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Telecom Operators
Let's face it
Core telco revenues the decline is here to stay: -1.8% p.a. until 2015e
Over-the-top services: a major threat for mobile but an opportunity for fixed-line
Diversification into adjacent markets can add significant revenues, but not enough to
stabilise the top-line
Big opportunities to transform costs
Mega-operator, local hero or infrastructure play: different telcos will make different
strategic choices
Telecom Operators
Contacts
Antoine Pradayrol
antoine.pradayrol@exanebnpparibas.com
Exane BNP Paribas, London: +44 207 039 9489
ARTHUR D. LITTLE
Didier Levy
levy.didier@adlittle.com
Arthur D. Little, Paris: +33 1 55 74 29 62
www.exanebnpparibas-equities.com
Please refer to important disclosures
at the end of this report.
Telecom Operators
Executive Summary
This 11th edition of the joint annual report by Exane BNP Paribas-Arthur D. Little
focuses on the consequences of the move to all IP for European telecom operators. Is
the opportunity linked to innovative services larger than the risk to legacy revenues?
What are the key strategic choices available to telcos across Europe? In preparing the
report, we have met with 105 organisations in the telecom-media-technology arena and
beyond, across 15 countries.
All in all, we see core telco revenues continuing to decline by 1.8% p.a. until 2015e.
The move to all-IP enables anyone to propose IP-based services over any network.
This is the over the top (OTT) concept.
In fixed-line, OTT TV is more an opportunity for telcos than a threat an opportunity
to gain market share in TV and to accelerate super-fast broadband adoption.
In mobile, OTT is a direct threat to legacy voice and SMS revenues. SMS can be
displaced rapidly by independent and embedded messaging applications. Operators
are taking defensive steps, but the downside risk remains significant.
In an all-IP world, everything will be connected. This creates opportunities for telcos
in adjacent markets such as automotive, energy and utilities, financial services, etc. We
estimate potential revenues at 4-9% of large telcos revenues by 2015e, significant but
not enough to reverse the overall negative trend.
In this context of prolonged revenue pressure, telcos must accelerate their cost
transformation. We identify large cost saving opportunities both in opex (online-centric
business model) and in capex (network consolidation/sharing).
Operators will increasingly make different strategic choices: 1) mega-operators,
competing (and collaborating) with OTT providers which will require both scale and a
range of new capabilities likely to lead large incumbents to make acquisitions;
2) local heroes, with limited geographic footprint and a presence in some vertical
businesses; 3) infrastructure plays, focusing on the network while developing a range
of partner agreements in services and distribution.
Figure 1: Contributions to the sector growth core telco revenues
6%
5%
4%
3%
2%
1%
0%
(1%)
(2%)
(3%)
(4%)
(5%)
(6%)
(7%)
2010
MTR
Mobile data
2011
2012e
2013e
Fixed telephony
2014e
Fixed broadband
2015e
Pay-TV
Telecom Operators
Lets face it, the decline in core telco revenues is here to stay
We expect core revenues from European telecom services to continue decreasing until
2015e, by 1.8% per year on average, including a CAGR of -2.4% in mobile and -3.4%
in fixed-line, partially offset by +5.8% in pay-TV.
The expectation of a decline is consensual among industry participants, but even
though we expect strong growth in mobile data (the single most important growth driver
in the sector), our overall forecast is more bearish than consensus.
In a nutshell, we expect the 2011 trend (-2%) to continue in the coming years, for three
key reasons: 1) the risk of cannibalisation of voice and text revenues has significantly
increased, with over-the-top services developing fast; 2) in fixed-line, broadband and
pay-TV are far from being big enough to offset the decline in traditional telephony;
3) the tough economic context is here to stay, with a direct impact on usage and
indirect impacts on competition and consumer behaviour.
For incumbents in their domestic markets, we model core revenues down 3.6% p.a.,
given their higher than average exposure to fixed telephony, despite our expectations
of improving broadband market share and increasing pay-TV market shares.
The largest uncertainty in the sector is mobile data monetisation: even a small tweak to
our 2015e assumptions regarding traffic per smartphone and revenue per GByte could
lead the whole sector to return to growth. On the other hand, stronger cannibalisation of
voice and text could lead to an even faster decline (-3.8% CAGR).
However, our analysis of mobile operators return on capital employed shows that a
return to growth is too optimistic, as it would imply operators increasing their returns
despite the tough environment (economy, competition, regulation, network capex)
while the bear case would imply returns of challenger mobile operators falling
significantly below their cost of capital, hence driving massive consolidation.
Telecom Operators
To make the best of this new world and avoid cannibalisation, the most effective moves
expected from telcos are: 1) price bundling which we think can basically halve the risk of
cannibalisation of mobile operators legacy revenues; 2) tiered pricing, in mobile but also in
fixed to make sure that revenues increase in line with traffic growth; 3) leveraging the
box, in fixed-line; and 4) developing wholesale revenues from OTT providers, although this
is difficult to quantify except for Content Delivery Network (CDN) activity.
