Head of Media & Digital Content Business Unit, IDATE
Linear TV is still the main source of revenues for the video industry – however, traditional players in mature markets see their business shrinking and have to adapt to an increasingly dense ecosystem, notably regarding competition from internet players. One of our estimates is that linear TV revenues will drop from EUR 368bn in 2015 to 344bn in 2025, against skyrocketing On-Demand TV revenues jumping from EUR 25bn to EUR126bn in 2025. In our disruptive scenario we assume the complete disappearing of home video up from 2022. Nonetheless, the total videomarket will grow with an annual average rate of 1.4% worldwide.
In developed countries, the TV sector has been suffering from what is expected to be a lasting state of stagnation, brought on by a growing number of channels; the relative saturation of pay-TV markets, and increasing competition from the Internet for viewers and advertising money.
Keeping in line with current market trends, a snapshot of the market 10 years from now includes on-demand services having a relatively small impact on revenue (accounting for around 10% of the total market in 2025) and a global market that will continue to grow by around 3.5% a year, on average – a large percentage of which will come from emerging countries. Asia/Pacific will become the world’s biggest market, while growth in the main European markets will be weak, and possibly even negative.
But another, far more disruptive picture is also possible. One where on-demand becomes the viewing method of choice amongst consumers, and live viewing confined largely to special events. Under this alternative scenario, on-demand services account for close to 30% of the sector’s revenue in 2025.
Two phenomena are at work here:
• on-demand services replace linear TV but generate less revenue per customer for an equal number of subscribers;
• on-demand services undermine the revenue earned by linear services by lowering both ad rates and subscription prices.
As a result, the market grows much more slowly than under the “business as usual” scenario, and even enters into a lasting state of recession in developed countries.
In this declining market, veteran market players – i.e. channels and distributors – lose a share of their income to the leading entertainment operators. Only content producers, which earn a growing share of the revenue being generated, are not affected by market deflation.
Veteran players are thus having to contend with two big issues:
• shrinking TV retail markets;
• decreasing share of the margin earned on these markets.
Find out more details regarding disruptions in TV content distribution and user behavior in our dedicated market report
CEO, IDATE DigiWorld
For some of us here at IDATE DigiWorld, the month of June was devoted to launching the 2015 edition of our DigiWorld Yearbook in London, Paris and Brussels, in that order.
It was not without some modicum of pride that our chairman, François Barrault, was able to rally top-flight special guests for the occasion. In the photos below, you will no doubt recognise the CEOs of BT (London), of Publicis, Orange, Bouygues Telecom and BlaBlaCar (Paris), and the CEO of Proximus (Brussels). I should also like to extend my warmest thanks to the other speakers from Ericsson, Google, IBM, and Verizon, and to the many people in attendance, including a fabulous turnout by DigiWorld Institute members.
Of course, IDATE teams had their role to play at what has become the “DigiWorld Future” series of conferences. This was the inaugural year for these forward-looking events whose purpose was to deliver our snapshots of the Internet, telecoms and TV markets in 2025, and to debate the core trends for the coming decade.
For the sake of brevity, I will confine myself here to just a few words about five major trends.
The great digital shake-up
The DigiWorld is no longer restricted to the few sectors that our Institute has been tracking from the outset (IT, Internet, telecoms, medias). Over recent months, digital innovation has taken hold as vital for company heads in all sectors – insurance, health, automotive, travel, tourism, etc. – which naturally has an impact on ICT sectors as well. We discussed the “softwarisation” of telecoms to underscore the growing influence of network virtualisation, through SDN and NFV.
Acceleration of telecom industry M&A deals
It is no surprise that Europe’s ailing economy has resulted in most markets going from four to three mobile operators. Less expected everywhere and by everyone has been the acceleration in the fixed-mobile convergence trend which is expected to go a long way in shaping the future of continental markets, and now the UK as well. Also noteworthy in recent times are the more or less direct links between mergers and acquisitions on either side of the Atlantic. What remains to be seen in Europe is whether the current spate of mostly in-market deals will led to more complex cross-border deals which seem inevitable, but whose potential synergies are less overt.
The GAFA quartet, i.e. Google, Apple, Facebook and Amazon, have increased their market power in recent months by combining their first-mover assets with a strategy platform that enjoys a cyclical effect: as customer numbers grow so does ad revenue, which in turn makes it possible to attract more content and applications, which attracts more customers, and so on. But does this mean that special rules need to be devised for platforms, or should they be covered by existing telecom regulation? Whenever possible, it would make the most sense to apply existing (competition, contract, consumer, privacy, tax, etc.) laws to ensure fair and equal treatment for players along the chain. We also need to factor in innovation and, for instance, the emergence of new disrupters in vertical markets (Uber, Airbnb and the like) who are also not short on ambition, not to mention veteran heavyweights, such as automotive industry leaders that have no intention of allowing their products – to quote one of our speakers – to become a “smartphone on wheels”.
