Telecom operators - Arthur D. Little

Transcription

February 2006
Telecom operators
Facing off on convergence
" Fixed-mobile convergence to begin in 2006
" A plethora of strategic options
" More competition and less growth
" Fixed vs mobile vs integrated: reshuffling market positions?
Contacts
Exane BNP Paribas
Antoine Pradayrol
[email protected]
Exane BNP Paribas, London: +44 0 20 7039 9489
ARTHUR D. LITTLE
Jean-Luc Cyrot
[email protected]
Arthur D. Little, Paris: +33 1 55 74 29 11
Telecom operators
Executive summary
Fixed-mobile convergent market: less growth …
Fixed-mobile convergence will begin in 2006. In the fifth edition of the Arthur D Little—
Exane BNP Paribas report, we will look at the impact of this major change on the
sector. Our core scenario is based on:
– further rate cuts on mobile services, driven by the imminent arrival of mobile-WiFi
hybrid offers and, ultimately, of future broadband mobile technologies;
– ongoing mobile traffic growth (fixed-mobile substitution) boosted by these rate cuts.
Thus, fixed revenues will continue to fall, but ultimately mobile voice revenues will also
follow this trend;
– accelerated development of mobile broadband sustaining growth in the overall
mobile market, but with a higher level of value-sharing with internet services specialists
and content providers.
In 2005, the telecoms services market represented EUR245bn in our sample of eight
European countries1, i.e. average revenues per capita of EUR50 per month, of which
EUR22/month for fixed-line (corresponding to EUR57 per fixed line) and EUR28/month
for mobile. In a voice/data split, the figure was EUR39/month on voice (fixed and mobile)
and EUR11/month on data (fixed internet, mobile data, fixed-line and mobile content).
In the 2005-2010 period, we expect average growth in the European telecom services
market to fall to 0.8% pa, of which +3.1% pa on mobile and -1.3% on fixed-line. These
trends—globally in line with the expectations of sector players—correspond to a
slowdown versus current mobile growth (+8% pa in 2002-2005) and sector growth (3%
in 2002-05), and to a slight deterioration in fixed (flat in 2002-05). Thus, the share of
household spending on telecom services will shrink slightly.
We have established best case and worst case scenarios based on 1) the speed of
mobile price drops and elasticity, 2) the potential for acceleration of mobile data and
3) the share of revenue captured by internet services specialists and content providers.
The scenarios that cumulate the best or the worst of each parameter show an average
annual growth rate for the global market within a range of +2% to -1%.
… and stiffer competition point to a decline in EBITDA and ROCE
Convergence creates new opportunities in services and customer loyalty. However, it
also fuels stiffer competition, not so much because of the arrival of lower cost technology,
but because of the gradual disappearance of the barriers between fixed and mobile.
At present, the European mobile markets count between three and five network
operators and the broadband fixed-line markets between five and nine significant
players. Excluding the possible entry of some media groups or internet services
specialists, the average number of potential players on the “convergent” fixed-mobile
market is between eight or nine.
The trend towards a convergent market should therefore result in greater market share
fragmentation, and thus less profitable operators.
Taking into account this competitive pressure, we expect sector EBITDA to drop 1% pa
in 2005-2010, and sector ROCE to decline to under 15% in 2010, vs over 20%
currently in the mobile segment and 15% in fixed for incumbents.
Our extreme scenarios show sector EBITDA 2005-2010 CAGR of between +1% and -4%.
1
Belgium, France, Germany, Italy, the Netherlands, Portugal, Spain, and the UK.
Please refer to important disclosures at the end of this report.
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Telecom operators
Convergence: reshuffling market positions
Fixed-line operators have strong negative exposure to fixed-mobile substitution, but
have a real opportunity to develop in mobility. The best-positioned are the small
alternative operators positioned on broadband, which have little to lose on fixed voice
and much to gain in investing in mobile (broadband and voice).
Internet service specialists like Yahoo! and Google are also poised to gain from
convergence. They have no telecommunications services revenues to protect, are
network agnostic and therefore naturally convergent.
Integrated incumbents theoretically have the most to lose, with cannibalisation risk on
both fixed and mobile. They are seizing convergence in order to create greater
customer loyalty and counting on: 1) their control over fixed and mobile access
networks and 2) their high mobile market share allowing them to offer attractive tariffs
(the on-net traffic advantage). However, their ability to develop convergent offers could
be hampered by operational and regulatory roadblocks.
Pressure on pure mobile operators is mounting, but they still have many cards to play
in terms of fixed-mobile substitution. 3G networks will remain the most efficient for
voice, with 3G/HSDPA providing a sterling opportunity in mobile broadband. However,
for both offensive and defensive reasons, mobile operators will need to broaden their
strategies (investment or partnerships in WiFi and new broadband mobile technologies,
such as WiMax, F-OFDM, etc.). And mobile operators now seem ready to do so.
Convergence of services vs convergence of access networks
The simplest form of convergence consists in the commercial bundling of fixed and
mobile offers. It has existed for several years and will continue to develop. In our view,
this form of convergence creates little value.
Apart from this, convergence will occur in two other very different ways.
– Convergence of services. It will now be possible to access the same service, such
as email, instant messaging (IM) but also music and television, from various handsets
connected to different types of networks (e.g. a PC at home and a mobile handset
outside).
– Convergence of access networks. This is the gradual disappearance of traditional
borders between fixed-line and mobile networks thanks to technological links between
networks (e.g. hybrid handsets that connect both to GSM mobile networks and to WiFi
via ADSL) or new technologies that allow for fixed, nomadic and mobile services at the
same time (e.g. WiMax).
The convergence of access networks is expected to intensify competition, as it will
allow fixed-line operators to provide mobile offerings and vice versa. We expect this
additional competition to prompt further price cuts on fixed broadband, mobile
broadband and/or mobile voice (depending on the country). This is why we forecast a
global market slowdown between 2005-2010. However, we also expect strong
momentum to build in the mobile broadband market.
– WiFi paves the way for hybrid offers blending the benefits of a mobile offer (for
voice) and of broadband wireline access (when the user is at home, the office or in a
hotspot). WiFi can provide broadband services that are more powerful and less
expensive than 3G and should thus be a catalyst for mobile data. On voice, WiFi could
accelerate the fall in mobile rates by as much as -15% in three years.
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Telecom operators
– MBWA technologies (Mobile Broadband Wireless Access: notably fixed and mobile
WiMax, F-OFDM, iBurst, etc.) will, in the medium term, enable much denser coverage
than WiFi, for more substantial investments. Compared with 3G, the key advantage of
these technologies will be higher bandwidth, possibly at a lower cost. In our view,
MBWA technologies already facilitate very competitive offers on the fixed-line dual play
market (in competition with unbundling) and on nomadic broadband (in competition with
data on 3G). By around 2008-2009, MBWA technologies should have progressed
sufficiently (handsets and handover capability), enabling fixed-line operators to
compete with mobile operators not only on broadband data but also on voice (in VoIP)
– with however limited capacity to slash prices compared with the 3G/HSDPA offers
that should exist by this date.
Convergence of services will create more value for the sector because it will generate
new usage, particularly on mobiles. But in this market, telecom operators are like any
other supplier: internet services specialists are partners, but also often rivals ahead of
the operators (e.g. on email or instant messaging). As a result, the mobile data market
could grow considerably, but operators will only capture part of it. Long-term, operators
will have to face the risk of disintermediation on both data services and voice.
Fixed-line stands to gain in some countries, mobile in others
Based on the 72 interviews that we conducted in 11 European countries, we conclude
that convergence should fuel competitive pressure in the French and UK mobile
markets, and to a lesser extent in Spain, the Netherlands, Belgium and Switzerland. In
Germany, fixed-mobile substitution will accelerate driven by the drop in mobile prices
and home zone offers; fixed-line is also under pressure from mobile in Portugal, Austria
and the UK. In Italy and Switzerland, the additional risk appears limited in our view.
In each country, the pre-existing levels of competition in fixed-line and in mobile will
determine the impact of convergence, together with other factors such as the existence
or absence of credible fixed-line operators who may enter the mobile market and viceversa. We have also taken into account the regulatory situation, notably in terms of
MBWA licences and MVNO access.
Chart 1: Exposure of European markets to stiffer competition on the back of
fixed-mobile convergence*
4
Mobile risk
3
France
UK
Spain
The NL
2
Belgium
Italy
Austria
Portugal
Switzerland
1
Germany
0
0
1
2
Fixed risk
*Our risk rating system is explained on page 76.
Source: Exane BNP Paribas, Arthur D Little
5
3
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Telecom operators
Arthur D Little – Exane BNP Paribas report, fifth edition
Below is a reminder of our January 2005 report’s conclusions, More effort required. We
have split them into two categories: our on-target projections and overestimated or
underestimated topics.
On target projections
“We forecast revenue growth in the European mobile sector (in the five largest
countries) at 7% in 2005e”; “operators will put more effort into growing underpenetrated customer segments, boosting fixed-mobile substitution and developing
mobile multimedia”. In fact, in 2005 growth was 6.7%; operators increased commercial
efforts, reflected in strong SIM card growth, i.e. 10% y-o-y vs 9% in 2004 (five major
European countries); outgoing mobile traffic remained very high (12% y-o-y); and
customer migration towards 3G accelerated at the end of the year (eight million 3G
handsets sold by Vodafone at end-2005).
“Volumes still offer an attractive opportunity, but the threat to prices per minute is
increasing”. The decline in the average price per minute accelerated (down 10% y-o-y
in Q4 05 vs 6% in H1, as did traffic growth (up 13% vs 11%).
“Residential mobile data: no certainty on the winning model”. Most operators did not
see data ARPU accelerate significantly in 2005.
“The key to value creation in any one mobile market is, in our view, asymmetry in
market share among players”; “asymmetry is least apparent in the UK and has recently
been weakening in (..) Italy (..). Market share in France has remained steady”. Market
share asymmetry dropped considerably in Italy and the incumbent’s response
prompted downgrades to growth and profitability forecasts. The market remained very
competitive in the UK. To date, in France, the stability of the mobile market has been
better preserved.
“Cost-cutting: two to three margin percentage points within reach”. Against the
backdrop of growing pressure on prices and rising commercial costs, operators are
increasingly commenting on their cost-cutting potential.
Overestimates and underestimates
“Threats to the competitive status quo should not be overestimated”; “competition in
(..), Spain and Germany is unlikely to stiffen very much”. In fact, Telefonica and
Deutsche Telekom launched bigger-than-expected commercial drives to offset high
market share losses. In Germany, the arrival of many MVNOs accelerated competitive
pressure at the end of the year.
“We reiterate our scenario of generally stable margins in Europe”; “we forecast stable
subscriber acquisition and retention costs over the 2005-2006 period vs 2004”.
Competitive pressure was greater than expected in several countries, prompting a
further hike in acquisition and retention costs (150bp y-o-y as a % of revenues on
average in Europe). This, in turn, depressed the European mobile sector margin by
about 100bp.
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Telecom operators
Contributors
Arthur D. Little
Exane BNP Paribas
Team
Author
-
-
Etienne Brumauld des Houlières
Antoine Pradayrol
Emmanuel Cornuau
Jean-Luc Cyrot
Pierre Harand
Contributor
Albert Kostanian
-
Pierre-Antoine Machelon
Karim Taga
Other contributors
Team
-
-
Arno Wilfert /Christian Niegel (Germany)
Jesus Portal / Christine Ribas (Spain)
Roberto Marelli / Andrea Faggiano (Italy)
Ignacio Garcia Alves / Eric Hazan (France)
Chris West / Michael Natusch (UK, Ireland)
Konstantinos Apostolatos / Feico Elhorst
(Netherlands)
-
Jean Fisch (Belgium)
Karim Taga / Thomas Strohmaier (Austria)
Reine Wasner (Switzerland)
Bo Lenerius (Sweden)
Rui Lavado / Grant Greatrex (Portugal)
7
Stuart Birdt
Justine Dimovic
Matteo Novelli
Mathieu Robilliard
Marketing analyst: William Beavington
Telecom operators
Acknowledgements
We would like to thank all the non-Exane BNP Paribas and Arthur D. Little contributors
who worked on this project. In particular, we thank the people we interviewed at the
following operators, service providers and telecoms equipment suppliers:
Austria: mobilkom Austria, One, T-Mobile Austria, 3 Austria, Tele.ring, UPC, Tele2,
Alcatel Austria, Siemens Austria, Qualcomm
Belgium: Proximus, Base, Telenet
France: Orange France, SFR, Bouygues Telecom, M6 Mobile, Iliad, Wanadoo, Tele2,
NeufCegetel, B3G, MSN, Yahoo! France, TDF, Nokia France, Lucent, Axalto
Germany: T-Mobile International, E-plus, O2, Telefonica Deutschland, debitel, Simyo,
Airdata, Ericsson Deutschland, Alcatel Deutschland
Italy: TIM, Vodafone Italy, 3 Italy, Wind, Italtel, Nokia Italy
The Netherlands: KPN Mobile, Vodafone NL, T-Mobile NL, KPN Fixed
Portugal: Vodafone Portugal, ONI Telecom
Spain: Telefónica Móviles, Vodafone Spain, Abertis, Microsoft Spain, Ericsson Spain,
Nokia Spain, CMT (regulator)
Sweden: 3 Sweden, Vodafone Sweden, Telenor, Dataphone Sweden AB, Swedtel,
Ericsson
Switzerland: Swisscom Mobile, Orange, Sunrise, Swisscom Fixnet, Cisco Systems,
BAKOM (regulator)
UK: O2 UK, Orange UK, Virgin Mobile, BT
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Telecom operators
Contents
Risks & opportunities _____________________________________ 10
Our scenario: limited growth and tougher competition ________________________ 10
Voice: mobile and fixed price convergence will accelerate fixed-mobile substitution_ 14
Data: you can’t have your cake and eat it__________________________________ 18
A larger market but weaker market shares: declining profitability _______________ 21
Fixed vs mobile vs integrated: reshuffling market positions________ 25
Fixed-line operators: a key opportunity____________________________________ 27
Mobile operators: watch out for seismic shift _______________________________ 31
Integrated operators: complex and risky convergence ________________________ 41
The many facets of fixed-mobile convergence _________________ 43
Much is expected from convergence _____________________________________ 44
Commercial convergence: scant appeal___________________________________ 46
WiFi: why not take advantage of it? ______________________________________ 49
MBWA: the hype is not all hype _________________________________________ 56
Convergent services: a bigger cake to share with more guests _________________ 68
National differences ______________________________________ 76
Germany: convergence against fixed line__________________________________ 79
France: convergence against mobile _____________________________________ 81
UK: BT is in a unique position___________________________________________ 83
Italy: convergence pushed by the incumbent _______________________________ 85
Spain: an attractive convergent market ___________________________________ 87
The Netherlands: toward a new wave of competition in the mobile market? _______ 89
Belgium: toward (somewhat) more competition _____________________________ 90
Switzerland: slow reconfiguration ________________________________________ 91
Austria: fixed-mobile substitution also expected on data ______________________ 92
Scandinavia: toward one convergent market _______________________________ 93
Arthur D. Little presentation ________________________________ 95
Exane presentation ______________________________________ 96
9
Telecom operators
Risks & opportunities
Our scenario: limited growth and tougher competition
Convergence creates new opportunities in services and customer loyalty, but also fuels
stiffer competition among a larger number of players. Compared with the scenario
already priced in by the financial markets (20% sector underperformance versus the
broader market since early 2005 attributable to lower prices and margins on the back of
aggressive commercial drives by major mobile operators), we believe that fixed-mobile
convergence will lead to:
– further rate cuts, prompted by mobile-WiFi hybrid offers and MBWA technologies,
reflected by ongoing, rapid fixed-mobile substitution, with fixed revenues continuing to
decline and ultimately a decline in mobile voice revenues;
– accelerated development of mobile broadband sustaining growth in the overall
mobile market, but with a higher level of value-sharing with internet services specialists
and content providers.
2
In our sample of eight major European countries , the telecoms services market
currently generates average revenues per capita of EUR50 per month (excluding
revenues on corporate fixed-line services offers). This breaks down as:
– EUR22/month per capita on fixed-line (corresponding to EUR57 per fixed line) and
EUR28/month on mobile, or
– EUR39/month on voice (fixed-line and mobile) and EUR11/month on data (fixed-line
internet, mobile data, fixed-line and mobile content).
In 2005-2010, we expect telecoms services revenues to grow by 0.8% pa on average
leading to a stable gross margin over the period, of which +2.7% pa on mobile and a
negative 1.9% on fixed.
Chart 2: Revenues from telecoms services in Europe in 2005
(EUR per capita per month)
Fixed P2P & Internet,
6.5
Mobile P2P &
Internet, 4.3
IP TV & content on
fixed, 0.1
Mobile TV & content,
0.5
Mobile voice, 23.1
Fixed voice, 15.8
2
Our calculation includes the following countries: Belgium, France, Germany, Italy, the Netherlands, Portugal, Spain and the UK.
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Telecom operators
Chart 3: Average revenue per capita in Europe (EUR/month)
60
50
40
30
20
10
0
2005
2006
2007
2008
2009
2010
Fixed voice
Mobile voice
Fixed P2P & Internet
Mobile P2P & Internet
IP TV & content on fixed
Mobile TV & content
We show the sensitivity of these trends to three major assumptions in the table below:
– the speed of the fall in mobile rates and the elasticity of demand to price: strong
mobile voice scenario with accelerated fixed-mobile substitution vs weak mobile voice
scenario with poor elasticity to the price declines expected from fixed-mobile
convergence;
– the potential acceleration of the mobile data market: 2010 data ARPU of EUR12 in
a positive scenario to EUR5.5 in a negative scenario vs EUR9 in our core scenario;
– the proportion of revenues on new data services (P2P and content) captured by the
operators vs that captured by new partners/competitors (internet services specialists,
content providers), on constant revenues per capita.
Table 1: Scenarios
2010 figures
EUR/month
Core
Mobile voice
Strong
Weak
Mobile data
Strong
Weak
Operators vs ISPs
Strong
Weak
Best
Worst
Revenue per pop (ex corporate)
Fixed
Mobile
54.7
22.4
32.3
56.2
21.3
34.8
52.8
23.0
29.8
56.9
21.7
35.2
51.2
22.8
28.4
54.7
22.4
32.3
54.7
22.4
32.3
58.3
20.5
37.8
49.2
23.4
25.8
Voice
Fixed voice
Mobile voice
P2P & Internet access
Fixed P2P & Internet
Mobile P2P & Internet
TV & content on telecom networks
Fixed TV & content
Mobile TV & content
30.4
8.2
22.2
19.3
11.4
7.9
5.1
2.8
2.2
31.5
6.7
24.7
19.5
11.7
7.9
5.2
2.9
2.2
28.6
8.9
19.6
19.1
11.3
7.9
5.1
2.8
2.2
29.9
8.1
21.7
20.8
10.7
10.1
6.2
2.8
3.4
30.3
8.1
22.2
16.9
11.9
5.1
3.9
2.8
1.1
30.4
8.2
22.2
19.3
11.4
7.9
5.1
2.8
2.2
30.4
8.2
22.2
19.3
11.4
7.9
5.1
2.8
2.2
31.0
6.7
24.3
21.1
11.0
10.1
6.3
2.9
3.4
28.5
8.9
19.6
16.8
11.7
5.1
3.9
2.8
1.1
Revenue CAGR 2005-2010 (%)
Fixed
Mobile
0.8
(1.3)
3.1
1.3
(2.0)
4.7
0.2
(0.9)
1.4
1.5
(1.8)
4.9
(0.3)
(1.0)
0.4
0.8
(1.3)
3.1
0.8
(1.3)
3.1
2.0
(2.6)
6.4
(1.0)
(0.6)
(1.4)
Gross margin CAGR 2005-2010 (%)
Fixed
Mobile
0.3
(1.9)
2.7
0.8
(2.4)
4.3
(0.4)
(1.6)
1.0
0.8
(2.6)
4.4
(0.9)
(1.5)
(0.2)
1.2
(1.5)
4.2
(1.2)
(3.0)
0.9
2.4
(2.7)
7.6
(3.0)
(2.5)
(3.7)
2010 EBITDA margin (%)
Fixed
Mobile
34.8
35.2
34.4
35.1
34.6
35.5
34.7
35.6
33.7
35.0
34.4
35.5
34.4
35.4
33.3
35.5
35.5
35.6
33.5
33.3
33.7
35.8
35.2
36.3
32.7
32.9
32.5
EBITDA CAGR 2005-2010 (%)
Fixed
Mobile
(0.9)
(2.8)
1.1
(0.3)
(3.8)
3.2
(1.6)
(2.2)
(1.0)
(0.1)
(3.7)
3.5
(2.3)
(2.4)
(2.2)
(0.5)
(2.6)
1.7
(1.7)
(3.9)
0.6
0.8
(4.0)
5.4
(3.9)
(3.5)
(4.5)
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Telecom operators
Scenarios with the best and the worst for each parameter could lead to gross margin
CAGR of between -1.5% and -3% for the fixed-line segment and between -4% and
+8% for the mobile segment. The combined fixed+mobile figures vary from -3% to
+2.5% (in gross margin).
Our worst case scenario gives 2010e mobile ARPU of EUR23/month (by SIM card) vs
EUR29/month in 2005. This is very conservative compared with:
- the floor price that could be offered by new competitors of mobile operators born of
convergence: a fixed-line operator that launches a mobile-WiFi hybrid offer (total cost
of EUR26/month), or ultimately an MBWA operator (total cost of EUR26/month) – see
pages 49-67.
- ARPU obtained assuming that all communications (voice and data) to fixed lines via
the mobile but from home would be billed not at the current mobile rate but at a fixedline rate, with no elasticity impact (EUR25/month) – see page 32.
Chart 4: 2005-2010e revenue CAGR in the scenarios
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
Strong
Core
Weak
Mobile voice
Strong
Weak
Mobile data
Total
Fixed
Strong
Weak
Operators vs. ISPs
Best
Worst
Best
Worst
Mobile
Chart 5: 2005-2010e EBITDA CAGR in the scenarios
6%
4%
2%
0%
-2%
-4%
-6%
Strong
Core
Weak
Mobile voice
Strong
Mobile data
Total
12
Weak
Fixed
Strong
Weak
Operators vs. ISPs
Mobile
Telecom operators
Our core scenario is in line with the prudent expectations of those
interviewed
We conducted over seventy interviews for this report. The vast majority of the
managers we interviewed do not expect the European telecoms services market
(fixed+mobile) to grow significantly. This view is shared Europe-wide by fixed-line
operators, mobile operators, integrated incumbents and telecoms manufacturers.
New services generating new usages. All of those interviewed believe that
convergence will pave the way for new services and render existing services more
accessible (email accessible from fixed-line and mobile; instant messaging on fixed and
mobile; an identical contact list on fixed and mobile; personalised content accessible
from both fixed and mobile handsets, for example, ‘music everywhere’).
But opinion is divided on the reality of consumer demand for these services, and this
even within the same country or the same group, or within groups already involved in
fixed-mobile convergence.
It is in the corporate market that demand for convergent services is the most pressing
and strong (including commercial convergence, for small and medium-sized
companies).
Many of the people we interviewed obviously identified mobile broadband as a growth
driver. This is a source of growth for mobile operators, who see it as a new market.
However, a large number of mobile operators, notably in Portugal and in Austria, also
see it as a substitution of fixed broadband offers. Some consider that the mobile
broadband market is currently in a phase of significant acceleration, and that this
acceleration will continue as prices fall and mobile broadband networks’ coverage
improves.
Some believe that growth will only stem from telecoms operators conquering certain
services or usages hitherto the domain of related sectors (notably IT services for
corporate clients and entertainment/media services).
Finally, two incumbents believe that convergent offers, for instance, based on a WiFi
antenna in the home improving indoor mobile coverage, will generate an additional
usage, even if prices remain unchanged.
A sharper price reduction. Our interviewees were unanimous regarding the risk of
price reductions. Fixed-mobile convergence should lead to price discounts and general
price erosion. In particular, many ‘pure’ mobile operators and integrated incumbents
highlight the risks of cannibalisation and ‘destruction’ of the mobility premium (mobile
rates currently higher than fixed-line rates).
The operators do not all draw the same conclusions on this expected fall in prices.
Some have high expectations of demand elasticity and foresee a rise in total traffic
(fixed+mobile, with a sharp upturn for mobile traffic), resulting in a stable voice bill.
Others foresee stable total voice traffic, and thus a decline in the voice bill.
Note that some mobile operators are less concerned by the risks of declining prices, as
they operate in markets where mobile prices are already very low – close to those of
fixed.
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Telecom operators
Voice: mobile and fixed price convergence will
accelerate fixed-mobile substitution
We estimate the total telecom services market in 2005 at EUR245bn in our sample of
eight major European countries. Excluding corporate fixed-line services, this represents
revenues per capita of EUR50/month, including fixed and mobile, voice, data and
content selling.
Voice is still dominant: EUR39/month per capita, of which EUR16 on fixed (which
corresponds to EUR40 per line, including the part of the subscription linked to
telephone usage) and EUR23 on mobile.
In terms of traffic, we estimate that fixed-line networks account for 67% of call minutes
at an average rate of EUR0.06 per minute (excluding the subscription, but including
fixed to mobile) and mobile networks for the remaining 33%, at an average rate of
EUR0.21/minute (on outgoing calls).
At this stage, revenues on mobile voice are growing, and revenues on fixed voice are
declining, owing to the following trends:
– fixed-mobile substitution: in the 2001-2005 period, total voice traffic grew by 2% pa,
but mobile traffic rose by over 15% pa, while fixed traffic fell by 2% pa. Calls from
mobiles represented only 17% of total traffic in 2000, compared with 33% today.
Chart 6: Number of fixed and mobile minutes/capita/month (five major European
countries)
100
Mobile minutes per capita per month
90
2005e
2004
80
2003
70
2002
60
2001
50
40
2000
30
20
10
0
170
175
180
185
190
195
200
Fixed minutes per capita per month
– ongoing price reductions, notably on mobile (-6% to -8% in the first three quarters of
2005; -10% in Q4 05 based on our initial estimates, owing to intensified competition),
both on outgoing calls and on mobile termination (regulated rates: -16% on average in
2005). The fall in mobile rates is boosting growth in usage to the detriment of fixed. The
latest quarters show that both mobile rate reductions and fixed-mobile substitution have
accelerated. Note that this trend is gathering speed at a time when fixed voice rates
have never been so low, with the growing usage of voice over IP (voice that is “free” or
sold in the form of unlimited packages).
14
Telecom operators
Chart 7: Growth in mobile voice revenues in recent quarters
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
Q1 04
Q2 04
Q3 04
Voice revenues
Q4 04
Q1 05
Voice traffic
Q2 05
Q3 05
Apparent price per minute
Although elasticity is close to 1 on average, this:
– varies from country to country, being good in Spain, but markedly below 1 in
Germany, based on our estimates;
– has slightly deteriorated in recent quarters, as the fall in prices accelerated: the
average was 1.00 in Q1 05, and 0.99 in Q3 05.
Table 2: Elasticity calculation
MOU1
9M 04
9M 05
Orange France
SFR
Bouygues
O2 UK
Vodafone UK
Orange UK
Vodafone Germany
E-Plus
O2 Germany
TIM Italy
Vodafone Italy
TEM Spain
Vodafone Spain
KPN NL
Base
Telia Sweden
Tele2 Sweden
Telia Norway
Telenor Norway
Telia & Orange Denmark
Telia Finland
Sample December 2005
166
258
293
151
148
150
76
76
130
129
139
127
133
123
104
131
89
174
184
166
248
158
172
271
267
161
148
153
75
76
135
133
138
150
157
119
113
137
113
189
184
210
276
164
ARPM2
9M 04
9M 05
0.170
0.130
0.114
0.110
0.147
0.125
0.276
0.244
0.188
0.200
0.185
0.215
0.224
0.238
0.197
0.164
0.170
0.202
0.182
0.182
0.137
0.169
1
MOU: minutes per subscriber per month
2
ARPM: average revenue per minute (outgoing and incoming).