Cloud, 2.0
Building
automation,
0.8
Smart
metering, 0.5
100
90
Vending
machines &
payment
terminals, 0.4
3
3
7
3
43
43
43
39
39
2011
2015e - Sceptics
2015e - Believers
EURbn
80
Others, 0.5
70
53
60
50
m-payment,
1.4
40
Connected
cars, 1.7
Fleet and
freight
telematics,
2.0
30
20
Mobile
Fixed-line
Pay-TV
Verticals
Telecom Operators
Geographic footprint
Local
Infrastructure
Services
Infrastructure play
Local hero
Mega-operator
Global
It is therefore no surprise that they consider a wide range of strategies, with varying
levels of emphasis on the retail side (this is the bit pipe versus full service operator
debate) and varying ambitions in terms of geographic footprint (with most European
telcos focused on one or a few countries, but a handful looking at a global footprint).
Combining these two axes, we find three key strategic routes: 1) the mega-operator;
2) the local hero, i.e. the full service telco focused on a limited geographic footprint; and
3) the local infrastructure play. We believe that:
The mega-operator approach can in theory create the most value in the long term,
but is the most difficult to execute (need for capital and multi-faceted competitive
challenges), so the most risky. In any case only a handful of European telcos can play;
The local hero could lead to a slightly better top-line than the infrastructure play,
but it comes with additional opex and capex in the next few years along with execution
risks. Due to its focus on one or a few countries, competitive structure in its home
market will have a material impact on its success;
The infrastructure play is the least risky but also brings the lowest returns in the
long term. In any case, it cannot be implemented by operators lacking opex flexibility
due to the requirement to be the low cost producer.
Telecom Operators
6
16
12
24
14
4
0
2011
EBITDA-Capex
2015e
Telecom Operators
Contributors
Arthur D. Little
Team
Didier Levy
Antoine Pradayrol
Author
Richard Swinford
Laurent Barbezieux
Angel Lam
Arnaud Schoenmakers
Karim Taga
Other contributors
Mathieu Robilliard
Michael Williams
Michael Zorko
Maxime Rey
William Beavington, marketing analyst
Telecom Operators
Acknowledgments
We want to thank everyone from outside Exane BNP Paribas and Arthur D. Little who
contributed to this project. We would particularly like to thank all those that we
interviewed at the companies listed below, including fixed, mobile, cable and satellite
operators, internet companies and software developers, media groups, equipment
manufacturers and regulators.
Telecom Operators
Contents
Telecom Operators
8%
3.5%
7%
3.0%
6%
2.5%
5%
2.0%
4%
1.5%
3%
1.0%
2%
0.5%
1%
0.0%
0%
(0.5%)
(1%)
(1.0%)
(2%)
(1.5%)
(3%)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
% of consumer spending - LHS
Telecom Operators
This apparent stability has masked 1) divergent trends in different sub-sectors, with
good growth in mobile until 2008, offset by a progressive decline in fixed-line; and
2) strong volume growth, in mobile but also in broadband, offset by significant pricing
pressures driven by competition and regulation.
40%
50%
38%
45%
35%
35%
40%
31%
30%
28%
30%
26%
25%
35%
25%
22%
21%
20%
20%
19%
17%
15%
15%
10%
10%
5%
0%
5%
BE PT DE
Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11
% of mobile customers
% of population
Q4 10
IT
SP
FI
FR DK NO UK SE NL US
Q4 11
Smartphone penetration has continued to grow by 2 percentage points (of the mobile
customer base) per quarter throughout 2011, despite the economic crisis in Europe.
The majority of handsets sold in Europe are now smartphones (figures publicly quoted
by operators vary between 30% and 90% in regards to Q4 11; for reference, this stood
at 70-80% at Verizon Wireless and AT&T in Q4).
The growth in mobile data traffic has slowed, to an estimated 35% yoy, but this is
largely because of traffic generated by dongles, which had represented up to 90% of
total data traffic in 2009-2010 depending on the countries and which is now declining
for several operators (notably Vodafone and Mobistar).
Data traffic from smartphones is growing by more than 100% yoy, a result of growth in
the smartphone base (almost +50% yoy in Q4 11) combined with growth in the average
traffic per smartphone.
10
Telecom Operators
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
57%
15%
85%
65%
48%
34%
-
79%
21%
-
69%
19%
-
57%
57%
46%
32%
20%
15%
but the decline in voice revenues largely outpaces the growth in data
Despite this continued strong growth in mobile usage, European mobile service
revenues have been declining by 1.8% per year over 2008-2011, ending the period on
a very negative note: -4.2% yoy estimated in Q4 11.
The chart on the left hand side of Figure 8 below shows the contributions of voice, data
and SMS to the sectors top-line trend, reflecting the massive negative impact of the
decline in voice revenues, compared to the positive contribution of data. Mobile
revenues represented EUR25.2/month per capita in 2011, including:
EUR14.6 from outgoing voice, down 7% yoy despite the 4% yoy growth in traffic
pointing to a yoy decline in the average price per outgoing minute of more than 10%;
EUR2.0 from incoming voice, estimated down more than 25% yoy given the steep
cuts in mobile termination rates (see below);
EUR4.2 from SMS: SMS revenues still grew in the first nine months of the year but
stalled in Q4, according to our estimates although the picture varies significantly
between markets and operators;
EUR4.4 from data, with data revenues up 23% in the year, a relatively steady pace
of growth despite the base effect.
