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Digital economy-legal-updates-webinar-co-investment-in-new-infrastructure-roll-out
- 1. Digital Economy Legal Updates Webinar Series Co-Investment in New Infrastructure Roll-Out Presented by Luigi Minerva, Felipe Florez Duncan & Francesco Liberatore 19 June 2017
- 2. 2squirepattonboggs.comsquirepattonboggs.com Agenda • Welcome & Meet the Presenters • Co-Investment Models: Financial Markets Perspective • Economic Rationale for Co-investment & Commercial Initiatives • Competition Law Considerations • Questions & Discussion
- 4. Co-Investment Models: Financial Markets Perspective Luigi Minerva
- 5. 5squirepattonboggs.comsquirepattonboggs.com Co-Investment within European Telecoms • European regulatory cycle: pro-consumer to pro-investment • Turning point: Non discrimination and cost methodology (Sept’13) • Investors key wish: see the sector deliver revenue growth -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Capex Lower Higher Europe US c2000 c2012-13 c2025? c2040?? -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Regulation Lighter Heavier Europe trying to regain early 2000s technology leadership – lightening regulation to stimulate capex… Tougher regulation may cost US its capex lead – sowing seeds of future lightening of regulation… Technological cycle: eg 3G Technological cycle: eg 4G Technological cycle Regulatory cycle: peak to trough to peak, or trough to peak to trough Regulatory cycle Source: HSBC
- 6. 6squirepattonboggs.comsquirepattonboggs.com Co-Investment within European Telecoms • Competition: wholesale-based vs infrastructure-based • Wholesale-based: recurrent unit cost to access infrastructure • Infrastructure-based: “sunk costs” • Co-investment: (-) larger operator shares scale advantage, but (+) avoids sunk costs, (+) instils capital discipline, (+) reduces product commoditization Markets featuring marginal not sunk costs where challengers have graduated beyond ‘teenage’ status and have balanced incentives are preferable Source:HSBC 0% 5% 10% 15% 20% 25% 30% 35% 40% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Mktshrchallengerclosest to'teenager'status Competition % wholesale- vs infrastructure-based Challenger is… Wholesale-based = marginal cost Post-’teenager’ = balanced incentives Challenger is… Infrastructure-based = sunk cost Post-’teenager’ = balanced incentives Challenger is… Wholesale-based = marginal cost ’Teenager’ or smaller = focused on market share contest Challenger is.. Infrastructure-based = sunk cost ’Teenager’ or smaller = focused on market share contest -/+-/- +/- +/+
- 7. Economic Rationale for Co-investment & Regulatory Developments Felipe Florez Duncan
- 8. 8squirepattonboggs.comsquirepattonboggs.com Economic rationale for co-investment • Rolling out full fibre networks is costly… • FTTH Council estimate: €137bn across EU28 for 100% coverage • … and carries significant risks • Demand uncertainty; cost/ deployment risks; regulatory uncertainty • Co-investment solves some of the problems (demand & cost) • “a problem shared is a problem halved” • European Commission is now proposing changes to the regulatory regime • proposed Article 74 in the Electronic Communications Code: co-investment initiatives will be exempt from regulation if they satisfy certain criteria: they invest in very high capacity networks; have open, transparent and non-discriminatory terms of participation; offer old generation access to non-investors
- 9. 9squirepattonboggs.comsquirepattonboggs.com Why? Europe is behind target of 100% coverage of >100Mbps by 2025 (capable of 1Gbp)
- 10. 10squirepattonboggs.comsquirepattonboggs.com Many different business models can be used to rollout ultrafast fibre networks CityFibre’s ‘anchor tenant’ model Oxera’s co-investment ‘NetCo’ model Participating service providers OAOs End-customers NetCo Ownership structure evolving over time P A P End-customers Anchor tenants/Service providers Vehicle holding fibre assets Participating investors P - structurally separate, independent ownership model, open access - anchor tenants obtain favourable conditions and limit demand risk - similar characteristics to NetCo, but addresses underinvestment through private investment and contracting - commercial network entity owned by operators and other investors, supplying mainly passive access - addresses underinvestment by avoiding duplication and long-term regulatory stability, achieving commitment through ownership stakes Investment supported by long-term contracts with anchor tenants sales of passive or active access sales of retail services wholesale/retail payment investment dividend After five years