Y-o-Y (%)
MOU (a)
ARPM
0.163
0.122
0.118
0.093
0.134
0.114
0.258
0.234
0.162
0.190
0.182
0.194
0.195
0.219
0.186
0.148
0.133
0.192
0.163
0.136
0.095
0.157
3.8
4.9
(9.1)
6.5
(0.1)
1.9
(1.5)
0.0
4.6
3.2
(0.6)
18.7
18.1
(3.3)
8.0
4.4
26.9
8.8
(0.2)
26.6
11.4
3.9
15
(4.2)
(6.5)
4.0
(15.2)
(8.9)
(8.5)
(6.5)
(3.9)
(13.6)
(5.1)
(2.0)
(9.6)
(13.0)
(7.7)
(5.9)
(10.1)
(22.2)
(5.1)
(10.5)
(25.5)
(30.3)
(7.4)
Restating for termination (%)
Elasticity
Est. effect
Restated ARPM (b) (1+a) x (1+b)
(1.6)
(1.6)
(1.7)
(5.3)
(5.3)
(6.1)
(4.3)
(4.3)
(4.3)
(2.6)
(2.6)
(2.9)
(2.9)
(4.0)
(1.3)
(3.4)
(3.4)
(1.2)
(1.2)
(2.6)
(2.6)
(3.1)
(2.7)
(5.0)
5.8
(10.5)
(3.8)
(2.5)
(2.3)
0.3
(9.8)
(2.6)
0.7
(7.0)
(10.4)
(3.9)
(4.7)
(7.0)
(19.5)
(3.9)
(9.4)
(23.5)
(28.5)
(4.5)
1.01
1.00
0.96
0.95
0.96
0.99
0.96
1.00
0.94
1.01
1.00
1.10
1.06
0.93
1.03
0.97
1.02
1.05
0.90
0.97
0.80
0.99
Telecom operators
Fixed-mobile convergence vs fixed-mobile substitution
Various possible manifestations of fixed-mobile convergence, notably the arrival of WiFi
and MBWA (WiMax, IP Wireless, F-OFDM, etc.), should exert stronger pressure on
mobile voice prices in several countries, notably as the rates on mobile calls made from
the home gradually converge with those of fixed-line.
The key issue for the development of sector revenues is the ability to step up mobile
traffic in the face of an anticipated acceleration in price reductions.
In our core scenario, we expect sector growth to slow, with a slight decline in mobile
voice revenues, despite faster fixed-mobile substitution, and a persistent decline in
fixed voice revenues.
On mobiles, we expect outgoing call rates to decline by 9% pa over 2005-2010, with a
7% annual increase in minutes per subscriber, implying a rise in total mobile outgoing
traffic of 10% pa (owing to a 3% pa increase in the number of subscribers, or rather the
number of SIM cards – corresponding to +7% in 2006 and a sharp slowdown the
following years).
Given the fall in mobile termination revenues (price expected to fall by 12% pa), this
leads to a 4% pa cut in mobile voice ARPU and a slight fall in mobile voice revenue
(-0.7% CAGR). This constitutes a sharp deterioration compared with the current mobile
voice revenue increase of 2-3% y-o-y. Our core scenario includes a gradual fall in
international roaming rates (10% pa), which in our view should generate significant
elasticity in roaming traffic.
Our scenario assumes that the percentage of calls made from mobiles will rise from
33% in 2005 to 52% in 2010e, i.e. almost 4 points pa, versus the current pace of 3
points pa. This translates to falls of 6% pa in fixed traffic and 12% pa in fixed voice
revenues.
We have built two extreme scenarios in order to measure the sensitivity of general
trends to assumptions on voice. The table below summarises the key assumptions of
these scenarios and shows the sensitivity of general sector trends to these
assumptions, all else being equal.
Strong mobile voice scenario. Stronger stimulation of demand elasticity on mobiles,
resulting in volumes accelerating at a faster pace than price reductions. In this scenario,
we assume that 58% of voice traffic will be carried on mobile networks in 2010, leading to
12% CAGR of mobile traffic, an average annual 9% decline in fixed voice traffic, leading
to outgoing voice mobile revenues up 2% pa (9% decline in prices pa), and a 16% drop in
fixed voice revenues pa.
This scenario is supported by the fact that at this stage, elasticity is below 1 in many
countries notably because the mobile / fixed price differential is too great (as is the
case in Germany). Gradual price convergence would fuel stronger elasticity.
Weak mobile voice scenario. Weak elasticity of demand on mobiles and/or the
capture by fixed networks of a significant proportion of mobile traffic in the home,
leading to volume growth slower than price declines. In this scenario, the percentage of
mobile traffic reaches only 48% in 2010, despite an annual 10% decrease in outgoing
call rates. Fixed-line is more resilient, with revenues on fixed voice falling by ‘only’ 10%
pa. This scenario could emerge if the fixed-mobile hybrid offers of fixed-line and
integrated operators are highly successful and if pure mobile operators are not
sufficiently proactive.
16
Telecom operators
Overall, our scenarios are conservative regarding the impact of voice over IP on fixedtraffic growth. An alternative scenario could include a big improvement in the fixedtraffic trend (in voice over IP), but we believe this would have a very limited impact on
fixed-voice revenues (voice over IP is free or sold in unlimited subscription packages).
Table 3: Scenarios on voice
2005
2010
Strong
mobile voice
Core
Weak
mobile voice
(8.5)
12.5
0.5
(6.0)
10.1
0.5
(4.5)
8.3
0.5
58
214
52
192
48
177
(7.7)
(9.0)
(6.1)
(9.0)
(5.8)
(10.0)
6.7
24.7
31.5
8.2
22.2
30.4
8.9
19.6
28.6
(15.6)
1.3
(4.2)
(12.2)
(0.9)
(4.8)
(10.8)
(3.2)
(6.0)
(2.0)
4.7
1.3
(1.3)
3.1
0.8
(0.9)
1.4
0.2
Outgoing voice traffic CAGR (%)
Fixed
Mobile
Total
% originated on mobile
Mobile MOUs
33
140
Outgoing voice prices CAGR (%)
Fixed
Mobile
Voice revenue per pop. (EUR/month)
Fixed
Mobile
Total
15.8
23.1
38.9
Voice revenue per pop. CAGR (%)
Fixed
Mobile
Total
Total market CAGR (%)
Fixed
Mobile
Total
Chart 8: Share of mobile traffic in total voice traffic
60%
55%
50%
45%
40%
35%
30%
25%
20%
15%
2000
2001
2002
2003
Core scenario
2004
2005
2006
Strong mobile voice
2007
2008
2009
2010
Weak mobile voice
The strong mobile voice scenario is more favourable for the sector as a whole than the
weak mobile voice scenario, with market CAGR of +1.3% vs 0.2% in 2005-2010. This is
because the migration of a greater share of traffic to mobile, at rates per minute that
are still higher than for fixed, generates higher revenues. Mobile market CAGR varies
from +4.5% to +1.5% depending on the scenario (including mobile data growth). Fixedline market growth ranges from -2% to -1%.
17
Telecom operators
Data: you can’t have your cake and eat it
Until now, the fixed broadband and mobile data markets have developed
independently.
– Fixed broadband is growing strongly; the current penetration rate is 30% of
households. Triple-play offers are rapidly developing (broadband internet access, VoIP
and TV), with increasing bandwidths for faster access leading to higher usage rates.
– Mobile data corresponds mainly to the SMS market, which has very weak traffic
volumes and very high unit prices. GPRS and 3G have recently begun to attract
demand on the corporate market for mobile data (Blackberry, Data Cards for laptops).
However convergence (telecom/media; fixed-line/mobile) will radically change the
picture.
Firstly, it will generate real development potential for nomadic and mobile broadband
offers (via WiFi, HSDPA and MBWA technologies such as WiMax and F-OFDM). This
could change users’ habits in the same way as was seen when DSL arrived on the
fixed-line market. These offers may also compete with fixed-line broadband.
Second, new players will arrive in the value chain:
– The growing role of content (which generates revenues and differentiation) raises
the question of the relationship between operators and content providers.
The arrival of truly convergent data services (email, IM, etc., indiscriminately
accessible from any type of terminal, especially PCs and mobile handsets) raises the
question of operators’ position in the value chain in relation to internet services
specialists, which are often more technologically “agile” than the operators but require
access to their networks.
–
Our estimates on the sector are based on two key parameters:
– the size of the fixed and mobile data markets. In the long term will there be high
demand for mobile data and will it eventually partially substitute fixed broadband?
– the share of value won by operators compared with internet services specialists and
content providers.
We believe that these two parameters show signs of negative correlation. By aiming to
win a high share of the market’s value, operators are preventing internet services
specialists from developing. At the same time, this slows the overall growth of the
broadband market, and in particular mobile broadband which is still in its infancy.
In our opinion, the attitude of operators to convergence will become more open, due to
pressure from:
– internet services specialists themselves, which are beginning to by-pass the
operators (e.g. Yahoo! Go);
– various kinds of challengers (mobile operators that are number three, four or five in
their market; MVNOs; alternative fixed-line operators), which will be much more open
than larger operators to internet services specialists. This is an excellent way for these
challengers to create differentiation at a low cost (e.g. Google boosted by T-Mobile,
Skype with E-Plus, MSN IM with Bouygues Telecom).
18
Telecom operators
Overall, we believe that the most likely scenario is a faster-than-expected development
of the mobile data market, but with telecom operators gaining a weaker share of the
market’s value.
In our view, the agreements recently announced by Vodafone with Microsoft and
Google on mobile Internet services (email, web search) point to increased openness by
mobile operators and corroborate our scenario.
Our central scenario corresponds to:
– 70% fixed broadband penetration by 2010, with ARPU per broadband line (including
the subscription, voice and Internet access) of EUR45/month versus EUR57 currently,
i.e. a decrease of 4.5% pa. This will lead to annual fixed broadband revenue growth of
13%. This growth contributes, via the development of VoIP, to a drop in fixed-line voice
revenues, which is a second negative factor alongside fixed-mobile substitution.
Blended fixed-line ARPU (including broadband and narrowband subscriptions) falls by
1% pa;
– an increase in mobile data ARPU from EUR5.0 currently to EUR9.0 in 2010. This
includes a drop in SMS ARPU from EUR4.0 to EUR3.5, which we expect to be more
than offset by an increase in internet access ARPU (from EUR0.5 to EUR3.5) and
content and television ARPU (from EUR0.5 to EUR2.0);
– gross margins of 100% for internet access, 50% for content and television, on both
fixed-line and mobile and 60% for P2P messaging (corresponding to the payment
between operators of SMS termination rates in 2005 and to the sharing of value with
internet service specialists in 2010). These margins are lower than our current
estimates for the first contracts with media groups, which implies that operators will
gradually give away a larger share of the market’s value.
Overall, this will lead to:
– an annual increase of 16% in revenues per capita for fixed and mobile broadband
services, including person-to-person (P2P) communication services (+12%) and
content sale, including television (+48%). The forecast regarding content sale via
telecom networks (fixed and mobile) implies that operators would become a major
distribution network for digital content (television, video, music, games, etc.) and could
ultimately capture about 10% of household spending on this market;
– an annual increase of 14% in the gross margin generated by operators, due to a
slight decrease in the average gross margin as a percentage of revenues.
We have analysed the sensitivity of the market size to two series of assumptions:
– A best case and worst case scenario for mobile data market growth: data ARPU
varies between EUR12 in a best case scenario and EUR5.5 in a worst case one. In the
event of very strong development of mobile data, we integrate a slight cannibalisation
of fixed broadband. The best case scenario leads to total market growth of 1.5% pa,
o.w. +4.9% in mobile and -1.9% in fixed line. The worst case scenario leads to flat fixed
and mobile markets.
– Two scenarios concerning the balance of power between operators and internet
service specialists and content providers. In a “weak operators” scenario, we assume a
less favourable sharing of value, not only for data but also for voice services (scenario
of development of mobile voice offers like Skype, Google Talk or Yahoo! Talk, where
internet specialists capture a resale margin on voice). Average gross margin growth for
the sector is 0.3% in our core scenario, +1.2% in a “strong operator” scenario and
-1.2% in a “weak operator” scenario.
19
Telecom operators
Table 4: Scenarios for the mobile data market
2005
Strong
2010
Core
Weak
4.0
0.5
0.5
5.0
4.5
4.5
3.0
12.0
3.5
3.5
2.0
9.0
3.0
1.5
1.0
5.5
Fixed broadband ARPU
Access
Internet access
Voice traffic
TV & content
Total
13.0
26.3
16.9
0.5
56.7
11.0
19.0
8.0
5.0
43.0
12.0
20.0
8.0
5.0
45.0
12.0
21.0
8.0
5.0
46.0
Data revenue per pop. (EUR/month)
Fixed
Mobile
Total
6.6
4.8
11.5
13.5
13.5
27.0
14.2
10.1
24.3
14.7
6.2
20.9
Data revenue per pop. CAGR (%)
Fixed
Mobile
Total
15.3
22.9
18.7
16.4
16.0
16.3
17.2
5.2
12.7
Fixed
Mobile
Total
(1.8)
4.9
1.5
(1.3)
3.1
0.8
(1.0)
0.4
(0.3)
Strong
2010
Core
Weak
Mobile data ARPU
P2P
Internet
TV & content
Total
Table 5: Scenarios for the share of mobile data value
2005
Gross margin on mobile services (%)
Voice
P2P
Internet
TV & content
Total
70
75
100
60
71
70
80
100
70
75
70
60
90
50
70
65
50
85
40
64
Gross margin on fixed broadband (%)
Access
Internet access
Voice traffic
TV & content
Total
100
100
63
60
89
100
100
50
70
88
100
100
50
50
86
100
90
45
40
79
Gross margin per pop (EUR/month)
Fixed
o.w. voice
o.w. data
Mobile
o.w. voice
o.w. data
Total
18.4
11.1
7.4
19.9
16.2
3.7
38.3
19.0
4.5
14.5
24.2
15.5
8.7
43.2
18.6
4.5
14.1
22.5
15.5
7.0
41.2
17.3
4.3
13.1
20.6
14.4
6.2
38.0
Fixed
Mobile
Total
(1.3)
3.1
0.8
(1.3)
3.1
0.8
(1.3)
3.1
0.8
Gross margin CAGR (%)
Fixed
Mobile
Total
(1.5)
4.2
1.2
(1.9)
2.7
0.3
(3.0)
0.9
(1.2)
20
Telecom operators
A larger market but weaker market shares: declining
profitability
Competitive landscape: more actors in a bigger market
At present, the European mobile markets count between three and five network
operators (3.6 per country on average for eight major countries). The broadband
fixed-line markets have between five and nine significant players, including the cable
operators (6.5 on average per country).
Fixed-mobile convergence will result in more players competing on a bigger market.
In general, each country has at least one mobile operator that is not present on the
fixed-line market (notably Vodafone’s subsidiaries in most countries).
–
– In each country, there are often several fixed-line operators, cable operators or
unbundlers that are not already present in the mobile market.
As shown in the chart below, the potential number of players in the future convergent
fixed-mobile market in each major European country is therefore always higher than
the number of players that are present in fixed-line or mobile. There are between eight
and nine potential operators per country on average (see pages 76-94 for more detail
by country).
N.B. These estimates do not include the possible entry of new players owing to mediatelecoms-internet convergence. Some media groups have entered the fixed-line and
mobile telecoms market, such as BSkyB in the UK and NRJ in France. Internet
specialists (Google, Yahoo!, MSN) also aim to win a share of the value of the telecoms
market, but are not expected to increase competition on the infrastructures.
Chart 9: Number of major players in each country in the fixed-line, mobile and
convergent market (see pages 76-94)
11
10
9
8
7
6
5
4
3
2
1
nd
er
la
Ita
ly
Sw
itz
Be
lg
i
um
ai
n
Sp
e
ag
Av
er
e
Th
e
N
Fr
an
c
et
he
r la
nd
s
K
U
G
er
m
an
y
0
Fixed
Mobile
Convergent
The trend towards a convergent fixed-mobile market should therefore result in greater
market share fragmentation, and thus less profitable operators due to increased
competition.
21
Telecom operators
We have already underlined, in previous reports, the strong correlation between the
level of concentration of a mobile market and its profitability. We have measured each
market’s concentration based on the Herfindahl-Hirschman Index (HHI), calculated as
the sum of market shares squared of all players in the market. The chart below shows
this strong correlation.
Chart 10: Correlation between OpFCF per capita (EUR/month) and market
concentration
150
2006e
2003
OpFCF per capita
125
100
75
50
25
2001
0
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
HHI concentration factor
France
UK
Germany
Spain
Netherlands
Belgium
Italy
We have calculated a theoretical HHI for the “convergent market” of each major
European country by recalculating fixed-line and mobile operators market shares within
this large combined market.
We estimate an average European convergent market HHI of 2,800, versus the current
average of 3,100 for the fixed-line market and 3,500 for the mobile market. This index
of 2,800 is still high, but much lower than the indices for the fixed-line and mobile
markets when considered individually.
Chart 11: Fixed-line, mobile and convergent market HHIs in each major country
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
22
Mobile
Convergent
ly
Sw
itz
er
la
nd
Ita
ai
n
Sp
m
Be
lg
iu
ge
Av
Fixed
er
a
an
ce
Fr
y
G
er
m
an
N
L
Th
e
U
K
0
Telecom operators
ROCE is likely to fall below 15% in the long term
The expected increase in competition created by convergence should lead to a
reduction in average profitability for the sector. We have factored this decrease into our
scenarios.
Our FCF and ROCE estimates are based on the revenue and gross margin estimates
presented earlier on, and the following EBITDA margin and capex trends:
– A 2010 EBITDA margin of around 35% in fixed-line and mobile (versus 38% on
average currently). Some players believe that fixed-line operators’ margins will fall more
considerably by 2010, but we believe that these operators have the capacity to
gradually cut costs. This is factored into our margin forecast.
– In our best case scenarios, we have assumed slightly higher EBITDA margins in the
long term (50-100bp higher than in our core scenario), but still lower than current
levels. However, in our worst case scenarios, we have assumed even lower EBITDA
margins (100-200bp lower than in our core scenario by 2010).
– We have assumed long-term fixed-line capex/sales of 13%, slightly higher than the
current level, and long-term mobile capex/sales of 13%, progressively decreasing
compared with the 2005 rate of 15%.
As shown in the chart below, our estimates correspond to a drop in ROCE to:
– 14% in mobile in 2010, versus a current average of 21%. Obviously, the level of
ROCE varies greatly according to operator and country: in 2005, we estimate a range
of 16%-50% for the leader in each country, 8-16% for the number three depending on
the country, and negative returns for 3G new entrants. Market share convergence
should gradually shrink the gap between ROCE levels, thus mean a sharper decline for
the leaders;
– 11% in fixed-line in 2010, versus returns of about 15% in 2005 for the fixed-line
businesses of incumbents and still well below 10%, or even negative, for many
alternative operators.
Chart 12: 2010e ROCE (after tax) by scenario
17%
16%
15%
14%
13%
12%
11%
10%
9%
Strong
Core
Weak
Mobile voice
Strong
Mobile data
Total
23
Weak
Fixed
Strong
Weak
Operators vs. ISPs
Mobile
Best
Worst
Telecom operators
We believe that these levels are sustainable in the long term, as the sector averages
include highly varied profitability for the leaders and challengers on each market. The
challenger’s weak profitability protects the leader’s over-profitability. The chart below
illustrates this phenomenon, which is linked to economies of scale within the sector.
Even if market fragmentation increases due to convergence, the operators’ market
shares should not completely converge. In 2005, incumbents’ average market share
was more than 40% on fixed and mobile markets combined, whereas, in comparison,
Vodafone’s market share reached 19% (see pages 25-26).
Chart 13: Mobile operators’ OpFCF (before acquisition and retention costs)
depending on their penetration of their domestic market
OpFCF before SARC (EUR/sub/year)
240
200
160
120
80
40
0
-40
-80
-120
-160
-200
0% 3% 6% 9% 12% 15% 18% 21% 24% 27% 30% 33% 36% 39% 42% 45% 48% 51% 54%
Population penetration
2001
2002
2003
2004
2005
Differences in profitability between countries will also continue, as the competitive
landscapes will inevitably remain different (see charts 9 and 11 above).
24
Telecom operators
Fixed vs mobile vs integrated: reshuffling
market positions
We have already outlined our overall expectations for the sector – weaker growth and
profitability in a tougher competitive context, but with significant opportunities in mobile
broadband. We will now examine the positioning of the various categories of players
and how they could reposition in this ever-changing environment.
Our conclusions are as follows:
– Fixed-line operators are negatively exposed to fixed-mobile substitution, but have a
real development opportunity in mobility. The best placed are the small alternative
operators positioned on broadband. These have little to lose on fixed voice and much
to gain by investing in mobile (voice and broadband).
– The pressure on pure mobile players is mounting, but these have not yet tapped all
of their potential in terms of fixed-mobile substitution on voice. 3G/HSDPA also
presents a sterling opportunity on mobile broadband. However, we believe that
operators need to broaden their strategies (to include WiFi and MBWA technologies)
both for offensive and defensive reasons.
– Integrated incumbents potentially have the most to lose, with both fixed-line and
mobile at risk. Developing convergent offers may allow them to leverage their high
market shares in fixed-line and mobile, but this opportunity could be hampered by
operational and regulatory difficulties.
Lastly, the other potential winners in the convergence movement should be internet
services specialists like Google and Yahoo!, as these do not have telecoms revenues
to protect. Being network agnostic and thus naturally convergent from the customer’s
viewpoint, these could capture a significant share of the market value.
The starting positions
The chart below shows the starting positions of the different types of players in the
convergent market. It shows that on average:
– local incumbents hold 44% of the total market (fixed+mobile), with 47% for fixed-line
and 41% for mobile. However, these averages include the particular case of the UK;
excluding the UK, the average is 47% market share of the mobile market, and 48% of
the total fixed+mobile market. Therefore, the incumbent operators have the most to
lose in this move towards convergence – but they also have many weapons of defence
(see pages 41-42).
– the number two mobile operator in each market (Vodafone in the majority of
European countries) has 19% of the total fixed+mobile market, with on average 32% of
the mobile market. This highlights the opportunity for Vodafone to extend the mobile
market beyond its current boundaries, by pushing fixed-mobile substitution on voice
and by developing the mobile broadband market (pages 31-40).
the alternative fixed-line operators collectively have 17% of the global market, of
which practically nil share of the mobile market. The mobile market is therefore an
obvious avenue of development (pages 27-30).
–
– the other mobile operators collectively hold 20% of the market. Depending on the
country, these operators are variously one, two or three in number, with some being
present in the fixed-line market and others not. This average figure therefore is not
representative of local situations.
25
Telecom operators
Chart 14: Market shares of different types of operators in the new convergent
market – average of eight major European countries
Cable & alternative
operators
17%
Local incumbent
operator
(fixed & mobile)
44%
Other mobile
operators
20%
Mobile operator #2
19%
26
Telecom operators
Fixed-line operators: a key opportunity
Fixed-line operators are very aware of the very significant risk that fixed-mobile
substitution raises for them. As one fixed-line operator said “mobility is a must for fixed
operators”. Fixed-mobile convergence is a major opportunity for fixed-line operators.
It is mainly a defensive opportunity for those with strong exposure to the decline in fixed
voice and with no mobile subsidiary. It is an offensive opportunity for small alternative
or cable operators, which have relatively modest voice revenues to protect but which
see an opportunity to develop in mobility.
Fixed-mobile substitution: a fundamental shift that is far from over
At present, the mobile market is equivalent in size to the fixed-line market: EUR115bn
in 2005 based on the eight major west European countries in our sample, versus
EUR132bn for the fixed-line market.
In recent years, the trend towards fixed-mobile substitution on voice has not weakened,
but accelerated, with, in 2005, record growth in mobile voice traffic (+14%, up 38 billion
minutes compared with 2004), and a record decline in fixed voice traffic (down 4%, i.e.
a reduction of 24 billion minutes vs 2004). This is in a context of weak total traffic
growth (we estimate +2% in the five major European countries*). In 2005, we estimate
that 33% of total voice traffic stemmed from mobiles, versus 30% in 2004.
Chart 15: Change in voice traffic; fixed, mobile and total*
Net increase in traffic (billion minutes)
50
40
30
20
10
0
-10
-20
-30
2001
2002
2003
Fixed-line
Mobile
2004
2005
Total
* Cumulative traffic volumes in Germany, Spain, France, Italy, UK.
This shift is set to continue. Migration to 3G gives mobile operators additional network
capacity, which they have already begun to exploit by pushing increasingly aggressive
voice offers. These include unlimited packages in advanced markets like France, offers
like the home zone rates in Germany which should soon spread to other countries and
the introduction of MVNOs to tap new customer niches, leading to significant price
reductions at the low end of the market (prepaid).
27
Telecom operators
These trends also lead to fixed-line cancellations, not so much in main residences,
where the fixed line is increasingly used for internet access and is thus kept, but in
second homes, with a negative impact on fixed-line subscription revenues. Some
mobile operators believe that eventually all households of under 3-4 people will migrate
to mobile only, even though this seems exaggerated in our opinion.
In addition, there remains unexplored potential in fixed-mobile substitution on data
services, thanks to the arrival of 3G, HSDPA, DVB-H, but also to WiFi and MBWA if it is
the mobile operators that seize these technologies, with two potential risks for the fixedline operators.
– More intense competition in broadband internet access for ADSL and cable
providers, resulting in weaker market shares and/or potentially lower prices in this
market. Even if mobile technologies never provide the low-cost high bandwidth offered
by fixed-line technologies, including ADSL, the development of 3G internet access
offers by mobile operators could compete with fixed-line operators in some market
segments (customers using the internet essentially for applications requiring low
bandwidth like email).
– For these market segments, the fact that fixed line will no longer be the only means
of internet access constitutes a further risk of fixed line cancellation.
The special case of BT: an opportunity to re-enter the mobile market
In this context, fixed-mobile convergence, notably via hybrid technologies like mobileWiFi and MBWA-type technologies give the fixed-line operators a potentially powerful
weapon of defence against fixed-mobile substitution. This goal can be expressed in two
different ways, which amounts to the same.
– Counteract fixed-mobile substitution by ensuring that some of the fixed-line traffic
that would have migrated to mobile networks remains on fixed-line networks;
– Take advantage of fixed-mobile substitution: the trend to “mobilise” voice and data
cannot be stopped, but fixed-line operators could develop their own nomadic or mobile
offers, to capture at least some of the mobile market.
Concretely, from mid-2006, fixed-line operators could offer hybrid fixed-mobile services
based on a combination of WiFi hotspots and mobile technology (the latter being
purchased wholesale from the mobile operators). In addition, the MBWA licences could
“fall into the hands” of fixed-line operators, thus ensuring the capacity to compete with
mobile operators, at least for mobile data initially (2006) and for voice further out (20082009).
BT has realised that it is crucial to come back into mobility offers. The cornerstone of
this strategy is the BT Fusion offering, soon to be launched using WiFi mobile hybrid
handsets, based on the MVNO agreement between BT and Vodafone UK.
BT aims to extend coverage of this service with its own nomadic or mobile capability in
order to reduce dependence on the MVNO agreement. The goals are 1) to capture as
much value as possible, and 2) to have a product that is different from the 3G offers of
mobile operators, given that WiFi permits higher bandwidth than 3G.
With the BT Fusion plan based on WiFi being due for launch in 2006, “BT zones” will
correspond to:
– the house and/or office, where the customer has his personal BT broadband line
and WiFi hotspot. BT estimates that 30% of mobile voice traffic comes from these fixed
locations;
–
BT and The Cloud’s WiFi hotspots, which number almost 6,000 in the UK.
28
Telecom operators
However, BT wishes to go further, by developing more extensive WiFi coverage, and
also backing The Cloud’s project. BT is targeting urban coverage of ten UK cities,
including part of London. Longer-term, BT is also aiming for MBWA rollout: as such BT
should be a candidate for a 3.5 GHz licence usable with MBWA technologies, ensuring
more extensive coverage than the WiFi hotspots.