Figure 8: European mobile service revenue trends
Voice, SMS and data contributions
6%
35%
3%
30%
0%
25%
20%
(3%)
15%
(6%)
10%
(9%)
Q1 07
Q2 07
Q3 07
Q4 07
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
5%
SMS
Q1 07
Q2 07
Q3 07
Q4 07
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
Voice
0%
Non-SMS data
11
Telecom Operators
Figure 9: Mobile voice revenue drivers: volumes and prices, impact of regulation
Volume versus price
MTR impact
4%
15%
3%
10%
2%
1%
5%
0%
0%
(1%)
(5%)
(2%)
(3%)
(10%)
(4%)
(5%)
Q1 07
Q2 07
Q3 07
Q4 07
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
(15%)
Voice revenues
Traffic
Q1
09
Price
Q2
09
Q3
09
Q4
09
Q1
10
Q2
10
Q3
10
Q4
10
Q1
11
Q2
11
Q3
11
Q4
11
75%
100%
70%
90%
80%
65%
70%
60%
60%
55%
50%
50%
40%
45%
30%
40%
20%
35%
10%
30%
0%
2007
2008
2009
2010
NL
2011
12
FR
UK
BE
EU
DE
SE
SP
AT
IT
PT
Telecom Operators
At the end of 2011, fixed broadband penetration reached 69% in Western Europe, up
2.9 percentage points over the period, and the number of broadband customers in
Europe was still up almost 5% yoy. The most advanced markets show penetration of
more than 80% while many are still below 70%, so there is still growth potential as the
lower-penetration countries catch up in the coming years.
54%
90%
52%
80%
70%
50%
60%
48%
50%
40%
46%
30%
20%
44%
10%
42%
0%
2008
2009
2010
NL
2011
BE
FR
PT
DE
UK
EU
SE
SP
IT
* In this chart, we include all customers with pay-TV services, i.e. satellite, cable and IPTV which leads to some double counting, particularly in
markets where IPTV is most advanced such as France, as many IPTV customers also subscribe to a premium pay-TV bouquet (hence are counted
as customers of the satellite operator).
Source: Arthur D. Little, Exane BNP Paribas estimates
13
Telecom Operators
Penetration discrepancies remain large between markets: e.g. Italy and Spain are still
below 25% while the UK, Germany and France are above 50%, and Belgium and the
Netherlands are above 95% (cable markets). Pay-TV penetration in the US is 85%.
These penetration figures reflect different situations in different countries. For instance
pay-TV in Italy mainly reflects the premium pay-TV services offered by Sky Italia, while
in France our pay-TV penetration figure includes not only cable and satellite but also all
broadband customers using IPTV.
Although each market must be analysed on a local basis (e.g. penetration in Germany
is likely to remain below average given the attractiveness of free-to-air satellite TV), we
believe that there is further penetration potential in pay-TV in Europe.
In addition, unlike telecom service revenues, pay-TV revenues have been growing by
an average of almost 5% p.a. over 2009-2011, driven by a 4% CAGR in customer
numbers combined with increasing ARPU. Average spend per household on pay-TV
has reached EUR12.7/month in 2011 (penetration of 52%, ARPU of EUR24.5/month).
Given the rise in triple-play (pushed by telcos and cable operators across Europe, and
in one particular case by a satellite operator, BSkyB in the UK), it makes sense in our
view to aggregate the fixed-line and pay-TV markets (see pages 45-47 for our analysis
on the importance of TV for telcos).
As shown in Figure 12 on the left hand side, the total spend per household on fixed-line
and pay-TV reached EUR62.3/month in 2011, down c1.5% yoy, as the growth in payTV revenues was not sufficient to offset the decline in fixed-line telecom revenues.
