European telco industry at a crossroad


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Discusses strategic options for European telecommunications both in terms of industrial approach and regulatory framework with reflections on net neutrality and smart network management from the point of view of a major European operator

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European telco industry at a crossroad

  1. 1. European Telco Industry at a Cross Road Opportunities in a complex scenario Telecommunications and Media Forum, Madrid June, 24th 2008
  2. 2. <ul><li>01 Role of Telco industry in European competitiveness </li></ul><ul><li>02 Most relevant trends in Telco industry </li></ul><ul><li>03 Network deployment challenges </li></ul><ul><li>04 Framework for an investment scenario </li></ul><ul><li>05 European regulatory framework </li></ul>Index
  3. 3. The EU is today the largest economy of the world <ul><li>The UE is the largest economy of the world followed closely by USA at a GDP of 14.6 and 13.2 trillion USD respectively </li></ul>Source: IMF World’s largest economies GDP 2006, Trillion USD (nominal) World’s leading traders Merchandise trade flow; Y2006; Trillion USD Source: WTO -0.22 -0.88 0.20 0.18 0.07 World Investment Flows FDI investment flows; Y2006; Billion USD Benefit Deficit Source: UNCTAD, Eurostat 1 1, 2: Exclude internal operations of member countries 0.07 EU countries
  4. 4. A significant part of world’s top companies are European <ul><li>There are 16 European companies among the top World 30 companies led by Royal Dutch Shell and BP </li></ul><ul><li>Approximately 29% of the world's leading 2,000 companies are European </li></ul>World’s largest companies Revenues 2006, Billion USD Source: Global Fortune 500 World’s largest companies (cont.) Revenues 2006, Billion USD European Companies Revenue: 66.4 Rank: 77 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
  5. 5. However, during the last decade the EU has underperformed in terms of growth, productivity and competition China Anemic Growth Real GDP Growth (Percentage) Stagnant productivity Labour productivity (Nominal prices) Lagging in competitiveness Competitiveness 1 (Lisbon score -Ranking of performance –scale 0-7) India USA EU 15 USA Japan Source: IMF; World Economic Outlook Source: OECD 1- Competitiveness score based on publicly available data (Internet penetration, unemployment rates, etc.) and results from World Economic Forum’s Executive Opinion survey (EOS)- 2 East Asia only available for 2006 scores, refers to competitive markets: Japan, Hong Kong, Korea, Taiwan and Singapore Source: The Lisbon Review (2006 and 2004) € % CAGR 98-06 2.2% 2.3% 1.5% 2 EU
  6. 6. ICT, beyond Solow’s paradox, is the key factor for competitiveness in a global world Productivity growth GDP per person employed 1995-2000 x2.3 x9.4 Source: The Contribution of ICT Using Industries to Productivity Growth, Bart Van Ark, 2003 Note: Classification of ICT and non-ICT using industries according to the share of ICT capital in total capital services from Stiroh analysis (2002) Ln (GDP per Capita) Source: Oliver Wyman analysis; IMF, ITU DOI index rank Information Society Index vs. GDP Relationship between DOI and GDP per capita (at logarithmic scale) Korea Luxembourg Norway Qatar Ireland Denmark Hong Kong Taiwan Estonia Greece Arabia Saudi Botswana Lithuania Bulgaria China Egypt Uzbekistan Congo Burundi Chad Niger The DOI index (Digital Opportunity Index) measures the trends in infrastructure, usage and opportunities that shape the Information Society of a country R 2 = 0,8645 Spain USA France Japan
  7. 7. What’s the UE's positioning in ICT? ICT IT HARDWARE & SOFTWARE TELECOMMUNICATIONS CONTENT / MEDIA Telecom equipment & handsets (56 b €) Telecom services (322 b €) Content / Media Telecom IT hardware and software Films (13.2 b €*) TV services (76 b €) Videogames (10,4 b €) Music Computer hardware (105 b €) Software and computer services (225 b €) Consumer electronics (67 b €) Revenues 2007 b € Source: DigiWorld 08, OECD Source Music: IFPI Digital Music Report 2007, eMarketer Source Movies: Screen Digest for the EC January 2007 only EU Source: Videogames: Activision, eMarketer, DFC intelligence, FX applied Telecommunications accounts for 45% of DigiWorld markets in Europe