China’s new digital ambitions
When we talk of disruptions we also need to talk about the new Internet giants who grew up in China. We have seen Tencent and later Alibaba launch their IPOs on the New York exchange, and invest in a growing stable of promising start-ups in the US and Europe. So only a fool would think that China is just the place where iPhones are made.
Content is king, still
The combination of ubiquitous high-speed Internet and a proliferation of screens is fuelling two major upheavals in the TV industry. Today, it is not hard to imagine global distribution strategies that largely by-pass traditional home network operators. Access to premium content will be based more and more on the size of the programme and the ability to pay for itself. Second, viewing is becoming an increasingly individual pastime with users making more personal choices. This marks a break with mass media structures and the traditional models offered to advertisers. As a result, European broadcasters, which are even more fragmented than telcos, need help in accelerating their digital transformation.
I’ll stop there, and let you discover for yourself a more detailed look at current trends and future scenarios in DigiWorld Yearbook 2015, along with datasets and analyses of the digital economy’s main markets.
It only remains for me to say that we look forward to seeing you at the upcoming DigiWorld Summit (17 to 19 November 2015): Digital First, with a great many surprises in store.
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Published in COMMUNICATIONS & STRATEGIES No. 98
Group Director and Board Member at Ofcom;
UK Regulator, London
C&S: Is the SMP regulatory framework fit for purpose given the competition among telecom providers and between telecom operators and online service providers?
Dr UNGER: The SMP framework has served us well over the years. It is a good starting point for the Framework review that is about to start. However, there are areas where we need to build on it.
For example, we need to ensure that when analysing the market power of traditional network operators, we take into account the presence of new communications providers, delivering services such as voice and messaging over the top of the internet. This is something we can do within the current Framework, but it is also part of a broader debate about the need for a level playing field between network operators and internet-based providers. It may be that expanding the scope of the SMP analysis in the manner results in a reduction of market power, and it’s clearly important that we consider this possblity. There is a separate question about whether or not there are new bottlenecks created by internet-based providers and whether we have the right tools to deal with this .
A more difficult issue is that whilst the SMP framework is an effective means of addressing concerns arising from single firm dominance, it does not deal effectively with oligopolies. This is a problem because a key market trend for both fixed and mobile is towards a limited number of end-to-end competitors – more than one, but not many. In some circumstances this is fine, in that a limited number of competitors is sufficient to deliver a good consumer outcome, and there is no need to intervene. In other circumstances however the outcome might be poor. We need the right tools within the framework to distinguish these cases, and intervene where appropriate. At present the only tool available is the concept of joint dominance, and I don’t think this is sufficient.
What are the most important skills sets for those who need to make sense of results of big data analytics?
Statistics and machine learning are most obvious. But in order to put analysis to work, communication skills are critically important. To be effective, a data analyst needs to turn data into information, information into knowledge, and knowledge into action. You can't do this without communication.
What are the biggest opportunities for business and are businesses able to make effective use of big data to improve their margins?
As in every business, it is imperative to understand your customer. When you can draw on computer mediated transactional data, it is possible to gain a deeper understanding of the customers' needs than was previously the case.
Are there already some ideas for developing appropriate tools for dealing with oligopolies?
BEREC has recently published a report on this matter, and I think this provides a good starting point for the debate we need to have. The report distinguishes two questions: whether there is joint dominance, associated with tacit collusion, and what is the threshold to prove it; and whether we have situations where there is no tacit collusion, but uncoordinated behavior within a tight oligopoly still results in a poor outcome. The report then focusses on the second of these questions, which is the one that is not currently addressed by the European Framework
It is important to emphasise that tight oligopolies may still result in a good outcome. For example, you may have a small number of networks but we still observe effective competition, including for example the provision of wholesale access on a commercial basis. However, it is not difficult to imagine circumstances where there is more limited retail competition, either between a single incumbent telco and a cable operator, or between a small number of vertically integrated MNOs.
The BEREC report sets out a number of criteria which one might use to distinguish between ‘good’ and ‘bad’ tight oligopolies. It also draws an interesting parallel between these criteria and the SIEC test applied in merges, which serves a similar purpose. What we now need to do is consider in more detail how this thinking might be applied in practice, and what evidence would be required to do so.
Could symmetrical regulation replace or complement asymmetrical regulation in these matters?
I’m afraid I don’t even like the term ‘symmetric regulation’. It sounds benign, since it implies consistency of approach, but that is often not what it means in practice. What it means in practice is that regulation is applied to all service providers in the market, regardless of whether a particular provider has market power.