Figure 12: Fixed-line, broadband and pay-TV trends
Fixed-line, broadband and pay-TV revenues
70
60
45%
11.7
12.0
12.7
15.0%
44%
50
40
14.5%
21.5
43%
22.5
23.4
14.0%
42%
30
13.5%
20
30.4
41%
28.6
13.0%
26.3
10
40%
12.5%
2007
2009
Fixed telephony
2010
Fixed broadband
2011
2008
Incumbents (lhs)
Cable (rhs)
Pay-TV
14
2009
2010
2011
Altnets (lhs)
Telecom Operators
2010
2011e
2012e
2013e
2014e
2015e
2011-2015e CAGR
110.8
78.3
11.8
66.6
32.4
17.2
15.2
95.3
53.3
42.0
22.5
228.6
107.1
70.4
8.5
61.9
36.7
17.8
18.9
92.9
49.1
43.7
23.7
223.7
103.8
62.7
5.8
56.9
41.1
17.8
23.3
89.7
44.9
44.8
25.1
218.6
99.8
54.2
3.1
51.1
45.6
16.9
28.7
86.7
40.5
46.2
26.6
213.2
97.9
47.2
2.4
44.9
50.6
15.2
35.4
83.7
36.2
47.6
28.1
209.7
97.1
40.8
2.0
38.8
56.4
12.9
43.4
80.8
31.9
48.9
29.7
207.7
(2.4%)
(12.8%)
(30.1%)
(11.1%)
11.4%
(7.7%)
23.2%
(3.4%)
(10.2%)
2.8%
5.8%
(1.8%)
* Excluding revenues from verticals and including mobile termination rate cuts
Source: Arthur D. Little, Exane BNP Paribas estimates
15
Telecom Operators
Figure 13: Interview feedback 71% expect the industry revenues to decline
% of respondents split by their expectations for the sectors top-line over the next few years
35%
30%
25%
20%
15%
10%
5%
0%
<-2%
-2% / -1%
-1% / 0%
Flat
1%+
Our -1.8% CAGR forecast is more cautious than this industry consensus. The key
drivers of our scenario are: 1) our view that pressure on legacy mobile revenues i.e.
voice and SMS can increase further, driven by regulation, competition but also
cannibalisation by data; 2) our expectation that the fixed market will continue to decline,
with growth drivers such as broadband and pay-TV not big enough to offset the decline
in traditional telephony; and 3) an expectation that the difficult macroeconomic
environment in Europe is here to stay i.e. limited hopes of underlying improvement in
consumer confidence or business trends in the coming years.
As another point of reference, Telecom Italia recently published its 2011-2014 plan
which is based on the groups expectation that the overall Italian telecom services
market (fixed + mobile, excluding pay-TV) would decline by 2.1% pa. over the period.
The tough macro context is here to stay: direct and indirect impacts
The European economy has deteriorated in recent quarters, as the compound effect of
austerity measures (lower spending, higher taxes) increasingly impacts consumer
spending. In the Eurozone, consumer spending declined by 0.8% in Q4 11 and is
expected to decline by 1.2% in Q1 12. Given the long term nature of the ongoing
deleveraging process in Europe, Exane BNP Paribas economists expect the economic
environment to remain difficult not only for a few quarters but for several years. As
shown in the charts below, consumer spending in the Eurozone is expected to decline
by 0.3% in 2012e, and merely to stabilise in 2013e.
16
Telecom Operators
5%
8%
4%
6%
3%
2%
4%
1%
2%
0%
0%
(1%)
(2%)
(2%)
(3%)
(4%)
(4%)
(6%)
SE
2013e
2012e
2010
2011e
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
(5%)
DE
UK
2010
GDP
NL
EU*
2011e
BE
FR
SP
2012e
IT
PT
2013e
Consumer spending
We believe that this economic context will have both a direct impact on telecom
revenues, in particular on mobile (lower traffic, in particular less international travel,
consumers more budget-conscious, corporate customers getting tougher at
renegotiations), as well as two types of indirect impact: low-cost challengers should be
more successful than they would have been in a growing economy; and consumers are
likely to optimise their bills, increasing the risk of voice and SMS substitution by data.
1) Direct impact: In 2009, as European GDP dipped from +0.7% in 2008 to -4.1% in
2009, the European mobile service revenue trend (restated for MTR cuts) slowed from
+2.7% to +0.2%. In the following year, as GDP returned to growth (+1.8%), the ex-MTR
service revenue trend returned to +2.1%.
In particular, a weak economic environment has a direct impact on B2B revenues the
area most impacted in 2009. Corporate customers are themselves less active (less
lines and less traffic) and focus on efficiency in all domains, including telecoms. Such
macro-pressures on the sector are likely to continue in the coming years.
Figure 15: European mobile trends have shown they are not immune to the economy
YoY service revenue trends versus GDP
4%
6%
3%
5%
2%
4%
3%
1%
2%
0%
1%
(1%)
0%
(2%)
(1%)
(2%)
(3%)
(3%)
(4%)
(4%)
Q1
09
(5%)
2008
Service revenue
2009
2010
Ex-MTR
2011
Q2
09
Q3
09
Q4
09
Q1
10
Q2
10
Q3
10
Q4
10
Q1
11
Q2
11
GDP
17
Q3
11
Q4
11
Telecom Operators
As shown by the right-hand chart above, the difference between Northern and Southern
Europe in terms of mobile service revenue evolution is telling, highlighting how
contrasting macro-economic environments lead to contrasting mobile revenue trends.
2) Competitive impact: As the economic backdrop worsens, customers are getting
more sensitive to price. Spain is a good example of this: since the end of 2008,
Spanish challengers have seized the opportunity with growing success, both on the
fixed broadband side and on the mobile side.