This strategy is a progressive one involving modest investment carried out in stages. It
goes further than a pure MVNO strategy, where the fixed-line operator would capture
only a minor part of the value of the mobile market and would not have the means to
differentiate its offers from those of mobile operators. But, neither is this strategy an
aggressive re-entry into the mobile segment (via the rollout of a greenfield mobile
network, which would be very costly and risky, as illustrated by Hutchison, notably in
the UK, or via the acquisition of an existing mobile operator).
We believe that BT will be able to capture or recapture part of the mobile market, which
will mean stronger pressure on the revenues of UK mobile operators compared with
their counterparts in other countries.
Cable and alternative fixed-line operators: the mobile as opportunity
Outside the UK, this type of fixed-mobile convergence project initiated by fixed-line
operators already exists in most European countries, notably France, Spain and Italy.
Technically, these projects are similar to BT’s project, in the sense that, to provide a
similar comprehensive service in terms of coverage, they depend, at least partly, on an
MVNO. The table below summarises these projects.
A hybrid offer launched by a fixed-line operator using WiFi technology, and eventually
MBWA, can lead to competitive rates compared with average mobile ARPU (see pages
56-67).
However, the real ability of these operators, originally in the fixed-line segment, to
capture some of the mobile operators’ revenues – and thus to intensify competition in
the mobile market – will depend, in each country, on:
– the conditions of access of MVNOs to mobile operators’ networks and mobile
termination rates (lower termination rates will allow non-mobile operators to offer more
attractive prices and compete with mobile operators);
–
the reaction of mobile operators in that country, notably in terms of prices;
– the strengths and weaknesses of each operator concerned: its pre-existing assets
(subscriber base, brand, network, licence etc.), but also capacity to invest (state of the
balance sheet and shareholder support).
29
Telecom operators
Table 6: Some of the alternative fixed-line operators’ convergent projects
(announced or potential)
Country
Operator
Type of project
Comments
Germany
Arcor
Hybrid offer?
Expected during CeBit 2006
DBD
Commercial bundling: DBD’s WiMax
offer + O2 Germany’s mobile offer
Freenet
Hybrid offer (VoIP at home via a mobile Offer in its early stages for the
handset) with E-Plus
moment
Spain
France Telecom Wandaoo’s hybrid offers with Amena
Due in 2006
France
NeufCegetel
“Beautiful Phone” will target the
residential market
WiFi-MVNO “Beautiful Phone” hybrid
offer
Commercial bundles between SFR and Commercial bundles on the
corporate market
NeufCegetel
Italy
UK
Iliad
Possible WiMax-MVNO hybrid offer
Iliad believes that current conditions
for MVNOs do not allow for the
launch of this type of offer
Fastweb
Discussions underway for an MVNO
with Vodafone Italy
Offer which could target the
corporate market
Wind
Commercial convergence offers
On both the residential and corporate
between fixed-line and mobile divisions markets
NTL
Acquisition of Virgin Mobile underway
Projects for convergent offers still to
be defined
France Telecom Wanadoo hybrid offers with Orange
Due in 2006
The Cloud
Mainly sold via partnerships: BT,
Skype, iPass, etc.
Nomadic broadband in WiFi hotspots;
VoIP for businesses
30
Telecom operators
Mobile operators: watch out for seismic shift
The threat is real and significant, but mobile operators have many possible responses.
For voice, we believe that mobile operators have a strong arsenal at their disposal.
Their key weapon is pricing: bigger bundles or home zone tariffs. In our view, with the
introduction of these types of offers, mobile operators will be able to continue to push
fixed-mobile substitution. We expect the reduction in mobile voice rates to accelerate,
as well as growth in mobile traffic volumes.
For data, an initial approach consists in launching broadband offers based on 3G and
HSDPA networks – where huge potential remains unexploited. However, these
technologies are not sufficient to address the entire convergent broadband market.
Some of the options for “going further” include 1) selling fixed-line broadband
(e.g. DSL) as a complement to mobile, either via partnerships with fixed-line operators
or by using regulatory openings such as unbundling or naked-DSL, 2) offering WiFi
access, in the home via DSL and outside, either in their own hotspots or those of other
hotspot operators, and 3) using new MBWA technologies.
We believe that the best solution consists in combining the two last options. WiFi and
MBWA should enable mobile operators to offer broadband, both nomadic and in the
home at attractive rates, complementing their 3G/HSDPA data offers. Just reselling
DSL would consist in “commercial convergence”, which offers little differentiation and
value creation. WiFi already exists and facilitates attractive offers; MBWA will permit
wider coverage and in particular broadband at home without passing through the
fixed-line network. Such an approach is also justified from a defensive viewpoint,
particularly as the acquisition of an MBWA licence will ensure that it is not a fixed-line
competitor or new entrant that will win it.
The table below summarises the position of mobile operators in the five major
European countries, as known at this stage, on these various subjects.
Table 7: Mobile operators’ weapons to contend with fixed-mobile convergence
Country
Operator
Large bundles
Home zone
DSL resale WiFi
MBWA
France
Orange
SFR
Bouygues Telecom
++
++
++
No
Under study
No
No
No
No
++
++
=
Candidate to WiMax
Candidate to WiMax
No
Germany
T-Mobile
Vodafone
E-Plus
O2
+
+
++
+
Yes
Yes
No
Yes
No
No
Yes
Yes
++
++
=
+
450 MHz
Arcor testing WiMax
No
Agreement with DBD
Italy
TIM
Vodafone
Wind
H3G
=
=
=
+
No
Under study
No
No
No
No
Yes
No
+
+
=
No
No licence available
Spain
Telefonica Moviles
Vodafone
Amena
=
=
=
No
Under study
No
No
No
Yes
+
=
=
UK
Vodafone
Orange
O2
T-Mobile
H3G
+
+
+
++
++
Under study
No
Yes
No
No
No
Yes
No
No
No
=
=
++
++
No
No
No
No
No
Open
No
No
No
The majority of mobile operators that we interviewed unsurprisingly estimate that
fixed-mobile convergence will translate essentially into fixed-mobile substitution, in
voice, but also according to some, on data. The development of WiFi and MBWA is not
perceived as a threat to the general trend.
31
Telecom operators
However, the latest announcements from Vodafone, the only major pure mobile
operator in Europe, concerning, for example, a possible partnership with Fastweb in
Italy, appear more pragmatic. This suggests that 1) Vodafone has identified a growing
risk that the dangers of fixed-mobile convergence will materialise, with potentially
significant demand from customers for this type of service, but 2) that the group is
determined to seize any offensive and defensive opportunities that arise.
The threat is real and substantial
Fixed-mobile convergence could lead to a bleak scenario for mobile operators – even
more aggressive than our “weak mobile voice” scenario – adversely impacting their
revenues by over 10%, with a bigger impact on EBITDA and free cash flow.
Such a scenario could be characterised by:
– On voice: mobile minutes at the rate of fixed-line for calls from the home and in WiFi
hotspots. Given the estimated proportion of mobile calls made from the home, we
calculate the impact on mobile ARPU of this scenario, excluding any potential elasticity
effect, at an average decline of EUR2/month, or a 9% fall on voice ARPU.
– On data: equivalent cannibalisation of potential usage of 3G in the home, or an
impact on ARPU of around EUR1.5/month (estimating that the share of data usage in
the home is equivalent to the share of voice usage in the home).
– This would bring the total decline in revenues in the mobile sector to 12%, as the
table below shows.
Our core scenario includes a drop in mobile rates driven by the pressure on home
mobile rates, but is more optimistic for three key reasons. It prices in demand price
elasticity, as is already the case, significant development of mobile data, and, more
generally, mobile operators’ proactive response on all fronts to combat this threat.
Table 8: Risk of cannibalisation of mobile by fixed-line
2005
Mobile voice
cannibalisation
scenario
Impact (%)
Voice ARPU (EUR/month)
Outgoing
o.w. @home
o.w. to fixed
o.w. to mobiles
o.w. other
Incoming
24.2
17.5
5.2
2.6
2.6
12.2
6.7
22.1
15.3
3.1
0.5
2.6
12.2
6.7
(9)
(12)
(40)
(81)
0
0
0
MOU (minutes/month)
Outgoing
o.w. @home
o.w. to fixed
o.w. to mobiles
o.w. other
Incoming
140
84
25
13
13
59
56
140
84
25
13
13
59
56
0
0
0
0
0
0
0
Average revenue per minute (EUR)
Outgoing
o.w. @home
o.w. to fixed
o.w. to mobiles
o.w. other
Incoming
0.17
0.21
0.21
0.21
0.21
0.21
0.12
0.16
0.18
0.12
0.04
0.21
0.21
0.12
(9)
(12)
(40)
(81)
0
0
0
Data ARPU
o.w. @home
o.w. other
5.0
1.5
3.5
3.5
0.0
3.5
(30)
(100)
0
Total ARPU
29.2
25.6
(12)
32
Telecom operators
The strengths of mobile operators
Before going into the details of the possible responses of mobile operators to this
threat, we stress that the latter have numerous strengths at their disposal to defend
their positions against convergent offers from fixed-line operators.
– The simplicity of a pure mobile plan in contrast with a hybrid one, especially in
terms of service continuity. The WiFi/mobile hybrid offers are intrinsically more complex
than pure mobile offers, requiring a fixed point of access in the home in addition to
having to work the handover between WiFi and mobile.
– Mobile handsets are key to mobile offers but also to hybrid offers with WiFi. Mobile
operators have the full spectrum of experience in mobile handsets: the purchase,
design with manufacturers, distribution and sale, after-sales service, and so on.
Fixed-line operators have everything to learn and have less credibility with customers,
suppliers and distributors.
– Mobile operators have very strong, constantly developing distribution networks.
Many of the alternative fixed-line operators that are tempted to launch hybrid offers
would have a tough time catching up. Direct distribution via the internet is not strong
enough to win significant market share (as shown by the experiences of EasyMobile).
In some countries, mobile operators have stronger brands than the fixed-line
operators.
–
– In all cases they have more abundant cash flow than the alternative fixed-line
operators, and thus the financial means to counter-attack commercially.
The fundamental trend is towards personalisation. The mobile is a personal telephone,
in contrast with the fixed line which is the house phone. Currently, for data, fixed
broadband is the house connection, but with the number of personal tools set to grow:
each household member with their own PC, or at least their own settings, personal IM
account, games console, mobile handset etc. The notion of “home” is increasingly
limited, concerning only the pipe that connects the house, and services less and less.
The real champions of personal services are the mobile operators and internet services
specialists rather than fixed-line operators.
Voice: large packages and home zone – the lethal weapon?
All of the mobile operators – and some fixed-line operators – firmly believe in the
development potential of fixed-mobile substitution on voice. They note that two-thirds of
voice traffic are still carried by fixed-line networks, and that 3G is a key factor in
enabling mobile operators to gain additional network capacity (which they frequently
lack) and thereby room to continue to grow mobile voice traffic volumes.
In particular, all of the German operators we interviewed stressed the current
accelerated fall in mobile prices, and the concomitant rise in mobile traffic. This growth
is essentially to the detriment of fixed-line traffic, as total growth in fixed+mobile traffic
is practically nil.
33
Telecom operators
Not all of the countries and not all of the mobile operators are starting from the same
base:
–
the level of fixed-mobile substitution varies from country to country.
Chart 16: % of mobile traffic in total outgoing voice traffic, by country
60%
50%
40%
30%
20%
10%
0%
France
Spain
Germany
2000
2001
UK
2002
Italy
2003
2004
Austria
Total
2005
– the gap between mobile and fixed-line rates varies. In our view, a mobility premium
is justified by the service rendered, but the differences between some countries are not
sustainable.
– within each country, not all of the operators are starting from the same base. The
challengers can generally be more aggressive, as the revenues generated by highARPU customers are usually weaker for them.
E-Plus is among the operators that have the most to gain from fixed-mobile
substitution. First, Germany has the least advanced mobile market. Second, in the
German market, E-Plus’ ARPU is below average, the operator having mostly prepaid
customers. The company has little to lose in offering unlimited voice packages. E-Plus
has recently launched the Base brand, with unlimited calls between Base and E-Plus
customers as well as to fixed lines for EUR25 per month; EUR50/month includes
unlimited internet access.
In the UK, T-Mobile is in a similar situation, and has prompted a similar response, with
the Flext packages launched in February 2006. This comprises notably a plan with 900
minutes per month (or an equivalent mix between minutes and data services) for
GBP35.
For other operators, notably for the leaders or joint leaders, with the most to lose in a
rapid shift to very large packages or to unlimited plans, the home zone concept is an
attractive pricing solution.
34
Telecom operators
The first home zone offer was launched in Germany several years ago by Viag
Interkom (O2 Germany), but this type of offer has recently surged. We group under this
category mobile offers based solely on the mobile network (in contrast with hybrid
offers which are based in the home on a WiFi antenna connected to a DSL line), and
which include:
– a special rate, similar to fixed-line rates, for calls made when the customer is at
home or in a specific area around the home;
– some home zone plans include additional fixed-line functionalities, such as a fixed
number allowing calls to the customer at fixed-line rates instead of mobile rates;
–
mobile services and rates outside this area.
These home zone rates are particularly appropriate to respond to the threat of hybrid
offers. They pre-empt the promise of these hybrid offers (“mobile calls at fixed-line rates
in the home”), while better segmenting the market than if the mobile operator were
focused solely on its classic voice bundle range.
– For bundles to be attractive, they must offer low marginal rates, while this risks
cannibalising the revenues generated on the biggest customers. The higher the mobile
rates in a specific market, the truer this is.
– In contrast, the home zone is charged in addition to the existing mobile bundle. It
presents a lower cannibalisation risk, as it clearly addresses fixed-line substitution, thus
the customer is pushed to compare the home zone price with the fixed-line price rather
than with the mobile price. This is reinforced by the fact that the pricing structure is
closer to fixed than mobile. In particular, the headline prices are very low, but they
apply only to calls to fixed lines – as on a fixed line – and not on calls to mobiles, as in
large mobile bundles which usually include all calls.
Naturally, Vodafone rushed to adopt this concept, first in Germany. Deutsche Telekom
followed suit, and now the majority of operators in Germany are present in this niche.
Vodafone and T-Mobile’s home zone offers come on top of any mobile package, for an
extra EUR5/month. This extra gives customers, regardless of their basic contract, a
preferential rate of EUR0.04 per minute for calls made to a fixed line from within the
home zone (within a 2km radius). Vodafone’s offer also includes the option of unlimited
calls to a fixed line from within the home zone for EUR15/month. Customers
subscribing to either of these offers are also given a fixed-line number.
Vodafone is likely to export this concept to other countries, particularly to countries
where mobile rates are still high and the large or unlimited packages are not
developed. This is notably the case in Spain. Why not Italy also, in response to the
potential convergent offers of Telecom Italia.
There is a risk of cannibalisation from home zone tariffs, but we believe that it is
counterbalanced by the opportunities for additional revenues linked to potential
elasticity - as our calculations below illustrate.
The portion of ARPU impacted by the price cut, i.e. mobile calls to fixed lines made in
the home, is small. Our interviews with operators confirmed this. We estimate the
ARPU generated by these calls at EUR2.6/month on total voice ARPU of
EUR24/month. On this type of call, we have simulated a drastic tariff reduction: new
rate of EUR0.04/minute – based on home zone offers in Germany – versus
EUR0.21/minute (average outgoing mobile rate). Leaving aside any elasticity effect,
this leads to a decline in ARPU of around EUR2/month.
35
Telecom operators
Our simulation shows that to offset this decline, the operator would have to generate a
rise in total outgoing traffic of 18%. In other words, at the sector level, mobiles would
have to capture 9% of fixed-line voice traffic and raise their share of outgoing voice
traffic from 33% to 39%. This assumes the following:
mobile traffic concerned by price reductions (calls made in the home zone to fixed
lines) increase by almost 80% for an 80% reduction in call rates;
–
– the remainder of the operator’s mobile traffic increases by 8% “in sympathy”, as the
aim behind these home zone offers is for at least some customers to drop their fixedline contracts. This could lead to a rise both in outgoing and termination traffic.
Table 9: Home zone: simulation of impact on voice ARPU
2005
Cannibalisation
scenario
Impact (%)
Neutralisation
scenario
Impact (%)
Voice ARPU (EUR/month)
Outgoing
o.w. @home
o.w. to fixed
o.w. to mobiles
o.w. other
Incoming
24.2
17.5
5.2
2.6
2.6
12.2
6.7
22.1
15.3
3.1
0.5
2.6
12.2
6.7
(9)
(12)
(40)
(81)
0
0
0
24.2
16.9
3.7
0.9
2.8
13.2
7.3
0
(3)
(29)
(66)
8
8
8
MOU (minutes/month)
Outgoing
o.w. @home
o.w. to fixed
o.w. to mobiles
o.w. other
Incoming
140
84
25
13
13
59
56
140
84
25
13
13
59
56
0
0
0
0
0
0
0
160
99
36
22
14
64
60
14
18
43
77
8
8
8
Average revenue per minute (EUR)
Outgoing
o.w. @home
o.w. to fixed
o.w. to mobiles
o.w. other
Incoming
0.17
0.21
0.21
0.21
0.21
0.21
0.12
0.16
0.18
0.12
0.04
0.21
0.21
0.12
(9)
(12)
(40)
(81)
0
0
0
0.15
0.17
0.10
0.04
0.21
0.21
0.12
(12)
(18)
(50)
(81)
0
0
0
331,560
673,168
1,004,728
33
331,560
673,168
1,004,728
33
0
0
0
392,564
612,164
1,004,728
39
18
(9)
0
Mobile outgoing minutes
Fixed outgoing minutes
Total outgoing minutes
% of mobile in total
3G/HSDPA: still unexploited potential on mobile broadband…
All the mobile operators have launched broadband access offers, but in most cases
these are positioned solely on the corporate market, and at high rates and/or with
limited traffic allowances:
– average rate of EUR26/month for allowance of 50-100MB/month, very weak
compared with fixed-line broadband offers (generally unlimited, or with a limit of over
1GB/month);
– average rate of EUR70/month for capacity equivalent to fixed-line (1-2GB/month, or
unlimited).
Table 10: Mobile broadband offers – January 2006
Offers
Average
EUR/month
EUR/unit
Hour allowances
<3
8-12
15-30
1.9
11.8
6.3
10.0
37.4
3.7
23.4
49.1
2.1
36
<20
10
13.4
1.37
Mbyte allowances
50-100
200-400
~500
71
25.7
0.36
103
37.3
0.36
532
56.2
0.11
No limit
~1,000
1022
70.1
0.07
NS
65.8
NS
Telecom operators
HSDPA is eagerly awaited, as it permits higher bandwidth on 3G networks (up to 1Mb/s
currently and 3.6Mb/s in the future or even 7.2Mb/s according to T-Mobile, vs 384kb/s
without HSDPA) and enhances spectral efficiency (3x more bit/s per Hz than 3G
currently, and close to MBWA in the medium term). HSDPA is already a reality in some
countries (Austria) and will be launched throughout Europe during 2006.
We believe that the arrival of HSDPA will prompt mobile operators to adopt a more
aggressive positioning on broadband offers, beginning to compete more head-to-head
with fixed-line broadband. This has already begun in some countries.
– In Spain, TEM has launched a 3G offer including 1 GB for EUR30/month and 5 GB
for EUR58;
– In Portugal, Vodafone has launched the XL Pack (UMTS/WiFi router, EUR30/month
for 10 GB) and Optimus the Kanguru plan (same price);
– In Germany, Vodafone sells the “Talk&Web box” for EUR99.90, with internet
service access at EUR29.95 for 5GB and 60 hours per month; O2 Germany launched
“surf@home” in March 2005, an offer based on a “box” connected to its 3G network,
and which targets light broadband users, with prices starting at around EUR20/month
for 10 hours or 500 MB, and up to EUR32/month for 40 hours or 2 GB;
In Austria, all of the mobile operators are very active on broadband access, and
mobilkom and T-Mobile have already launched HSDPA. Mobilkom sells a Vodafone
Mobile Connect Card including HSDPA/UMTS/EDGE for EUR99.00. Customers who
already have a UMTS/EDGE card can download a free HSDPA upgrade, speeds are
1.8 Mbit/s on download and 384 kbit/s on upload. Prices are EUR29/month for 500 MB
and EUR49/month for 1 GB; T-Mobile has packages at EUR21/month for 250 MB,
EUR35/month for 800 MB and EUR45/month for 1.5 GB;
–
– Dell and Vodafone have also announced that in the coming months customers in
France, Germany and the UK will be able to order on line laptop computers with an
integrated SIM card enabling 3G/HSDPA/EDGE service. The customer will also be able
to activate on line his data subscription from the local Vodafone subsidiary. Dell
promises that the additional cost of this 3G equipment for PC will be lower than the cost
of a 3G handset.
…but which remains limited
In the course of our interviews, one mobile operator and one manufacturer said that the
3G and HSDPA/HSUPA technologies are sufficient for mobile operators to offer
attractive broadband plans, and that in their view MBWA does not provide anything
extra.
Our vision is less bullish.
– We believe that 3G will facilitate offers that are competitive with fixed and nomadic
broadband for some market segments – notably for light data users.
– However, even with HSDPA, 3G will not enable mobile operators to address the
whole “convergent” broadband market in a competitive way.
In fact, mobile technologies will remain more costly than fixed-line technologies
(spectrum is a scarce resource vs almost unlimited capacity on fixed line). Bandwidths
will also remain more limited: mobile will get faster (384kb/s on 3G then up to 3.6Mb/s
or even more on HSDPA in the next few years) but will not catch up with fixed (up to
20Mb/s on ADSL2+; VDSL and FTTH plans up to 50Mb/s by incumbents). In particular,
HSDPA will not be sufficient to provide competitive broadband services in cities, as it
would need a very high concentration of sites and that would be extremely expensive.
HSDPA will only be sufficient in less dense areas.
37
Telecom operators
We calculate that if a typical major European mobile operator wanted to launch a mass
market internet access offer based on its 3G network at constant capacity, this service
could only support 950,000 users on UMTS, and 3 million users on HSDPA. This
calculation is based on the assumption that the customers would have the same usage
as they have on fixed broadband, and that the 3G network would be entirely dedicated
to this broadband offer, meaning that it would not transmit any voice or TV.
We estimate that the incremental production cost of a MB on a 3G network is roughly
equal to the price at which the fixed-line broadband players sell this MB (around
EUR0.03-0.04). Therefore, it is theoretically not profitable for a mobile operator to
invest in increasing the capacity of its 3G network solely for DSL-like usage, which
generates such low revenues per MB. It would be better to sell 3G capacity in the form
of other more lucrative services, such as SMS (EUR150/ MB) or voice (EUR2/MB).
DSL, WiFi or MBWA: how to complement 3G?
If 3G and HSDPA are not sufficient to address the whole of the broadband convergent
market, which route will the mobile operators take?
We believe that it is not in the interest of the operators to pass up the opportunity that
WiFi represents, and, that longer term, MBWA could be an excellent option –indeed it
has already been adopted in many eastern European countries – provided that the
licences are available and that local market conditions are favourable.
– From an offensive point of view: MBWA should facilitate broadband offers at attractive
prices in our view, both in the home and on the move, which would complement mobile
operators’ 3G/HSDPA data offers in terms of bandwidth and at a low cost. Choosing to
resell DSL would consist only in commercial convergence, which, as we have seen,
creates little value. Relying solely on WiFi would mean the operator would be confined to
hotspots, i.e. in much more limited areas than the potential coverage of MBWA. In
particular it would not enable to provide service in homes, except if the operator decided
to resell DSL (personal WiFi hotspot connected to a DSL line);
From a defensive point of view. WiFi and MBWA pose a significant threat for mobile
operators. In particular, acquiring an MBWA licence prevents one fixed-line operator or
new entrant from getting one.
–
Entry into fixed line? No obligation
Some operators – notably integrated operators – consider that “mobile only” will not be
tenable in the longer term, as mobile networks will always lack the capacity to compete
with fixed-line operators on broadband data.
Our analysis is that “mobile only” should not be ruled out. We have already seen that
3G is sufficient for voice. With HSDPA and MBWA, wireless technologies will permit
sufficient bandwidth for broadband access – apart from intensive television usage.
However, fixed line is not necessarily vital to solving the inability of mobile technologies
to provide large-scale television. Radio transmission technologies such as DVB-H, DAB
or T-DMB could make it possible to bypass fixed-line telephony. Two Italian mobile
operators have taken this position (this is notably, the official position of H3G Italy).
38
Telecom operators
Nevertheless, some mobile operators are likely to choose to enter fixed-line, and
several possibilities are open to them. Commercial negotiation and / or use of tools
provided by the regulatory framework, making it possible for mobile operators with no
fixed-line infrastructure to launch convergent offers.
– Simple commercial bundling such as the offer by Orange UK and Wanadoo UK in
the residential market, or as officially envisaged by Telefonica Germany and O2
Germany in the corporate market. More generally, partnerships are possible between
mobile operators and fixed-line broadband providers (DSL or cable operators).
However, this would merely constitute a commercial bundling of existing offers, which,
in our view, does not create value (see pages 46-48), and which notably does not
facilitate offers that are as innovative/integrated as those developed by integrated
operators. Most of the mobile operators interviewed do not envisage this route, as they
consider that DSL reselling does not offer much value added.
– Partial or total unbundling or naked-DSL. This would permit a mobile operator to
include in its offer the broadband line to the home, with all the related advantages in
terms of bandwidth, available capacity, etc. However, this would involve substantial
investment, but without the benefits offered by MBWA in terms of independence
compared to fixed-line incumbents.
Embracing WiFi so as to better control WiFi hotspot operators
It is in the mobile operators’ interests to forge links with WiFi hotspot providers and/or
to develop their own networks – WiFi is less costly and faster than 3G (and even
HSDPA) for intensive usage of nomadic broadband. Its development could drive usage
of mobile broadband applications.
The operators have at this stage adopted a conservative approach, with a strategy of
developing WiFi hotspots and/or partnerships with hotspot operators, enabling them to
achieve both offensive and defensive objectives.
Offensive: offer their customers the best possible bandwidth in every possible
location, and at the best possible price. If a WiFi hotspot exists, the operator should
ensure that the customer benefits, in a straightforward and transparent manner.
–
Defensive: prevent hotspot operators from emerging that are outside of their control
and that are sufficiently powerful to offer extensive and threatening coverage compared
with 3G coverage.
–
Most mobile operators sell in the corporate market Data Cards integrating WiFi
(3G/GPRS + WiFi), and many of their data packages also include 3G, GPRS and WiFi
access. These offers are particularly attractive for business travellers, and exert strong
pricing pressure on independent WiFi hotspot providers, whose offers do not integrate
3G. A price analysis shows that hotspot tariffs are still more attractive for infrequent
usage, but that 3G packages are less expensive for frequent usage. The biggest users
of WiFi hotspots are business travellers who are prepared to pay extra to a 3G operator
to have more extensive and international coverage.
Outside the Data Cards market, mobile operators are in a position in the short term to
prevent the uncontrolled development of WiFi mobile hybrid handsets, by wielding their
weapon of subsidising handsets. Several pure play mobile operators say that they will
not subsidise mobile handsets with WiFi capability. However, this weapon will probably
not be viable over the long term. The cost of hybrid handsets should approach those of
other handsets, as WiFi will probably become a standard function in mid/high-end
mobile handsets.
39
Telecom operators
MBWA: a serious option for mobile operators
As for WiFi, but on a larger scale, MBWA technologies also present an opportunity for
mobile operators, using it to develop more aggressively in data, and therefore initiate
fixed-mobile substitution on data services, as has been the case for voice.
Some mobile operators admit that culturally they have a problem going down this road,
as it requires recognising that the payback on their 3G investments will not be what
they had hoped a few years back.
