Trends in Telecommunications: Implications for Regulation 20 September 2017 Mark DJ Williams, Managing Director, BRG mark.williams@thinkbrg.com +44 (0) 7825 862 132 Trends in Telecommunications Regulatory Implications 20 September 2017 1
Introduction 01 Trends in Telecommunications Regulatory Implications 20 September 2017 2
Rapid sector evolution is changing the way it is (should be) regulated Sector evolution Financial performance Technology change Regulatory implications Changing public expectations Changing market definitions Positive vs negative regulatory objectives 3
Industry trends 02 Trends in Telecommunications Regulatory Implications 20 September 2017 4
Globally, performance varies by region and product Source: McKinsey 2016 5
Emerging markets are small but growing fast Source: McKinsey 2016 6
Recent recovery in European telecoms markets Reported mobile revenue growth Top 5 European markets Source: Enders 2017 7
UK sector revenues 45 40 40.6 39.5 UK telecoms revenue 39.4 38.2 37.3 37.5 5y CAGR -1.5% 35 10.1 8.9 8.3 7.5 6.5 6.2-9.2% 30 Revenue ( bn) 25 20 15 12.6 12.5 12.5 12.6 13 13.5 +1.4% 10 15.1 15.4 15.9 15.5 15.2 15.2 +0.1% 5 0 2.7 2.8 2.7 2.7 2.6 2.6 2010 2011 2012 2013 2014 2015-1.1% Corporate data services Retail mobile Retail fixed Wholesale services Source: OFCOM 8
Who is winning? Big = profitable 9
Revenue does not tell the whole story Telecoms operator share performance by region Source: EY 10
A broader view of sector performance Total market cap 1000 900 830 885 847 898 800 US$billion 700 600 500 400 300 564 350 323 597 200 100 98 161 84 104 0 Telecoms operators Network vendors Terminals vendors Internet companies IT vendors Media companies 2004 2014 Source: Altran 11
Industry response: consolidation European MNO consolidation Source: Enders 2017 12
Industry response: retail bundling Take up of bundled services in the UK Source: OFCOM 13
Industry response: new lines of business Operator confidence in digital service revenue development Q: which digital services represent the best opportunities for incremental revenue growth? Digitial indentity services 6 Health services 9 Security services 11 Smart City 11 Unified communications 14 Smart home 17 Enterprise mobility 23 Infotainment services 26 Mobile financial services 29 Advertising marketing, e-commerce 36 Enterprise cloud TV and video service 51 54 Source: EY 0 10 20 30 40 50 60 14
Key trends: summary Financial performance Revenue, margin, capex Market cap Distribution of performance within the industry Convergence Technology Business models/market structure Retail strategies Industry consolidation Within the telecoms sector Within the broader media/communications sector Business models Sharing Outsourcing Partnering 15
Regulatory implications 03 Trends in Telecommunications Regulatory Implications 20 September 2017 16
Regulatory implications Changes in public expectations Market definition: product, geography Positive vs negative regulatory objectives 17
Public expectations: a moving target 20 18 16 14 12 10 Mbit/s 8 6 4 2 0 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Emerging - Mobile average connection speed Developed - Mobile average connection speed Emerging - Fixed Average Connection Speed Developed - Fixed Average Connection Speed Source: GSMA, Akamai State of the Internet Notes: Population weighted averages for 15 large developed and emerging markets 18
Public expectations: benchmarking Ultrafast broadband (at least 100Mbps) household penetration, 2016 Source: Europe's Digital Progress Report 2017 Connectivity 19
Market definitions: geographical Source: Europe's Digital Progress Report 2017 Connectivity 20
Mark definitions: product Total outgoing voice call volumes Source: Ofcom 2016 21
Positive vs negative regulatory objectives: co-investment Most definitions: co-operation between players in a market to develop new network infrastructure in order to reduce capital costs and to limit commercial risk. Recent focus on fixed networks. Commercial and policy priority of getting more investment into superfast broadband networks. Extension of well-established model of network sharing in the mobile industry. 22
Examples of co-investment Fixed Spain Portugal Italy France UK(?) Mobile 2001-2014: 109 network sharing deals globally. Peaked in 2009: 22 deals globally, 17 of which were passive sharing arrangements. 2010-2014 - average of 17 deals per year globally. Non-telecoms Microelectronics and Computer Technology Corporation New United Motor Manufacturing Inc. (NUMMI) Electric Power Research Institute United States v. Minnesota Mining and Manufacturing Co. et al DX Imaging 23
Potential regulatory concerns Coordinated effects Information sharing effects, cost commonality These make it easier to operationalize the monitor-detect-punish mechanisms for achieving coordination in the downstream market. Unilateral effects concerns A co-investment structure can mimic the effects of an upstream merger Cost-sharing rules could soften unilateral expansion incentives Co-investment could create joint dominance or enhance single-firm dominance (e.g. where one party is a dominant firm). Sharing of existing assets may forestall competitive facilities-based entry. Foreclosure and leveraging concerns Some commercial access offers may by object or effect lock-in potential network competitors and thereby foreclose entry Restrictive entry rules for potential subsequent co-investment partners could effectively foreclose future market entry 24
Potential benefits Efficiency gains associated with new networks Perceived societal benefit from investment in a new platform for innovation Reduction in variable costs Efficiency gains recognised in EC merger review, but even more explicitly in Article 101 analysis May not be a significant adverse impact on competition Market definition is key. Regardless of JV structure, a competition analysis may not find competitive concerns if the overall market is sufficiently competitive. Relevant product market may be broader than products using the technology that a co-investment network provides (e.g., fibre-based broadband products constrained by copper and cable products) May increase competition Could represent an increase in the number of players able to supply at wholesale Could increase end-to-end competition and provide more operators with full control of their costs 25
Conclusions 04 Trends in Telecommunications Regulatory Implications 20 September 2017 26
Conclusions The sector is changing very rapidly The regulatory tool box has been very successful in delivering performance todate But, regulators are reluctant to make major changes to the way that they analyse and regulate, despite changes in the market realities The regulatory framework is not well designed to achieve positive sector objectives 27