Figure 16: Market share trends in the Spanish fixed broadband and mobile markets
Leading operators market shares
62%
82%
12%
26%
11%
25%
10%
24%
60%
80%
58%
23%
9%
78%
22%
8%
56%
21%
7%
20%
76%
54%
6%
72%
50%
48%
18%
4%
17%
3%
16%
2%
70%
15%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11
Telefonica, fixed broadband - Left
19%
5%
74%
52%
Jazztel
18
Telecom Operators
120
35%
70
35%
30%
30%
60
25%
115
20%
25%
20%
50
15%
15%
110
40
10%
5%
105
10%
5%
30
0%
0%
20
(5%)
100
(10%)
-5%
-10%
10
-15%
(15%)
95
(20%)
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
08 08 09 09 09 09 10 10 10 10 11 11 11 11
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
08 08 09 09 09 09 10 10 10 10 11 11 11 11
MoU per month
-20%
YoY
YoY
Mobile data
2011
2012e
2013e
Fixed telephony
2014e
Fixed broadband
2015e
Pay-TV
Interviewees have also pointed to other growth drivers for telecom operators much
more emphatically than in previous years in particular: ICT (including cloud services)
and new/adjacent services such as m-payment, and generally machine-to-machine
applications (M2M). This corresponds to the use of wireless technology to enable all
kinds of machines to communicate including cars, utility meters, etc. We focus on
these new growth opportunities in pages 60-94.
19
Telecom Operators
Figure 19: Interview feedback Mobile data to remain the key growth driver
Number of interviewees having quoted different potential growth drivers for telecom operators
Mobile data
Fixed broadband
ICT, B2B, Cloud
New TV services
New/adjacent services
Pay-TV
M2M
mpayment, NFC
CDN
Wholesale
Gaming
0
10
15
20
25
30
35
40
45
50
30
25
3.6
20
4.1
4.4
5.5
6.7
8.2
4.2
4.2
15
10.1
3.9
3.5
10
3.0
15.7
14.6
13.3
11.9
10.4
9.0
2.8
2.0
1.3
0.7
0.5
0.5
2010
2011
2012e
2013e
2014e
2015e
Mobile termination
Voice outgoing
20
SMS
Mobile data
Telecom Operators
There is little doubt that mobile data traffic has a bright future:
smartphone penetration has grown faster than we anticipated in 2010, providing
room to increase long term penetration estimates. We now model 95% population
penetration by 2015e, corresponding to a pace of 14 percentage points per year, only a
mild acceleration compared to the increase observed during 2011 (+12ppt).
the average traffic per smartphone currently stands in the 200-400MByte/month
range, and under our core scenario we estimate this will grow to 1.9GByte/month.
How will this huge usage increase translate at the revenue level for telcos? This is
arguably the largest unknown in the sector.
The growth in data revenues is key not only for the whole sector revenue outlook (the
single biggest contributor in the next five years) but also for its profitability. The growth
in data traffic impacts network capacity requirements hence capex, and operators need
to establish a link between consumption and revenue generation.
Based on the current data revenues and estimated traffic, we calculate that the
average revenue per GByte in the European mobile industry was EUR40-50 in 2011
(versus more than EUR80 in 2010), and under our core scenario we estimate that this
will drop to EUR6 by 2015e i.e. CAGR of -40% until then. We discuss this assumption
in page 53.
This leads to mobile data revenue CAGR of 23% over 2011-2015e, basically in line
with the 24% CAGR observed over 2009-2011. However, we must emphasise that
visibility is very low regarding the balance between the expected growth in traffic and
the expected decline in prices. As discussed below, any small move in either of the
variables can have a massive impact on trends for the whole sector.
Figure 21: Key assumptions on smartphone penetration, usage and revenue
80%
6
70%
5
60%
50%
40%
30%
2
20%
1
10%
0%
90%
100%
Smartphone penetration (% of pop)
90
1.8
80
1.6
70
1.4
60
1.2
50
1.0
40
0.8
30
0.6
0.4
20
0.2
10
0.0
2.0
0
2009
Total traffic
2010
21
EUR/GB
Telecom Operators
Regarding voice, our core scenario largely reflects continuity compared to current trends:
we model +1.4% voice traffic CAGR until 2015e, slowing down only modestly
compared to the latest trend (+2.3% in Q4 11). This does not include a large
cannibalisation of traditional mobile voice traffic by mVOIP or by messaging which
represents a risk to our scenario;
we expect the average price per outgoing minute to decrease by 12% per year,
from the current EUR0.09/min to EUR0.05/min by 2015e. This is a sharp decline, but
again in line with the latest trend and the long term level of EUR0.05/min could prove
optimistic, i.e. it has already been reached in many offers across many markets.
On SMS however, we take a more aggressive stance: we expect this revenue stream
to decrease by 8% per year in the period 2011-2015e, an important change of trend
compared to the last few years (SMS revenues were up 3% in 2011). We expect SMS
revenues to be cannibalised over time by messaging applications, both independent
services (such as WhatsApp or equivalent) and smartphone-native applications (such
as RIM Blackberry Messenger, or iMessenger in Apples devices) see details in
page 34. Such cannibalisation has started notably in the Netherlands (see Figure 17).