However, we believe that they will become increasingly pragmatic. For example,
Orange appears open: a spokesperson for the group recently stated in the Wireless
Broadband Analyst review that today, Orange is not in a position to say whether it will
invest in WiMax, but that WiMax (802.16e) is among the opportunities under
discussion. Orange is interested in all technologies that would facilitate mobile
broadband.
Some integrated and mobile operators have already launched broadband offers based
on MBWA technologies, notably in Slovakia, the Czech Republic, Romania and
Finland.
40
Telecom operators
Integrated operators: complex and risky convergence
The widespread view among integrated operators is that they are the best placed to
benefit from convergence, as they have all of the fixed-line and mobile assets, but also
the critical mass to develop services and acquire differentiating content.
We put this viewpoint into perspective.
– It is clear that fixed-mobile substitution could be impeded by the development of
convergence offers, notably if they are aggressively pushed by integrated incumbent
operators.
– The latter have many important cards to play in the convergence story, in both
defensive and offensive terms: with the full range of network access (fixed, including
broadband, mobile GSM and UMTS, WiFi hotspots, etc.), integrated incumbent
operators can, in theory, provide their customers with a more complete offer. Moreover,
with generally high mobile market share, they have greater flexibility on pricing than
their competitors, especially fixed-line operators that are not present on the mobile
market, as a large share of calls made on their mobile networks are “on-net”, for which
they do not have to pay a mobile termination rate. This is a significant network effect.
– However, integrated incumbents are at the highest risk of cannibalisation arising
from convergence, both on mobile and on fixed, and could be hampered by regulatory
and operational difficulties. The advantage on mobile termination rates due to a high
mobile market share will gradually decrease as mobile termination rates drop.
Most of the major European incumbents have now decided to participate in the move
towards fixed-mobile convergence.
France Telecom: This operator was the first to buy out the minorities of its mobile
subsidiary. Convergence is at the heart of the NeXT strategy announced in June 2005,
and the operator aims to apply it both in France and in the countries where it is
challenger. The first convergent commercial offers have already been launched
(Orange/Wanadoo commercial bundling in the UK; family package including fixed and
mobile calls), but the real convergent services, notably those based on hybrid mobile
handsets integrating WiFi (called HomeZone by France Telecom) are scheduled for
launch in the coming quarters. The year 2006 will support the heavy costs and
investments of launching these new offers. Moreover, at this stage, it is not known if
France Telecom will launch its HomeZone in France before NeufCegetel’s “Beautiful
Phone”.
Telecom Italia: Having merged with its mobile subsidiary, Italian operator Telecom
Italia has announced similar services to those offered by France Telecom, notably a
mobile-WiFi hybrid service called “Superphone”, that they expect to launch in June
2006. The group considers, and we concur, that it is better to be the first mover in this
type of new service.
Deutsche Telekom announced in September 2005 a series of initiatives on convergent
products over the coming quarters. These include new services (voicemail, email,
convergent address book), home zone tariffs (offers based solely on its mobile network
launched in January 2006 which are similar to O2 Genion and Vodafone’s ZuHause)
and hybrid offers (DSL-WiFi-mobile, announced for 2006). This all-round approach
shows that DT aims at all of the potential market segments. This appears logical, given
1) Deutsche Telekom’s legitimate ambition in Germany and 2) the lack of visibility on
the direction of the German market (fixed-mobile substitution is very underdeveloped).
41
Telecom operators
KPN: the Dutch operator has been actively converging the client management and backoffice services of its fixed and mobile divisions over the past two years. This offers two
advantages in our opinion: 1) giving KPN better knowledge of its clients and allow it to
efficiently manage convergent commercial offers and 2) an opportunity to reduce costs.
The opportunities open to incumbents are as follows.
– Development of broadband, notably on mobile, and convergent new services. This
is an opportunity for all of the players in the sector. Integrated incumbents could also
benefit, with their weaknesses (operationally cumbersome, risk of cannibalisation) and
their strengths, notably their financial and human resources, and the network effect, in
two ways: 1) they could leverage their presence on fixed broadband to develop usage
of mobile multimedia services (e.g. internet-based services such as photo albums and
personal music libraries), and 2) leverage their high mobile market share to offer
attractive “on-net” tariffs, which would be hard to match by smaller mobile competitors.
– Reducing the churn rate, by taking advantage of the fact that many customers are
already in relation with their various divisions, fixed, mobile and internet. Initiatives in
this area are however watched extremely closely by the competition and regulatory
authorities.
– Further reducing operational costs, via integration of networks, services platforms,
and so on.
However, the integrated incumbents are by definition already present in both fixed and
mobile, with generally large market share in both. The cannibalisation risks are
particularly intense for them.
– On mobile, the risk of an accelerated drop in price and/or cannibalisation of existing
revenues in the event of an overly aggressive hybrid offer. The drop in termination
rates has two negative effects: firstly, the mechanic impact on revenues, as is the case
for other operators; and second, the reduction of the “price barrier” which could
constitute the mobile termination rate for the mobile operator with the highest market
share.
– On fixed, accelerated risk of fixed-mobile substitution on voice, with a potential impact
on voice traffic, but also in the case of strong development of nomadic/mobile broadband,
a risk of new competition for DSL offers – and therefore also for fixed-line access.
Operational difficulties and regulatory uncertainties
Although many of the various subsidiaries have been acquired by the groups
(e.g. Wanadoo and Orange by France Telecom), many of the operational fixed-line,
mobile and internet entities have remained separate companies, or different business
units, each with their own P&L and managers motivated by the performance of their
own unit.
All of the telecoms players that we interviewed, including the incumbent operators
themselves, stress the complexity of implementing these fixed-mobile offers from an
organisational point of view. One among them, whose mobile subsidiary is 100%
owned, highlighted this difficulty, with the words “I need a convergent company”. Many
smaller operators highlight the organisational challenge of convergence, which is even
greater for the incumbents.
Moreover, regulation constitutes a potential brake on overly ambitious convergent
initiatives on the part of incumbents. This is underscored by all of the incumbents.
Many competitors stress the risk of incumbents reinforcing their dominant positions.
We believe that the regulators’ target will be to make it possible for un-integrated
operators to “copy” the incumbents’ offers. The necessary conditions appear to be
MVNO access to mobile networks and a drop in termination rates, for mobile, and the
introduction of unbundling and/or naked-DSL, for fixed-line.
42
Telecom operators
The many facets of fixed-mobile convergence
This section of our report looks at the three pillars of fixed-mobile convergence:
commercial convergence (bundling), convergence of access networks (hybrid mobileWiFi offers and new MBWA technologies aimed at both the fixed and mobile
broadband markets), and the convergence of services (services accessible from both
fixed and mobile handsets).
Commercial convergence. In our view, little value is created by commercially
combining fixed and mobile offers, because the gains from bundling—especially in
terms of churn reduction—do not offset the price cuts needed to make the bundle
attractive to the customer. Nevertheless, this type of convergence, which has existed
for several years, should continue to develop.
Convergence of access networks: the migration to all IP and the crumbling of the
traditional barriers between fixed and mobile networks will lead to more competition
and possibly to lower prices in fixed broadband, mobile broadband, and eventually
mobile voice (through VoIP). Conversely, these trends will also fuel growth in the
mobile nomadic and broadband markets.
– WiFi paves the way for hybrid offers blending the benefits of a mobile offer (for
voice) and of broadband wireline access (when the user is at home, the office or in a
hotspot). WiFi can provide broadband services that are more powerful and less
expensive than 3G and should thus be a catalyst for mobile data. In voice, WiFi could
trigger a 15% decline in mobile prices in three years, with the actual erosion depending
on the situation in each country. Many wireline operators are interested in exploring
hybrid mobile-WiFi offers as a means to counter fixed-mobile substitution. We believe
that mobile operators are also going to invest more heavily in WiFi, for both defensive
and offensive reasons.
– MBWA technologies (in particular fixed and mobile WiMax, F-OFDM and iBurst) will
offer broader coverage than WiFi in return for steeper outlays. They will, however,
come to market after WiFi. Compared to 3G, their biggest edge lies in their ability to
propose greater bandwidth, often at lower costs, depending on the technology and on
spectrum available. In our view, MBWA technologies already make it possible to
propose attractive offers in two markets: fixed double-play (in competition with
unbundling) and nomadic broadband (in competition with data over 3G). By around
2008-2009, MBWA is likely to enable fixed operators to compete with wireless carriers
on mobile broadband but also on voice (with VoIP).
Convergence of services. It will now be possible to access services such as email,
instant messaging (IM), music or television from any fixed line or mobile handset.
Fixed-mobile convergence represents an improvement over the current situation in
which fixed services (developed) and mobile services (fledgling) are usually
incompatible. Convergence will thus lead to a development of these services,
especially on mobile handsets. That said, telecom operators will be only one of the
suppliers on this market; we expect internet services specialists like Yahoo!, Google
and MSN to be in a better position than operators to propose convergent P2P services
(email, IM, etc.), while media companies will capture a chunk of the value of
entertainment services. Further out, operators will run disintermediation risk not only on
data but also on voice. Mobile operators are even exposed to a risk of association
between internet specialists and fixed or hybrid operators or WiFi hotspot operators.
43
Telecom operators
Much is expected from convergence
One interviewee summed up the prevailing attitude among operators vis-à-vis fixedmobile convergence as one of ‘fear and excitement’. Operators are keen to seize this
opportunity to develop new services and thus, potentially, fresh revenue sources, but
they are concerned about cannibalisation of existing revenues—especially for mobile
operators.
Fixed-mobile convergence has so far failed to develop extensively owing to a lack of
technological maturity and because most telecom companies had believed that risk
overshadows possible benefits, given that demand remains uncertain.
Most operators are still dubious as to the ability of fixed-mobile convergence to lift
customer spending. In the eyes of its supporters, the primary benefits of convergence
are greater simplicity of services for clients and lower prices.
Matching convergent offers with customers
Three major segments should be targeted by fixed-mobile convergence offers.
Corporates, for whom commercial convergence is already a reality (e.g. single
commercial point of contact and unified billing). Convergent services are also
developing apace, e.g. open access to business applications via fixed and mobile
handsets, for example France Telecom’s Business Everywhere and Blackberry email
system. Later on, the integration of mobiles on company networks via hybrid
mobile/WiFi handsets will ensue rapidly; hybrid offers have already been launched by
DoCoMo in Japan and by BT: Fusion product in the UK, with Spain and Germany soon
to follow.
–
– Families. The home zone concept makes it possible to offer attractive services to
families, for example private virtual networks within a family with preferential rates for
calls within the family, without distinguishing between calls to or from the fixed lines and
mobiles of family members. This logic also applies to SoHo. The point was stressed by
several operators, both incumbents with fixed and mobile assets and pure mobile
operators. We expect to see a pick-up in the development of home zone-type offers
from these two types of players beginning in 2006.
– Younger users are the biggest consumers of consumer data services. They are
especially voracious users of email and Instant Messaging, which will lend themselves
ideally to convergence. For example, access to existing IM services (such as MSN
Messenger and Yahoo! Messenger) from wireless handsets is developing, making it
possible to provide a seamless service on different handsets (PC, mobile, etc.).
Very few of the managers with whom we spoke were prepared to venture a quantitative
forecast regarding the proportion of customers that could be interested by fixed-mobile
convergence offers. A Portuguese operator and a mobile operator in the Netherlands
stated that 5% of their customers could potentially migrate to this type of offer every
year in the next few years, while a German operator said that the target market could
represent 20% of the total market, and a Swiss operator aims to generate 30% of its
revenues via convergent offers by end-2008.
44
Telecom operators
Greater simplicity
Simplicity is the paramount advantage expected from fixed-mobile convergence. The
examples of possible simplification cited by our interviewees include:
– a single bill and a single contact at the operator. These are examples of what we
refer to as “commercial convergence”;
a single handset for each customer that operates on fixed and mobile networks –
even though individual customer segments could be interested in different handsets
(e.g. those specialised in music, in emails and professional applications, in instant
messaging or in photos, video or television). This is what we refer to as “convergence
of access networks”;
–
– convergence on wireline and mobile of key services and data such as voice mail,
email, contact lists, logins and passwords. We refer to this trend as “convergence of
services”;
more extensive personalisation of the usage of the full range of services, resulting
in a better adaptation to individual needs (convergence of services);
–
– simpler rates. Several people we spoke with stressed that, as convergence makes it
possible to integrate several services on a single handset or on a single bill, such bills
could become less predictable. This would raise the ire of customers, who are willing to
pay a premium to lock in visibility. Such a preference is reflected in the success of
unlimited packages, even though only a few heavy users actually pay less thanks to
these unlimited packages.
Lower prices
Nearly all of the people we spoke with expect fixed-mobile convergence to lead to
lower rates. They believe this to be one of the reasons that could drive the take-up of
convergent offers.
Having said that, it is not obvious that customers will race to buy undifferentiated
products whose only selling point is price. More critically, operators may struggle to
propose convergent offers that are much cheaper than existing ones.
Indeed, the lack of success of BT Fusion’s offer in the UK could be partly attributable to
the fact that the technology involved is not leading-edge, but some of the people we
surveyed believe that the public’s response has been tepid because price cuts alone
are not enough to spark broad consumer interest. The offer needs to be both simple
(see above) and add something new, for example genuine mobile broadband, which is
not the case in the current version of Fusion, although this will change with the arrival
of hybrid mobile/WiFi handsets.
Several of the people we surveyed said that the level to which rates need to be cut to
attract consumers to a convergent product is 20%. Some questioned the ability of
operators proposing convergent offers to cut prices that deeply. In what follows, we
examine the cost cuts made possible by fixed-mobile convergence for the various types
of convergent offers–and thus the potential for rate reduction. Regardless, the rapid
decline in price of existing, ‘non convergent’ offers, in particular the decline of wireless
rates, makes the challenge for convergent offers that much steeper.
45
Telecom operators
Commercial convergence: scant appeal
Commercial convergence consists of rate cuts for customers of an operator who elect
to subscribe to both fixed and mobile services. Value creation potential is weak in our
view for most operators, and regulators will limit possible gains for incumbents.
How do we define commercial convergence?
Several commercial convergence offers already exist. The two main versions are:
1) rate reductions for customers who subscribe to fixed and mobile services from the
same operator:
– Tele2 gives (small) discounts to customers who subscribe to both its pre-selection
or DSL offers and its mobile MVNOs offers;
– in the UK and Belgium, France Telecom has lower DSL prices for customers of its
mobile branch: Wanadoo UK offers DSL at GBP9.99 a month for Orange UK
customers vs a base price of GBP17.99; in Belgium, a EUR3 per month reduction for
ADSL is offered by Mobistar to its mobile customers.
there are several examples in Austria of DSL+mobile or cable+mobile offers, with
reductions on upfront fees (for instance, H3G and the ISP Inode) or on the monthly
subscription (e.g. combined offers of UPC and One and Tele2 and One).
–
2) attractive rates within restricted user groups, mainly within a family or company:
– professional offers: individual services (e.g. single billing, single commercial point of
contact, etc.) tied in with specific rates for communications between fixed-lines and
mobiles within a company. All of the incumbents propose such offers, as do many
alternative carriers. These include 9 Office by NeufCegetel in France; B2B by Mobistar
in Belgium; and Amena’s offerings, such as Solucion Negocio, Solucion Autonomos,
Solution Empresas, which comprise, for example, two mobile lines, one fixed line and
broadband internet access for EUR59 per month including unlimited calls between
these lines, 1,000 SMS/mobile line, a single bill, specific services and even a call
centre dedicated to fixed-mobile customers;
– residential offers: rates applicable both for calls to fixed lines and mobiles: France
Telecom (Family Talk), Telecom Italia (Teleconomy TIM Famiglia), Wind (EUR59.95
per month for ADSL, unlimited fixed voice, plus 150 minutes per month of calls from the
mobile to mobile numbers).
Little potential to create value
What type of advantage can commercial convergence bring to the operator promoting
it? Does this exceed the cost of the offer for the operator?
As regards purely commercial convergence, it offers no benefits in terms of production
cost except, possibly, on customer management costs (including billing), which
represents just over 10% of sales for telco operators, and customer acquisition and
retention costs (5-25% of wireless operators’ revenues, depending on the country; an
average of 12% of revenues).
Experience has shown that such offers have failed to entice new customers into the
fold. For example, the Orange UK - Wanadoo UK combined offer does not seem to
have met with huge success, despite the huge rate reduction for ADSL.
Such offers may be more effective in securing the loyalty of existing customers. This is
essentially because it is more difficult for customers to change operators if they
subscribe to several different types of service.
46
Telecom operators
Yet the gain from potential churn reduction appears too modest to justify the rate
discount needed to attract customers. As the chart below shows, a 15% discount could
be justified economically if it sliced churn by 25%, but experience indicates that this is
not the case. Double-play offers seem to yield 20% churn reduction (as shown by the
data released by US cable operator Cox Communication).
The chart below shows the estimated relationship between price discounts and decline
in churn. The blue area shows that double-play offers (such as commercial fixed-mobile
convergence offers) empirically appear in an unfavourable area, i.e. below the curve
representing the points where the economic equation is neutral for the operator.
Chart 17: Gain from lower churn vs price discount
60%
Triple play zone
50%
Economical efficiency
zone
Churn decrease
40%
30%
Double play zone
20%
10%
Churn decrease to keep constant LTV
0%
5%
10%
15%
20%
25%
30%
Price discount
Commercial convergence expected mainly in the corporate market
The operators not in a ‘natural’ position to launch commercial convergence offers are
very likely to steer clear of them:
– for a pure play mobile operator, bundling fixed voice or internet access services with
mobile services would entail reselling fixed services provided by a fixed operator. Such
resale activity is a low margin undertaking that would not allow the mobile operator to offer a
significant rate discount, thereby preventing the carrier from making an attractive offer.
Exceptions could exist in markets where fixed retail rates are high and resale
conditions are attractive. But this situation is unlikely to occur, for if resale conditions
are attractive, they have probably already been exploited by alternative fixed carriers;
– for a pure play fixed operator, the ability to add a mobile offer to its portfolio
depends on the conditions proposed by the mobile operators of its country to buy
mobile services wholesale, in other words the conditions offered to MVNOs in this
country.
There are many examples of fixed operators having launched MVNOs (in particular,
Tele2), but they have met with limited commercial success (except for Tele2 in the
Netherlands: 400k customers), and the lack of success is not related to whether the
offer was convergent or not. For example, Tele2 uses its “fixed” brand to launch its
MVNOs, but the fixed customers are not offered more attractive rates than new
customers, but only a marginal reduction in upfront costs or a discount over the first few
months, e.g. Tele2 shares the savings on customer acquisition costs with the customer
in question.
47
Telecom operators
The situation is different for integrated incumbents, who have no interest in offering
discounts if competitive pressure is slight. However, if it heats up, incumbents could
react by offering convergent bundles – as Telecom Italia and France Telecom have
begun to do.
Regulation is, however, a key check on incumbent operators’ efforts to push this type of
convergence:
– in France, ARCEP had initially blocked a more massive launch by France Telecom
of Family Talk offers (limited to 10,000 contracts);
– in Italy, all the competitors of Telecom Italia with whom we have spoken strongly
endorse tough regulations for the incumbent in this area.
48
Telecom operators
WiFi: why not take advantage of it?
WiFi paves the way for hybrid offers blending the benefits of a mobile offer (for voice)
and of wireline broadband access (when the user is at home, in the office or in a
hotspot). In our view, given its low cost, WiFi could:
– be a mobile data catalyst. WiFi sets the stage for the provision of a much more
powerful wireless broadband service that is less expensive than 3G. It can thus
promote the development of new, mobile broadband usages. WiFi enters households
via ISP set-top boxes, ensuring broadband coverage at a low cost. WiFi handsets will
not only be classic mobile handsets. There will also be PDAs, game consoles,
walkmen, video consoles, etc., and this could create a new wave of demand.
– accelerate the pace at which mobile prices decline in certain countries.
Roughly 10% penetration of hybrid handsets by end 2008 appears to be within reach.
This figure is high enough to bring downward pressure to bear on mobile prices (-15%
in three years, i.e. 5% pa). Risk varies by country depending on the competitive
backdrop in the wireless market, the access conditions enjoyed by MVNOs and
whether or not there are fixed operators in a position to launch such products;
Many fixed-line operators are interested in hybrid WiFi solutions as a bulwark against
fixed-mobile substitution. However, several mobile operators are already present in the
WiFi market, and more can be expected to show an interest in it:
– for defensive reasons, to close the door on new entrants and fixed-line operators,
and thus to safeguard their voice revenues;
– offensively, by adding WiFi as a complement to 3G, to offer customers a more
attractive mobile broadband experience at a lower cost.
What does WiFi bring to the table?
WiFi is a mature technology already built into millions of PCs and other devices (e.g.
game consoles) and soon to be in wireless handsets (hybrid GSM-3G/WiFi handsets,
which are appearing in 2006).
WiFi has three key features.
Genuine broadband access of up to 54Mbit/s in theory; the available bandwidth is
strongly conditioned by the environment, chiefly the broadband link-up between the
hotspot and the backbone network (if this is a DSL 2Mbit/s link, the speed of the access
will clearly be limited to 2Mbit/s). Regardless, the available bandwidth is higher than
that available on mobile networks, even in 3G (384kbit/s in theory, but doubtless less in
practice) and in HSDPA (1Mbit/s currently and soon 3.6Mbit/s);
–
Coverage limited to hotspots. Each hotspot has a radius of several meters or
several dozen meters. The coverage of a WiFi network is thus necessarily patchy
compared to that of a mobile network. Today, hotspots are primarily present in the
home (an increasing proportion of DSL modems/routers are WiFi-enabled), in the office
(WiFi is the standard for corporate wireless networks), in heavily populated public
spaces (airports, universities, cafés, etc.), and potentially in an “outdoor” context in city
centres, if some operators decide to build this type of network. However, this coverage
will remain very limited compared with that of a mobile network (indoor and outdoor,
over 99% of the population).
–
49
Telecom operators
– No handover between cells. The signal is lost if the customer leaves the hotspot
coverage radius and must be re-established in the next hotspot (if there is one). This is
not necessarily a problem for data applications: the process of downloading a piece of
music can be interrupted and picked up again a few minutes later with no real damage
being done. Moreover, ‘mobile’ usage is often in a static position and can thus be
addressed in WiFi better than in 3G/HSDPA. However, this lack of handover between
hotspots is a stumbling block for real-time communication, especially for telephone
conversations, because GSM users are accustomed to having nearly perfect handover.
The solutions that provide a handover between WiFi and GSM theoretically resolve this
issue (see below).
How should WiFi be used? Mobile broadband and cheaper voice
Compared with mobile technologies, WiFi appears to be:
– A “natural” competitor in mobile/nomadic data, even though it does not meet quite
the same needs: WiFi provides greater bandwidth at a lower cost, but with incomplete
coverage and no handover. In data, we believe that WiFi’s drawbacks compared with
mobile technologies are more than offset by its advantages;
– a “forced” competitor in mobile voice: we consider WiFi inferior to 3G for voice,
chiefly because it does not provide mobility handover, which is key for voice (unlike
data), and because VoIP on WiFi is structurally inefficient compared to voice over 3G
(use of a bandwidth of 30-40kbit/s vs 10kbit/s). However, the fact that WiFi operates on
free spectrum enables new entrants or fixed operators to develop voice offers that
could compete with those of mobile operators.
Two types of offers can therefore be built from WiFi technology:
– broadband data offers: in the home, but also in a ‘nomadic’ context. This is already
possible on PC and soon will be on WiFi enabled handsets, especially PDAs, game
consoles and hybrid mobile phones;
– offers combining nomadic broadband with cheaper voice rates than those available
on mobiles (for example at fixed-line rates), in the home – and more generally in WiFi
hotspots; WiFi coverage in the home can also be superior to GSM in some instances
(this is the case for 20% of UK households, according to BT).
We believe that 2006 is the year in which WiFi will move beyond the PC and become a
key component of mass market offers. The principal catalyst will be the advent of
hybrid GSM-WiFi mobile handsets, as well as a certain openness of the market for
mobile broadband services, insofar as fixed broadband is now a mass market product.
Offers have already been launched or soon will be:
– by telecom operators which have a strong interest in taking an offensive stance, i.e.
alternative wireline carriers, cable companies, and BT (see pages 27-30);
– by integrated operators (FT, DT, TI), for whom such offers are both offensive and
defensive (see pages 41-42);
– mobile operators have no need for WiFi for voice services, but we believe that they
will be increasingly interested in exploring WiFi to develop a broadband offer equal in
quality to that proposed by their rivals.
Some players have chosen to specialise in WiFi, e.g. The Cloud, a leading WiFi
hotspot operator in the UK and number two in Germany and Sweden, which sells its
services through other service providers such as BT and O2 in the UK, Vodafone in
Germany, but also Skype or Nintendo. The Cloud’s project includes the rollout of urban
networks in nine UK cities: Edinburgh, Leeds, Manchester, Birmingham, Nottingham,
Oxford, Cambridge and a part of London.
50
Telecom operators
Can WiFi pose a threat to mobile voice?
In theory, WiFi can offer practically free voice over IP. Practice is, however, slightly
more complex.
On a stand-alone basis, WiFi makes it possible to make a call in VoIP on a laptop
connected to a WiFi hotspot. Yet this is a service that does not seriously compete with
the mobile operator given that it operates on a specific terminal (laptop), has severely
restricted coverage radius (hotspots) and offers rates that are not necessarily attractive.
With Skype or any other VoIP supplier, this call can be:
–
free, if to another PC, with all the attendant complexity of such communications;
– billed if to a fixed line. The rate per minute is attractive compared with the average
price per minute of wireless offers, but is more expensive than that enjoyed by
customers with unlimited packages included in fixed DSL double-play or triple-play
offers in several European countries, and also more expensive than some mobile offers
(unlimited packages);
– billed at an uncompetitive rate if to a mobile phone. For example, Skype bills more
for these calls than several mobile operators, as it must pay the mobile termination,
which averages EUR0.12/min. in Europe.
However, WiFi can go farther via hybrid offers, which allow an operator without a
mobile network to offer a service similar to that of a mobile operator, i.e. one based on
a handset comparable to a mobile handset with coverage comparable to a mobile
operator. For this the operator needs:
– hybrid GSM/WiFi handsets, which are scarce at present but should arrive in
sufficient numbers during the course of 2006;
an MVNO agreement with a mobile network: such an agreement is needed to
ensure that coverage extends beyond WiFi hotspots, which will always have a very
limited coverage radius. BT has signed such an agreement with Vodafone in the UK. In
the other countries, mobile operators have not signed this type of agreement, but
regulators will probably want to take action on this question in the forthcoming quarters
(especially in France and Spain).
–
Several people we interviewed underlined the technological and regulatory progress
that should enable hybrid services from H2 06. That said, many also expressed doubts
that services as simple as those of mobile operators were likely to crystallise.
Unsurprisingly, these doubts came from “pure” mobile operators, but sceptical voices
were also heard from MVNOs and incumbents, who underlined WiFi’s complexity and
said that it will be difficult to launch hybrid offers that provide satisfactory quality of
service. H3G ran into the same problems when it started its 3G offering. Its 3G product
was far from perfect, the handsets were dogged by problems, customer service was
poor, etc. In particular, several people we spoke with believe that the “handover” of a
voice call between GSM and WiFi has little chance to function correctly. As a result,
some operators have yet to decide how to package their “dual-phone”, which could
function using a GSM chip instead of a WiFi chip. This would reduce handset costs and
quicken the speed with which the subscriber base can be equipped with the new
phones.
Cost gains and potential price cuts
We have modelled the production costs of a hybrid mobile/WiFi offer and conclude that,
in theory, such an offer could be proposed at a rate nearly 15% lower than an
equivalent offer from a mobile operator today. Given the relative attractiveness of such
a WiFi offer on mobile broadband (higher bandwidth than in 3G), we believe that some
commercial success is likely.
