Investment in next generation networks

A competitive approach to stimulating Europe’s broadband future - CEPS 22 February 2007

About ECTA



European Competitive Telecommunication Association represents some 150 operators across Europe



Aims to drive forward liberalisation and competition across the telecoms sector



Our operator members are diverse – pan European & national, consumer & business most have made substantial investments in infrastructure

Contents

A history of investment Narrowband to broadband Broadband to broaderband What if… we had regulatory holidays?

An alternative model What can we learn from history?

A history of investment…

Source: Infonetics Research, London economics

   Investment increased after OECD liberalisation Investment growth in Europe strong – 9% 2005-06 Higher investment in better regulated countries (OECD, ECTA, LE)

A history of investment…

     Competition tends to drive investment overall – by incumbents and competitors Incumbents invest most in absolute terms and have

maintained or increased investment

recently Competitors have spent €blns climbing the ladder of investment (new investment + marketing) and have typically spent a

greater % revenues

(LE 3x more than incumbents) Competitive operators have been primary innovation drivers

where economics permits

– the commercial Internet, triple play, NGN backbones Markets require certainty and a fair return on capital. Incumbent performance has been steady after the economic recovery.

Competitors returns limited

From narrowband to broadband

Broadband penetration, historic, G7 countries

10 5 25 20 15 Canada United Kingdom United States Japan France OECD Germany Italy 0

Source :

2001 2002-Q2 2002 2003-Q2 2003 2004-Q2 2004 2005-Q2 2005 2006-Q2     Broadband emerged late ’90s. Upgrades to exchanges, core networks LLU countries (allowing competitive upgrades) took early lead Elsewhere, delays in mandating access – suggested ‘new’, ‘emerging’. Growth lagged. Incumbent market share high Action was needed to spur growth – incumbents maintain >80% broadband access lines in Europe. Pressure from USTR

Case study: France

   French market stagnated until action taken by regulator LLU spurred growth & innovation, bitstream rural choice Fixed investment increased 17% in 2005, 40% from competitors

Other technologies not undermined

Evolution of Cable Penetration rate in Europe from Q103 to Q306

12% 10% 8% 6% 4% 2% 0% Austria Belgium Denmark France Germany Italy Netherlands Spain Sweden UK

ECTA Broadband Scorecards

  Cable penetration increased alongside LLU more influential factor than regulation – mutual competitive stimulus (OPTA: Is 2 enough?). History seems Despite much promise, wireless has tended towards being complementary not substitute technology (3% lines Q3 2006)

From broadband to broaderband

 Incumbents NGN and NGA investment often stimulated by competitive pressure: • Netherlands: Competitive pressure from cable and unbundling. KPN announced all-IP upgrade (access and core) – additional capex cost now < €0.9bln

• • Germany: Unbundling pressure in cities. DT announced €3bln vDSL urban investment complemented by ADSL2+ UK: Relatively well regulated and competitive market. €10b core network upgrade announced by BT • France: Free investing FT response €1bln in fibre through sewer system on open access basis (building on broadband competition). – 200,000 customers targeted by end 2008 • US: Telcos investing to provide triple play networks to compete with Cable Cos having >50% market share • Japan: Open access regime. Fibre penetration highest in world. Substantial and continued investment

25,000,000 20,000,000 15,000,000 10,000,000 5,000,000

Case study: Japan

Broadband FTTH DSL CATV 1,200 （\bn） 1,100 【

NTT’s investment in fiber local loops & total investment in equipment

】

1,097.7

FTTH：26% （6.31million） DSL：60％ （14.49million） CATV：14％ （3.41millon） 00/9 01/03 01/09 02/03 02/09 03/03 03/09 04/03 04/09 05/03 05/09 06/03    1,000 900 800 700

766.2

Total Investment

775.4

796.9

696.6

885.1

810.0

600 500 400 300 200

149.0

164.0

Investment for fiber local loops

333.0

283.0

237.0

349.0

about

350.0

100 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 （planned） NTT retains nearly 80% underlying fibre access lines Copper and fibre substitutes Unbundled fibre since 2001

A parallel universe: NZ

      Market liberalised late 80s – ex post approach Limited ex ante Framework introduced 2001 Local loop unbundling rejected by Commerce Commission 2003. Upheld by Govt 2004  Economic Ministry report 2004 - cost of communications basket most expensive in OECD May 2006 Government required LLU Functional separation approved Dec 2006 In Europe: Ineffective application of LLU in many countries with similar effects - low broadband penetration, few access upgrades

What if… we have regulatory holidays?

     Competitors have invested on the basis that economic bottlenecks will be addressed Economic bottlenecks occur where replication not efficient/feasible (can be medium or long term) If rules changed for access upgrades: • Substantial competitive investments made in recent years risk being stranded, and investment confidence destroyed • The monopoly slowly eroded since 1998 could be reintroduced with longer term damage to investment trends The choice and variety available for consumers and businesses will reduce, take-up will stall Policy makers will have delivered ‘deregulation’, but will consumers and businesses thank them?

An alternative model

   Provide fair and level playing field for

all

investors with clear rules up front • For incumbents: Regulation only to address SMP and prevent leverage. Return should reflect risk • For entrants: Access to address market failure (on technologically neutral basis) and true non-discrimination Examine possibility of functional separation – investment incentives secured through return and ‘customer demand’ (from all operators) Europe’s regulatory Framework is based on addressing competitive failure – built in sunset clause

What can we learn for the future?

       

Monopolies do not drive investment

needed – competitive stimulus is

Efficient investment is key

, not investment for its own sake Competition requires a

fair return for all

: incumbents, and – critically – competitors

Action is needed

to enable competition. Inaction tends to result in stagnation and foreclosure The broadband investment ladder does not prevent further investment eg cable, wireless where economic Given similar history,

fibre economics unlikely to be inherently different from copper

. 80% incumbent share of lines for copper based broadband EU, 80% for fibre-based broadband Japan Need to

enable competition from outset

– real non discrimination, functional separation, fair return reflecting risk, customer-driven demand to maintain incentives to invest

Learn from the past

!

Thank you

Ilsa Godlovitch [email protected]