From encouraging competition to promoting investment: new direction for regulatory policies. Matt Yardley (Partner, UK) Analysys Mason

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2 From encouraging competition to promoting investment: new direction for regulatory policies Matt Yardley (Partner, UK) Analysys Mason

3 The situation 15 years ago Exponential traffic growth, 30-50% CAGR Concerns about funding broadband nationally Altnets worried about wholesale broadband access Yet in the end plenty of investment occurred, e.g. in LLU

4 What s different now? 1. The growth driver has moved from adoption to usage 2. Usage patterns are shifting towards rich media 3. Bundling is increasingly important (TV especially) 4. Access network upgrades cost significantly more Policy actions can be geared towards these points

5 1. The growth driver has moved from adoption to usage Residential fixed broadband connections as a % of total premises Policy actions Adoption is still not universal, so introduce demand stimulation schemes to prevent certain at risk user groups from being left behind Source: Analysys Mason, 2015

6 2. Usage patterns are shifting towards rich media TV & video drove historic growth and will continue to do so in future Source: Analysys Mason forecasts for Ofcom, 2008 Source: Analysys Mason for Ofcom, 2014 Policy actions Ensure pricing of wholesale products scales well with demand, and encourage key enabling features like multicast Adopt a watching brief on OTT services and the power of platforms

7 3. Bundling is increasingly important (TV especially) Take-up of bundled services in the UK Policy actions May need to assess potential dominance issues in converging broadband and TV markets Determine if QoS issues will be resolved by the market Review longer-term implications of linear TV distribution over broadband Source: Ofcom, Communications Market Report, 2014

8 4. Access network upgrades cost significantly more Additional policy actions Allow incumbents to make incremental upgrades (e.g. vectoring) if the competitive implications are manageable Joined-up industry approach to develop a long-term copper switch-off plan? Source: Analysys Mason

9 4. Access network upgrades cost significantly more (cont.) Observations: Large variance in approach by market Initiatives which have been in operation for several years offer the opportunity for learning best practice for markets that are lagging behind Source: Analysys Mason

10 Infrastructure- or service-based competition? The geographical dimension makes this more complex than in the first generation broadband case The fundamental economics of passive and active options (duct/pole, dark fibre, VULA, bitstream) vary strongly with location / demand density Pricing passives low destroys incentives for incumbents whilst bitstream may be too constrained for altnets

11 Regulatory policy is mainly about Not deterring or delaying commercial investment Allowing the market to discover the price at which consumers will buy ultrafast broadband Ensuring availability of suitable resources (e.g. spectrum) Encouraging rational behaviour where appropriate (e.g. RAN / site sharing, access to bottleneck infrastructure) but it is not sufficient to meet all policy makers objectives

12 National broadband plans can help address the gap Most markets will require Government support for uneconomic areas Funding can be direct subsidy, via a new USO or other mechanism However, policy makers should be cautious about policies that stimulate sub-scale market entry Incumbents are well placed to deliver rural coverage not a priori a major concern if access conditions are effective Market in the EU and beyond are all at very different stages of NBP development

13 We forecast the UK to lead the large EU markets based on BT and Government investment BDUK have implemented a grant-based scheme to enable superfast broadband to reach 95% of premises Policy for the final 5% is still to be determined Government contribution is expected to be in the range billion (approx.) BT s functionally separate Openreach is delivering the solution Source: Analysys Mason, 2015

14 Pre-requisites for a Gigaband Europe Demand continues to grow (bandwidth and willingness to pay) There are strong incentives for operators to invest (particularly outside the cable footprint) Operators and investors have the confidence that the policy environment won t change radically (for the worst)

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