Picking Winners among European Telcos

December 9th. 2009 Prepared By Sue Rudd email: srudd@strategyanalytics.com Complimentary Version

Challenges for Operators

    

Continuing Decline in Access Lines Ongoing High Capital Expenditure Requirements for Broadband Falling $ARPU in Fixed & Mobile Voice Need to Maintain Profitability & Hold Market Share Competitive Pressure from Cable, Mobile Broadband and soon Fixed Wireless

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Decline in Residential Access Lines is expected to continue in all 5 countries

Residential Access Lines (Thousands)
40,000 France Residential Access Lines 35,000

5 EU Countries Access Lines

30,000

Germ any Residential Access Lines

25,000 Italy Residential Access Lines 20,000

15,000

Spain Residential Access Lines

10,000 UK Residential Access Lines 5,000

0 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Regulatory Agency, Operator Statistics for 2003 - 2008 Strategy Analytics Estimates and TRS Forecasts for 2009 - 2011
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Fixed Networks will continue to require Billions in Capital Expenditures for Broadband

Fixed Network Capital Expenditure Estimates - USD$ Millions By Country

France

$8,000 $7,500 $7,000 $6,500 $6,000 $5,500 $5,000

2004

Italy

Annual Capital E penditure $ Millions



Germany

Significant Investment in both Copper and Fibre is projected to continue to deploy Next Generation Fixed Networks. Italy and Spain are projected to increase Investment in 2010 and 2011, while France, Germany and UK level off

Spain

UK

$4,500
2005 2006 2007

$4,000
2008 2009 2010

2011

2012

Source: Regulatory Agency, Operator Statistics for 2003 2008 Strategy Analytics Estimates and TRS Forecasts for 2009 - 2011
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K
   

High Capital Expenditure per Subscriber requires long term payback.

Broadband CAPEX USD $ per Subscriber
$350

Annual $ Capital Expenditure per Subscriber

$300

$250

Spain and taly are expending the highest level of Capital Expenditure per Subscriber. Germany has the lowest Due partly to extensive VDSL. France has Fiber & ADSL2+ Fiber expansion continues
 

$200

$150

$100

r ance Fixed CAPEX per Subscriber e r anyFixed CAPEX per Subscriber Italy Fixed CAPEX per Subscriber Spain Fixed CAPEX per Subscriber


$50 Fixed CAPEX per Subscriber $0 2004 2005 2006 2007 2008 2009 2010 2011 2012
"!

Source: Regulatory Agency, Operator Statistics for 2003 - 2008 Strategy Analytics Estimates and TRS Forecasts for 2009 - 2011
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How are Telcos managing the Transition? ..Some ncumbent Operator Lessons
Positive Lessons
 

Tough Lessons to deal with:

  

Aggressive Adoption of Next Gen/IP can pay off even if Voice goes over IP (FT Orange) Predatory competition at too low prices will undermine itself over time but may teach you about new services Video and IPTV (Telcom Italia) Operations outside of home territory must generate profits for the parent (DT/TMobile) Moving into Adjacent Countries with fewer Regulatory constraints accelerates competitive business (Telfonica/O2/Hansenet etc.&
Orange/Wanadoo)

  

  

Fixed operators with strong Mobile subsidiaries may perform better Tough Cost cutting in Recession has made Telcos leaner and ready to compete Demand for Next Gen Services is there if delivered at competitive price
September 1st 2009

 

Loss of Access Lines (But Still important Revenue) Decline in ARPU for Fixed Voice Requirement to Wholesale Capacity and Unbundle Loops at low margin is tough for all Incumbents - but now too big a business to allow it to erode margins Can no longer fend off competition with help of Regulators (DT) Below 30% Market Share it may be tough to stay as profitable (BT) Broadband services are becoming Commodities before they become profitable Mobile Voice ARPU Fixed and Mobile Broadband will be competing for limited CAPEX budget for next 5-7 years
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Revenues in 2010: Baseline Forecasts

 Forecast shows Flat or Declining Revenues due to declining $ARP and Competition [Not lack of demand]
Aggregate F recasts f r 5 c

tr es ( el w):

Fixed Broadband Wireless and Residential Telephone Service

 Challenge is how to ncrease Revenues and Balance nvestment to achieve Profitability by:
Increasing $ARPU Optimizing CAPEX Managing Operating Costs

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Baseline Forecast:
n 5 European countries declining Revenues from Residential Service have been partially offset by new Fixed Broadband Services
Residential Fi ed Re enues s
$16,000

road and

illions

$1 ,000
$ $

ermany Res idential Ser i ce

& &

$10,000

taly Res idential Ser i ce

&

illions

Spain Res idential Ser i ce Res idential Ser i ce

& & 2 1

$8,000

France r oad a nd Ser i ce ermany r oad a nd Ser i ce

& & 2 2 1 1 '

taly r oad a nd Ser i ce

& 2 1

$6,000

Spain r oad a nd Ser i ce r oad a nd Ser i ce

& 2 1 0)