51
Telecom operators
The business model of the hybrid mobile/WiFi operator has the following
characteristics:
– much lower capex than a classic mobile operator because its WiFi network can
only cover a small part of a given country, and this coverage costs less than 3G
coverage. This also results in lower network opex in the coverage area. Intel has
indicated that the cost by MB is USD0.1 in GPRS, USD0.06 in WCDMA, USD0.03 in
HSDPA and USD0.01 in WiFi;
– but higher opex, for several reasons: 1) handsets will be more expensive, at least
during an initial phase; 2) the operator must manage additional complexity in the
network, such as IT and billing, the cost of which is difficult to estimate; 3) all the
operators that propose such an offer without having a mobile network in areas not
covered by WiFi will have to pay a mobile operator for the traffic in the regions it does
not cover – at a wholesale rate (MVNO) – hence steep opex payments (which
corresponds to a return on the mobile operator’s coverage capex). We assume minutes
being purchased wholesale at a 40% discount to the retail price.
Finally, there is the question of the size effect, as fixed costs and interconnection costs
are more onerous for a small operator. As regards interconnection, the problem is not
termination on fixed networks (which is nearly free), but rather the termination of calls
to mobiles, which remains very expensive (around EUR0.12 per minute). Yet owing to
its lower market share, a small operator has to pay mobile termination rates on a larger
proportion of the outgoing calls to mobiles, unlike a large mobile operator for which a
majority of the outgoing traffic can be “on-net”, i.e. on its own network, a fact that allows
it to propose unlimited voice offers. Nevertheless, to “measure the menace”, we
assume that the hybrid operator benefits from the same size effect as the competing
2G/3G operator.
All told (see chart and table below), we estimate that a stand alone hybrid operator has
opex 40% higher than a pure mobile operator, owing to handset and MVNO costs, but
capex 65% lower, giving him higher total capex+opex than the pure mobile operator but
with a much lower asset base.
For an operator that is not ‘stand alone’ but already present with a fixed or mobile
network and customers, substantial savings can be realised:
– lower acquisition costs if the operator already controls a customer base, a
distribution network or a brand that can be leveraged;
– economies on customer management costs if the operator already has a telecom
customer base;
– on network costs (backhaul, installation of WiFi coverage) if the operator already
has a fixed or mobile network;
– finally, for an operator that already has a mobile network, MVNO traffic costs are
replaced by network capex, which is less expensive (but replaces opex by capex).
These are significant savings and allow:
an operator already present in fixed line to be more competitive than a stand alone
hybrid operator (total cost 5% lower) – and to propose hybrid offers that in our view are
competitive with the current offers of mobile operators;
–
– a mobile operator that invests in WiFi to be even more competitive with a cost base
that is 20% lower than that of a stand-alone hybrid operator.
52
Telecom operators
Chart 18: Cost structure of the different types of hybrid operators* (EUR/month
per subscriber)
30
-8%
-13%
-19%
25
20
15
10
5
0
2G+3G
SARC
Customer management
Hybrid Stand-alone
Interconnection
Hybrid Fixed
Network costs
MVNO payments
Hybrid Mobile
Capex
Margin
* Complete cost including ROCE of 10%.
As such, in theory, mobile operators could propose more attractive hybrid offers than
those planned by alternative fixed or stand-alone operators.
– they could also position themselves much more aggressively on mobile broadband
(higher bandwidth at a lower cost than 3G);
– by routing part of their traffic to WiFi hotspots, especially in the home, they could
free up capacity in their 3G network;
– this also holds for the strategy of integrated incumbents such as France Telecom,
Deutsche Telekom or Telecom Italia, all of whom appear well placed in terms of costs
in relation to the alternative carriers with which they will compete on hybrid products.
Although the impact will vary by country, WiFi will thus either introduce fresh
competition via hybrid offers from alternative fixed-line operators or will be a source of
cost savings for integrated mobile operators, giving them “fuel” for new price cuts in
mobile services.
To evaluate the price cut potential, we have taken the case of a hybrid operator already
present in fixed lines, such as BT in the UK and Iliad in France. Assuming such an
operator targets ROCE of 10%, the decline in theoretical prices reaches nearly 15%
compared with current mobile offers. This potential decline appears attractive given the
‘plus’ in terms of bandwidth that WiFi makes possible versus 3G. Clearly, this is an
average estimate: the scale of the opportunity will depend on the local situation.
53
Telecom operators
Table 11: Potential decline of mobile prices owing to hybrid offers
EUR/month
2G+3G
Hybrid
Standalone
Revenue
30.0
30.0
SARC
o.w. handset subsidy
o.w. other commercial costs
SMC
Interconnection
Variable technical costs
o.w. own network
o.w. MVNO payments
Total Opex
5.4
2.7
2.7
3.9
4.2
4.2
4.2
0.0
17.7
6.2
3.5
2.7
3.9
4.2
10.3
1.3
9.0
24.6
15
30
0
0
0
144
(70)
ns
39
5.7
3.5
2.2
3.1
4.2
10.3
1.3
9.0
23.3
5
30
(20)
(20)
0
144
(70)
ns
31
6.2
3.5
2.7
3.9
4.2
3.0
3.0
0.0
17.3
15
30
0
0
0
(28)
(28)
ns
(2)
EBITDA
12.3
5.4
(56)
6.8
(45)
12.7
3
1.2
1.0
1.8
3.9
0.4
0.0
1.0
1.3
(70)
(100)
(45)
(66)
0.4
0.0
1.0
1.3
(70)
(100)
(45)
(66)
0.4
1.0
1.8
3.1
(70)
0
0
(21)
Total Opex + Capex
Normalised OpFCF
21.6
8.4
25.9
4.1
20
(51)
24.6
5.4
14
(35)
20.4
9.6
(5)
14
% of revenue
SARC
o.w. handset subsidy
o.w. other commercial costs
SMC
Interconnection
Variable technical costs
o.w. own network
o.w. MVNO payments
Total Opex
18%
9%
9%
13%
14%
14%
14%
0%
59%
21%
12%
9%
13%
14%
34%
4%
30%
82%
19%
12%
7%
10%
14%
34%
4%
30%
78%
21%
12%
9%
13%
14%
10%
10%
0%
58%
EBITDA (%)
41%
18%
23%
42%
Technical capex, dense area
Technical capex, non dense area
Non technical capex
Total normalised Capex
4%
3%
6%
13%
1%
0%
3%
4%
1%
0%
3%
4%
1%
3%
6%
10%
Total Opex + Capex
Normalised OpFCF
72%
28%
86%
14%
82%
18%
68%
32%
(3.9)
26.1
(13.0%)
0.4
30.4
1.3%
(0.9)
29.1
(3.1%)
(5.1)
24.9
(17.0%)
(46%)
9%
(17%)
(53%)
31.2
5.5
18%
10.5
2.7
26%
10.5
3.5
34%
24.6
6.2
25%
Minimal price for 10% ROCE
Implied EBIT before tax
Delta revenue which can be supported
Minimal revenue which can be supported
Potential reduction of revenue
5.8
(2.6)
27.4
(8.8%)
1.9
(2.2)
27.8
(7.3%)
1.9
(3.5)
26.5
(11.7%)
4.6
(5.0)
25.0
(16.8%)
Max. theoretical impact on incumbent OpFCF
(31%)
(26%)
(42%)
(60%)
Technical capex, dense area
Technical capex, non dense area
Non technical capex
Total normalised Capex
Minimal price for 15% OpFCF margin
Delta revenue which can be supported
Minimal revenue which can be supported
Potential reduction of revenue
Max. theoretical impact on incumbent OpFCF (%)
Normalised asset base
Normalised EBIT after tax
Normalised ROCE @ EUR30/month
54
Delta (%)
Hybrid
Fixed
Delta (%)
30.0
Hybrid
Mobile
Delta (%)
30.0
Telecom operators
Timetable
The speed with which these offers can be developed is as critical a question as the
potential to lower prices.
Based on the interviews we carried out, we believe that conditions will be right for the
development of commercial hybrid offers in 2007.
Most fixed and mobile operators questioned (particularly in Germany, Italy, Spain,
Portugal and the Netherlands), as well as equipment suppliers, have fairly uniform
views on the subjects below.
Until now, technology has been the main stumbling block impeding the development of
hybrid offers:
– the network of operators are all far from ready to provide such seamless services
that would involve both fixed and mobile networks; and
–
GSM/WiFi hybrid handsets are not ready.
Our interviewees consider that handsets meeting several key criteria (reliability, longlasting batteries, light weight, easy to use, inexpensive, etc.) will come to market by
mid-2006. Several dozen equipment suppliers have wireless handsets in their pipeline
that include GSM/GPRS and WiFi for 2006 and beyond. In particular, Nokia should be
ready by mid-2006. SonyEricsson is also coming out with such handsets. Asian
equipment suppliers and Qualcomm should also be present.
From 2007, the development pace will be dependant on:
– the higher price of hybrid handsets versus basic 2G-3G models. Some players
believe that the price difference between GSM-WiFi and GSM handsets will be
significant (one source cited a difference of EUR50 by end-2008), but we believe that
prices will fall faster; and thereafter
– on the replacement rate of mobile handsets, i.e. around 40% of the base every
year.
Introducing these handsets mean that operators will have to shoulder the additional
subsidy, at least during the transition phase. The length of the phase will depend on the
number of operators that push these handsets.
A major WiFi hotspot operator estimates that 20-25% of all wireless handsets will be
equipped with WiFi by end-2008. This represents a take-up rate of 10-12% pa, or 2530% of all wireless handsets sold in Europe in 2007-2008. A mobile operator we spoke
with projects 10% at end-2007, which appears to be consistent with the abovementioned forecast.
Such a rapid rate of penetration will only be possible if all of the major mobile operators
begin subsidising such handsets; however, at this stage, several operators have stated
that they do not want to go down this path. If hybrid handsets remain the preserve of
new entrants or incumbents, the take-up rate will be much lower.
Keeping in mind the uncertainties hanging over the rollout, and the fact that these
handsets could be marketed to selected market segments (families, corporates) rather
than to the market as a whole, we consider penetration of around 10% by end-2008 a
more realistic forecast.
55
Telecom operators
MBWA: the hype is not all hype
The hype surrounding WiMax (and MBWA technologies in general) has often been
shrill. For example, a recent article in a specialised newspaper announced that WiMax
was going to turn the wireline and mobile markets on their head by opening the
floodgates to direct competition between fixed-line operators, mobile operators and
new entrants.
Compared to WiFi, MBWA technologies will allow greater coverage provided larger
outlays are made up front. Still, MBWA will come to market after WiFi. Compared with
3G, their main advantage will be to propose superior bandwidth for possibly lower costs
and investments, depending on the technology and spectrum available. “Fixed WiMax”
exists today and the “mobile WiMax” standard (802.16e) has just been officially
approved by the WiMax forum. However, other MBWA technologies could still appear,
in particular F-OFDM, which has Qualcomm’s backing, or iBurst, both potentially
affiliated with the 802.20 standard. IP wireless has also sparked considerable interest
from operators.
MBWA technologies will now enable fixed-line operators to propose attractive nomadic
data offers, but mobile operators should also be able to use them to propose offers that
compete with DSL. Further out, in 2008-2009, WiMax should enable fixed-line
operators to compete with mobile operators on mobile broadband, but also on mobile
voice (VoIP).
Thus, we believe that, like WiFi, these technologies will step up the pace of nomadic
and mobile broadband development. However, they will also put pressure on the price
of fixed broadband, mobile broadband and, eventually, mobile voice.
More precisely:
– BWA technologies offer a good short-term opportunity to develop fixed broadband
offers (or FBWA). That said, the opportunity for new entrants appears restricted to
countries in which DSL is still expensive (it will be hard to bring the cost of FBWA below
EUR21 per month while maintaining quality);
– a mobile operator could propose a nomadic offer (for a laptop) beginning at EUR17
per month. This is attractive when viewed alongside existing 3G offers (no unlimited
package for under EUR30 per month in Europe) and DSL offers (from EUR20/month
but with no nomadic capability). It is thus probable that certain mobile operators will
seek to obtain MBWA licences;
– for a fixed alternative operator already present on DSL via unbundling, MBWA
facilitates a nomadic extension of its fixed broadband service (for a laptop). The cost of
this service (estimated at EUR17 per month) appears too high for it to be sold as an
add-on of a few euros to the fixed broadband bill, but it could be positioned as a
competitor to mobile operators’ 3G/HSDPA data offers if these remain at their current
levels in certain countries (EUR70-100/month);
– longer term (2008-2009), MBWA could be leveraged not only on the
nomadic/mobile data market but also on the voice mobile market (in VoIP) on genuine
mobile handsets, in return for a double surcharge, the handsets and the national mobile
coverage in roaming/MVNO beyond MBWA-covered regions. This leads to a total cost
of EUR26/month for an operator already present in fixed, which is competitive
compared with voice+data ARPU of roughly EUR30 per month. In contrast, it is not
really competitive for a pure new entrant (estimated cost of EUR32 per month).
56
Telecom operators
MBWA: competition between several technologies
Several technologies that compete with GSM-UMTS-HSDPA-HSUPA have been
developed or are in progress, as the chart below illustrates. They have several points in
common:
– much higher bandwidth: up to several dozen Mbit/s versus 1Mbit/s for HSDPA
currently and 3.6Mbit/s in the future, with a much better “spectral efficiency”: 1-4 bit/s
per Hz for WiMax for example, versus 0.3-0.4 bit/s per Hz for UMTS and around 1 bit/s
per Hz for HSDPA currently and potentially 3 bit/s per Hz in the future;
–
complete IP integration;
–
the capacity to transporting wireless data--but also voice--at much lower costs;
– for certain technologies, the promise of much lower spectrum/licences costs (free or
low-cost spectrum).
Chart 19: MBWA technologies
Standards Environment for (Mobile) Broadband Wireless Access
Regional
technology
organizations
Body Family
3GPP
GSM GPRS EDGE
CDMA
IS-95A
3GPP2
802.11
IEEE
Mass-production
Production
Pilots
Concept
UMTS/ EDGE TD-(S)CDMA / UMTS-TDD
WCDMA Ph2 HSDPA Phase 1
HSDPA Phase 2
CDMA
2000 1xRTT
CDMA
1x EV-DO
HSUPA
CDMA
1x Rev. a
CDMA
1x Rev. d
802.11a 802.11b 802.11g
802.16
PreWiMax
WiBro
802.16a
802.16d
(2004)
802.16e
802.20
802.20
Proprietary
MC-CDMA / Navini
Flash OFDM / Flarion
TDMA/FDMA/SDMA / iBurst
* 3GPP: ARIB, ATIS, CCSA, ETSI, TTA, TTC
3GPP2: ARIB, CCSA, TIA, TTA, TTC
Standard(s) family
Chart 20: Rollout timetable for MBWA technologies
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
CDMA 1X EV DO
S
S
WCDMA
HW
HSDPA
MM
CR
CR
HW
S
F-OFDM
HW
S
S
WIFI
HW
HW
CR
HW
S
S
S
Standardization
HW
Hardware availability
57
MM
MM
Wi-Bro (Korea)
S
MM
CR
CR
WiMAX (802.16e)
i-Burst
MM
CR
MM
CR
HW
S
MM
CR
HW
HSUPA
TD-SCDMA
MM
MM
S
TD-CDMA
2011
HW
HW
HW
CR
CR
CR
CR
Commercial Roll-Out
CR
MM
MM
MM
MM
Mass Market
Telecom operators
However, not all of these technologies are capable of proposing a genuine mobile
service, including the handover from one cell to the other as with GSM or 3G. This is a
serious problem for voice but is less acute for data.
Moreover, most more or less proprietary technologies mostly concern the fixed
broadband—not the mobile—market. This is because non standard technology has
little chance to be taken up on a broad scale, and there is thus little chance it will attract
sufficient volumes to enable manufacturers to produce mobile handsets at competitive
prices.
Two ‘families’ of technology appear to be in a position to propose competitive mobile
services:
–
WiMax, known as 802.16e, a standard that has just been approved;
– Flash-OFDM, which is backed by Qualcomm and iBurst, both potentially affiliated
with 802.20.
IP Wireless (which permits 1.5 Mbit/s on 1.9 GHz spectrum) has also drawn
considerable interest from operators (15 tests are in progress worldwide with
companies such as Orange France, H3G Italy, Optus and Nextel; commercial offers
have been deployed, notably by T-Mobile in the Czech Republic).
WiMax enjoys substantial industry support, in particular from Intel (which also backed
WiFi), as the company has said that it will integrate WiMax into the PC chips it is
developing.
The development of WiMax has picked up in recent months. The first fixed WiMax
802.16 products recently received approval from the WiMax forum, and the future of
fixed WiMax appears secure—at least in countries where fixed broadband penetration
is low and/or rates are high.
Chart 21: Maturation of a new technology – where in the process is WiMax?
Step One: Build and test a prototype system
Step two: Establish standard specifications for system and devices
Mobile
Wi-Max
Step three: Revise and stabilize the standard
Step four: Test performance of standard release
Step five: Optimize system and device performance
Step six: Develop engineering prototypes of chips and software
Step seven: Test interoperability between devices and manufacturers
Fixed
Wi-Max
Step eight: Test interoperability of multimode/multiband systems
Stop nine: Pre-commercial launch
Step ten: Finalize chips and software for full commercial launch
Step eleven: Full deployment
Step twelve: Ramp volumes, reduce manufacturing cost
Source: Qualcomm
58
Telecom operators
Mobile WiMax (802.16e) was standardised in December 2005. This does not mean that
its future is secure.
– Qualcomm has attacked WiMax by pushing 802.20 (positioning it as a competitor of
the 802.16e) and by indicating that it is not clear that WiMax has any advantage over
CDMA and WCDMA/HSDPA. Qualcomm wants to establish Flash-OFDM as a model
technology for the 802.20. F-ODFM functions on 450 MHz bands (a sizable advantage
because lower frequencies expand the coverage of each cell, thereby lowering the cost
of covering large areas), and permits bandwidth up to 6 Mbit/s downstream (2.5 Mbit/s
upstream). F-OFDM tests are currently in progress at Nextel in the USA, Vodafone
Japan, Telstra in Australia and T-Mobile in the Netherlands.
– At best, mobile WiMax products could be ready in 2007 and the commercial launch
could take place in 2008. In the meantime, 3G-HSDPA-HSUPA technologies will have
made substantial progress and will have been deployed. By recently proposing to
integrate HSDPA in PC chips, Intel has taken a position interpreted by some as paring
back its commitment to WiMax.
At this stage, the main problem is that WiMax is standardised only on the 3.5 GHz
spectrum. These are high frequencies meaning that each base station covers a limited
area; hence it requires a large number of base stations to secure good coverage. As a
result, costs are much higher than would be the case for lower frequencies. Cell radius
should be below 1km in urban areas, which is similar to 3G. WiMax would therefore not
provide any advantage in terms of the number of base stations compared with 3G
(hence costs for construction, backhaul, etc., which would be equivalent to those of a
3G network). The only benefit would be in equipment costs, as each WiMax base
station has higher capacity and will cost less than a 3G base station, as long as enough
spectrum is available (at least 21 MHz is necessary). As things stand today, WiMax
does not appear to be the most competitive technology. This is illustrated by our model
in chart.
–
Chart 22: Comparison of the total Capex+Opex for the rollout of different MBWA
technologies
IP Wireless 3.5 GHz
500
450
IP Wireless 2.5GHz
OPEX 2010 in EURm
400
350
300
UMTS-HSDPA 1.8-2.1Mhz
IP Wireless 1.8-2.1Mhz
= <1000 sites
Wimax 2.5GHz
250
200
CDMA 450Mhz
Navini 3.5 GHz
= 1000 sites
= 3000 sites
Flarion 450Mhz
iBurst 1.8-2.1Mhz
= 5000 sites
150
100
500
600
700
800
900
1000
Cumulated Capex 10 years
59
1100
1200
1300
1400
Telecom operators
Chart 23: Cost breakdown for different MBWA technologies
400
OPEX year 2010 in EURm
350
300
250
200
150
100
50
Site leasing costs
Other direct costs
Other costs
iBurst 1.82.1Mhz
Flarion 1.82.1Mhz
Navini 2.5GHz
Flarion 450Mhz
Navini 3.5 GHz
CDMA 450Mhz
Wimax 2.5GHz
IP Wireless
1.8-2.1Mhz
Wimax LOS
3.5 GHz
UMTS-HSDPA
1.8-2.1Mhz
IP Wireless
2.5GHz
0
Depreciation
NB: this cost model includes:
– network capex, over a period of 10 years (including IMS—but not HLR—
equipment). Our calculation is based on a coverage target limited to large, high-density
cities in a big European country corresponding to coverage of 60% of the population;
– handsets: this is a key question mark. In our model, they are included in capex
based on a fixed handset/modem. The chart below shows our forecasts for handset
costs;
– opex: the main cost items are interconnection, network maintenance, backhaul, site
rental, marketing and billing costs;
–
our model does not include content costs.
Chart 24: Cost of BWA handsets (USD)
Proprietary BWA
1,000
900
Fixed WIMAX
Mobile WIMAX
Truck
Roll
800
Truck
Roll
700
600
Supply Chain
Standardization
500
400
Certification
& Interop
300
Indoor / Self
Install
200
100
0
2004
Outdoor CPE
2005
Outdoor CPE
Early Indoor
60
2004
Indoor RG /
CPE
2007
PC Card
2008
Notebook
Mini Card
Telecom operators
Current BWA offers: competing with and complementing ADSL
BWA services are already operational commercially in several countries, notably
France, Ireland, Germany, Austria, UK, Slovakia, the Czech Republic, Romania and
Finland. In western Europe, the operators are start-ups with little impact on their market
for the time being: in France, Altitude Telecom, which has been bought by Iliad; in
Ireland, Clearwire, Wireless Broadband; in Germany, Airdata; in Austria, WiMax
Telecom; and in the UK: PCCW. In eastern Europe, some incumbents have launched
their own BWA offers.
These offers are not revolutionary: broadband internet access for corporates and the
general public, at fixed points and sometimes with a nomadic/portable service (similar
to a WiFi offer). The rates are comparable with ADSL or cable broadband access, and
even with those of certain 3G wireless broadband offers: the BWA offers cost between
EUR15 and EUR50 a month for a downstream bandwidth of between 128kbit/s and
2Mbit/s:
– Ireland: all of the suppliers have offers of between EUR29 and EUR40 per month,
depending on the bandwidth. For example, EUR40 per month by Clearwire in Ireland,
on 3.5 GHz spectrum (Techno: NextNet Wireless), for 1M downstream and 256k
upstream; EUR36 a month by Wireless Broadband for 1M symmetrical
(Techno: Alvarion, Navini Networks). Most are more expensive than Eircom’s ADSL
offer (e.g. EUR30 a month for 1M downstream and 128k upstream);
– PCCW in the UK has launched a BWA offer under the Now brand using licences
obtained in 2003. It currently covers a very small area in west London. Its rates are at
the low end of the ADSL rate scale in the UK: between GBP10 per month for 256k and
GBP18 per month for 1M;
– Also in the UK, Pipex has said that it has reached bandwidth of 5Mbit/s at 2km from
the base station and appears to want to launch in 2006 a nomadic broadband service
based on Airspan’s WiMax equipment;
– Germany’s Airdata markets portable broadband data solutions on 2.6 GHz band
(the offer is portable but not mobile, i.e. no handover is possible). It covers Stuttgart
(indoor coverage of 95%), Bensberg (Cologne region) and the centre of Berlin. Airdata
is positioning itself as an alternative supplier of broadband access infrastructure to
enable operators to circumvent Deutsche Telekom’s network access. Offers include:
128k downstream, 64k upstream, flat-rate for EUR29.9 a month; 512k / 128k (i.e. faster
than UMTS) for EUR39.9 a month; 1M flat rate at EUR49.9 a month;
– DBD, in Germany, has launched a fixed broadband access offer called ‘DSLonair’.
It is based on WiFi and WiMax technologies and aimed in particular at areas not
covered by DSL. In early 2006, the operator launched a fixed-mobile convergence offer
in conjunction with O2 Germany. This consists of a residential package including O2
Genion for voice and DBD’s WiMax offer for broadband in the home.
We also note the BWA offers currently marketed in the Czech Republic (IP Wireless
and CDMA EVDO technologies), Slovakia (F-OFDM), Romania (CDMA EVDO) and
Finland (F-OFDM).
MBWA: necessarily a two-step business plan
MBWA technologies are superior to existing wireless technologies for broadband
(higher bandwidth, lower costs) and can enable nomadic broadband offers on laptop
PCs.
However, the technologies that will offer complete mobility (notably 802.16e or 802.20)
are nowhere near ready today. In particular, the development of genuine mobile
handsets will take years.
61
Telecom operators
The business plan of an operator who wants to use these technologies must thus be
based on a two-step process:
– from 2006, there is the possibility of proposing broadband offers for the home
(based on a fixed wireless modem) that will compete with DSL and cable, as well as
nomadic offers (modem integrated in a laptop), that will compete with WiFi offers;
– from 2008-2009 (although visibility is still poor on these dates), there should be a
possibility to penetrate the mobile market as such, with an offer combining wireless
broadband and VoIP on mobile handsets.
The addressable market will initially be that of fixed broadband: double-play offers,
which correspond to an ARPU of EUR30-65 a month depending on the European
country and the configurations (European average of EUR56 in 2005): EUR20-30 a
month for internet access, EUR13 a month for the basic line rental (the BWA offer
replaces the telephone line) and EUR10-20 a month for VoIP. We expect that this
broadband ARPU (excluding television) will converge towards EUR40 a month by
2010.
Broadband penetration averages 30% in Europe and we estimate that the European
market is worth just under EUR40bn. By 2010, we expect broadband penetration of
70% and a market worth EUR70-75bn.
However, this market has already been tackled by several alternative carriers through
unbundling and ADSL. Therefore, real opportunities only exist in countries where this
competition via unbundling or naked DSL has not yet developed, and where ADSL
prices are high.
The nomadic/mobile broadband market is difficult to assess and remains miniscule
compared with that of fixed broadband. Mobile/nomadic broadband use is still a niche
phenomenon, particularly for businesspeople travelling (PCs equipped with 3G and/or
WiFi cards) and students (WiFi in universities, cafés, etc.). Prices are still high in this
market (a one hour connection costs EUR5; an unlimited monthly subscription runs
between EUR20 and EUR60 in WiFi, and between EUR30 and EUR100 in 3G and
WiFi). We estimate that the number of 3G Data Cards for portable PCs is currently
below one million in Europe. Vodafone, which is clearly one of the most advanced
operators in this area, had sold 600k cards of this type group-wide (including outside of
Europe but not including the USA) at end-December 2005. Excluding revenues from
WiFi hotspots, which are hard to gauge, the mobile broadband market can be
estimated at around EUR500m annually in Europe (assuming one million data cards
generating monthly ARPU of EUR40).
In the longer term, the addressable market will be much larger since it will encompass
the entire mobile market: mobile voice represents ARPU of EUR24 a month on average
in Europe, while mobile data averages EUR5 a month, giving a total of EUR29 a month
and annual revenues of EUR115bn in 2005. Our scenario projects a European mobile
market of EUR130-135bn in 2010.
MBWA: offers, prices and timetables
In Europe, MBWA spectrum cannot be exploited without licences. Some of these have
already been attributed, while others have yet to be (see page 78). The cost of licences
has not been factored into our calculations; it should not be forgotten as it is critical for
any project undertaken by an MBWA operator.
We have used a cost model to evaluate the capacity of an already available MBWA
technology (IP Wireless) to build different types of fixed, nomadic or mobile offers,
including broadband data access and, eventually, a voice service (VoIP).
62
Telecom operators
The following table lists the results in the form of service cost per subscriber and per
month, and compares them to the ARPU that could be hoped for by operators on the
relevant market segments (see our market analysis above). We establish the possible
discount based on current prices for various offers assuming the operator targets
normative ROCE of 12%.
Table 12: What offer at what price in MBWA?