Such a blanket approach to regulation might be appropriate in circumstances where there is a market-wide market failure. For example, high barriers to switching might necessitate a market-wide intervention to improve switching processes. But where there is not a market-wide market failure, I believe very strongly in the principle that any regulatory intervention should be proportionate, and targeted at the problem you’re trying to solve
I therefore find it odd that, within the current framework we are able to address concerns arising from single firm dominance, or a rather narrowly defined joint dominance, but that where these fail our backstop position is to regulate everyone in the market. We need to find a more sensible middle ground.
Some observers have argued that symmetric regulation has already proven its value for dealing with access problems (e.g. interconnection). Can we apply this comparison to issues dealing with access networks?
I’m not sure the comparison is valid. Remedies which mandate interconnection (or other forms of interoperability) are I think usually imposed because there is a risk that network effects will result in the market tipping to a single provider. In those circumstances it may well be appropriate to impose a market-wide remedy, since the problem you’re trying to address is one that arises from the way that the market as a whole operates
To put it another way, I think we need to distinguish between those forms of network access which are designed to address market failures associated with network effects, and those forms of network access designed to address market power. The former may have to be market-wide, the latter should be targeted at the source of market power.
Steve UNGER is Ofcom's Chief Technology Officer, and is also the Group Director responsible for Ofcom's strategic approach to communications regulation. His group is responsible for critically evaluating external market and regulatory developments, and leading the process of setting Ofcom's strategic priorities. He is also responsible for several specific policy areas, including Ofcom's work on Communications Infrastructure. Steve previously worked in industry – for two technology startups, both of whom designed and operated their own communications networks, and as a consultant advising a variety of other companies on the commercial application of new wireless technologies. He has a Physics MA and a Ph.D. in Astrophysics.
The Communications & Strategies No. 98 "A review of SMP regulation : Options for the future" is now available !
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The place to be in Europe, to understand upcoming disruptions and their impact on telecom, IT, Internet and media markets
From 17 to 19 November 2015, the 37th annual DigiWorld Summit will bring together 150 top-tier speakers to Montpellier to share their views with the more than 1,200 participants from over 30 countries. French Tech will also be in the spotlight during the 2nd annual DigiWorld Week and at the inaugural DigiWorld Awards.
Under the banner of “Digital First” IDATE will host debates on the core trends shaping telecom, IT, Internet and media markets, with the knowledge that digital technology is entering a new stage in its ubiquity, becoming the vehicle of a major overhaul in many sectors: energy, insurance, finance, health, automotive, travel and tourism… “But,” says IDATE CEO, Yves Gassot, “this digital verticalisation also represents a new challenge for IT, telecoms, Internet and media industry stakeholders. They may see new growth opportunities, but also challenges as innovation cycles are accelerating, as they consider the shifting outlines of their business and contend with new digital intermediaries.”
This new stage in the digital transformation is being spurred by ubiquitous wireline and wireless connectivity, the economies of scale of cloud computing, and the power of real time data processing algorithms. But it is being amplified by the rise of connected objects, and the promises of 3D printing, of artificial intelligence and the collaborative economy. A profound transformation of the economy that is already materialising in changes to production and distribution infrastructures, in the accelerated shift from product to service and the profusion of channels for interaction with end users.
• What do vertical companies (media groups and TV networks, insurance, automotive, travel, retail, etc.) want from digital industry players (telcos, OTT, IT)?
• How should digital industry players position themselves with respect to the digital transformation in vertical markets?
• How can the Web’s top destination platforms cohabitate with the vertical markets’ new digital champions?
• This year’s Guest Country: China. Can China combine the power of its recently acquired positions in Internet and telecom markets with its manufacturing ambitions?
2015 DigiWorld Summit Programme
Analysis and debates between veteran industry players and disruptive start-ups, with insights from IDATE’s finest economists and analysts:
Digital Europe, Digital World
In-depth seminars with the industry’s top expertsConnected Things Forum
Smart City Forum
TV & Video Distribution Forum
Future Digital Economy Forum
DigiWorld Week (14 – 22 November 2015): IDATE expands on the two days of the DigiWorld Summit, and plays host to an exciting event-filled week. Delving deeper into the issues and shaking up ideas: symposiums, workshops, hackathons, exhibitions, festivals, master classes, …
DigiWorld Awards: in partnership with Business France and French Tech, IDATE will be hosting the first annual DigiWorld Awards, recognising French digital start-ups (Equipment and devices, Networks and telecoms, Internet services and application, M2M and IoT…), created abroad. Awards will be in four categories: Africa and the Middle East – The Americas – Asia – Europe
The DigiWorld Summit, is organised under the patronage of the French Ministry of the Economy, Industry and Digital Affairs, the Région Languedoc Roussillon and Montpellier Métropole, with the support of DigiWorld Institute member companies.
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To many, the deal seemed like a foregone conclusion, and we had been looking forward mostly to the negotiations that would steer it to completion (see the attached press release). It is hard to know exactly what motivated the Bouygues Board’s decision.