Figure 22: Core scenario Revenue outlook for mobile voice and SMS
Mobile voice & SMS drivers
2010
2011
2012e
2013e
2014e
2015e
2011-2015e CAGR
882,329
0.089
0.059
0.097
919,386
0.077
0.041
0.087
937,774
0.067
0.028
0.078
951,841
0.057
0.015
0.069
961,359
0.049
0.011
0.060
970,973
0.042
0.009
0.052
1.4%
(13.9%)
(31.1%)
(12.3%)
18.5
4.1
22.5
19.8
16.5
4.2
20.7
18.7
14.7
4.2
18.8
17.5
12.7
3.9
16.6
15.9
11.0
3.5
14.5
14.0
9.5
3.0
12.4
12.0
(13.1%)
(8.0%)
(12.0%)
(10.6%)
2009
2010
2011
2012e
2013e
2014e
2015e
CAGR 09-15e
France
Netherlands
UK (GBpence)
Italy
Germany
Spain
Portugal
Sweden (SEK)
Denmark DKK
Norway (NOK)
Finland
Belgium
Average big 8
YoY in EURc
5.8
8.3
5.2
8.6
7.1
7.0
6.8
38
57
58
4.9
8.5
7.3
(1.4)
3.9
6.8
4.2
7.4
6.5
5.5
5.3
29
48
50
4.8
6.8
5.9
(1.4)
2.5
3.7
3.3
6.5
3.6
4.5
3.6
23
37
30
4.4
4.3
4.1
(1.8)
1.3
2.6
1.3
4.2
3.4
3.5
2.2
13
28
25
3.7
2.6
2.7
(1.4)
0.8
2.1
0.7
1.3
1.8
2.3
1.3
10
23
15
2.8
1.1
1.4
(1.2)
0.8
1.5
0.7
1.0
1.3
1.1
1.2
10
21
12
2.8
1.0
1.1
(0.4)
0.7
1.0
0.7
1.0
0.8
1.0
1.0
10
19
10
2.2
0.9
0.9
(0.2)
(29%)
(30%)
(28%)
(30%)
(31%)
(27%)
(27%)
(20%)
(17%)
(25%)
(12%)
(31%)
(29%)
(1.1)
* Average over the full year, per country, with MTRs of different operators weighted by market shares.
Source: Arthur D. Little, Exane BNP Paribas estimates
22
Telecom Operators
Further risk on roaming - The European Parliament is pushing for steeper reduction
in retail roaming fees than proposed by the European Commissioner Nelly Kroes in
2011, proposing: EUR0.15/min for voice calls (versus Kroes proposal of EUR0.24),
data capped at EUR0.20/MB (versus EUR0.50) and SMS capped at EUR0.05 (versus
EUR0.10). Under the Parliament's proposal, the caps proposed by Ms. Kroes would
come into force in July 2012, but the steeper cuts would be implemented from 2013.
Discussions are ongoing to reconcile the two sets of proposals.
The Commission is also willing to introduce structural measures to boost competition in
the roaming market, e.g. allowing customers to sign up (from 1 July 2014) for a
cheaper mobile roaming contract, separate from their contract for national mobile
services, whilst using the same phone number.
Roaming rate reductions are therefore likely to end-up being more aggressive than
anticipated. Roaming still represents 5-8% of European mobile operators' revenues and
a slightly greater share of EBITDA. This is a potential additional negative for the sector.
ARPU (EUR/month)
80%
18%
50
70%
16%
45
14%
60%
12%
50%
40
35
30
10%
25
40%
8%
30%
20
6%
15
4%
10
10%
2%
0%
0%
20%
2009
2010
2011
2009
Normal broadband
2010
2011
Normal broadband
Pay-TV
Pay-TV
23
2012e
2013e
2014e
2015e
Super-fast bband
Telecom Operators
Figure 25: Core scenario Revenue outlook for fixed broadband and pay-TV
Fixed-line drivers
2010
2011e
2012e
2013e
2014e
2015e
2011-2015e CAGR
28.6
22.5
12.0
26.3
23.4
12.7
23.9
23.9
13.4
21.5
24.5
14.1
19.1
25.2
14.9
16.8
25.8
15.7
-10.5%
2.5%
5.4%
42,007
1,434
40,572
43,736
1,965
41,771
44,842
3,515
41,327
46,211
5,935
40,276
47,559
8,460
39,100
48,891
11,080
37,811
2.8%
54.1%
-2.5%
102,969
2,986
99,983
107,775
4,419
103,356
113,183
9,140
104,043
118,626
14,294
104,332
124,105
19,888
104,217
129,619
25,924
103,695
4.7%
55.6%
0.1%
66.2%
1.9%
64.3%
2.9%
69.1%
2.8%
66.3%
4.1%
72.3%
5.8%
66.5%
8.1%
75.6%
9.1%
66.4%
12.1%
78.8%
12.6%
66.2%
16.0%
82.0%
16.4%
65.6%
20.0%
35.1
46.8
34.8
12.0
34.6
44.2
34.2
10.0
33.8
43.2
33.2
10.0
33.2
42.2
32.2
10.0
32.7
41.2
31.2
10.0
32.1
40.3
30.3
10.0
-1.8%
-2.3%
-3.0%
0.0%
78,109
50.2%
24.0
80,615
51.7%
24.5
83,355
53.3%
25.1
86,113
54.8%
25.8
88,888
56.4%
26.4
91,682
58.0%
27.0
3.3%
2.4%
90
50
80
45
40
70
EUR/month
Customers (m)
35
60
50
40
30
25
20
30
15
20
10
5
10
Legacy pay-TV
DTH (satellite)
Incumbents IPTV
Cable
PT
Orange F
DTE
KPN
BGCM
Ziggo
Zon
TNET
VMED
Sky DE
Sky IT
Sky UK
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
09 09 09 09 10 10 10 10 11 11 11 11
Canal+
IPTV
* Belgacoms IPTV ARPU is stated as reported, i.e. with the discount offered to pack customers applied proportionately to telephony, broadband and
TV ARPU rather than only applied to TV ARPU.
