Innovation and Regulatory Risk

ANACOM-ENISA Workshop on Risk and Innovation

Lisbon, 22 January 2010

Antonio Robalo de Almeida

- Executive Board Chairman, ETNO

Presentation slides, not a full record of remarks made

Contents

Introduction to ETNO

Innovation is driving force in telecoms sector

Innovation requires balance of risk and reward

Regulatory framework allows for reduction in investment risk

2

Introduction to ETNO

Innovation is driving force in telecoms sector

Innovation requires balance of risk and reward

Regulatory framework allows for reduction in investment risk

3

4

ETNO comprises leading telecoms operators

• In 2008, total turnover in the EU telecoms sector was €290.6 billion (0.8% growth year-on-year)

• ETNO members‟ revenue was €267.5 billion of this tally

• ETNO members devoted 12.4% of their revenues to investment, accounting for 71% of total sector investment

• Shrinking revenue growth, alongside with economic and regulatory uncertainty, has started impacting investment.

• For the first time since 2003, negative investment growth (-1% in 2008)

Telecoms sector and ETNO members are struggling to maintain growth and investment

Source: IDATE for ETNO “Facts & Figures” (2009)

ETNO members continue to invest, accounting for 71% of sector CAPEX

2008 CAPEX in Europe

Total

Fixed

Mobile

non

ETNO

telcos

ETNO

members

non

ETNO

telcos

ETNO

members

non

ETNO

telcos ETNO

members

€ 46.5 b

€ 24.7 b

€ 21.8 bSource: IDATE for ETNO “Facts & Figures” (2009)

Introduction to ETNO

Innovation is driving force in telecoms sector

Innovation requires balance of risk and reward

Regulatory framework allows for reduction in investment risk

7

Innovation is a driving force in the telecoms sector

Source: Gartner (2009)

ILLUSTRATIVE

. . . across its business across as well as with its products and services

Source: McKinsey; ETNO analysis

Understandvalue anddesires

Selecttarget customers

Value proposition

Designproduct/process

Procure,manu-facture

Distri-bute

Basic business system

Service PriceDefinebenefits/price

Salesmessage

Marketing & sales

Adver-tising

Promo-tion/PR

Areas for innovation• Service delivery

• Business models

• Pricing models

• Point of sales

• Customer service

Areas for innovation• Customer segmentation

• Market research

NON-EXHAUSTIVE

Technological innovations launched NON-EXHAUSTIVE

20009894 96 20040293 95 97 991992 01 03

SMSVoice

mailGSM GPRS MMS

IP

Phone

Dual-

bandContest SMS

Clam-shell

phone

Change-

able

cover

WAP EMS

Poly

ring tone

compos.

CDMA

20001X

Digital ring tone

service

Full

rate voice

codec

i-modeDown-

loads

Video

camera

Camera with opti-cal zoom

Audio stream-

ing

DMB120

for mobileJava Edge

HS-

CSDSDPTT

CDMA data

serviceLBS

Poly-

phonic

Quad-

band

GSM

PTT

3+ mega pixel

cameraMP3

Mobile

content

Mobile

payment

Color

displaySymbian IM

CDMA Photo cameraMiDi

FM

W-LAN

PhoneT9

Pre-

paid

Ring

tone

Tri-

band

W-

CDMACDMA PTTCaller ID

Linux ?

UMTS ?

Blue-

toothSkins ?

Video

streamsTV tuner Black-berry ?