We ourselves had underscored the tremendous complexity of such a deal that involved the acquisition of the number three operators’ customer base and the sale of its network and a portion of its frequency holdings to the country’s number four operator, Iliad/Free. This dual negotiation was nevertheless necessary, for both financial reasons and to get a jump on the Competition authority’s expected reservations about the merger. Here, we understand that Bouygues was very reluctant to endure the uncertainties of a long period of anti-trust investigation, with no guarantee of substantial compensation should the deal fail to win approval.
To this can be added the federal government’s very strong reservations, and the difficulties in negotiating credible guarantees for the future of the company’s teams and jobs.
Lastly, without underestimating the ability of the Bouygues Telecom team, its 4G network and its frequency holdings to achieve pre-Free EBITDA (25%) by 2017, we cannot discount the possibility of further merger and acquisition deals in the French telecom market.
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CEO, IDATE DigiWorld
It is a surprise?
No, everyone was expecting it. First, because Altice/Numericable-SFR spokespeople had underscored the appeal of such a deal and, second, because in most European countries we are seeing national market structures going from four to three mobile operators. Such is the already the case in Germany and the UK, and very likely in Italy and Spain.
If we look at the situation outside the European Union, we see that in the United States there are four national operators for as many people as there are in Europe’s five biggest markets combined.
Would this means an increase in retail market prices?
Let’s not forget that, in France and in most other countries in Europe, the sector is in a state of deflation, and has been suffering a steady decline in revenue since 2008. Another outstanding feature of the French market is particularly low prices. While this is of course a positive thing for consumers, it can also be at the expense of investment (which decreased in France in 2014) and innovation: in a healthy competitive environment, price alone must not be the sole element of distinction between vendors.
Second, predicting what the landscape will look like after this merger occurs, Free will no doubt remain very aggressive on the pricing front for mobile products as it works to close the gap with its rivals: it would represent only just over 7% of the sector’s revenue, well behind Orange (43%) and the new SFR with just under 50%. In the fixed line market, the breakdown of market share would be less dramatic (23.5% –41.5% – 35% respectively) but competition should remain quite lively.
Would this mean a decrease in investment?
Theoretically, it is possible that we will see a decrease in telcos’ combined CAPEX. But this remains theoretical if we take into account the situation of a sector that is struggling to get back on its feet, and to invest at a rate that keeps pace with the ongoing increase in superfast fixed and mobile network traffic. Remember that telcos’ spending in France was down in 2014. Here again, it is interesting to compare with the situation in the United States: over the past two years, telcos’ combined per capita spending on mobile networks in the United States was roughly double what is was in Europe’s main markets.
The goal for public authorities and consumer associations examining the deal should include an expectation that it would accelerate the pace of superfast fibre and 4G+ network coverage nationwide.
What have we seen, in terms of prices and investment, in other European countries that have experienced a similar consolidation?
In Germany, it is still too early to draw any conclusions. In the UK, in a market once populated by five operators, the merger of T-Mobile UK and Orange UK in 2009 – which were the country’s third and fourth largest operators, respectively, at the time, with a close to 20% market share each – resulted in the creation of a new leader, EE, with a 37% market share at the outset, but which fell to 32% in 2014. Calling prices in particular decreased steadily: the average price of a mobile calling minute dropped by 17% between 2009 and 2012. The company’s spending decreased in 2010 but rose again in subsequent years: T-Mobile UK and Orange invested an average 9% of their network revenue in 2008, compared to close to 10% for EE in 2014 – although it is also true that the company’s combined revenue decreased by 22% during that time.
In Austria, Hutchison’s takeover of the local Orange subsidiary, which took the market from four operators to three, had the opposite effect: putting an end to ongoing price decreases, and even resulting in a significant increase in 2013 of around 20% on the previous year. Although it should be said that prices in Austria had been very low for a long time. The consolidated entity’s capital expenditures (as part of the 3 conglomerate) dipped slightly, but relative CAPEX rose from 16.5% of the company’s revenue in 2012 to close to 20% in 2014.
What can we expect from the players if the deal goes through?
Numericable-SFR should take in around €2 billion in cash from the sale of the Bouygues Telecom network to Iliad/Free. It should also be able to enjoy economies of scale in the revenue generated from Bouygues Telecom customers, thanks to the new entity’s improved OPEX and CAPEX ratios.
Bouygues is given an exit strategy under terms that are far better than what was on the table six months ago, even if the short-term outlook for free cash flow is not guaranteed.
Iliad can look forward to putting an end to its roaming agreements with Orange, and gaining a 4G network with one of the two best rates of national coverage, without having to have built it itself. The company is also likely to gain access to new frequencies, either directly under the terms of the deal or indirectly as the result of imposed “remedies”.
As to Orange, it will suffer from the lost roaming revenue from Free, earlier than planned, but could also benefit from more stable market prices.
How are antitrust authorities, and public policy-makers in general, likely to react?