  8. 8. EU is the global leader in telecommunications equipment and handsets Telecommunications equipment companies Equipment sales 2005 (Billion EUR) Source: DigiWorld 07, End 2006 Handset manufacturing companies Market share Q3 07 Source: iSuppli Corp. October 2007 <ul><li>Highly concentrated industry: the big four players represent 61% of the market </li></ul><ul><li>Out of the top five companies, three of European origin </li></ul><ul><li>The global market leader is a European landmark </li></ul><ul><li>2 out of the top 5 handset manufacturers are from European origin (market share), however increasing trend of Asian manufacturers </li></ul>
  9. 9. European telecom operators are among the largest in the world… Telecommunications services companies Enterprise value (Billion EUR February 27 th 2008 ) 4 of the top 8 telecommunications companies worldwide are European, and differing from US or Asian companies, operate globally. * Source: Operators’ annual reports 2007 World’s largest operators Million of accesses (subscriptions) as of Dec ‘07 Source: Bloomberg Feb 27th, 2008
  10. 10. … and they have been the first to get global Source: Oliver Wyman Analysis; Company data Source: Company data T V D F V T T T T T V V V V V V V V V V V V D D D D D V D D D D T T T T T T T T T T Venezuela T T T D T V V V V V Czech Republic Hungary Germany Ireland UK France Spain Portugal Greece Italy Malta Austria Slovak Rep Macedonia Croatia Mexico Guatemala Panamá Ecuador Colombia Perú Chile Argentina Uruguay Brazil El Salvador Nicaragua Morocco New Zealand Egypt South Africa India Australia Albania V F F F F Poland F F F Switzerland F F F F F F Senegal F Cameroon F Ivory Coast F F Guinea F F Mali Botswana F Madagascar Mauritius F Jordan F F F Vietnam New Caledonia Vanuatu T T T China AM/T AM AM AM AM AM AM AM Puerto Rico Dominican R. Honduras AM AM AM AM AM AM AM AM AM Operators’ geographical presence Y2006 Operators’ foreign revenues Percentage; Y2006 >30% >55% <5% ~ 0% ~ 0% <5% Extra EU revenue Jamaica AM >15% >20% >35% 62% Extra EU revenue Extra Spain revenue
  11. 11. European companies have a weak presence in the IT software & hardware industry, consumer electronic, Internet and contents, but can take the lead in the telecom side Europe USA Asia Telecom Connectivity IT hardware & software Content / Media DEFEND EU MARKET OPPORTUNITIES IN SOME SUBMARKETS OPPORTUNITY TO BE GLOBAL LEADER
  12. 12. Telecom industry is the key factor for keeping european competitiveness in a global economy Not all of us are always aware of this fact, ….. … nor are authorities or regulators ICT DIRECT CONTRIBUTION OF EU’S ECONOMY Total GDP EU27: 14.6 Trillion Euro In GDP: % of total GDP 8% 1.2 T € In Growth: % of GDP growth Total EU27 GDP growth: 2.8% 25% 0.7% In R&D: % of R&D expense Total EU27 R&D expenditure: 212.8 b € 25% 53.2 B € In Employment % of total employment 6% 13 M Total EU27 employed: 232 million people 6% 13 M
  13. 13. <ul><li>01 Role of Telco industry in European competitiveness </li></ul><ul><li>02 Most relevant trends in Telco industry </li></ul><ul><li>03 Network deployment challenges </li></ul><ul><li>04 Framework for an investment scenario </li></ul><ul><li>05 European regulatory framework </li></ul>Index
  14. 14. Telco industry is facing an scenario where 3 major trends are shaping the future The search for scale will continue, mostly through consolidation <ul><li>In the Telecom industry, size matters because economies of scale are crucial </li></ul><ul><ul><li>US, Chinese and some European operators are looking for large scale </li></ul></ul><ul><li>However European operators, unlike other global counterparts, have achieved scale through overseas acquisitions instead of regional consolidation, which left the EU industry highly fragmented </li></ul><ul><ul><li>Currently the bulk of European industry is composed of sub-optimal small/medium sized operators </li></ul></ul>CONSOLIDATION 1 Industries convergence and the emergence of new disruptive players <ul><li>Fixed-mobile, services and platforms convergence is causing the blurring of boundaries between industries and the emergence of new players with disruptive business models that threaten the established Telecom Industry </li></ul>CONVERGENCE 2 Operators are to enter a new investment cycle <ul><li>The Telecom Industry is facing a new investment cycle to set the basis for tomorrow’s Information Society </li></ul><ul><li>There is a risk that EU may be left behind in the deployment of these new infrastructures, due to regulations and policies that do not foster investment </li></ul>NEW INVESTMENT CYCLE 3
  15. 15. <ul><li>01 Role of Telco industry in European competitiveness </li></ul><ul><li>02 Most relevant trends in Telco industry </li></ul><ul><li>03 Network deployment challenges </li></ul><ul><li>04 Framework for an investment scenario </li></ul><ul><li>05 European regulatory framework </li></ul>Index
  16. 16. Technological evolution could support and foster broadband growth … Nominal maximum speed per technology GSM GPRS UMTS HSxPA LTE 0,0096 Mbps 0,08 Mbps 0,384 Mbps 14,4 Mbps 100 Mbps Speed per access Mbps 1982 85 88 92 96 2000 02 04 10 12 2014 Moore Law x2 every 18 months Copper Fiber ADSL ADSL2+ VDSL FTTH Mobile Broadband Fixed Broadband 0,033 0,056 0,128 0,257 0,512 22 0,0024 0,0012 0,0003 0,028 0,0144 0,0096 1 6 8 0,0001 0,001 0,01 0,1 1 10 100 1000 08 Maximum commercial speed in Europe Source: IEE Spectrum, Julio 2004; Phil Edholm; Hussein Eslambolchi 1995 2001 2003 2006 2010
  17. 17. … that new services and user habits require … IP Traffic EE.UU. 2015 * <ul><li>Film download </li></ul>* <ul><li>Video conference </li></ul>* <ul><li>Distributed processing and backup over the network </li></ul>* <ul><li>Internet Video , Games, Virtual Worlds </li></ul>* <ul><li>IPTV </li></ul>* <ul><li>Corporate IP </li></ul>* <ul><li>E-mail, Web, VoIP, pictures, music </li></ul>* (=1 Zettabyte) * Estimated traffic 2015 EE.UU. Exabytes 1 Zettabyte 50 times 2006 traffic 50 millions LOC* * LOC = American Congress Library Source: Discovery Institute 2008 1.000 <ul><li>Those are services that citizens demand and deserve. </li></ul><ul><li>Access to those services will become the true digital divide </li></ul>Source: IDC, Ovum, Pyramid, Cisco IBSG
  18. 18. Discussion about NGN/NGA management principles goes back to the debate smart vs. dumb pipes, but … 1. Smart pipe VoIP @ TV - VOD Mobile Telco-managed pipe Monetisation Subscription Advertising e-commerce Digital Ecosystem 2. Dumb pipe User or portal managed pipe Web <ul><li>PORTAL </li></ul><ul><li>Advertising </li></ul><ul><li>Subscription </li></ul><ul><li>eCommerce </li></ul><ul><li>… </li></ul><ul><li>… this is not a technological discussion, but a strategic one: </li></ul><ul><li>A debate about positioning in the sector value chain </li></ul><ul><li>A debate about risk and benefit relationships </li></ul><ul><li>A debate about business models </li></ul>
  19. 19. A first answer to NGN/NGA management approach: The Net Neutrality principle Net Neutrality is a concept that undermines industry capacity to invest, innovate and to properly manage networks and offer adequate services to new customers and new traffics Net neutrality principle is the bet on the dumb pipe approach impeding agents that must invest in the deployments of new networks to provide a full range of services There is not, and there has never been, a real or potential risk for none of these issues What it does focus on <ul><li>Citizens rights </li></ul><ul><li>Freedom to access to all kind of contents </li></ul><ul><li>Freedom to access from all kind of devices </li></ul><ul><li>Risk of abuse by network owners </li></ul>What it hides <ul><li>Network investment needs </li></ul><ul><li>Relationships between business risks and business profitability </li></ul><ul><li>Network upgrades roadmap </li></ul><ul><li>Consumers rights </li></ul><ul><li>Quality of service </li></ul>