Source: Arthur D. Little, Exane BNP Paribas estimates
24
Telecom Operators
60%
40%
50%
35%
30%
40%
25%
30%
20%
15%
20%
10%
10%
5%
0%
0%
2009
2010
2011
2012e
2013e
2014e
2010
2011
Triple-play penetration
Revenue share
2012e
2013e
2014e
2015e
2015e
25
Telecom Operators
100%
16
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
14
SP
12
10
PT
8
DE
BE
6
IT
UK
4
NL
2
FR*
0
PT
2009
BE
NL
FR
2010
SP
DE
UK
IT
0%
20%
40%
60%
80%
2011
*In France, double-play is not offered separately from triple-play, hence an inferred price premium of zero
**Belgacom penetration based on unique TV customers (excluding multi-boxes equipment) as a % of consumer broadband customers; KPN
penetration based on TV customers as a % of consumer broadband customers.
Source: Arthur D. Little, Exane BNP Paribas estimates
26
100%
Telecom Operators
2010
2011e
2012e
2013e
2014e
2015e
CAGR
110,778
53,327
42,007
22,450
228,561
107,069
49,131
43,736
23,722
223,658
103,771
44,860
44,842
25,148
218,621
99,847
40,510
46,211
26,620
213,188
97,855
36,175
47,559
28,139
209,728
97,144
31,941
48,891
29,705
207,681
(2.4%)
(10.2%)
2.8%
5.8%
(1.8%)
41.2%
70.0%
42.8%
4.4%
44.6%
40.5%
70.0%
41.8%
5.1%
43.5%
40.2%
70.0%
41.4%
6.5%
42.7%
39.9%
70.0%
41.1%
7.7%
41.9%
39.6%
70.0%
41.1%
9.0%
41.1%
39.4%
70.0%
41.3%
10.5%
40.4%
45,599
37,329
17,970
988
101,885
43,335
34,392
18,300
1,301
97,328
41,671
31,402
18,576
1,647
93,296
39,829
28,357
18,987
2,055
89,228
38,785
25,323
19,526
2,534
86,168
38,304
22,359
20,192
3,105
83,960
162%
70%
23%
34%
61%
70%
19%
25%
50%
70%
25%
24%
47%
70%
30%
28%
52%
70%
40%
32%
68%
70%
50%
37%
102,969
44,630
43%
27%
107,775
45,698
42%
22%
113,183
47,050
42%
25%
118,626
48,683
41%
30%
124,105
50,875
41%
40%
129,619
53,632
41%
50%
4.7%
4.1%
78,109
9,235
12%
55%
80,615
11,134
14%
76%
83,355
13,302
16%
79%
86,113
15,667
18%
86%
88,888
18,361
21%
97%
91,682
21,453
23%
111%
3.3%
18%
41%
21%
9.9
24%
10.6
28%
11.2
32%
11.8
36%
12.4
40%
13.0
(3.0%)
(10.2%)
2.5%
24.3%
(3.6%)
5.1%
Overall, our estimates point to incumbents increasing their pay-TV revenue market
share from 5% in 2011 to more than 10% in 2015e i.e. incumbents capturing c.30%
of the markets revenue growth in the coming years.
This positive view on telcos opportunity in pay-TV is backed by companies surveyed
for this report: 32 of the 74 respondents see pay-TV as a key growth driver (more than
for fixed broadband), reflecting 1) the growth potential into traditional pay-TV (via IPTV)
but also 2) new TV services, including web-based TV, time-shifting, VOD, etc.
We discuss the potential impact of over-the-top TV services on the telcos pay-TV
opportunity in page 53.
27
Telecom Operators
2012e
Bear x2
2013e
2014e
Bull x2
2015e
Bull and bear combined
* Bear x2 refers to a scenario combining our bear case n1 (on mobile voice and text) and our bear case n2
(on pay-TV), and Bull x2 refers to a scenario combining our bull case n1 (on mobile data) and our bull case
n2 (on broadband). Bull and bear combined refers to a scenario combining all alternative scenarios.