The new SFR would become the mobile market leader, earning just under 50% of the sector’s revenue, ahead of Orange with 42% and Free with >7%. This market structure is not likely to curry favour with the competition authority. As concerns the deal itself, the competition authority should view the Bouygues Telecom-Iliad aspect as a guarantee of ongoing competition, as the smallest operator would enjoy a real gain in assets. Depending on the frequency-related options that are included in the terms of the deal, France’s anti-trust authorities could impose further spectrum sales and terms in support of MVNOs.
The biggest issue for public authorities is the destabilising impact on the rules for upcoming auctions being held by market regulator, ARCEP. The original rules had been designed to maximise bidding incentives for a four-player market. Now, they will need to consider how these rules will be affected by the likelihood of a three-player market, keeping in mind that, even if it does go through, the merger is not likely to close before the auctions are held later this year.
In the fixed access market, public authorities could see the deal as a way to strengthen guarantees from operators for superfast fibre network rollouts: chiefly Numericable-SFR and Orange, which are by far the heaviest investors in new gen systems.
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IDATE, Europe’s premier digital economy think tank, uncovers major disruptions in the telecom, Internet and TV markets
Over the past 15 years, IDATE’s DigiWorld Yearbook has become a vital source of information for industry players, delivering analysis of the developments that have shaped the telecoms, Internet and media markets during the year gone by, identifying core global trends and providing snapshots of what lies ahead. The purpose and scope of the Yearbook has expanded as digital technologies have become an increasingly central component in the different sectors’ transformation: connected cars, financial services, insurance, healthcare, retail sales, the collaborative economy…
IDATE Chairman, François Barrault, is delighted to be celebrating this 15th edition, noting that, “we have entered into a new stage in the digital transformation over the past few months. Today, new intermediaries are coming to shake up the status quo, many of them from outside the industry, taking advantage of new technologies and new consumer cultural behaviour to revolutionise the value chain. Everybody knows how Uber has disrupted the taxi business, and Airbnb the hotel market. But finance, insurance, health and automotive industry leaders have all had to sit up to the risk of digital innovations shaking up their ecosystem, and forcing them to depend on external, unavoidable platforms.” This echoes the central theme of the upcoming DigiWorld Summit (17 – 19 November 2015), as IDATE’s annual conference will be held this year under the banner of: “Digital First”.
“For we here at IDATE,” says CEO, Yves Gassot, “whose business it is to wade through the latest market developments on a daily basis, the process of looking back over the year’s events only confirmed the significance of certain game changers such as mobility, the cloud, the Internet of Things, big data and social media. Some would also add 3D printing and artificial intelligence to the list.”
Scorecard for the digital economy in 2015: back on a growth path, but Europe still lagging behind
After the recovery announced in 2013, DigiWorld markets confirmed a stronger rate of growth in 2014, generating 3,700 billion euros. All segments combined, growth increased to 4.4%, which is 0.5 points more than the year before. These figures are still below those being reported for the economy as a whole: global GDP rose by 5.9% in current value in 2014, compared to 5.3% in 2013. This global recovery will become stronger still in 2015, with DigiWorld markets generating 3,900 billion euros, and climbing to 4,400 billion in 2018.
• This improvement can of course be attributed to Internet services which continue to boast more than 20% annual growth and, despite still accounting for only a fraction of the market, are helping to sustain the whole (growing from 275 billion EUR in 2014 to 475 billion in 2018);
• But also to stronger performances from a large number of more traditional segments – which are typically bundled together as core DigiWorld markets, i.e. telecom and IT equipment and services, consumer electronics, TV services, etc. Growth in these markets, i.e. excluding Internet services, rose from 2.8% in 2013 to 3.2% in 2014.
• Europe as a whole continues to lag behind increasingly vigorous North American markets, and the powerhouse that is emerging Asian markets.
2025: snapshots of 10 key trends and three outlook scenarios for Internet, telecoms and TV markets
For the first time, this year’s edition includes outlook scenarios for Internet, telecom and TV markets and players, provided by IDATE’s teams:
• Internet 2025: Will the top platforms become even more powerful?
• Telecoms 2025: Can the top telcos strike a balance between becoming commodities and competing head on with the top OTT companies?
• TV 2025: How can distributors avoid being cut out of the loop?
About the DigiWorld Yearbook
The finest market insights from IDATE experts who track the changes at work in the globe’s telecom, Internet and media industries throughout the year.
The DigiWorld Yearbook is published in English and French and available in print and PDF format.
> The 2014 edition can be downloaded for free on www.idate.org
> The 2015 edition is available for purchase. Print: €100, incl. VAT; PDF: €69, incl. VAT on www.idate.org
For more information: www.idate.org/digiworldyearbook/
Back from a brief trip to San Francisco, I wanted to share some of the industry news making headlines over in the United States.