Offer
Terminal
Operator
Fixed Broadband
Fixed wireless
modem
Fixed wireless
modem
Fixed wireless
modem
Fixed wireless
modem
Laptop3
Laptop3
New entrant
20.8
Reference
ARPU
2005
2010
26.3
20.0
Already
mobile
New entrant
15.5
26.3
20.0
(41)
(23)
++
21.8
56.2
40.0
(61)
(45)
++
16.5
56.2
40.0
(71)
(59)
++
Broadband+VoIP in
competition with
unbundling
25.0
19.6
35.0
35.0
25.0
25.0
(29)
(44)
0
(21)
+
++
Nomadic offer: what
market?
31.7
29.2
28.8
9
10
-
26.3
29.2
28.8
(10)
(9)
+
Fixed Broadband
Fixed Double-play
Fixed Double-play
Mobile Broadband
& VoIP
Mobile handset
Already
mobile
New entrant
Already fixed
or mobile
New entrant
Mobile Broadband
& VoIP
Mobile handset
Already fixed
Nomadic Broadband
Nomadic Broadband
1
Complete
cost1
Possible
discount2 (%)
2005
2010
(21)
4
Attractive? Comment
+
ADSL competition
Business case of a
pure new entrant
appears difficult
Limited, but puts
pressure on wireless
ARPU in the long term
Including normal remuneration of capital.
2
Assumption: ARPU = complete cost.
3
PCMCIA card.
The model evaluates the monthly cost of supplying a broadband service. The main
shared assumptions are that it is a greenfield operator covering 25% of the population
of a large European country; the equipment selected is IP Wireless with a radio
backhaul; the base product is 1Mbit/s downstream, 256kbit/s upstream.
The result is shown in the table below, based on three key parameters:
The average load factor of the installed capacity: 70% is a high level, which
assumes good capacity optimisation in relation to demand and thus a good commercial
success. Our calculations below are based on an average between the results obtained
with 70% and with 50%.
–
– Capacity by site, in Mbit/s: even though the current equipment proposes around
20Mbit/s per site, the developments in progress should make 50Mbit/s possible in the
years to come. As our estimates try to capture what an offer could look like in the years
to come, we take 50Mbit/s as our core assumption.
– A third key parameter is the network’s overbooking rate. This is a choice made by
the operator based on the quality of the service it wishes to provide to clients. For a
professional service, the rate is 4:1; for more basic quality of service, a rate of 50:1 can
be used, which divides by nearly two the monthly cost compared with the 20:1
scenario. Our calculations assume a weighted average of 2/3 in 20:1 and 1/3 in 50:1.
Table 13: Sensitivity of the monthly network cost (EUR/month/subscriber) to the
model’s key parameters
Capacity by site (Mbit/s)
70%
20
30
40
50
50 and Overbooking 50:1
35.4
27.4
23.3
21.0
NA
63
Average network load factor
50%
45.0
33.8
28.2
24.8
16.7
30%
67.5
48.8
39.4
33.8
20.3
Telecom operators
Chart 25: Sensitivity to the network’s load factor
Network Load (%)
0
10
20
30
40
50
60
70
80
90
100
110
Monthly Cost per User (EUR)
160
140
120
100
80
60
40
20
0
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Users on Network
The model includes the following cost categories:
investment in the network, in particular the sites, depreciated over five years; the
model includes ROCE. The total cost by installed site is EUR80,000 (versus EUR130150,000 for a 3G site, although the latter has less capacity). This cost assumes strong
co-letting of sites (and thus that the operator can negotiate site sharing with an operator
in place). NB: Siemens is testing WiMax in Italy and has suggested that capex of
EUR500m could be needed to blanket Italy with 3,500 sites, i.e. EUR140,000 per site,
which is higher than our assumption. If we assume a cost of EUR140,000, the result in
the model would climb by EUR3-4 a month;
–
–
maintenance opex, which also depends on the number of sites;
–
staff costs, some of which are fixed (G&A);
– the subsidizing of the cost of a basic terminal, i.e. a fixed modem, or EUR185
amortised over 24 months (WiMax certified modems are currently available for
EUR170-330).
Note that the result (monthly cost) is proportionate to the number of users: the
economies of scale on a certain number of fixed costs are offset by a network utilisation
rate that falls for an operator who wants to make its network denser so as to add
customers.
Using the base model of a greenfield operator, we have then estimated the cost
advantage from which an operator would benefit were it already present on the market,
with synergies on network opex (backbone, backhaul) but also on IT costs and, more
marginally, on personnel (economies of scale) and marketing (cross selling, etc.). The
savings are EUR5.5 a month, a substantial amount given the monthly costs previously
indicated for a stand-alone operator.
64
Telecom operators
Chart 26: Synergies that can be realised for an operator already in place – at
comparable network utilisation rates (EUR/month per subscriber)
30
Monthly costs
25
20
15
10
5
0
Greenfield MBWA operator
Existing telco operator
Network opex
Network capex (depreciation+ cost of capital)
Personnel & Misc
Modem subsidies
Marketing
Potential competition on fixed double-play
Given the prices of DSL and double-play offers in Europe, it would appear that MBWA
technologies will foster competition:
– on our assumptions, the cost of supplying internet access is EUR21 a month for a
greenfield operator and EUR15.5 a month for an operator already present on the
market, for example a mobile operator;
– the cost of supplying a double-play offer that replaces a fixed line, and thus that
includes VoIP (see below), is EUR22 for a new entrant and EUR17 for an operator that
is already present on the fixed or mobile market. This is very competitive when
compared with existing double-play offers. The cost does not include mobile
termination, but not the tariffs of existing double-play offers either.
Chart 27: Comparison of the monthly production cost estimated in MBWA vs
ARPU of the addressable market in 2005 and 2010e (EUR/month per subscriber)
60
50
EUR/month
40
30
20
10
0
Fixed
broadband New entrant
Fixed
broadband Already in
mobile
Fixed double
play - New
entrant
Fixed double
play - Already in
mobile
ARPU 2005
65
Nomadic
broadband New entrant
ARPU 2010
Cost
Nomadic
broadband Already in fixed
or mobile
Broadband &
VoIP mobile New entrant
Broadband &
VoIP mobile Already in fixed
Telecom operators
Some operators could also use BWA technologies in addition to DSL, not as a
competitor. Eurotel has already done this with its Data Express offer: it is a “technology
agnostic” broadband access offer that functions under ADSL, in areas where the
operator has deployed the technology, and under CDMA EVDO (450 MHz) in other
areas; the choice between the two technologies is transparent for the customer. Eurotel
has deployed a CDMA EVDO network to complement its existing GSM network.
However, the shift of fixed-line competition to increasingly high bandwidths with tripleplay offers that include television could well pose problems for BWA’s business model,
insofar as it is attractive only for double-play offers.
Nomadic broadband or mobile
The MBWA offer could, however, be extended to nomadic applications, by replacing
the fixed modem with a PCMCIA modem. Assuming a price EUR100 higher than the
fixed modem also amortised over 24 months, we arrive at a cost of EUR20 a month for
an operator that has synergies with a pre-existing network.
Looking ahead, Intel has said that it wants to integrate WiMax into chips for laptops, as
it did with WiFi. This would lead to a deep cut in the cost of enabling a laptop with
WiMax.
Mobile operators thus have an opportunity to use MBWA spectrum to propose services
that complement their 3G/HSDPA mobile data offers (higher bandwidth but in limited
areas) but also compete with wireline operators’ DSL services. This service could be
provided at a price equal to—or more attractive than—DSL, depending on the country,
but it also contributes nomadic capability, unlike the services for the home offered by
ISPs.
Mobile broadband and VoIP offer: a good business case for a fixed
operator with strong synergies
From 2008-2009, we may see MBWA offers centred not on PCs but rather on smaller
wireless handsets (telephones, PDA, etc.). The technical challenge–and thus the
timetable for bringing such handsets to market at a reasonable price–should not be
underestimated.
This is reflected in the experience:
– of UMTS handsets, which were announced for 2002 but came to market at an
attractive cost only in 2006 (although they are still more expensive than 2G handsets);
– of WiFi hybrid handsets: these will arrive in sufficient numbers only in mid-2006,
with a satisfactory battery lifespan and a reasonable cost, whereas WiFi has been built
into Pentium Centrino laptop chips for several years.
We have nevertheless calculated the rough costs of an MBWA offer based on such
handsets and which provides customers with a mobile broadband service and a mobile
telephony service in VoIP.
66
Telecom operators
We have added three types of costs to our previous mobile broadband model:
– the cost of supplying VoIP: the cost of the VoIP platform is negligible (EUR500,000,
a very low amount on a per subscriber, per month basis). However, in order to propose
a VoIP service that encompasses more than PC-to-PC calls, the operator must pay a
call termination fee on fixed and mobile networks; on fixed networks, this amounts to
around EUR0.005 minute or, for a usage of 200 minutes a month, EUR1.0 a month.
This can thus be included in the package in return for a small surcharge. However, on
mobile networks it costs approximately EUR0.12 a minute to terminate a call. We have
already highlighted that the higher the mobile termination rate, the more difficult it is for
a small operator to compete with a big mobile operator, which automatically benefits
from much higher on-net traffic, on which it does not pay the mobile termination rate;
the additional cost of the handset: we put this at EUR150, which brings the total
cost of the MBWA handset to EUR330. This leads to an additional monthly charge of
EUR6.3 compared with the fixed PC model;
–
the cost of the complementary coverage to propose a national service: the MBWA
network covers only 25% of the population. If the operator wishes to compete with
mobile operators, it needs to strike a roaming/MVNO agreement with a 3G mobile
operator. Based on usage of 120 minutes of outgoing calls per month, 30% of which
outside the area covered by the MBWA network, and a wholesale cost of EUR0.10 a
minute, the additional charge is EUR3.6 a month;
–
Overall, the monthly cost of such an offer genuinely able to compete with 3G mobile
services (voice + data on a wireless handset) is EUR32 a month for a greenfield
operator and EUR26 a month for an operator already present in fixed, assuming that
this operator proposes a voice package including unlimited calls only to fixed lines and
that it bills separately calls to mobiles.
This cost level is comparable to ARPU on the market addressed, namely the mobile
voice and data market. We expect average ARPU (voice + data) of around EUR29-30 a
month in the next few years. As this is an offer on a wireless handset and not a PC, the
voice ARPU potential is greater but the data ARPU potential is lower (logically, there is
less mobile broadband usage on a small wireless handset than on a nomadic PC).
In conclusion:
– a greenfield offer has (based on this very simple model) little chance to be attractive
enough to compete with the offers from mobile operators on the mass market (ARPU of
EUR29 for a cost of EUR32);
– an operator with a strong fixed-line presence (for instance via unbundling) could
propose a relatively attractive mobility offer in terms of price (average cost of EUR26,
10% lower than the ARPU expected for the market), and in terms of services (services
converging with its fixed broadband offer; higher bandwidth than 3G).
We therefore believe that taking a long-term view, MBWA technologies are not poised
to cut the value of the mobile market in half in relation to our core scenario, which is
already on the conservative side, but should rather:
–
fuel demand for mobile broadband services;
– while keeping mobile prices under pressure, via real or potential competition,
depending on the country.
67
Telecom operators
Convergent services: a bigger cake to share with more
guests
The operators and suppliers we have spoken with agree that there is potential to
generate revenues from new services made possible by convergence. These include:
– person-to-person communication services: this entails making services such as
email and instant messaging available on all handsets, in particular on mobile
handsets;
– content services: this involves the arrival of music, television and video on new
distribution vehicles such as fixed and mobile telecommunication networks.
These services respond to real demand, and have already grown strongly on wireline
internet. Fixed-mobile convergence allows the same personalised service to be
accessed from fixed line terminals (set-top-box, television, telephone, PC) and from
wireless handsets (mobile phones and PCs, mobile game consoles, etc.). This adds
real value in relation to the current situation in which fixed services (developed) and
mobile services (still in a fledgling state) are still relatively incompatible.
We have concluded that:
– convergence, which goes hand in hand with the arrival of mobile broadband (3G,
WiFi and other technologies), will lead to a development of these services on mobiles
at lower prices;
– but operators will be just one type of supplier on this market. Internet services
specialists like Yahoo!, Google and MSN are better positioned than operators on the
P2P convergent services market (email, IM, etc.); these specialists are both partners
and competitors of operators. Moreover, content suppliers will capture a big chunk of
the value of new services such as music and television. The share captured by
operators on these new markets will thus be lower than on previous generations of
service like voice and SMS;
– mobile television has substantial growth potential, notably with technology currently
being developed (particularly DVB-H). However, there is uncertainty regarding other
operators in the value chain, as visibility regarding associated frequencies is low;
– in the long term, operators could face disintermediation risk along the full chain of
services, not only data services but also voice. They could thus be relegated to the role
of pipe suppliers;
– mobile operators could come up against a risk of association between these
internet specialists and alternative operators (fixed or hybrid operators or WiFi hotspot
operators) that could offer alternative mobile broadband services.
Instant messaging and e-mail: killer applications
E-mail is a key reason to access the internet and probably accounts for up to 50% of
clients’ willingness to pay for internet access. Instant messaging on PC (IM) is also
becoming an increasingly important application on the internet. Based on these figures,
we estimate the theoretical value of the email and fixed IM market at around EUR3.3
per month and per inhabitant. This is a purely theoretical calculation, as these services
are generally included for free in packages and/or financed by advertising.
On mobile, person-to-person communication is also the most highly developed data
application (SMS). This is a market worth EUR16bn in 2005 in the same eight
countries, i.e. EUR3.5 per month and per inhabitant. All told, the P2P fixed and mobile
market thus represents around EUR6.7 per month per inhabitant in Europe.
68
Telecom operators
Table 14: Estimated theoretical value of the P2P market in Europe
EUR/month
2005
Fixed broadband internet access ARPU
% attributable to P2P
Theoretical fixed P2P ARPU
Theoretical fixed P2P revenue per pop
26.3
50%
13.2
3.3
Mobile data ARPU
Mobile P2P ARPU
Mobile P2P revenue per pop
5.0
4.0
3.5
Total P2P revenue per pop
6.7
Nearly all of the people we spoke with consider email and IM to be services which lend
themselves ideally to fixed-mobile convergence:
– several incumbent operators such as Telefonica, France Telecom, Telecom Italia
and TDC have publicly cited these services as killer applications of fixed-mobile
convergence. They want to make the email accounts of their customers accessible
from mobiles and develop IM services that are accessible from PCs, fixed-line phones
and mobile handsets;
– many mobile operators in the UK, the Netherlands and Scandinavia consider mobile
messaging to be a market with high development potential. The success of the
Blackberry is a clear sign on the professional market, while on the youth segment,
certain operators believe that there could be a substantial market for Blackberry-style
devices proposing convergent fixed-mobile IM services. The agreement between
Vodafone and Orange to make their instant messaging services interoperable shows
they are interested in developing the market;
internet service specialists like Microsoft, Google and Yahoo! have already begun
mobilising their services. Personal communication tools (email, IM) have been the first
to be so mobilised. These services are aimed above all at young and tech-savvy users.
For operators, these specialists are both competitors (via the portals they offer for
mobile handsets) and partners (like in the agreements recently announced between
Vodafone and Microsoft as well as Vodafone and Google).
–
We believe that this market will continue to grow, spurred by the development of 3G
and increasingly large (or unlimited) data packages, just as the shift from narrowband
to wireline broadband has led to an explosion in usage.
Chart 28: Revenue per capita from Internet access and P2P services (email, IM,
etc.) – fixed gross margin, mobile gross margin and revenue passed
20
18
16
EUR/month
14
12
10
8
6
4
2
0
2005
2006e
2007e
Fixed P2P & Internet - gross margin
69
2008e
2009e
Mobile P2P & Internet - gross margin
2010e
Revenue passed
Telecom operators
Internet services specialists have a step on operators
We have identified three key reasons for this:
1) Suppliers of email or IM accounts already have more active accounts than fixed-line
operators, and obviously more than mobile operators. For example:
– at end-2005, in France MSN had six million Hotmail users and nine million
Messenger users; Yahoo! had 420 million users worldwide, nine million of which in
France;
– by way of comparison, at end-2005, Wanadoo had around six million broadband
subscribers worldwide, of which 4.5 million in France, to which narrowband accounts
must be added (1.8m-2.0m in our view). Many of these doubtless have an email or IM
account with one of the internet services specialists, given Wanadoo’s market share in
France (close to 50%) and the number of users declared by the Internet services
specialists;
– at the same time, mobile operators have not developed a significant email address
base nor a base of email users, apart from professional users of connected PDAs like
the Blackberry.
2) Telecom operator and ISP email accounts are linked to a client’s subscription with
the operator (for instance, it is impossible to keep an email address with Wanadoo
when you cancel your subscription with the ISP), whereas email accounts on Internet
service specialists are independent of a customer’s subscription to internet access
offers.
3) Finally, suppliers such as Yahoo!, Google and MSN appear to be a bit more
advanced than operators:
– Yahoo! has just launched Yahoo! Go, which is currently available on Nokia
handsets and soon will be on those of other brands as well. Yahoo! Go is a new
wireless portal that mobilises Yahoo!’s key services such as email, Instant Messaging,
address books, photo albums, etc. Email and IM are the same accounts as on PCs,
and therefore fully synchronised with the PC. The client pays only the data traffic to his
mobile operator. These services already exist on mobiles in WAP mode but Yahoo! Go
is intended to considerably simplify their usage;
– RIM, the Blackberry supplier, has just announced a partnership with Google that will
integrate the Google Talk service into the Blackberry (Google Talk, Google’s IM
service, is expected to be launched before mid-2006, and will be proposed to holders of
a GMail account). Google has also struck partnerships with equipment suppliers. For
example, it has an agreement with Motorola to make Google a pre-recorded service on
Motorola handsets (one-click access to Google; operators will have to decide whether
to propose these services; some will offer the Google service from March 2006);
– Microsoft has signed several partnerships and is positioning itself as a new entrant
on the fixed-mobile convergence market. For example, in Spain, Microsoft has a
partnership with Amena for a mobile email service at EUR12 per month with a
100Mbyte traffic allowance, as well as for the commercialisation of MSN Messenger.
Microsoft has also launched Messenger on Bouygues Telecom’s EDGE network in
France.
Contribution to growth vs cannibalisation risk
Today, all of these services are free or nearly free and the benefits there from are
flowing to telco operators. The traffic generated is captured by the operator and these
services can attract customers to new broadband offers (fixed and mobile).
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Telecom operators
Certain operators have openly supported the development of these service suppliers
on their networks by positioning themselves as access providers (while leaving the
provision of services to specialists). This is the case of T-Mobile USA, which already
offers AIM (AOL IM), ICQ and Yahoo! Messenger on its Blackberry, and which will offer
Google Talk. In Europe, T-Mobile has also mentioned Google in its mobile data offers.
In the USA, Cingular could launch Yahoo! or Google services as part of a bundle with
its mobile data packages.
Vodafone has opened itself up to Internet specialists via two recent, major agreements,
putting in practice the pragmatic approach that management has been preaching for
the past few months. It has a mobile email agreement with Microsoft, and an
agreement with Google to integrate its search tools to Vodafone’s mobile Internet offer.
These are positive developments because we believe they will allow more rapid
development of mobile Internet use.
However, this trend poses two types of risk for operators: 1) a risk of SMS revenue
cannibalisation and 2) a risk of disintermediation across the service range, including
voice via VoIP.
Cannibalisation risk. Internet specialists base their activity on business models that
differ from those of telecoms: revenues are derived from advertising, whereas
operators generate revenues directly from customers. They could thus bring pressure
to bear on telecoms service prices.
Email and IM are emblematic in this respect, as these services can replace (at least in
part) SMS, which is billed per message (EUR0.10 per SMS on average). Email and IM
are free on fixed-line (customers pay only for internet access, and thus for traffic), and
service suppliers earn money by monetising their audience through advertising and
sales of additional pay services. Internet specialists hope to develop an equivalent
business model on mobile, which could imperil SMS revenues. Today, operators
appear divided on the question of IM and mobile email:
– certain operators have been willing to play the game and price IM by volume, at the
same rate as data, and some have even released ads that compare this aggressive
pricing approach with that of SMS (e.g. Bouygues Telecom in France). Some of the
people we interviewed consider that SMS cannibalisation risk is marginal because SMS
will remain much simpler to use than wireless email;
– other operators, and in particular the strongest, are still able to impose their will on
internet specialists. Although the latter would prefer that IM not be billed by message,
the big operators such as Vodafone have so far been able to ensure that IM messages
remain a pay service, like SMS. The agreement between Vodafone and Orange for the
interoperability of their paying IM services shows that mobile operators are determined
to develop these services, while maintaining these rates separate from fixed rates.
Disintermediation risk. The ambition expressed by internet specialists entails
monetising their large user base by developing new services to generate sales and by
capturing part of operators’ existing revenues.
This is not a new goal. These internet specialists have not yet been able to derive
significant revenues from users (their revenues come essentially from advertising).
However, the arrival of their services on wireless, an environment where customers are
used to paying (whereas customers generally consider that internet services should be
free) is a golden opportunity.
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Telecom operators
Several types of business model are being made possible by mobile. They factor in
revenue sources that could have been developed by telecom operators but which will
actually be captured in part by internet specialists:
– new advertising revenues: Google will launch Google Local, a service similar to
yellow pages, on Blackberry. This is an extension of Google Map, giving information on
local businesses and navigational guidance. These are free applications; the customer
will continue to pay the mobile operator for data traffic, but Google will get revenues
from advertisers. This will generate revenues that the telecom operator could have
captured but now will not;
– sharing access revenues (i.e. traffic) with operators, as is the case with Yahoo!
Broadband in the UK and Japan. An operator (fixed-line, mobile, WiFi, MBWA, etc.)
with a limited franchise (for example a new entrant) could opt to share part of the
access revenue with one of these large internet brands to accelerate its market share
gains;
sharing voice revenues via VoIP: the mobile portals of internet specialists and
their IM applications will be platforms for VoIP services. This trend is already in motion
in fixed-line (Yahoo! Messenger, Google Talk, etc. offer VoIP) and could ultimately spill
over into mobile. A major drawback is that mobile VoIP could develop on the WiFi and
MBWA networks, but it currently can not develop significantly on existing EDGE and
3G networks, for two reasons: 1) data traffic prices on these networks are too high to
make VoIP more attractive than operators’ voice packages; 2) more fundamentally, the
way in which voice is transported on 3G networks is structurally more effective than the
encapsulation of voice in IP packets which are themselves transported on these same
networks (10kbit/s for voice on 3G vs 30-40kbit/s for VoIP).
–
Internet services specialists have thus positioned themselves to capture not only
revenues from new convergent services, but also a slice of the broader telecom
revenue pie (i.e. from access and traffic, fixed and mobile). As they have no access
network, they will capture only a resale margin on access and traffic (much like Tele2),
but this is nonetheless a potentially significant sharing of value, both on new services
and on operators’ current revenues.
This disintermediation trend can also be tied in with the risk posed by new technologies
for the operators in place (hybrid WiFi; MBWA). Internet service specialists appear to
be the ideal partners for WiFi or MBWA new entrant candidates: a Yahoo! can provide
them with all manner of convergent services, as well as a strong brand.
Taking this reasoning to its ultimate conclusion, internet specialists could even be
tempted to form JVs with new network operators. This would entail taking the risk of
becoming a direct competitor to other telecom operators, but they could be prepared to
accept this as the price to be paid to educate the broadband internet market and to
increase their pressure on existing operators.
TV on ADSL and on mobile: significant potential
Mobile television is a key wireless broadband application. It is already one of the most
successful 3G services, and it is still at a fledgling stage since other technologies now
in a trial stage (DVB-H, DAB, T-DMB) will make it possible to expand the offer. We
have included mobile television in this market, but also mobile video on demand (VOD).
TV and VOD are becoming a key component of wireline triple-play offers, as they are a
genuine source of revenues today and a differentiating factor between triple-play offer
suppliers.
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Telecom operators
This market is still in its infancy, but the numbers already speak for themselves.
1) on our estimates, television on ADSL has attracted around 200,000 paying
customers for Iliad in France, but also for France Telecom in France and for Imagenio,
Telefonica’s offer in Spain;
2) mobile 3G television has entered a commercial phase. Operators have published
significant statistics on the usage of their offers only during promotional periods, which
are promising but do not yet necessarily provide a template for the future. For example,
Vodafone Germany said in July 2005 that it had won 100,000 users for its mobile TV
offer (included in 3G packages). According to the company, each of these watched
television ten times per month on average, with each session lasting 2.5 minutes;
3) mobile television is also in a test phase as regards broadcast technologies,
especially DVB-H, DAB and T-DMB (as opposed to 3G television, which is based on
point-to-point communications). These tests also show positive feedback from users:
– O2 in Oxford in Q4 05 (375 testers): 83% of the testers were satisfied; 76% were
interested in subscribing in the next year – but with no indication on price. Average
usage of 23 minutes per session, with one or two sessions a day; on average, three
hours per week; usage took place in the morning, the evening and during lunch, mainly
in the home, at work and during commuting time;
– Spain: test of Abertis in cooperation with TEM on DVB-H; hopes to beat the EUR4.9
per month ARPU achieved in Finland;
– positive lessons have also been learned in DAB technology: BT/Virgin Mobile
(1,000 testers in the London area): 2/3 of the testers are willing to pay GBP8 per month
for mobile TV; 59% find this service ‘attractive or very attractive’ and 65% feel this way
about radio on mobile; average usage of 66 minutes per week for TV and 95 minutes
for radio; BT will launch a wholesale service and Virgin will be the first operator to
launch the service on the retail market. Other operators may jump on the bandwagon in
2006.
Most of the people we have spoken with agree that mobile TV has vast potential, not as
a competitor to classic TV but rather as a complement to it:
– usage on the move, as a “time killer” while commuting. This would clearly
complement traditional TV, not replace it, given the short connection periods involved;
– personal usage: teenagers watch TV on their mobile phone in their room while their
parents watch in the living room. This is one of the biggest usages emerging from the
current offers.
The Canal+ group confirms this. The company believes that mobile television will
enable it to attract young customers who were not pay-TV subscribers (traditional payTV was a family subscription, while mobile TV is aimed at individual subscribers).
73
Telecom operators
We believe that operators are aiming to generate ARPU of EUR10 per month per
active mobile TV user:
– Vodafone UK currently has exclusive rights to offer BSkyB on mobile; the rates are
GBP5 a month for each ‘Sky Mobile TV’ pack and GBP3 a month for the ‘Vodafone
Variety’ pack, with a special offer of GBP10 a month offer for a customer who
subscribes to two Sky packs and to the Vodafone pack;
– in France, Canal Sat on SFR is priced at EUR7 a month during the current
promotional period, then EUR12 a month (plus the connection to the Vodafone live!
Portal) and is already believed to have signed up 10,000 subscribers. The other SFR
TV stations are currently billed EUR0-0.25 per indivisible minute and are expected to
be billed EUR0-0.50 per indivisible minute plus the price of the Vodafone live!
connection after the promotional period;
– Orange France has opted to include television in its Orange Intense subscriptions:
usage is included in the package, and unlimited the week-end for one year;
– in Germany, mobile TV is still free at Vodafone Germany for ‘basic’ channels, and
premium channels are billed EUR3 per hour.
Our core scenario for 2010 includes revenues of:
– EUR5 per month and per line from wireline content services, of which TV is a large
part, i.e. EUR2.7 per month and per inhabitant in Europe;
– EUR2 per month and per subscriber from these same services on mobile, of which
TV is also a large part, i.e. EUR2.2 per month and per inhabitant. This ARPU of EUR2
per month corresponds to 30% of the mobile subscribers paying around EUR7 per
month for mobile television.
Chart 29: Revenue per capita forecasts for content services on telecom networks
including television
6
EUR/month
5
4
3
2
1
0
2005
2006e
2007e
2008e
2009e
Fixed TV & content - gross margin
Fixed TV & content - revenue passed
Mobile TV & content - gross margin
Mobile TV & content - revenue passed
2010e
Several operators have highlighted that mobile television is also, and perhaps mainly, a
way to attract customers to new generation handsets, notably 3G, thus develop the use
of other mobile data services like Internet access, email, etc.
