
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