Now that the Comcast – TWC merger has fallen through, new deals are in the works. As America’s biggest cable company, Comcast, has put an end to its plans to merge with the number two player, Time Warner Cable, largely because anti-trust authorities were proving hostile to the deal, everybody is wondering what will happen next, as there is little doubt that the country’s cable market will continue to consolidate. It is entirely possible that the number four cableco, Charter, will make the first move, reviving an earlier attempt to take control of TWC that was quashed by Comcast’s bid – albeit compensated to some degree as the company was able to pick up a few assets in the bargain.
The deal could start by Charter merging with Bright House, sixth biggest cable company in the US and an old TWC spin-off, before making a play for TWC. This merger would not be without consequence for the Europeans as Charter’s biggest shareholder is Liberty (more precisely, Liberty Broadband and its redoubtable CEO, John Malone. It is also worth considering that John Malone swooping back in into the American cable market might pave the way for a deal in Europe between Liberty Global and Vodafone…
This consolidation in the cable market cannot be seen separately from the growing popularity and presence of streaming video services (Netflix, Hulu, Amazon, HBO Now, CBS, YouTube, etc.) which represent a threat to cable companies’ revenue – with a potential ability to cut them by half. They will need to become more powerful, to stand up to this new source of competition, protect their exclusive rights to feature films, series and sport. Otherwise, they will be pushed out of the market, and reduced to the status of dumb pipe…
Ubiquitous Gigabit networks in the near future?
We still don’t know what Comcast plans to do. If it can continue to improve its clusters in the main markets through customer swaps, it no longer appears to be in a position to expand its footprint by increasing the number of households it covers. In fact, it may become increasingly bent on protecting cable’s supremacy in its broadband market franchises: currently accounting for more than 60% of the market and close to 80% of all new subscriptions each quarter for several years now. The danger here appears to come from the momentum triggered by Google Fiber to deploy symmetrical 1 Gbps access (for 70 USD a month, without the TV channels), with the first plans available in several cities, including Kansas City, Missouri, Austin, Texas and Provo, Utah. Taken first with some scepticism ("Fiber To The Press Release"), today Google’s initiative has translated into subscriber numbers in the tens of thousands, which is making ISPs sit up and take notice. It is a move that has won the support of the Chairman of the FCC who early on stated his plans to abolish the ban on municipal networks that exists in some states, and has attracted real interest from a number of cities. From a list of around 34 cities whose applications are being examined, five – Raleigh-Durham, Charlotte, Nashville, Atlanta and Salt Lake City – were selected early in the year for the next Google Fiber rollouts. As this initiative gathers pace, and feeling their franchises threatened, telcos and cablecos have responded by announcing their own Gigabit network rollouts. AT&T, which had focused chiefly on hybrid fibre-copper networks with VDSL, has begun to deploy FTTH at 1 Gbps in Austin, Texas.
Since then, the country’s biggest telco has reveal plans to follow up with similar rollouts in 21 more metropolitan areas, including cities such as San Francisco and Los Angeles where Google Fiber has no plans to set foot as yet. Century Link has also unveiled its plans for Gigabit network rollouts. Verizon, meanwhile, has taken something of a back seat, increasing access speeds on its Fios FTTH lines to 500 Mbps, and for its video bundles, but does not appear to have plans to enter the fray and expand its fibre footprint. Over in the cable market the number three player, Cox Cable, was the first to deploy Gigabit networks – in Phoenix, Omaha and Las Vegas – and has committed to steadily expand into other markets. This was the backdrop to Comcast’s subsequent announcement of 2 Gbps connections for 1.5 million households in Atlanta by next month, and for a total 18 million households by the end of the year – but no mention of how the plans would be priced.
Although we are hearing more and more Gigabit network announcements in the United States, a grain of salt would not be unwarranted. First, because we are all aware of the inevitable gap between headline speeds and actual speeds. Second, because figures on the scale of the rollouts, the actual increase in the number of homes passed and the sums earmarked for the deployments remain unclear. And, lastly, because there has not yet been any feedback on the use of these plans speeds…
Will the FCC and FTC also block the AT&T – DirecTV merger?
More than a year after the 49 billion USD merger was announced, the two protagonists are still waiting for authorities to greenlight the deal. In theory, the merger has set off fewer alarm bells than the Comcast/TWC deal, as it involves a telco and a satellite pay-TV provider. But it would nevertheless consolidate the position of the country’s biggest pay-TV provider, which already has 26 million subscribers in the United States, compared to fewer than 6 million for AT&T’s U-Verse and more than 20 million for DirecTV. This tremendous market clout is the central argument being put forth by Netflix and others who are demanding certain commitments in exchange for the deal going through.
Faced with the likelihood that the FCC and the FTC will give the merger the nod, discussions today have shifted to what these commitments might be: an obligation to sell broadband and pay-TV services separately, forbidding the new company from unduly favouring its own OTT TV programmes, for instance by imposing data caps on the use of rival services, etc.