$ ,000
Source: Regulatory Agency, Operator Statistics for 2003 - 2008

$2,000

Strategy Analytics Estimates and Forecasts for 2009 - 2011

0
% $

2003

200

200

2006

2007

2008

2009

2010

2011

Growth in Broadband in Germany, , France and taly have PART ALLY offset dramatic decline in Residential Fixed Revenues
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&

$12,000

France Res idential Ser i ce

' ( (

0) #

Baseline Forecast:
France: Annual Net Growth or Decline $Millions By Service: Relative importance of Wireless & Broadband Revenues Change since 2002
France: Relative
$18,000 $16,000 $14,000 Fr nc $ Millions $12,000 $10,000 $8,000 $6,000
A7 7 7 @ 6 7 7 B 6@ 6 AA7 7 C 7 A7 7 7 @ 6 7 7 B @ @ 7 A7 6 7 A7 7 7 @ 6 7 7 68 9 6

ontributions of roadband and Wireless

F a nc adband S vc R v nu F a nc R d nt a S vc R v nu F a nc S vc R v nu t nnua R v nu G
7 7 7 D E 7

Note: To Highlight Offsetting Values all Services are ndexed to Zero in 2002
3

$4,000 $2,000 $0
Source: Regulatory Agency, Operator Statistics for 2003 - 2008

2003
($2,000) ($4,000)

2004

2005

2006

2007

2008

2009

2010

2011

Strategy Analytics Estimates and WNS, MMD & TRS Forecasts for 2009 - 2011

France s early adoption made Broadband No. 1 in Revenues in 2003 2004 before new wave of Wireless took off. Both now slowing And Fixed Voice Telephony is now even growing again but over P/Broadband
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6 F9 B

5 4

th

Baseline Forecast: Germany: Annual Net Growth or Decline $Millions By Service: Relative importance of Wireless & Broadband Revenues Change since 2002
Germany: Relative Contributions of Broadband and Wireless
$1 ,000 $14,000 $12,000
H I H

Germany $Millions

$10,000 $ ,000 $ ,000 $4,000 $2,000 $0 ($2,000) ($4,000) 2003 2004 2005 2006 2007 2008 2009 2010 2011

G e rm a n y Bro a d b a n d Se rvi ce Re ve n u e s G e rm a n y Re s i d e n ti a l Se rvi ce Re ve n u e s G e rm a n y W i re l e s s Se rvi ce Re ve n u e s N e t An n u a l Re ve n u e G ro w th

Note: To Highlight Offsetting Values all Services are ndexed to Zero in 2002
G

Source: Regulatory Agency, Operator Statistics for 2003 - 2008 Strategy Analytics Estimates and WNS, MMD & TRS Forecasts for 2009 - 2011

Germany s Aggressive deployment of VDSL led to Broadband outstripping Wireless. But Both Broadband and Wireless Revenue growth are projected to slow down producing net revenue decline
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Baseline Forecast: taly: Annual Net Growth or Decline $Millions By Service: Relative importance of Wireless & Broadband Revenues Change since 2002
Italy: R lativ
$16,000 $14,000 $12,000 Ita l y r a dba nd Ser e e enue
S V R Q U TS

tri

ti

Broadband and Wireless

Millions

$10,000 $8,000 $6,000 $4,000

S WW

Ita l y i rel e e enue

W X S V

Ser i ce

Italy

et Annua l Re enue r th
S

Note: To Highlight Offsetting Values all Services are ndexed to Zero in 2002
P

$2,000 $0 2003 ($2,000) 2004 2005 2006 2007 2008 2009 2010 2011

Source: Regulatory Agency, Operator Statistics for 2003 - 2008 Strategy Analytics Estimates and WNS, MMD & TRS Forecasts for 2009 - 2011

taly s Wireless Revenues are expected to decline while Fixed Broadband continues to grow. As Residential Revenues continue to decline overall Revenues are basically flat.
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Ita l y e denti a l Ser i ce e enue

S V TW V S

aR `

11

Baseline Forecast: Spain: Annual Net Growth or Decline $Millions By Service: Relative importance of Wireless & Broadband Revenues Change since 2002
Sp in: R l tiv
$18,000 $16,000 $14,000 $12,000 Spa n a dba nd Serv ce Revenues Spa n Res dent a Serv ce Revenues Spa n rel es s Serv ce Revenues Net n nua l Revenue Growth
p d di d d h d d d d gfe d

ontribution of ro db nd nd Wir l

Million Sp in

$10,000 $8,000 $6,000 $4,000 $2,000 $0 2003

c

Note: To Highlight Offsetting Values all Services are ndexed to Zero in 2002
b

Source: Regulatory Agency, Operator Statistics for 2003 - 2008 Strategy Analytics Estimates and WNS, MMD & TRS Forecasts for 2009 - 2011

