Dig Now

Slide 1: Dig now But will anyone dig? Stavanger, April 10 2008 Rudolf van der Berg Rudolf.van.der.berg@logica.com © Logica 2008. All rights reserved

Slide 2: Disclaimer The opinions expressed here are my own. They do not represent the view of Logica 17 April 2008 .No2

Slide 3: Situation OECD governments are pressured (not) to do something about broadband Proponents Government Opponents Job Growth Waste Innovation Too Soon Green Society No Government Weightless Society Competition World Peace 17 April 2008 .No3

Slide 4: Dig Now or dig later? What needs to happen if our country wants to remain competitive? Technology -How much bandwidth will users demand? -Are the current networks enough? -Do we need to dig fibre? Will some other technology not save us? Market -Will the market provide what end-users and businesses require? -Who will pay for the investments? -Will the markets develop to a competitive situation with multiple providers Paul Keleher, Flickr of infrastructure? 17 April 2008 .No4

Slide 5: Dig now Fibre to the curb is the minimum, but will you get it? Technology (discussed in previous sessions) -End-users need 50/10 Mbit/s. SME’s more. -Current Cable/DSL not enough. FTTC for VDSL2/Docsis3 minimum -No mobile broadband without FTTC for backhaul. -FTTH ideal. It removes technology as a bandwidth barrier Market - Market outcome = possibility to monetize benefits + possibility to invest. - Different market position, different opinion -Those that benefit from the network will not build it, those that build it will not monetize its benefits. - Market for networks will not see multiple competitive infrastructures - Governments in unique position as they can internalize the benefits and have the possibility to invest. 17 April 2008 .No5

Slide 6: Market Market outcome = possibility to monetize benefits + possibility to invest. Market Parties: • Customers • Service providers • Investors ●Long term ●Short term New entrants •Network owners Short term investors ●Incumbent ●New entrant ●Wireless Service providers •Governments Customers Let’s look at demand, money and supply 17 April 2008 .No6

Slide 7: Market parties – Customers Cannot monetize benefits + no possibility to invest Characteristics -Don’t care about technology -Never asked for email, Youtube, SMS -All services, anytime, everywhere - No generic user profile Possibility to Monetize - Mostly non-monetary benefits (no commuting, healthcare, security, communication) Possibility to Invest Kalandrakas, Flickr - Fixed Monthly Budget - Budget is enough for new networks - No investment upfront 17 April 2008 .No7

Slide 8: Market parties – Service providers Low possibility to invest + medium possibility to monetize Characteristics •Services and Networks ≠ Chicken and Egg (No runway, no airline) •Services adapt to infrastructure •Some are unique, others commodities (Google/Ebay vs email/VoIP) •What used to pay for networks is now free Possibility to Monetize - Profit? - Who really benefits from infrastructure? Airline or Hotel? Possibility to Invest - ARPU services low. (Google: $6.25/month/OECD broadband user) - The combined profits of service providers may be just enough to finance the network Demand side wants it, but cannot invest 17 April 2008 .No8

Slide 9: Market parties – Long term investors High possibility to invest + risk averse Characteristics • 10-30 year horizons • Pension funds • Steady yield and inflation compensation • Very risk averse • Like infrastructure • Burned by long haul fibre Possibility to Invest - Norwegian state pension fund: €256 billion Biggest fear: - Competing networks - Bankrupt network may rise from ashes, with clean balance sheet. - Mutually assured destruction 17 April 2008 .No9

Slide 10: Market parties – Short term investors Medium possibility to invest + Short term Characteristics • Shareholders in existing telecom firms • 5 year horizons • Above market returns Possibility to Invest - Invest in IPO’s - Or buy from initial investor (without money going to the company) Private Equity - Different kind of short term investment - Creating value and/or sweating assets - Interested in structural separation Money side dislikes yield or risk 17 April 2008 .No10

Slide 11: Market parties – Incumbent fixed networks High possibility to invest + low possibility to monetize Characteristics • Owners of existing infrastructures • Expand networks easier/cheaper because of established position • Dominated by short term shareholder value Possibility to Invest - Free cash flow declining, but enough for investments - Will invest when forced by competition or regulator - Limit investments to locations where competitor present - Prefer sexier investments abroad or in services - Sometimes beg for government support and/or (service) monopoly Possibility to monetize - failed investments in services and content, - in neutral networks relegated to dumb pipe 17 April 2008 .No11

Slide 12: Market parties – New entrants Low possibility to invest + low possibility to monetize Characteristics • Providers of access networks (ULL/Wholesale) or utilities • Dependent upon incumbent for copper, backhaul, facilities • Limited to denser populated areas Possibility to Invest - Want to move up the value chain - Sometimes backed by billionaires or utilities - Face strong competition from existing players - Need +/- 40% penetration for FTTH - Need to get it right first time Possibility to monetize - Accept position as commodity provider 17 April 2008 .No12

Slide 13: Market parties – Wireless High possibility to invest + low possibility to monetize Characteristics • Provide 3G networks • Think about 4G and Wimax • Need FTTC for 4G and Wimax backhaul Possibility to Invest - Good strong revenues - Revenues under attack - Prefer to piggy back FTTC developments Possibility to monetize - More successful than fixed in services - Difficult in an All-IP world (IMS no success) Market: Only when forced to 17 April 2008 .No13

Slide 14: Governments High possibility to invest + high possibility to monetize Characteristics • Caught between proponents and opponents • Have privatised telecoms in ’90s • Faced with monopolies • Looking into structural/functional separation •Traditional role in network infrastructure Possibility to Invest - Would only need to invest part to get whole - Should demand open network in return - Best position is low in the stack (ducts, fibre) Possibility to monetize Rageforst, Flickr - Great societal benefits. Large or small it all adds up - Efficiency benefits within government Hey now, are we back to pre-90s? 17 April 2008 .No14

Slide 15: Conclusion Those that benefit will not build it, those that build it will not benefit. Demand side - There is demand - Value not known upfront Money Side - There is money - Risks and Yield unattractive Supply Side -There is only room for one (2?) -Shareholders say no - New entrants face battle uphill Flickr, ESGPHOTO Governments - What are you looking at me for? 17 April 2008 .No15

Slide 16: Conclusion To solve the deadlock players will have to step out of their comfort zone Yewenyi, Fliickr Demand side - Cooperate on bottlenecks (bandwidth) Money Side - Accept medium - long term yield and risk Supply Side - Accept that you provide a utillity - Enable not deliver services Governments Flickr, ESGPHOTO - Accept that infra competition is flawed - Regulate natural monopoly on infra - Push open and competitive services 17 April 2008 .No16

Slide 17: 17 April 2008 Title of Presentation .No17