The final thing to remember is that the merger would also provide AT&T with an opportunity to strengthen its offensive on the Mexican market, where it has already made substantial investments in its mobile business via Iusacell and Nextel, and on Latin American in general, where DirecTV already operates.
What does the future hold for T-Mobile?
The first thing to mention is the dip in the US market: after rising steadily, contrary to the European market, revenue (year-on-year) began to decrease for the first time in Q4 2014 – a trend that carried on through the first quarter of 2015 (46.093 billion USD versus 46.880, year-on-year). With 39 million customers, Deutsche Telekom’s 67% owned US subsidiary is poised to overtake Sprint in prepaid/postpaid/wholesale market share – 15.8% versus 15.9% – to become the country’s third biggest mobile operator. In Q1 2015, the telco’s aggressive pricing strategy brought in 1.125 million subscriptions, including 991,000 mobile phone accounts – the remainder being for tablets. At the same time, T-Mobile needs to sustain very high spending levels to achieve LTE coverage nationwide. The company’s finances will also feel the pinch of the second digital dividend auctions (600 MHz band) in 2016.
So it is with all this in mind that market watchers keep waiting for a new merger or acquisition deal to be announced. As it seems unlikely that the authorities will agree to a major merger inside the sector, many see Dish as the most likely candidate. The satellite pay-TV provider acquired more than 100 MHz in the different frequency bands and spent more than 10 billion USD at the latest AWS3 actions, without saying what the spectrum will be used for. Another option would be for Comcast – which, like other cable companies, is very committed to its Wi-Fi strategy – enter the mobile market. One major story making the rounds is the launch of Google’s Wi-Fi First service, based on agreements with T-Mobile and Sprint. Certainly less ambitious in scale and means than Google Fiber, this initiative nevertheless raises the same questions: is this the Mountain View company’s way to stimulate competition in the access market? Or should we see it as a desire to diversify by developing a presence over time in the telecommunications sector?
Follow-up to the FCC’s net neutrality decision
Debates since the regulator’s decision have gone in two directions. The first are over how the courts will rule in opposition cases. Among the FCC’s opponents is cable association, NCTA, whose former long-time chairman now heads up the FCC, and whose chairman today is Michael Powell who was the FCC chairman in 2005 when broadband access was classified a Title I service. The second topic of debate concerns interpretations of the FCC decision. Those who are criticising Facebook in India and its Internet.org offer are stoking the polemic over how compatible the different zero rating options are with net neutrality. Not least because Canadian regulator, the CRTC, recently cracked down on zero rating offers from Videotron and Bell Canada.
Verizon acquires AOL for 4.4 billion USD
Verizon is pushing through with its strategy to snap up the content that will allow it to sustain its LTE market leadership, and its mobile video business ambitions. In addition to the content brought in from AOL, the deal gives Verizon control of the adap.TV platform that AOL bought in 2013, which should prove an interesting asset when going up against Google and Facebook in the sale of advertising inventory (the two heavyweights currently accounting for close to 70% of the market).
The end of the Patriot Act and the NSA’s unchecked powers?
The House of Representatives voted in favour of a bill that would put an end to the most controversial sections of the law that was passed after the events of 9/11. Topping the list, wire taps will once again need to be authorised by a judge. The bill is still being hotly debated in the Senate, but hopes are high that it will go through.
Google cars hitting the road in California
We may well see city road testing begin on the first driverless Google cars this summer. Although authorities have demanded that Google put a steering wheel and brake pedal back in the cars, to allow the user to take control of the vehicle if necessary.
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Over the past few decades, TV service providers’ market power guaranteed them a certain leadership in production.
Thanks to a steady relaxation of competition rules in the United States, the resulting vertical integration trend has seen production studios merge with TV networks and cable companies. In other markets, such as France, public authorities have continued to oppose such a trend, underscoring how vital production independent of the top networks is to sustaining diversity and creativity.
A new way of consumption
Here too the Internet is changing the status quo. We watch more and more videos. We watch them more on our own, and from increasingly global sources. Content providers and pay-TV distributors are being penalised both by their costs and their only national footprint, and are having to contend with two major threats: being cut out of the service equation and being cut off from customers. Market heavyweights like the ones found in the United States are having to weigh the pros and cons of working with a platform such as Netflix that is expanding worldwide, versus setting up their own over-the-top solution… and protecting what is still their main source of income, i.e. selling programmes to TV channels (including affiliate stations). But their dilemma is still less dire than the one facing Europe’s independent providers, who have a primarily national footprint and which are often restricted in the extent to which they can exploit the rights to the programmes they help finance.