74
Telecom operators
Uncertainty regarding the role of the operators in the value chain
The share of value that operators could win on ADSL and mobile TV services is difficult
to estimate for the moment.
Firstly, as the value comes from content that operators do not produce themselves, the
gross margin cannot be as high as for a P2P service. Television’s gross margin is
currently estimated at 50% for fixed and 60% for mobile (on EDGE and 3G). The
balance of power between distributors (operators) and providers will evolve according
to their individual strengths, and according to the upstream (content) and downstream
(operators) market structures.
Different operators are already making different choices with respect to content
providers/traditional pay-TV players. For example, France Telecom seems to be
following cable operators’ business model in combining existing TV packages with its
own package of channels, whereas other operators decided to simply redistribute
existing packages (Vodafone/BSkyB, SFR/Canal Satellite). The former may generate
higher gross margins, but the latter has a stronger marketing impact as BSkyB and
Canal Sat are big names in Pay-TV.
Mobile TV will not only develop using 3G technology, but also other technologies such
as DVB-H, DAB and T-DMB, where mobile operators are likely to gain less of the
market value. A new network would enter the value chain and would require a specific
licence (different frequencies) and specific infrastructures (broadcast network different
from the mobile networks).
DVB-H, DAB or T-DMB licences will be allocated at different times in the various
countries and based on different rules.
– The UK: there are no DVB-H licences available, but BT has taken a proactive
approach to DAB, putting it in a unique position to offer mobile television over and
above what can be offered on 3G networks. Mobile operators are lobbying intensely for
decisions to be made on DVB-H.
– France: DVB-H frequencies cannot be allocated before the switch-off of analogue
TV. For the moment, these frequencies will not be available before 2008 and the
regulator plans to assign them to distributors (including operators) if there are many,
but to content providers (the channels) if there are only a few available.
–
Spain: 700 MHz frequencies should be assigned to DVB-H from 2006.
– Germany: studies are underway to free up and allocate the frequencies for DVB-T
and DVB-H (174-230 MHz and 470-862 MHz). The regulator should take a decision by
mid-2006. The situation is complicated by the fact that Länder are in charge of
allocating frequencies, but do not agree on the choice of technology (DVB-H or DMB).
Thus, national deployment of DVB-H is unlikely before 2007.
– Italy: the regulator has just launched a “request of interest” for 700 MHz
frequencies.
Operators have varying opinions on whether it is necessary to own these new
infrastructures. H3G Italy has bought a small company with a DVB-H licence and
believes that this network is as “core” as its 3G network. The French and UK operators
want to own frequencies capable of providing DVB-H services, but the process is
blocked for the moment, and, in the UK, BT could become the main mobile TV provider
using DAB technologies. Vodafone seems to be adopting a more pragmatic strategy
and would be willing to use another operator’s network (excluding the 3G core
network), as is already the case with its use of The Cloud’s WiFi hotspots in Germany.
75
Telecom operators
National differences
Convergence is likely to result in the entry of fixed-line operators’ into mobile (via WiFi
or MBWA) and mobile operators’ into fixed-line (3G mobile broadband, or even WiFi
and MBWA).
Not all European countries will be affected in the same way:
– convergence should increase competitive pressure on the French and UK mobile
markets, and to a lesser extent in Spain, the Netherlands, Belgium and Switzerland;
– in Germany, fixed-mobile substitution should accelerate, driven by the drop in
mobile rates and home zone offers; the fixed-line is also under attack from mobile in
Portugal, Austria and the UK;
the risk in Italy and Switzerland seems fairly limited.
–
The chart and table below summarise our analysis of the different countries.
Chart 30: Exposure of markets to stiffer competition on the back of fixed-mobile
convergence*
4
Mobile risk
3
France
UK
Spain
The NL
2
Belgium
Italy
Austria
Portugal
Switzerland
1
Germany
0
0
1
2
Fixed risk
3
4
* Risk rating system based on the table below.
Table 15: Analysis of convergence impact in each country
Country
Current competition
on fixed
Risk of mobiles
competing with fixed
Current competition
on mobile
Risk of fixed
competing with mobile
Potential for new
entrants (MBWA)
Germany
France
The UK
Italy
Spain
The Netherlands
Belgium
Switzerland
Austria
Portugal
Rising / still high prices
High
Rising / still high prices
Limited
Limited
High
Limited
Limited
High
Limited
Yes
Limited
Yes
Limited
Yes
Limited
Yes
Limited
Yes
Yes
Rising
Medium
Fierce
Fierce
Medium
Medium
Medium
Medium
High
Medium
Uncertain
Yes
Yes
Limited
Yes
Yes
Yes
Uncertain
No
No
Limited
Yes
Yes
No licence
No
No
Na
Yes
No
No
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Telecom operators
In each country, the level of existing competition within the fixed and mobile markets
will be a key determinant for convergence. Schematically, convergence offers mobile
operators more chances of gaining broadband market share when fixed broadband
prices are high. Conversely, the opportunities for fixed-line operators to enter the
mobile market rise when mobile competition is weak.
The chart below situates each country in terms of the HHI (the sum of market shares
squared of different actors) of the fixed-line market (horizontal axis) and the mobile
market (vertical axis). Countries that are placed high on the chart are theoretically more
susceptible to see their mobile markets decline. Countries more to the right on the chart
are more susceptible to see their fixed-line markets decline.
Chart 31: Fixed-line and mobile markets HHIs in Europe
5 000
Switzerland
4 500
4 000
France
3 500
The NL
Mobile
3 000
2 500
Belgium
Spain
Portugal
Italy
Germany
UK
2 000
1 500
1 000
500
0
0
1 000
2 000
3 000
4 000
5 000
6 000
Fixed
However, other factors must be taken into account, notably:
– the existence of strong fixed-line operators that are not present on the mobile
market and/or strong mobile operators with no presence on fixed-line;
– the regulatory situation, especially concerning MVNOs and the MBWA licences that
have already been allocated, are currently being allocated and frequencies that are not
yet free (see below).
Numerous MBWA licence allocations expected from 2006
Licences for frequencies that are not yet used are available in most countries:
– in the 3.5 GHz band (frequencies for WiMax) in Germany, France, the UK, Austria,
Portugal; currently under review in Italy;
– in the 450 MHz band (frequencies for CDMA-EVDO 450 and F-OFDM) in Austria
and Sweden; studies underway in France and Spain;
– in the 2.5-2.7 GHz band (frequencies for UMTS and likely also for MBWA) in the UK
and Austria; studies underway in France, Germany and Spain;
– the 700 MHz band should be allocated to DVB-H in Spain, Austria, Portugal and
Sweden; studies are underway in France, Italy and Germany.
77
Telecom operators
The most advanced countries (licences already allocated and/or offers already
launched) seem to be Austria (WiMax offer, broadband 3G/HSDPA mobile offers) and
Portugal (broadband mobile CDMA EVDO 450 offers and 3G/HSDPA offers). Germany
is one of the countries in western Europe where fixed-line BWA is most advanced
(Airdata, DBD – even if their offers remain marginal).
2006 should see a lot of movement in France and the UK, as well as in Austria and
Germany. In Italy and Spain, it is likely to be some time before licences are allocated or
reallocated.
Table 16: Current situation on MBWA frequencies
Country
450 MHz
700 MHz
2.5-2.7 GHz
3.5 GHz
Germany
2 licences: T-Mobile and
Dolphin
Studies underway
Initially planned for UMTS, TDD and 3 national: 1 IP wireless, 2 WiMax o.w.
FDD, but not used; studies underway 1 for DBD; other available frequencies:
operators to indicate their interest by 28
February 2006; regional licences should
be allocated by end-2006
France
Studies underway
Studies underway
Studies underway
UK
Allocated; no reallocations planned
DVB-H frequencies not
available
Auctions in 2006: neutral technology Pipex – licence and launch of nomadic
regulation: UMTS or WiMax possible, broadband offer based on WiMax in
2006
or mobile TV; interest shown by
BSkyB, BT, NTL and mobile
operators; rollout in 2007
Italy
No available licences
“Expression of interest”
recently launched
Not specified; 3G mobile operators
have a 5 MHz frequency available to
offer more attractive broadband
services
No licences have been allocated or are
available at this point; “expression of
interest” recently launched; potential
interest from RAI, Mediaset, Fastweb
and Wind
Spain
No available licences,
studies underway
DVB-H should be allocated
from 2006
UMTS expansion bands
Historically, licences have been
allocated to wireless local loop services
Austria
Auctions in February
2006: unattractive
regulatory conditions
DVB-H
MBWA or UMTS
3 national licences allocated: WiMax
Telecom (fixed broadband offer); UPC
and Telekom Austria (not yet used)
Portugal
Zapp (RadioMovel):
1.4Mbit/s broadband
mobile offer,
EUR35/month; some
frequencies still left to
allocate
DVB-H/T to be allocated
UMTS extension bands
Licences to be allocated
Sweden
5 licences allocated
2 national licences allocated to Interloop
Initially an “IMT 2000 expansion
DVB-H licences to be
allocated, number still under band”, but re-allocation proposals are and TeliaSonera; 21 regional licences,
expected from the regulator in Q2 06 o.w. some held by Telenor,
discussion
NextGenTel: fixed-line WiMax offers
expected in 2006
1 national: Iliad
22 regional: H1 06 – strong interest
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Telecom operators
Germany: convergence against fixed line
In Germany, mobile prices and fixed-line broadband prices remain high and the
theoretical risk on the two markets is significant. At this stage, however, we expect
development to be more in favour of the mobile market.
– In voice, we expect the current acceleration in mobile rate cuts, driven by the
MVNOs on E-Plus’ network, to result in an acceleration in fixed-mobile substitution. No
mobile-WiFi alternative hybrid operator appears to be in a position to develop, and
Deutsche Telekom is currently playing the fixed-mobile substitution card (but is also
preparing a mobile-WiFi offer).
In data, competition in ADSL increased in 2005 with increased momentum in
unbundling, and we do not expect BWA technologies to have a significant impact.
–
The table below summarises the position of the various players on the fixed and mobile
markets and on the convergent market. It shows that there are 11 potential players on
the convergent market, which is very high, and that the HHI of the combined market is
2,600, versus 2,800 for the fixed-line and 3,100 for the mobile market.
For the longer-term, there is uncertainty regarding the possible allocation of extra
MBWA licences and/or the arrival of other players (Arcor, Mobicom/Freenet) on the
convergent broadband market.
Table 17: Germany – analysis of market shares
Deutsche Telekom
Vodafone / Arcor
KPN / E-Plus
Telefonica / O2
United Internet / 1&1
Freenet
AOL
Tiscali
Telecom Italia/ Hansenet
Cable & Fiber operators
Other
Number of players
HHI
Fixed*
Mobile*
Convergent
48%
11%
0
0
17%
7%
3%
2%
5%
5%
3%
37%
38%
12%
14%
0
0
0
0
0
0
0
41%
26%
7%
8%
7%
3%
1%
1%
2%
2%
1%
9
2,779
4
3,102
11
2,577
* Market share in value for mobile and in number of broadband subscribers for fixed-line, at end September 2005.
Acceleration in mobile price decreases and in fixed-mobile substitution
Mobile services rates in Germany remain above the European average
(EUR0.23/minute vs EUR0.17/minute on average in Europe) even though they have
started to drop sharply. Fixed-mobile substitution is not very advanced (18% of traffic
comes from mobiles vs 33% on average in Europe).
In 2006, we expect a continuation of the strong decline in mobile prices seen in H2 05,
driven by competition from MVNOs on prepaid and the development of home zone
offers. At the beginning of 2006, even Deutsche Telekom launched home zone offers,
based on its mobile network. A factor which fosters this acceleration is the drop in
mobile termination rates; the difference between retail prices and termination rates in
Germany is already among the highest in Europe, but the drop in termination rates
could further widen the gap.
These trends can already be seen in the acceleration in mobile traffic growth in
Germany, at the expense of fixed-lines, which partly compensates for the drop in
mobile prices. The German managers we interviewed for this report emphasised this
acceleration in fixed-mobile substitution expected in 2006.
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Telecom operators
BWA: not much of a rival for ADSL
ADSL prices have dropped sharply in Germany in 2005, and Deutsche Telekom’s
market share has eroded rapidly. We do not expect an acceleration in this trend in
2006, unless the regulator intervenes regarding naked-DSL this year, which appears
unlikely at the moment.
Several small operators have launched wireless broadband offers to compete with
ADSL, and to an extent with the 3G offers of mobile operators.
– DBD launched a fixed broadband offer in June 2005, called “DSLonair”, based on
WiFi/WiMax and aimed mainly at zones that are not covered by DSL. O2 Germany
announced a partnership with DBD in January 2006 to launch a residential package,
called “SmartDuo”, which includes access to Genion for voice and broadband data at
home via DBD’s WiMax network.
– Airdata sells nomadic broadband solutions on the 2.6 GHz frequency, using the IP
Wireless technology. Coverage is very limited, including Stuttgart (95% indoor
coverage), Behnsberg near Cologne and Berlin’s city centre. Airdata’s offer is
“portable” but not “mobile” as handover is not possible.
The positioning of these operators shows the theoretic competitive potential of WiMax
versus ADSL offers. However, these German operators are still very small and only
have a marginal impact on the market.
Vodafone Germany is present on the nomadic broadband market via a partnership with
the WiFi hotspot operator The Cloud. The Cloud aims to have 10,000 WiFi hotspots in
Germany by 2008-2009 and has already opened 1,000 hotspots since July 2005. This
offer complements Vodafone’s 3G-related data service portfolio and customers are
billed via their mobile phone bill.
Medium-term uncertainties
1) There still remain frequencies to be allocated and the situation remains open.
– 3.5 GHz band: the allocation of more of this spectrum is under consideration and
the regulator has requested “expression of interest” with a 28 February 2006 deadline.
If there is strong competition, then an allocation process will be launched before the
end of 2006. It is however unlikely that a national 3.5 GHz licence is allocated to just
anyone.
– 2.6 GHz band: this spectrum was initially intended as an extension for UMTS.
However, mobile operators did not use these frequencies and therefore a study is
underway to determine who they should be allocated to.
2) Many of the main players on the German market have not yet adopted a strong
stance on fixed-mobile convergence. This is especially true of Arcor, controlled by
Vodafone, which for the moment contents itself with challenging DT on fixed-line and
DSL. Arcor is rumoured to announce a hybrid offer during the 2006 CeBIT summit. The
same is true of Mobilcom/Freenet, which could be in a natural position to play the
convergence market, but the merger between the two entities will not be finalised
before the summer of 2006. For the moment, Freenet has only tested a hybrid offer
with E-Plus.
3) In the longer term (2-3 years according to numerous players), the introduction of
naked-DSL in Germany could make the development of mobile + DSL hybrid offers
even easier. Certain mobile operators and MVNOs are waiting for this.
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Telecom operators
France: convergence against mobile
France is one of the countries where we believe that fixed-mobile convergence will lead
to higher pressure on the profitability of mobile operators. Many factors, including the
presence of determined and credible players and the intentions of the regulator, should
lead to the development of mobile-WiFi and mobile-WiMax hybrid offers. This risk
should become more apparent as from H1 06.
In fixed-line, we believe that competition is already high and prices low and fixedmobile convergence is unlikely to bring added pressure to DSL prices.
The table below summarises the position of the various French players on the fixed and
mobile markets and on the convergent market. It shows that there are ten potential
players on the convergent market, which is slightly above the European average, and that
the combined market’s HHI is 2,700, in line with the European average. The French fixedline HHI is 2,600 and mobile HHI 3,700. As such, this theoretical calculation confirms that
convergence in France will above all intensify competition on the mobile market.
Table 18: France – analysis of market shares
Fixed*
Mobile*
Convergent
France Telecom
SFR
Bouygues Telecom
NeufCegetel
Iliad
Tele2
Telecom Italia
Deutsche Telekom
Cable
Other
46%
0
0
13%
16%
3%
5%
4%
6%
7%
44%
37%
18%
0
0
0
0
0
0
0
45%
21%
11%
5%
7%
1%
2%
2%
3%
3%
Number of players
HHI
8
2,645
3
3,690
10
2,677
A threat on mobile voice?
Among the big European countries, fixed-mobile substitution is most advanced in
France, with 45% of voice traffic on mobiles, versus an average 33% in Europe. Prices
per minute are below the European average (EUR0.14 vs EUR0.17 per minute), but
the difference between retail prices and termination rates is fairly high as termination
rates expected over the next few years are among the lowest in Europe. This may
result in arbitrage opportunities on the market. Moreover, the profitability of the market
remains above the European average (market EBITDA margin of 39% in 2005 versus
an European average of 37%).
Nobody made an offer for the fourth national UMTS licence, which is still available (for
an upfront fee of EUR619m plus tax of 1% of sales). However, MVNOs are beginning
to develop, even if their room for manoeuvre on prices remains limited for the moment,
and there are at least two serious candidates for the fixed-mobile hybrid offers, which
could lead to pressure on mobile margins.
– NeufCegetel is aiming for a “soft launch” of a GPRS/WiFi hybrid service in mid2006. The operator has announced that it is happy with tests already carried out,
especially on handsets. Visibility remains weak for the moment on a larger scale
launch.
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Telecom operators
– Iliad, the largest alternative fixed-line DSL operator (under the Free brand), has
recently acquired a national WiMax licence via the acquisition of Altitude Telecom. For
the moment, it has announced that it will not launch a hybrid WiMax-MVNO mobile
offer until the conditions imposed on MVNOs to access the mobile networks are
revised.
Finally, France Telecom has already announced a wish to launch a hybrid mobile-WiFi
service.
We believe that France is one of the markets where fixed-mobile convergence could
result in the introduction of hybrid offers that are likely to slow down fixed-mobile
substitution and put pressure on mobile prices and profitability.
Data: competition in fixed-line is already high
ADSL prices in France are among the lowest in Europe, which makes efficient
competition from mobile broadband technologies difficult, or even impossible:
– in our opinion, mobile operators are not in a position to provide DSL-type offers
based on their 3G/HSDPA networks for less than EUR20/month;
– MBWA does not allow such prices either (according to our estimates), except for
mobile operators that are already present on the market. Orange and SFR have
submitted WiMax licence requests to the regulator, which is a logical move in our view.
We therefore believe that in France MBWA could only be used to:
–
supplement DSL coverage in zones where this coverage is lower;
– offer a nomadic broadband or even a mobile broadband offer to compete with
mobile operators’ data offers, as well as voice offers in the long term (which in our
opinion is one of Iliad’s aims).
H1 06: regulatory news flow to underline mobile risk
Over the next few months, the French regulator (ARCEP) should announce proposals
and decisions on various cases that involve fixed-mobile convergence:
– WiMax licences: applications were made by 1 February and licences should be
allocated in the months ahead;
– MVNOs: ARCEP should begin revising regulations regarding MVNO access to
mobile networks in around June 2006. The French regulator’s aim is to establish
conditions in France which will allow mobile-WiFi hybrid offers to be launched;
– ARCEP should also provide guidelines on mobile termination rate cuts that it
intends to enforce on mobile operators for the 2007-2009 period.
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Telecom operators
UK: BT is in a unique position
Convergence should contribute to increasing competition on the UK mobile market,
initially via WiFi and then potentially via WiMax. Considering the fragmented fixed and
mobile markets, and BT’s lack of mobile infrastructure, we believe that convergence will
inevitably result in stronger competition on both fixed and mobile.
markets and on the convergent market. It shows that due to BT’s unique position, the
HHI of the combined market appears at just 1,200, a record low in Europe, whereas the
fixed line and mobile indices are already among the lowest in Europe (2,000 and 2,300
for fixed line and mobile respectively).
Table 19: UK – analysis of market shares
Fixed*
Mobile*
Convergent
BT
Vodafone
Telefonica
France Telecom
Deutsche Telekom
H3G
AOL
Tiscali
NTL & Telewest
Other
24%
0
0
9%
0
0
14%
9%
28%
15%
0%
30%
24%
23%
17%
6%
0
0
0
0
10%
17%
14%
17%
10%
3%
6%
4%
12%
6%
Number of players
HHI
6
1,974
5
2,336
10
1,233
Growing risk on mobile…
Mobile prices remain fairly high in the UK, and the difference between retail prices and
termination rates are at the upper end of the European range. Moreover, many factors
will continue to put pressure on UK mobile prices.
“Classic” competition. H3G UK and the MVNOs in general, and mobile operators’
determination to regain market share: Orange UK, T-Mobile UK (Flext offers which
have just been launched with for instance a plan including 900 minutes talk time per
month, or an equivalent mix between minutes and data services, for GBP35);
–
BT is the only incumbent in Europe that does not have a mobile subsidiary. For the
moment, it has shown limited aggressiveness in the mobile market, but we believe that
BT should launch more convincing offers in 2006 thanks to the arrival of hybrid mobileWiFi handsets. The operator has a clear desire to make an ambitious re-entry onto the
mobile market, firstly via WiFi (Fusion offer with broadband and VoIP for the home and
for companies; service also available in BT and The Cloud’s public hotspots). BT is
also looking at new MBWA licence opportunities. We estimate that, with a network
covering 60% of the population, BT can hope to win a 15% market share, a unique
situation in Europe for an operator that is currently only present in fixed-line. BT is also
developing a mobile TV offer using DAB technology and tests have already been
carried out with Virgin Mobile which will market this service.
–
– NTL’s acquisition of Virgin Mobile, which is currently underway, will create an entity
that is theoretically in a position to propose convergent offers. This would mean more
pressure on the mobile market.
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Telecom operators
The Cloud has big ambitions in WiFi. The company, which is an infrastructure provider
specialising in WiFi hotspots, is financed by 3i and has recently reinforced its
management team. The Cloud currently operates more than 5,500 hotspots in the UK
and aims to roll out urban networks in nine cities, including part of London, Edinburgh,
Leeds, Manchester, Birmingham, Nottingham, Oxford and Cambridge. The company
already has partnerships to distribute its services with O2, BT, Skype, Nintendo and
Boingo and has announced that discussions are underway with T-Mobile, NTL,
BSkyB/Easynet and Vonage.
There is potential for further competition via licences that have already been allocated
(3.6-4.2 GHz) or that will be allocated in the UMTS extension bands and the GSM
guard bands (auctions in 2006):
– 2.5-2.7 GHz (UMTS extension bands) are the most attractive bands as they can be
used for both UMTS and WiMax (UK regulation is expected to be technology neutral).
They could be allocated by auction for broadband services and mobile TV during 2006:
Sky, NTL, BT and mobile operators have shown an interest.
– GSM guard bands could be sought after by operators such as Coffee Telecom to
offer local GSM services in static locations.
– The possibility that Pipex’s 3.6 GHz licence could be used to provide mobile
broadband as opposed to fixed-line broadband (the current project: see below) cannot
be excluded. A stand-alone business plan seems very unlikely due to the existing
competitive pressure on the UK mobile market, but Pipex’s licence could be of interest
to an operator that already has a strong position on the fixed-line or mobile market.
In general, it seems likely that mobile operators will try to win some of these licences,
for both defensive reasons (to stop BT, NTL or BSkyB obtaining them) and offensive
reasons (to launch genuine broadband mobile).
… and on fixed line
DSL prices have remained high in the UK. Unbundling is now starting in earnest and
classic competitors (cable operators, alternative ISPs such as C&W and Wanadoo)
have now been joined by two new players: Carphone Warehouse and BSkyB/Easynet.
Mobile operators have not launched DSL-type products for the moment, but
convergence should lead to heightened competition on fixed-line broadband:
– France Telecom has already launched an offer with Orange and Wanadoo UK,
allowing Orange clients to benefit from DSL for less than GBP10/month (compared to
DSL stand-alone offers which start from GBP18/month). France Telecom should push
for further convergent products over the next quarters.
– WiMax should lead to the introduction of other broadband offers. Pipex has a
3.6-4.2 GHz licence, which is an ideal frequency for WiMax. Pipex, which is already
present on the fixed-line broadband market (283k subscribers at end-2005), announced
that its WiMax tests with Airspan have shown that their broadband service works within
a 2km range of the base station (non line of sight). The operator recently announced
that it had reached a bandwidth of 5 Mbit/s and was aiming for 8 Mbit/s by March 2006.
Pipex’s licence is a valuable asset for many UK players. Other small operators such as
Now (PCCW) aim to position themselves on the UK broadband market.
84
Telecom operators
Italy: convergence pushed by the incumbent
The table below summarises the position of the various Italian players on the fixed and
mobile markets and on the convergent market. It shows that there are just seven
potential players on the convergent market and that the combined market’s HHI is still
high at 3,600. This compares to the European average of 2,700 and to the Italian
fixed-line record HHI of 4,900 and mobile HHI of 3,600.
Table 20: Italy – analysis of market shares
Fixed*
Mobile*
Convergent
68%
0
10%
0
4%
11%
7%
44%
38%
13%
5%
0
0
0
54%
22%
12%
3%
2%
5%
3%
5
4,879
4
3,549
7
3,574
Telecom Italia
Vodafone
Wind
H3G
Tiscali
Fastweb
Other
Number of players
HHI
Competition in mobile is pushing TIM towards TI… and Vodafone
towards Fastweb
In theory, the short-term risks on mobile prices are fairly low as prices are about
average, the gap between retail prices and termination rates is below average, and
termination rates are converging with the European average following recently
announced cuts. However, TIM’s response to strong market share losses to Hutchison
3G Italy is aggressive and over the past few months the drop in outgoing mobile prices
has accelerated.
Italy is one of the countries where convergence should take place fairly quickly, due to:
– Telecom Italia’s plans (launch of its Superphone, a fixed-mobile hybrid handset,
expected in June 2006);
–
Wind’s historical position on convergence;
– Fastweb’s interest in the mobile market. Fastweb is already a strong fixed-line
player and has an IP network that is already “convergence ready”.
Mobile operators are not obliged to open their networks to MVNOs until 2011, but
Telecom Italia’s plans could lead pure-play mobile operators to open their networks to
fixed-line operators voluntarily. Negotiations are currently underway between Vodafone
and Fastweb, publicly acknowledged by both parties, to at least provide convergent
offers to businesses.
Fixed-line: minimal impact from convergence?
Fixed-broadband prices remain fairly high and the market is very concentrated.
In theory, there seems to be an opportunity for new entrants on the fixed and nomadic
broadband market in Italy, with mobile operators being the likely potential players.
85
Telecom operators
However, the likelihood of a true increase in fixed-line competition due to convergence
seems very limited at this stage.
– Mobile operators do not have DSL-type offers for the moment and do not seem
likely to market any in the medium term. The mobile operator that appears to be the
most aggressive, and which could compete marginally with fixed broadband offers is
Hutchison 3G Italy.
–
The allocation process for MBWA licences is very slow – indeed even blocked.
MBWA: in theory, a very long process
The allocation process for the new licences for MBWA services is currently very slow in
Italy. The 3.5 GHz spectrum appears to be used by military radar systems. The
regulator has recently requested “expression of interest” from operators. We do not
exclude interest from RAI, Mediaset, Fastweb or even Wind.
3G mobile operators have a licence for a 5 MHz frequency suitable for UMTS that is
not currently in use, which could be used to develop more attractive mobile broadband
offers. Finally, the 3G frequencies of Ipse, the joint venture created by Telefonica to
launch a new 3G operator, have recently been recovered by the government and could
therefore be re-allocated in the future.
86
Telecom operators
Spain: an attractive convergent market
Competition is heating up on the Spanish market, but the structure of both the fixed line
and mobile markets remain sound for the moment. Convergence could, in our opinion,
lead to heightened competition, especially in mobile.
The table below summarises the position of the various Spanish players on the fixed
and mobile markets and on the convergent market. It shows that there are just seven
potential players on the convergent market and that the combined market’s HHI is
3,300, above the European average of 2,700. The Spanish-fixed line HHI is 3,600 and
mobile HHI 3,700.