Source: McKinsey (2006)

Mobile industry has produced a large number of innovations

First launch

of services

c.1983

. . . and is considered as one of the most innovative industries

61

55

39

Handset

manufacturers

Computer software

Computer hardware

Mobile network

operators

21

12

39

48

Car industry

Internet service

providers

Healthcare

pharmaceuticals

Food and drink

31

44

Fixed-line

network operators

Percent ranking in top two of industry choicesweb-based primary survey research in Germany, Japan

Source: McKinsey (2006)

NGA – and the services they support –represent a major innovation in the industry

Saving time

Doing new things Doing more

Source: Plum Consulting for Broadband Stakeholders Group

Consumer opportunities

• Video calling

• HD video

• HiFi voice

• Video presence

• Multiple video streams

• Games libraries

• Video blogging and

messaging

• Download-and-go

• Upload-and-go

• Back-up services

• Network storage

Business opportunities

• Video conferencing

• HD video conferencing

• Collaborative working

• More capable teleworking

• Network-hosted applications,

e.g., „cloud computing‟

• Back up services

• Network storage

12

13

For example, FTTH will enable Portugal Telecom to offer bundles of a wide range of advanced services

Home Management premium services

> Video surveillance> Total computer

equipment maintenance> Home automation

management

> Video conferencing> Video and picture sharing> School services> Multiplayer games

High speed internet

> 100 Mbps, 200 Mbps, up to 1 Gbps download> 20 Mbps, 100 Mbps,

200 Mbps upload

TV and enhanced TV features

> Basic and premium channels> HDTV> PVR> VoD> RF Overlay

Advanced communication services

Source: Portugal Telecom

13

…but business case is plagued by risks

14

Demand risk

• Which services will be accepted in the market?

• How will demand develop over time (stable, increasing, decreasing)?

NGA business case profitability?

Technological risk

• Which investment will be „future proof‟?• Which services will be accepted in the

market?• How will demand develop over time (stable,

increasing, decreasing)?

Uncertain price development

• Will end-users be willing to pay a premium for higher bandwidths offered by fibre?

• Will value-based pricing be feasible in market and allowed by regulator?

Regulatory risk

• What access will be imposed?• Will network security & safety be preserved?• Will regulated prices reflect risk and give fair

return on investment?• What will happen to pricing of legacy network

if/when it becomes obsolete?

Introduction to ETNO

Innovation is driving force in telecoms sector

Innovation requires balance of risk and reward

Regulatory framework allows for reduction in investment risk

15

16

Innovation is particularly challenging in telecoms sector

Source: OECD; ETNO analysis

ILLUSTRATIVE

Innovation =

the implementation of a new or

significantly improved product

(good or service), process,

business practice or workplace

organisation

Critical return on investment

• Massive capital base

• Rapid technological change

• Rapid business model evolution

• Rapid changes in demand and

price elasticity

• High risk that regulatory

burdens can reduce or

eliminate profitability

17

Bringing an innovation to market depends on a risk/reward nexus

Clear enough future

Alternative futures

1

23

Range of futures

True ambiguity

?

Source: McKinsey, S.Godin, ETNO analysis

ILLUSTRATIVE

18

Regulatory risk can easily undermine the investment equation

ILLUSTRATIVE

No legal/regulatory certainty

no investment

no innovation

no increase in customer welfare

?

For NGA, the investment calculus is straight-forward

Fibre investment will take place*, when

Annualised costs of fibre < operating cost of copper

+

incremental revenue from fibre

+

wholesale revenue gained from competitors

+

wholesale and retail revenue protected from

competitors

* In relation to the replacement of copper by fibre in an access network, this is a static-form formulation

Source: Cave (2009)

19

Introduction to ETNO

Innovation is driving force in telecoms sector

Innovation requires balance of risk and reward

Regulatory framework allows for reduction in investment risk

20

21

• Decision on broadband markets, defining geographical segmentation of the wholesale market (bitstream)

• ANACOM report on the regulatory framework applicable to NGA

– Competitive areas• Obligation to give access to

ducts• Access to fibre (own or dark)

only if there is no space in ducts• Virtual access to network as last

resort (advanced bitstream)

– Non competitive areas• Access to ducts• Access to fibre (own or dark)• Virtual access to network

(advanced bitstream)

Regulator (ANACOM)