Ecosystem and legislation
The European Commission likes the idea of having TV rights negotiated for the EU as a whole. It would provide an opportunity to introduce the idea of economies of scale in a lucrative sector, and one that has a tremendous cultural influence. Unfortunately, in its revised version, this plan, which is one of the pillars of the Digital Single Market proposal unveiled in early May, is coming up against Europe’s very disparate set of national TV ecosystems. As national laws – and especially the state of the industry – currently stand, very few companies in the EU can hope to come out winners in any negotiations for rights to all 28 European markets. Bluntly put, a very cut and dried application of such a scheme would more likely be a boon for outsiders such as Netflix, Google, Apple, Facebook, Amazon, etc.
Despite which, our desire to be optimistic leads us to hope that the steady and inexorable development of the OTT video model will drive a change in legislation across Europe, and lead to cross-border and possibly continental deals between Europe’s TV sector players.
For the publication of the last study about "OTT Regulation" and the 15th edition of the DigiWorld Yearbook, IDATE is organizing a conference on the perspectives and key trends that will structure the digital economy for the next decade, DigiWorld Future
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Year after year, the economic and financial power of the GAFA quartet of Internet platforms continues to increase. Which brings two questions back to the fore, again and again: what trends might emerge to counter this seemingly inexorable rise? And do we need regulations that apply specifically to platforms?
A quick reminder of what economists mean by platform economics (digital or not): multi-sided markets (i.e. involving interactions between two or more parties) with reciprocal “network effects”. So the more iPhones that Apple sells, for instance, the more attractive its app store becomes to developers (and so to users), and vice-versa. In digital sectors, this characteristic is typically combined with a reduction in fixed costs (software), generating increasing returns as the platform becomes more successful.
Network effects usually go hand in hand with another property: asymmetrical prices. If Apple is starting to earn substantial income from the App Store, its business model and profits are rooted chiefly in the high price of its iPhones. With ad-funded models, one side of the market operates as a free service. As we have seen with Apple, digital platforms are a very efficient means of fostering open innovation, and capitalising on innovations from third parties. All of these aspects, which go some way to explaining why “winner takes all” when it comes to platforms, naturally need to rely on the ability to maintain the role of intermediary, and continue to become more proficient at it. Otherwise, the platform’s customers and suppliers will begin to adopt multiple homes, before eventually moving on to another, better platform. The efficiency of the leading platforms is the very reason for the current ambivalence over how much they are serving the greater good. On the one hand are concerns that a dominant OS will abuse its position while, on the other, this popularity can also mean an opportunity for developers, and can have positive repercussions for consumers.
The dichotomy needs to be resolved by taking account of the Internet’s dynamics as a whole. Windows has been through a number of anti-trust investigations but, today, this is the mobile Internet which has moved down the priority.
Worth reading on this topic is the recent IDATE report on "The future of the Internet: 2025". It takes a detailed look at the key technologies for the coming years, and especially at how development scenarios will be shaped by key variables, such as the openness of the Internet ecosystems, or the impact of restrictive privacy or security-related public policies. Here, we will add two other events that take us beyond a GAFA-centric environment. First, 2014 saw a number of Internet powerhouses emerge from the shadows of the GAFA quartet: in China (Alibaba, Weibo…) and in Asia’s leading markets in general (Rakuten, Line…).
We cannot entirely discount the possibility of these players gradually coming to compete head on with their Western peers. Second, we need to consider the position held by new players moving into vertical markets, many of which have carved out a place of sector-specific intermediary – Uber and Airbnb being two prime examples – and which have no intention of being taken over by Google or Apple or the like.
Nevertheless, faced with the realisation that GAFA continue to become increasingly powerful, the inefficiency of antitrust laws and the regulatory asymmetries compared to those imposed on other players along the chain, the idea of regulation that applies specifically to platforms is gradually coming to the fore. It may not be a good idea. Competition law, even ex post, is not necessarily ineffectual.
Plus it will be no simple matter to define the contours of the platform sector. And extending existing sector-specific laws, such as those that apply to electronic communications, to make OTT companies and telcos subject to the same principles, would take us down a path where, as businesses become more and more digitised, every economic sector would be more or less governed by electronic communications laws. Keeping in mind that the upcoming review of the EU regulatory framework for electronic communications is expected to focus on network access conditions and interconnection – and probably put more emphasis on symmetrical regulation. Should voice and SMS products not be removed from the scope of the telecom sector’s ex ante regulation, rather than adding in competing OTT products such as Skype, Viber, WhatsApp, etc.?
It nonetheless remains that in sensitive areas for digital industry players, such as those governing contract law, taxation, public safety and privacy, we can very easily identify laws that should apply across the board, such as what we find in consumer products and the retail industry. Without having to produce laws that are specific to platforms, the current juncture could provide an opportunity to merge national legal provisions with regional (EU) and global ones, and to ensure that they apply equally to all players along the value chain
For the publication of the last study about "the future Internet in 2025" and the 15th edition of the DigiWorld Yearbook, IDATE is organizing a conference on the perspectives and key trends that will structure the digital economy for the next decade, DigiWorld Future
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