  20. 20. Traffic in new networks will not only come from traditional uses, but from new uses, much more demanding of quality issues Traditional traffic Web Surfing E-mail / Instant Messenger Social Networks P2P New traffic E-health E-Government E-learning New Media and Entertainment New uses require a smarter network traffic management to be able to cope with traffic with different requirements, some of them very stringent
  21. 21. An alternative answer to NGN/NGA management approach: Fair and Smart network management Fair and Smart Network management would allow a balanced market development with clear incentives for both network managers and services providers Transparency From clear game rules ... <ul><li>Transparency in consumer-provider relationship </li></ul><ul><li>Transparency in Network manager-service provider relationship </li></ul>… to a comprehensive target Consumer rights and satisfaction <ul><li>Clear quality of service commitment </li></ul><ul><li>No hidden cross subsidies among consumers (P2P) </li></ul><ul><li>Wide range of offers </li></ul>Quality of service management Services adapted to consumers needs <ul><li>Wide range of offers providing citizens with the services they demand and require </li></ul><ul><li>Service innovation not restricted </li></ul><ul><li>Offering for both intensive and low profile users </li></ul>
  22. 22. <ul><li>01 Role of Telco industry in European competitiveness </li></ul><ul><li>02 Most relevant trends in Telco industry </li></ul><ul><li>03 Network deployment challenges </li></ul><ul><li>04 Framework for an investment scenario </li></ul><ul><li>05 European regulatory framework </li></ul>Index
  23. 23. The Telecom Industry rests on top of heavy investments that require a favorable regulation and industrial policy INVESTMENT & EUROPEAN TELECOM LEADERSHIP <ul><li>Platform-based competition model </li></ul><ul><ul><li>Away from current low price-oriented regulatory model </li></ul></ul><ul><li>Competition policy allowing consolidation </li></ul><ul><ul><li>Allowing EU operators to compete at a global level </li></ul></ul>Necessary elements for an environment promoting investment and European Telecom leadership REGULATION COMPREHENSIVE TELECOM STRATEGY (industrial policy) <ul><li>De-regulation </li></ul><ul><ul><li>Allowing market forces to decide the leading technologies </li></ul></ul><ul><li>Symmetrical </li></ul><ul><ul><li>Without positive discrimination towards new entrants or different service providers </li></ul></ul><ul><li>Promoting an European single market </li></ul><ul><li>Promoting European innovation </li></ul>
  24. 24. Regulation must support NGN/NGA deployment through a sustainable model based on platform competition Market dinamization and extension Innovation and new services development <ul><li>More services adoption </li></ul><ul><li>Consumer empowerment </li></ul><ul><li>Quality of life improvement </li></ul><ul><li>Productivity increase </li></ul>New infrastructure deployment <ul><li>NGN </li></ul><ul><li>NGA: </li></ul><ul><ul><li>HSDPA - LTE </li></ul></ul><ul><ul><li>VDSL – FTTx </li></ul></ul><ul><ul><li>DOCSIS 3.0 </li></ul></ul><ul><ul><li>WiMAX </li></ul></ul><ul><li>Development of bundled offers </li></ul><ul><li>Increased competition </li></ul><ul><li>Price reduction </li></ul>
  25. 25. <ul><li>01 Role of Telco industry in European competitiveness </li></ul><ul><li>02 Most relevant trends in Telco industry </li></ul><ul><li>03 Network deployment challenges </li></ul><ul><li>04 Framework for an investment scenario </li></ul><ul><li>05 European regulatory framework </li></ul>Index
  26. 26. … but NGN/NGA deployment is a high risk investment that requires an adequate environment Europe <ul><ul><li>High degree of network unbundling </li></ul></ul><ul><ul><li>Favours some soil of fibre unbundling/ access </li></ul></ul><ul><ul><li>Push competition </li></ul></ul>Europe <ul><ul><li>Push infrastructure </li></ul></ul><ul><ul><li>Guarantee financial returns </li></ul></ul><ul><ul><li>Favours infrastructure competition </li></ul></ul><ul><ul><li>Unbundling was abandoned (2003) </li></ul></ul><ul><ul><li>No unbundling of fibre </li></ul></ul>USA Asia Goal Description Regulation and public policy framework plays a key role creating an investment friendly environment <ul><ul><li>Government-subsidized deployments </li></ul></ul><ul><ul><ul><li>Korean government offsets USD 50 billion to subsidy fiber investments </li></ul></ul></ul><ul><ul><ul><li>Japanese governments offers subsidy and tax incentives for fiber rollouts </li></ul></ul></ul><ul><ul><li>Make broadband accessible for everyone </li></ul></ul>