Table 21: Spain – analysis of market shares
Fixed*
Mobile*
Convergent
Telefonica
Vodafone
France Telecom
Deutsche Telekom
Auna & Ono
Tele2
Other
55%
0
11%
5%
20%
4%
4%
48%
32%
20%
0
0
0
0
51%
18%
16%
2%
8%
2%
2%
Number of players
HHI
6
3,616
3
3,733
7
3,298
An attractive mobile market and candidates for convergence
Mobile services tariffs are above the European average and the current sharp drop in
prices has been accompanied by growing volumes allowing the mobile market to keep
growing rapidly. Telefonica Moviles’ market share has dipped sharply due to pressure
from Vodafone and the incumbent operator has sacrificed record margins to try and
curb the trend.
Moreover, numerous factors have arisen which could lead to a more structurally
competitive mobile market.
Firstly, Xfera, owner of the fourth Spanish UMTS licence, could be taken over by
Hutchison to create a new aggressive 3G player.
Secondly, France Telecom, present through Wanadoo and Amena, aims to implement
its fixed-mobile convergence strategy. Although we do not expect France Telecom to
base its strategy on prices, Amena became more aggressive on the market in Q4 05
than over previous quarters.
Finally, the Spanish regulator should soon impose the opening of mobile networks to
MVNOs following recent approval of its market analysis by the European Commission.
In our opinion, many operators that are already present on the fixed-line market should
be interested in this possibility, especially Tele2 that has already shown interest, but
also BT, with its Fusion offer on the business market, or even Jazztel. We do not
exclude the possibility of cable operators (such as Ono and Auna, with a fixedbroadband market share of 20%) launching a quadruple-play offer via an MVNO, as US
cable operators already do with Sprint.
87
Telecom operators
Up until now, Telefonica has shown little interest in pushing for fixed-mobile
convergence, and have still not bought back minorities from its subsidiary Telefonica
Moviles. However, we would expect the group to react quickly and pragmatically if
demand arises, as it did with its triple-play offer on the fixed-line market. Contrary to
other European incumbents, Telefonica was the first player on its domestic market to
launch a TV offer via ADSL.
Fixed-line: an attractive market for a pure-play mobile player?
Competition on fixed-line broadband in Spain has sharpened recently with the arrival of
cable operators’ and unbundlers’ double-play and then triple-play offers, notably France
Telecom/Wanadoo. Nonetheless, fixed-line operators’ business models are still fragile
and Telefonica has responded quickly with convincing results in terms of market share.
It was the first to launch a TV offer via ADSL (Imagenio), which had attracted 200,000
subscribers by end-2005. Broadband rates have dropped, but remain high.
This presents a fairly attractive opportunity for a pure-play mobile operator such as
Vodafone. In coming quarters, this operator could, as has already been done in other
countries, implement a more aggressive strategy to attack fixed-line voice (launch of
home zone offers?) and data (with the arrival of HSDPA). However, it is an offensive
and defensive opportunity that must be taken quickly before quadruple-play offers from
France Telecom/Amena, or even Telefonica arrive on the market.
88
Telecom operators
The Netherlands: toward a new wave of competition in
the mobile market?
The table below summarises the positions of the various Dutch players on the fixed and
mobile markets, and on the convergent market. It shows that there are ten potential
players on the convergent market, which is above the European average, and that the
combined market’s HHI is 2,200, below the European average of 2,700. The Dutch fixedline HHI is 1,900 and the mobile HHI is 3,100.
Table 22: The Netherlands – analysis of market shares
Fixed*
Mobile*
Convergent
KPN
Vodafone
Deutsche Telekom
France Telecom
Versatel
Tiscali
UPC
Essent
Other cable
Other
36%
0
0
12%
6%
6%
13%
12%
6%
9%
42%
31%
18%
10%
0
0
0
0
0
0
39%
17%
10%
11%
3%
2%
6%
5%
3%
4%
Number of players
HHI
8
1,917
4
3,102
10
2,166
Convergence versus mobile?
The broadband fixed-line market in the Netherlands is highly competitive and
fragmented, with KPN, which controls only slightly more than a third of the market, and
a host of powerful cable operators and unbundlers. So there is little risk that any new
players will enter the fixed-line market.
The mobile market was fiercely competitive for years, but KPN’s acquisition of Telfort
has brought a measure of calm to the field.
Given the relative imbalance between the fixed and mobile markets, the convergence
of the two will quite probably lead to hybrid offers, meaning that fixed-line operators will
enter the mobile market, as in France.
Everything is in place for this to occur, in our opinion:
–
KPN has already started pushing convergent offers to the business segment;
– France Telecom, operating through Orange and Wanadoo, is also likely to develop
convergent services, as it plans to do elsewhere;
– there are powerful fixed-line operators that are well-positioned to grab a piece of the
mobile market, including Versatel and cable operators;
– and the conditions for MVNOs access to the mobile networks look to be pretty
favourable.
89
Telecom operators
Belgium: toward (somewhat) more competition
The table below summarises the positions of the various Belgian players on the fixed and
mobile markets, and on the convergent market. It shows that there are only seven
potential players on the convergent market, and that the combined market’s HHI is 3,250,
above the European average of 2,700. The Belgian fixed-line HHI is 3,850 and the mobile
HHI is 4,000 – well above the levels seen in the other European countries.
Table 23: Belgium – analysis of market shares
Belgacom
France Telecom
KPN
Telenet
Versatel
Scarlet
Other
Number of players
HHI
Fixed*
52%
0%
0
33%
5%
8%
3%
Mobile*
51%
35%
14%
0
0
0
0
Convergent
51%
20%
8%
14%
2%
3%
1%
6
3,849
3
4,020
7
3,255
The Belgian broadband fixed-line market is a duopoly dominated by Belgacom at the
national level, and by cable operator Telenet which has a broadband market share of
close to 60% in its region (Flanders). The other fixed-line operators remain small and
prices are still fairly high.
Competition intensified in the mobile market in 2005, as Proximus (Belgacom) stepped
up efforts to defend its market share amidst rapid gains by Mobistar (France Telecom)
and Base (KPN), which benefited from its aggressive unlimited packages. Belgacom’s
market share has eroded, but is still huge compared with that of incumbent operators
elsewhere in Europe.
Convergence could heighten competition in both the fixed and mobile markets:
– Mobistar has already begun investing in ADSL, offering a package that bundles
fixed-line and mobile services to the business segment. This could well increase
competition in the fixed-line market. Like the other subsidiaries of France Telecom,
Mobistar will undoubtedly go further and offer hybrid mobile-WiFi packages.
– Scarlet launched an offer for business customers combining fixed-line, ADSL and
mobile (MVNO on Base’s network).
– Versatel/Tele2 and Telenet are ideally positioned to offer a hybrid mobile-WiFi
package to the residential and business markets, as they can leverage their fixed-line
subscriber bases and the mobile operators are open to MVNO agreements.
This is confirmed by the recent agreement announced between Telenet and Mobistar.
The latter sees the partnership as an opportunity to strengthen its competitive position,
especially in the northern part of the country. The agreement also provides for Telenet
to make its WiFi network available, which according to the companies, presents
“interesting convergence opportunities in the context of the mobile data activities
developed by Mobistar,” who will hence become “the first operator to offer
multi-standard mobile broadband access throughout the country.”
Given the number of players in the market (seven, as opposed to the European
average of nine), the convergent market in Belgium will likely remain less competitive
than it is on average across Europe.
90
Telecom operators
Switzerland: slow reconfiguration
The table below summarises the position of the various Swiss players on the fixed and
mobile markets, and on the convergent market. It shows that there are only seven
potential players on the convergent market, and that the combined market’s HHI is near
3,800, well above the European average of 2,700. The Swiss fixed-line HHI is 3,370 and
mobile HHI is 4,600 - well above the levels seen in the other European countries.
Table 24: Switzerland – analysis of market shares
Swisscom
France Telecom/Orange
TDC/Sunrise
Cablecom
Tele2
Number of players
HHI
Fixed*
Mobile*
Convergent
49%
0
18%
24%
9%
62%
19%
19%
0
0
57%
11%
18%
10%
4%
4
3,368
3
4,586
5
3,774
*Market share in value for mobile and in number of broadband subscribers for fixed-line, at end September 2005.
A risk in the mobile market, more theoretical than real
In September 2005, prepaid mobile offers were successfully launched by distributors
Migros and Coop, which are resellers for Swisscom Mobile and Orange respectively.
In terms of fixed-mobile convergence, Swisscom appears to be taking a conservative
stance on convergence, given the risks of cannibalisation, but Sunrise and Orange
Switzerland are being more aggressive. Orange, for example, has already launched
several convergent offers, mainly in the business segment (single number with VoIP
and routing VPN, closed user groups).
More generally, though, the Swiss mobile market is highly concentrated, which means
there may be great potential for fixed-line operators who launch convergent fixedmobile services.
Cable operator Cablecom, which controls roughly a quarter of the broadband fixed-line
market, looks to be well-positioned to seize such an opportunity. Before its recent
acquisition (in autumn 2005), Cablecom had clearly expressed its intention of launching
quadruple-play packages in Switzerland, one of the options being to sign an MVNO
agreement with a Swiss mobile operator. With the advent of hybrid mobile-WiFi
handsets in 2006, an agreement such as this could intensify competitive pressure in
the Swiss mobile market in the coming quarters. Cablecom has recently begun to
market a mobile service in partnership with Sunrise.
Future change in the Swiss market still remains uncertain:
Sunrise, a TDC subsidiary operating in both the fixed and mobile markets in
Switzerland, will likely figure among the assets to be sold by TDC’s new shareholders,
a consortium of private equity firms. A possible avenue for Cablecom would hence be
to take over Sunrise, which would enable the company to offer its quadruple-play
package without worsening competition in the Swiss mobile market.
–
– However, visibility on Cablecom’s future plans is now vastly limited, following the
acquisition.
The Swiss telecoms regulator is expected to award three nationwide 3.5 GHz licenses
by year end (WiMax). And following tests currently underway on DVB-H, national or
regional DVB-H licenses could also be offered.
91
Telecom operators
Austria: fixed-mobile substitution also expected on data
The Austrian market is very advanced in terms of fixed-mobile substitution on voice
(already more than 50% of voice traffic is on mobile networks) and data is set to follow
the same trend. This favours mobile operators, especially as the market was already
very competitive; downside appears limited on mobile (with little chance of the arrival of
a new operator) and the situation is unfavourable for fixed-line operators, especially the
incumbent.
Generalisation of DSL-type offers on mobile
3G mobile operators are very attractive with true DSL-type offers for PCs equipped with
PCMCIA data cards. They have attracted hundreds of thousands of subscribers in just
one year, i.e. a market share of more than 25% on broadband net adds (fixed-line and
mobile excluding mobile handsets) in 2005. They are clearly competing aggressively
with DSL: these services can be integrated into PCs at the time of sale, and the
operators advertise these offers on TV.
Under these conditions, HSDPA should spread very quickly in Austria (mobilkom
Austria has already launched a commercial HSDPA offer; T-Mobile has also
announced a quick roll-out). HSDPA allows for speeds more capable of competing with
DSL (speeds of up to 3.6 Mbit/s expected) and greatly improves spectral efficiency.
New 450 MHz licences will soon come up for auction. Considering the capacity
required by mobile operators for their DSL-type offers, they are interested in this
potential additional network capacity. However, regulatory conditions are not
favourable, especially for mobile operators, who are only allowed to bid for one licence
(i.e. only one 1.25 MHz frequency). Moreover, the regulator has imposed coverage
(even partial) of at least 440 towns.
Overall, we believe that mobile and wireless operators could capture up to 40% of
Austria’s broadband market by 2010 and 60% by 2015.
Little room for new entrants
We do not exclude the possibility of a new entrant making a bid in the 450 MHz
auction. However, it seems very unlikely that a new entrant would have a sufficiently
attractive business case to win such an auction: 1) the existing operators will be able to
reap synergies that the new entrant cannot realise, 2) the market is already extremely
competitive and 3) finding available sites for base stations would be difficult and costly.
Excluding mobile operators, the only player on the wireless broadband market is
WiMax Telecom. This operator provides a fixed line offer, which is currently only
broadband, but also wants to develop a VoIP offer. Its products are at the moment
aimed at zones that are not covered by DSL or cable (less than 5% of the country).
The other 3.5 GHz licences are held by the cable operator UPC and by Telekom
Austria, but they are not commercially exploited. UPC could be interested in WiMax in
order to provide a service beyond its cable franchise zone, but it seems to be too soon
for a commercial roll out due to the cost of the terminals. UPC has recently acquired
Austria’s largest unbundler, making it a serious candidate for launching convergent
offers.
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Telecom operators
Scandinavia: toward one convergent market
Consolidation in Scandinavia
The recent acquisitions by Telenor in Sweden and Denmark and by TeliaSonera in
Norway underscore that a single market is gradually emerging in Scandinavia.
A noteworthy distinction here is that several integrated fixed/mobile players operate in
each country.
– Since last summer, Telenor has acquired two broadband access providers,
Cybercity in Denmark and B2 in Sweden, and Vodafone’s mobile activity in Sweden. In
February of this year, Telenor followed up by consolidating Glocalnet (Swedish
broadband operator), in which it formerly owned a 36.6% stake. Telenor now operates
fixed and mobile networks in Denmark, Sweden and Norway. In Sweden and Denmark,
Telenor can hence offer convergent services unfettered by the regulatory constraints
governing the incumbent carriers in these two markets.
– TeliaSonera acquired Norway’s biggest MVNO (Chess/Sense, with a market share
of 8%) in 2005 to beef up its mobile division in that country. TeliaSonera now operates
fixed and mobile networks in Sweden and Denmark and a mobile network in Norway.
We think the group is seeking to enter the broadband market in Norway, but acquisition
opportunities are scarce at the moment. The two biggest alternative operators are
Catch, who was bought last summer by a fund (Ventelo), and NextGenTel, 42% of
whose shareholding is comprised of private equity. We think that NextGenTel could
ultimately be a takeover target for TeliaSonera.
markets, and on the convergent market. As we can see, there are 11 potential players on
the Scandinavian convergent market. The combined market’s HHI is 2,100, well below
the European average of 2,700, which makes sense since the HHI readings in the fixedline and mobile markets are among the lowest in Europe, at respectively 1,800 and
2,800.
Table 25 : Scandinavia – analysis of market shares
Norway, Denmark, Sweden
Telenor
TeliaSonera
Tele2
TDC
H3G
Nextgentel
Catch
UPC
ComHem
Spray
Others
Number of players
HHI
Fixed
Mobile
Convergent
28%
21%
2%
18%
0
1%
1%
3%
4%
2%
15%
29%
37%
19%
12%
2%
0
0
0
0
0
0
29%
30%
12%
15%
1%
1%
1%
1%
2%
1%
7%
10
1,824
5
2,754
11
2,144
From convergence in the business segment toward convergence of
access networks
Telenor’s immediate strategy is to offer convergent services in the business segment.
The group describes the Swedish acquisitions as part of its continued focus on
corporate clients in the Nordic markets, most of which are headquartered in Sweden.
TeliaSonera already provides convergent offers in Sweden – packages with unlimited
calls between fixed-line and mobile, via traditional telephony, not VoIP – even though
the regulator imposes certain constraints.
93
Telecom operators
Both Telenor and TeliaSonera are currently working to define the portfolio of offers,
fixed and mobile, that will be migrated to their IP networks. Telenor has presented
plans for an all IP network for its fixed and mobile services in Norway in 2010. Looking
further ahead, the company also intends to create a single IP network across the three
Scandinavian countries.
TeliaSonera recently announced that it has completed trial runs of an IP mobile service
using UMA (Unlicenced Mobile Access) technology, which will enable the company to
offer hybrid features such as mobile-WiFi packages. The operator plans to begin
offering UMA-based services in 2006 on the Danish market.
Integrated operators emerge as the winners
Given the disproportionate market shares commanded by integrated operators vs those
present in just one segment, we think it will be extremely difficult, if not downright
impossible, for the latter to threaten the integrated operators in any meaningful way.
TeliaSonera, Telenor, TDC and Tele2 will be bothered little by operators in the fixedcommunications market. Some of the independent operators may be acquired by their
integrated peers, the natural consolidators of the Scandinavian market.
Little risk of new licences being awarded to newcomers
We think there is little risk of any new licences being awarded to aggressive new
entrants in Norway and Sweden:
– In Norway, WiMax licences are held by existing operators; Telenor and NextGenTel
each have a 3.5 GHz licence and plan to deploy a (fixed) WiMax offer by year end.
– Sweden now has a “technology neutral” approach to its licences. The UMTS
extension band frequencies should be allocated without the obligation of using UMTS
technology – they can for example be used with WiMax technologies. However, the
Swedish market is not very open to new entrants. Competition remains fierce on both
3G and WiFi technologies, and licences, which are allocated through beauty contests,
come with strict coverage requirements that lead to very high fixed-network costs. For
instance, a 450 MHz licence awarded in 2005 requires the holder to cover 80% of the
population in each region.
94
Telecom operators
Arthur D. Little presentation
Founded in 1886 in Boston by a pioneer chemist and MIT professor, Arthur D. Little
was the world’s first professional management consulting firm. Ever since its creation, it
has proved able to evolve and adapt with a constant focus on answering our clients’
needs and challenges and creating true partnerships with business leaders.
Together with its partners Altran Technologies and Cambridge Consultants Ltd., the
firm has over 17.000 professionals at your disposal in more than 30 offices world-wide.
Arthur D. Little’s global leadership in management consulting is embodied both by its
size and global presence, and by its innovation methodology, demonstrated by
numerous standard-setting publications.
Arthur D. Little completes over 2000 projects every year serving the world’s leading
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and a well established know-how which is highly valued by our clients.
The pioneer spirit of its founder is still a strong feature of Arthur D. Little today. Arthur
D. Little people bring curiosity, creativity, integrity and analytical rigor to every job,
which means fast and dramatic performance improvements. Our constant objective is
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Arthur D. Little teams work both with major multinational groups and smaller
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projects for companies that have been our clients for over three years.
With more than 500 professionals, the TIME practice (Telecommunications,
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their most sensitive projects. The practice has gained a true and precise knowledge of
the sector and of its main players.
For further information consult the Arthur D. Little website at www.adl.com.
95
Telecom operators
Exane presentation
Exane was founded in 1990. It is the number one French broker and among the top
European independents. The company specialises in research and broking both in
equities under the trade name of Exane BNP Paribas and in equity derivatives and
structured products under the name of Exane. An asset management subsidiary,
Exane SAM, was created in 2001.
Exane works primarily with institutional clients worldwide (pension funds, fund
managers for banks and insurers and hedge funds), and markets its derivatives
products to a broader pool of clients comprising private asset managers and
investment advisors.
Exane’s expertise in research, sales and execution allows it to provide clients with
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Exane BNP Paribas’s equity research team covers nearly 400 European companies,
200 of which are French.
Our research regularly wins coveted financial awards. Exane BNP Paribas was voted
best French research team in the Extel poll in June 2005. We were also voted best
research team and best in French stocks at the Grands Prix de l’Analyse Financière,
organised by the French business journal Agefi in December 2005.
In April 2004, Exane and BNP Paribas concluded a three-part agreement:
– operational: BNP Paribas granted Exane sole control over equity broking in Europe.
This business is carried out under the trade name Exane BNP Paribas.
– shareholding: BNP Paribas took a 40% stake in Verner Investissements, a finance
company made up of Exane’s top managers and experts. This stake is expected to
climb to 50%, although the partners will retain 60% of the voting rights and hence
control.
– financial: BNP Paribas has contributed financial assets and balance sheet support,
which will underpin the expansion of Exane’s business lines.
Exane’s 750-strong workforce operates from offices in Paris, London, Frankfurt,
Geneva, Milan, New York, Singapore and Zurich.
For further information, log on to our web site at www.exane.com
96
Telecom operators
Rating definitions
Stock Rating (vs Sector)
Outperform: The stock is expected to outperform the industry large-cap coverage universe over a 12-month investment horizon.
Neutral: The stock is expected to perform in line with the industry large-cap coverage universe over a 12-month investment horizon.
Underperform: The stock is expected to underperform the industry large-cap coverage universe over a 12-month investment horizon.
Sector Rating (vs Market)
Outperform: The sector is expected to outperform the DJ STOXX50 over a 12-month investment horizon.
Neutral: The sector is expected to perform in line with the DJ STOXX50 over a 12-month investment horizon.
Underperform: The sector is expected to underperform the DJ STOXX50 over a 12-month investment horizon.
Key ideas
BUY: The stock is expected to deliver an absolute return in excess of 30% over the next two years. Exane BNP Paribas’ Key Ideas Buy List comprises selected
stocks that meet this criterion.
Distribution of Exane BNP Paribas’ equity recommendations
As at 07/11/2005 Exane BNP Paribas covered 352 stocks. The stocks that, for regulatory reasons, are not accorded a rating by Exane BNP Paribas are excluded from
these statistics. For regulatory reasons, our ratings of Outperform, Neutral and Underperform correspond respectively to Buy, Hold and Sell; the underlying signification
is, however, different as our ratings are relative to the sector.
34% of stocks covered by Exane BNP Paribas were rated Outperform. During the last 12 months, Exane acted as distributor for BNP Paribas on the 1% of stocks with
this rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 12% of the companies
accorded this rating*.
49% of stocks covered by Exane BNP Paribas were rated Neutral. During the last 12 months, Exane acted as distributor for BNP Paribas on the 4% of stocks with this
rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 9% of the companies
accorded this rating*.
17% of stocks covered by Exane BNP Paribas were rated Underperform. During the last 12 months, Exane acted as distributor for BNP Paribas on the 0% of stocks
with this rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 7% of the
companies accorded this rating*.
* Exane is independent from BNP Paribas. Nevertheless, in order to maintain absolute transparency, we include in this category transactions carried out by BNP
Paribas independently from Exane. For the purpose of clarity, we have excluded fixed income transactions carried out by BNP Paribas.
97
Telecom operators
Commitment of transparency on potential conflicts of interest
Complete disclosures, please see www.exane.com/compliance
Exane
Pursuant to Directive 2003/125/CE and NASD Rule 2711(h)
Unless specified, Exane is unaware of significant conflicts of interest with companies mentioned in this report.
Belgacom
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Bouygues
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
BT Group
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
Cable & Wireless
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
Deutsche Telekom
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
Eutelsat Communications
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
Fastweb
Equity stake
US Law French Law
NO
NO
France Telecom
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
YES
NO
NO
NO
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
Iliad
Equity stake
US Law French Law
NO
NO
KPN
Equity stake
US Law French Law
NO
NO
Maroc Telecom
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
Mobistar
Equity stake
US Law French Law
NO
NO
98
Telecom operators
O2
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Disclosure
to company
Additional
material conflicts
NO
NO
Portugal Telecom
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
SES Global
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
TDC
Equity stake
US Law French Law
NO
NO
Tele2 B
Equity stake
US Law French Law
NO
NO
Telecom Italia
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
Telefonica Moviles
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
Telefónica
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
Telekom Austria
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
Telenor
Equity stake
US Law French Law
NO
NO
TeliaSonera
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
Tiscali
Equity stake
US Law French Law
NO
NO
Vodafone Group
Investment
banking
Distributor
Liquidity
provider
Corporate
links
Analyst’s
personal interest
NO
NO
NO
NO
NO
Equity stake
US Law French Law
NO
NO
Source: Exane
See www.exane.com/disclosureequitiesuk for details
99
Telecom operators
BNP Paribas
Exane is independent of BNP Paribas (BNPP) and the agreement between the two companies is structured to guarantee the independence of
Exane's research, published under the brandname « Exane BNP Paribas ». Nevertheless, to respect a principle of transparency, we
separately identify potential conflicts of interest with BNPP regarding the company/(ies) covered by this research document.
Bouygues
As of 31/01/2006 BNPP owns 2.0% of BOUYGUES
An employee of BNP Paribas and/or its affiliate(s) serves on the board of directors of BOUYGUES (Update on 12/31/2004)
Cable & Wireless
As of 31/01/2006 BNPP owns 1.2% of CABLE & WIRELESS PLC
Eutelsat Communications
BNP acted as joint-lead manager for the IPO (10/2005 until 12/2005)
Fastweb
As of 31/01/2006 BNPP owns 2.0% of FASTWEB SPA
France Telecom
BNP acted as joint bookrunner for the accelerated placement of France Telecom shares to institutional investors (06/2005)
BNP acted as advisor to France Telecom for the acquisition of Auna (07/2005)
BNP acted as joint global coordinator and joint bookrunner for the share capital increase through free allotment of warrants ("BSA") (09/2005)
An employee of BNP Paribas and/or its affiliate(s) serves on the board of directors of FRANCE TELECOM (Update on 12/31/2004)
Source: BNP Paribas
Arthur D Little
« This report is authored by Exane and draws upon research and analysis of both Exane and Arthur D Little. The conclusions are the results
of the aggregation of public materials and information provided in the course of recent interviews with a sample of industry players. At no point
in the development of this report was access given to the research team to client confidential information held by Arthur D Little as a result of
our recent and ongoing consulting work in this area. Use of this report by any third party for whatever purpose should not, and does not,
absolve such third party from using due diligence in verifying the report’s contents.
Any use which a third party makes of this document, or any reliance on it, or decisions to be made based on it, are the responsibility of such
third party. Arthur D. Little, its affiliates and representatives accept no duty of care or liability of any kind whatsoever to any such third party,
and no responsibility for damages, if any, suffered by any third party as a result of decisions made, or not made, or actions taken, or not taken,
based on this document.
Arthur D. Little does not make investment recommendations, in this report or otherwise, and nothing in this report should be interpreted as an
opinion by Arthur D. Little either on market forecasts or on the prospects of specific companies. »
100
Telecom operators
This page has been left intentionally blank.
101
Telecom operators
This page has been left intentionally blank.
102
Important notice: Please refer to our complete disclosure notice available on www.exane.com/compliance
This research is produced by EXANE SA and / or EXANE LTD (“EXANE”) on behalf of themselves. EXANE SA is regulated by the "Autorité des
Marchés Financiers" (AMF) and EXANE LTD is regulated by the "Financial Services Authority" (FSA). In accordance with the requirements of
FSA COB 7.16.7R and associated guidances “Exane’s policy for managing conflicts of interest in relation to investment research" is published on
Exane’s web site (www.exane.com). Exane also follows the guidelines described in the code of conduct of the AFEI (Association Francaise des
Entreprises d'Investissement) on "managing conflicts of interest in the field of investment research". This code of conduct is available on Exane’s
web site (www.exane.com).
This research is solely for the private information of the recipients. All information contained in this research report has been compiled from
sources believed to be reliable. However, no representation or warranty, express or implied, is made with respect to the completeness or
accuracy of its contents, and it is not to be relied upon as such. Opinions contained in this research report represent Exane's current opinions on
the date of the report only. Exane is not soliciting an action based upon it, and under no circumstances is it to be used or considered as an offer
to sell, or a solicitation of any offer to buy.
While Exane endeavours to update its research reports from time to time, there may be legal and/or other reasons why Exane cannot do so and,
accordingly, Exane disclaims any obligation to do so.
This report is provided solely for the information of professional investors who are expected to make their own investment decisions without
undue reliance on this report and Exane accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or
its contents.
This report may not be reproduced, distributed or published by any recipient for any purpose. Any United States person wishing to obtain further
information or to effect a transaction in any security discussed in this report should do so only through Exane Inc., which has distributed this
report in the United States and, subject to the above, accepts responsibility for its contents.
BNP PARIBAS has acquired an interest in VERNER INVESTISSEMENTS the parent company of EXANE. VERNER INVESTISSEMENTS is
controlled by the management of EXANE. BNP PARIBAS’s voting rights as a shareholder of VERNER INVESTISSEMENTS will be limited to
40% of overall voting rights of VERNER INVESTISSEMENTS.
3
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Exane research is also available on the website
(www.exanebnpparibas-equities.com) as well as on
Bloomberg (EXAA), First Call and Multex.

Telecom operators - Arthur D. Little

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