- 11. 11squirepattonboggs.comsquirepattonboggs.com BEREC strongly against current proposals BEREC’s preferred option: Delete Article 74 Alternative option: Water down Article 74 • Co-investment already takes place commercially • Regulators already take account of such networks in their market analyses • No need to explicitly encourage it in the Code • Current rules already allow regulators to reflect risk of investments • Criteria for regulatory forbearance too weak • Scope for tactical gaming by operators could reinforce market power • Regulators empowered (not compelled) to forebear • Greater clarity on “new network elements” • Co-investors must be ‘real’ competitors in retail market • Co-investment offer must be taken up (not just made available) • Non-investors should also benefit from access to new network elements
- 12. 12squirepattonboggs.comsquirepattonboggs.com What does the future hold for the co-investment regulatory proposals? • Whether Article 74 survives discussions in Parliament or not, expect many more discussions on these models across Europe • for example, in the UK, Ofcom has given strong signals that they expect to see a legally separate Openreach more open to discuss and pursue co-investment initiatives with willing investors • could this lead to a relaxation of (price) regulation on Openreach? • How will competition authorities react? • first, there was outright consolidation (M&A) • then, there was network sharing (live case at the Commission being investigated) • will be co-investment models be next in the firing line?
- 13. EU Competition Law Considerations Francesco Liberatore
- 14. 14squirepattonboggs.comsquirepattonboggs.com Analytical Framework Cooperation between non- competitors • Vertical Agreements Guidelines Cooperation between competitors • Horizontal Agreements Guidelines Full-function Joint Venture • Horizontal Merger Guidelines
- 15. 15squirepattonboggs.comsquirepattonboggs.com Market Definition Wholesale Market Fixed wholesale broadband access Separate market for new ultra-fast fibre technology? Retail Market Fixed broadband services Fixed-mobile substitution? Geographic Market National Separate regional markets at wholesale level? Additional Guidance SMP Guidelines and Recommendation on Relevant Markets BEREC Position Papers and Precedents
- 16. 16squirepattonboggs.comsquirepattonboggs.com Risk Assessment Cost commonality Jointmarketshare 25% 25% 20% 20% 30% 30% 15% 15% Risk Factor Multiplier: Exchange of Competitively Sensitive Information
- 17. 17squirepattonboggs.comsquirepattonboggs.com Balancing Act Efficiencies Anti- competitive effects
- 18. 18squirepattonboggs.comsquirepattonboggs.com Case Study: Italy Non-Full Function Joint Venture Joint production agreement without joint marketing Horizontal Agreements Guidelines
- 19. 19squirepattonboggs.comsquirepattonboggs.com Case Study: Italy (cont.) Market shares • Wholesale level • TI: 96% (volume) and 87% (value); • Others: 4% (volume) and 10% (value) • Retail level • TI: 40%; Fastweb: 27% Competition concerns • Direct Limitation of Competition between the Parties, Coordination and Input Foreclosure • Exclusivity, long duration; • IRU (30 years) on Fastweb’s network and Passive access to TI’s network • Spill over effects • Price coordination at retail level; • Reduction of competition on quality High Market Shares High Proportion of Variable Costs in Common
- 20. 20squirepattonboggs.comsquirepattonboggs.com Conclusion Specific block exemption and guidelines ? Full function joint venture may provide more legal certainty, but in practice limited application so far Competition law assessment is needed from the outset and at regular intervals Incentive for co-investment under sector-specific regulation must be reconciled with the need to comply with competition law
- 22. 22squirepattonboggs.comsquirepattonboggs.com Contact Details Luigi Minerva Felipe Florez Duncan Francesco Liberatore Senior Analyst Partner Partner HSBC Global Research Oxera Consulting LLP Squire Patton Boggs (UK) LLP +44 207 991 6928 + 44 0207 766 603 +44 207 655 1505 Luigi.minerva@hsbcib.com Felipe.Floren.Duncan@oxera.com francesco.liberatore@squirepb.com