  27. 27. New European Regulatory Framework encompass a political choice between two opposed beliefs in the future of the sector Competition-driven sector Platform competition Geographic Segmentation Regulation-driven sector Single Network Service-based competition <ul><li>Enables platform competition to develop where technically & economically viable </li></ul><ul><li>Regulation applied in a geographically differentiated way and focused on non-competitive areas </li></ul><ul><li>Allows both service and platform competition to develop </li></ul><ul><li>Poor regulatory design /neglecting the added value of competing platforms </li></ul><ul><li>Vision based on a single open network and service competition, ignoring alternative technologies and the potential of EU R&D efforts </li></ul><ul><li>Perpetuation of regulation as cornerstone of business models: little faith on the potential of self sustained competition and on the role of competition law </li></ul>
  28. 28. Europe has proposed an Agenda headed in the wrong direction … <ul><li>Heavily regulated access and deregulation promise postponed </li></ul><ul><li>Service competition and single network model as the basis of Sector model </li></ul><ul><li>Low price as the primary goal of regulation </li></ul><ul><li>European Electronic Communications Market Authority as the solution for fostering single telecommunications European market </li></ul>EECMA <ul><li>Functional separation as the most important sector debate for the coming years </li></ul>Functional separation Access regulation Service Competition Low Prices Agenda proposed by Commission
  29. 29. … and efforts should be devoted to the Agenda Europe really need, setting clear priorities for the rollout of NGN <ul><li>Promote efficient investment in new generation networks through gradual deregulation, based on geographic segmentation </li></ul><ul><li>Promote a new radio spectrum management policy that contributes to the development of new services </li></ul><ul><li>Support European industry in the search for competitiveness and leadership in a global and converging scenario </li></ul><ul><li>Promote a model of effective and sustainable competition, based on competition among platforms </li></ul>Platform competition <ul><li>Promote market growth based on innovation in networks and services </li></ul>Innovation Investment Spectrum Industrial Policy Agenda Europe needs <ul><li>Promote a single telecommunications market that enables growth of European companies </li></ul>Single European Telecom Market
  30. 30. Priorities of the framework review PLATFORM COMPETITION GEOGRAPHIC SEGMENTATION DUCTS FUNCTIONAL SEPARATION Discarding radical regulatory approaches such as… Confirming that Europe’s regulatory framework places a decisive, long-term, bet on… 1 2 3 4 … to stimulate the timely roll-out of high-speed broadband networks Ensuring the regulatory framework incorporates the key principle of… … that foster regulatory-based business models and perpetuate intervention that regulation is implemented proportionately where it is truly needed Just by enshrining a few key, forward-looking, regulatory principles in the framework the necessary shift can be obtained: Exploring the availability of accessing all types of… … as a means of facilitating the possibilities of rolling-out new networks
  31. 31. Conclusions <ul><li>The deployment of NGN/NGAN is: </li></ul><ul><ul><li>A key element for competitiveness of any economic area in a global world </li></ul></ul><ul><ul><li>Together with Internet contents and services, it is one of the cornerstones of the new model of economic development </li></ul></ul>