2004

2005

2006

2007

2008

2009

2010

2011

($2,000

Both Spain s Fixed Broadband and Wireless Revenue growth are expected to level off as Competition increases and Prices decrease producing Flat Total Revenues
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Baseline Forecast: : Annual Net Growth or Decline $Millions By Service: Relative importance of Wireless & Broadband Revenues Change since 2002
UK
$25 0 00
r

elative C

tri

ti

s f Br a

ireless

$20 0 00
r r r r r

$15 0 00 U $ Millions
u u w y vxw v ut u

UK $10 0 00

Se v ce evenues

UK es identia Se v ice evenues

u

UK

i e es s Se v ice evenues
u

Note: To Highlight Offsetting Values all Services are ndexed to Zero in 2002
q

As
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Fixed Broadband Revenues level off, Wireless Revenues are still expected to grow Steadily, but not enough to offset the loss of Residential Telephone service
Proprietary to Strategy Analytics

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Net Annua $5 0 00

evenue

o wt

Source: Regulatory Agency, Operator Statistics for 2003 - 2008

$0 2003 2004 2005 2006 2007 2008 2009 2010 2011

Strategy Analytics Estimates and WNS, MMD & TRS Forecasts for 2009 - 2011

($5 0 00)

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Maximizing Revenues & Profits in 2010

 To mprove Profitability despite Revenue slow down Operators need to:

Leverage Fully Depreciated Legacy Infrastructure that generates Cash from mature services e.g. Voice Remain in Top 3 & Hold Market Share to maintain economies of scale Optimize Payback from Capital Expenditures for Next Gen. Networks Plan for Economies from shared IP Services Infrastructure that supports Multiple Access Networks

 To ncrease Revenues:
Operators need to add Value and increase ARPU with IP Services and Triple/Quad Play Converged Services Need to Price Quad Play to encourage trade-up not selfcannibalization

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Convergence Need not be another name for deep discounts

Strategy Analytics: Tariff Response Model Typical Multiplay Service Feature Categories and some Scenario results
Ser i e eat re O ti s

TV

Broa

and

Digital phone

obile phone

Cha els: Basi a N -Premi m Premi m E tertai me t ha els Premi m Sports packages DV or HDTV Access Spee Options ps Data throughput & Limits Customer & technical support Voice Plan - Usage and lat ate inutes of usage per month for local usage plan obile plan: Voice and/or Data Contract Length & Prepaid/Postpaid Wireless Voice minutes of use Data storage and throughput Device Bundled ith Service initiation Device options: Phone,Smartphone, Netbook SMS and MMS/ Multimedia Messaging Proposed Price Service Provider Competitor

Scenarios have been run that indicate:

 Telco offering Triple Play w/o Home Telephone may be very popular with those who only want a Mobile Phone that works everywhere In some cases Telcos may make more Revenues if they do not match Cable Operators pricing for the same Quad Play bundle Bundling SMS and MMS with Fixed Broadband Services may be more attractive than bundling mobile voice Right combination of service features can minimize self cannibaliztion Matching the lowest price competitor may not be the best way to maintain market share

 

Inputs Select

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Dos and Don ts for Profitability

Do
 Exploit Scale Economies to Optimize Costs especially to deliver Core Transport services Be the Best low cost producer - Wholesale, Basic Access, naked ADSL Maximize customer value from Triple and Quad Play bundles without cannibalizing profitable existing customers Requires careful Feature Service Pricing

Don t  Give away profitable voice minutes

 Discount premium data services without gaining share or reducing churn  Focus only on Plans based on cost reduction  Overinvest in CAPEX for Broadband

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Winning Telcos must Perform Balancing Act

 Balance the Transition from Narrowband to Broadband and from Regulated ncumbent to Competitive Player
 Exploit Voice Cash Cow as it declines  Find Ways to make Money with Efficient Wholesale Transport

 

Add High Value Services to Enhance margins and hold Market Share Balance Capital nvestment Needs based on RO :
e.g.Match Urban vs. Rural Density with Cost per Sub & ROI Payback period

Abandon Regulatory Mindset that allows only Cost based Pricing

  Price for Value in a Competitive Broadband Market Hold Market Share without Regulatory Protection

Eventually Share nfrastructure Costs, Billing & Service Applications across Multiple Access Networks .. MS 3GPP DOCS S 3.0
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