• Resolution of the Council of Ministers, defining NGA as strategic priority and establishing objectives for 2009 / 2010

• Protocol signed between the Government and operators, as a result of the Resolution, foresees the possibility of multiple NGA networks

• Decree-Law which defines the legal regime governing the construction, access and installation of networks and infrastructure of electronic communications, promoting the development of next generation networks

Government

Clear political and

regulatory environment for FTTH in

Portugal

In Portugal, the Government and regulator have worked to create legal and regulatory certainty

Source: Portugal Telecom 21

22

• Applying state-aid rules rigorously, not allowing public funding to „crowd out‟ private

investment

• Allowing commercially-negotiated agreements to pre-empt economic regulation

• When finding ex ante regulation warranted,

- Ensuring technological neutrality for network upgrades and new deployments

- Taking into account varying competitive conditions in sub-national markets

- Applying a graduated approach to access obligations

- Allowing value-based pricing at retail level

- Allowing differentiated wholesale access prices and conditions based on risk

sharing (e.g., upfront payments, volume, length of contract)

Regulators across Europe are should follow suit and create incentives for private investment

23

DIRECTIVE 2009/140/EC (amended Framework, Access and Authorisation

Directives)

- to be transposed by 25 May 2011

Recital 8

“In order to achieve the goals of the Lisbon Agenda, it is necessary to give

appropriate incentives for investment in new high-speed networks that will

support innovation in content-rich Internet services and strengthen the

international competitiveness of the European Union. Such networks have enormous

potential to deliver benefits to consumers and businesses across the European Union.

It is therefore vital to promote sustainable investment in the development of these

new networks, while safeguarding competition and boosting consumer choice

through regulatory predictability and consistency.”

. . . giving priority to protecting innovation from regulatory risk, as done in the revised Framework

Thank you for your attention

For any follow-up questions or other inquiries, please contact ETNO Communications Manager Thierry Dieu:

dieu@etno.be

24

Annex

Extracts from ETNO “Facts & Figures about

European Telecoms Operators,” Oct. 2009

Selected data points for European telecoms sector

Source: IDATE for ETNO “Facts & Figures” (2009)

• In 2008, total turnover in the EU telecoms sector was €290.6 billion (0.8% growth year-on-year)

• ETNO members‟ revenue was €267.5 billion of this tally

• ETNO members devoted 12.4% of their revenues to investment, accounting for 71% of total sector investment

• Shrinking revenue growth, alongside with economic and regulatory uncertainty, has started impacting investment.

• For the first time since 2003, negative investment growth (-1% in 2008)

Growth of telecom services vs. GDP growth in EU27

0%

1%

2%

3%

4%

5%

6%

2004 2005 2006 2007 2008

telecom services GDP

Source: IDATE for ETNO “Facts & Figures” (2009)

Telcos facing an unprecedented (non-)growth challenge

ETNO members account for 71% of CAPEX in European telecoms sector

2008 CAPEX in Europe

Fixed and Mobile

Fixed

Mobile

non

ETNO

telcos

ETNO

members

non

ETNO

telcos

ETNO

members

non

ETNO

telcos ETNO

members

€ 46.5 b

€ 24.7 b

€ 21.8 bSource: IDATE for ETNO “Facts & Figures” (2009)

ETNO capex: first contraction since 2003

ETNO members‟ tangible CAPEX (EUR b)

0

5

10

15

20

25

30

35

2005 2006 2007 2008

fixed

mobile

Source: IDATE for ETNO “Facts & Figures” (2009)

CAPEX as

percentage of revenue

by geography

0%

4%

8%

12%

16%

20%

EU-15 12 NMS EU-27 ETNO perimeter outside EU-27

0%

4%

8%

12%

16%

20%

fixed + mobile fixed mobile

CAPEX as

percentage of revenue

by network type

ETNO capex: 12% revs on average

Source: IDATE for ETNO “Facts & Figures” (2009)