Source: Arthur D. Little, Exane BNP Paribas estimates
28
Telecom Operators
In addition, the rollout of LTE/4G will bring more capacity into the market and lower unit
costs to operators thereby constituting a potential trigger for mobile data price
deflation, depending on competitive intensity in each market.
Figure 31: Core scenario Incumbents core revenue outlook
Mobile data
Traffic per smartphone in 2015e (GB/month)
Average revenue per GByte in 2015e (EUR)
Mobile data revenue CAGR 2011-2015e
Data revenue per pop 2015e (EUR/month
Mobile voice & text
Voice traffic growth in 2014-2015e
Voice revenue CAGR
SMS revenue trend in 2014e
SMS revenue CAGR
Voice & text revenue per pop 2015e (EUR/month)
Core
Bull
mobile data
1.9
6.0
23.2%
10.1
2.5
7.0
37.1%
15.5
1.0%
(12.8%)
(10.0%)
(7.7%)
12.4
Fixed broadband
2015e super-fast broadband % of broadband
2015e super-fast broadband incremental ARPU
Broadband revenue per pop 2015e (EUR/month)
20%
10
11.3
Pay-TV
2015e pay-TV penetration
2015e pay-TV ARPU
Pay-TV revenue per pop 2015e (EUR/month)
58%
27
6.9
2011-2015e CAGR
Mobile service revenue
Fixed-line & broadband
Pay-TV
Total sector
Total revenue per pop 2015e (EUR/month)
Bear
voice & text
Bull fixed
broadband
Bear Pay-TV
(10.0%)
(18.8%)
(26%)
(20.8%)
8.7
40%
15
12.6
52%
22
5.0
(2.4%)
(3.4%)
5.8%
(1.8%)
3.0%
(3.4%)
5.8%
0.8%
(6.7%)
(3.4%)
5.8%
(3.8%)
(2.4%)
(1.8%)
5.8%
(1.2%)
(2.4%)
(3.4%)
(2.2%)
(2.8%)
48.1
53.5
44.4
49.4
46.3
29
Telecom Operators
30
Telecom Operators
35.8%
33.2%
35%
25%
30%
20%
25%
15%
20%
15.9%
15%
10%
10.1%
10%
5%
5%
0%
0%
2009
EBITDA margin
Leaders
2010
2011
2012e
2013e
2014e
2015e
Capex/sales
ROCE
Challengers
Mobile leaders
Mobile challengers
In our core scenario, the sectors ROCE should fall to 15% by 2015e, including 18% for
the leaders, still a healthy return, but with challengers continuing to struggle, on
average, at 8%.
Importantly, this outlook is based on our view that operators will be able 1) to reduce
costs by 2% p.a., because a significant portion are variable costs but also because they
have opportunities to transform their business model; and 2) to control capex despite
the large growth expected in traffic, thanks notably to network sharing opportunities
(see analysis on opex and capex, page 101-104).
In our bull case on mobile (Bull case N1), the long term ROCE of the sector would
return to 20%, i.e. the 2010 level, with leaders at 22% and challengers at 12%. In our
view, such a scenario is unlikely as it would mean that all players, large and small,
would create much more value than today i.e. it would indicate a significant return of
pricing power, which looks unlikely given competitive pressure and regulation.
31
Telecom Operators
Conversely, in our bear case (Bear case N1), the long term returns would fall to 12%
on average, with 15% for leaders (still fine) but only 6% for challengers, i.e. significantly
below their cost of capital. This would be an unsustainable level, similar to that
achieved by T-Mobile USA in 2011 and the key reason why Deutsche Telekom has
decided to seek a structural solution for the business. In other words, we believe that
should this bear case unfold, smaller operators would seek consolidation in a majority
of European markets.
Figure 33: Impact of scenario analysis on the sectors ROCE
30%
26%
24%
25%
22%
21%
21%
20%
20%
20%
18%
17%
15%
15%
15%
12% 12%
10%
8%
9%
8%
8%
6%
5%
0%
2009
2010
2011
ROCE
Mobile leaders
32
Telecom Operators
WhatsApp, which already carried 5% of the worlds SMS traffic in November 2011, is
one of the three most downloaded paid iPhone applications in nine European countries;
Google, Microsoft, Apple, etc. all have an interest in upping their game in
communication services and the growing integration of hardware and software
(Google/Motorola, Nokia/Microsoft/Skype, Apple) gives them new firepower.
In a bear case scenario, our 2015e mobile revenue estimate which is already 9%
lower than the 2011 figure would be cut by another 8%.
For fixed-line, over-the-top TV propositions are evolving very quickly in terms of both
hardware and services all made possible by ever faster broadband. Viewing habits
are changing fast, with a massive generational effect.
From the telcos perspective we believe that OTT TV is not risk free, but it is overall
more a positive than a negative: 1) whatever the impact on pay-TV, telcos have limited
exposure to downside in this market; 2) playing the OTT game is an opportunity for
telcos to differentiate from legacy pay-TV players; 3) last but not least, OTT TV should
have a positive impact on fixed broadband, pushing towards faster speeds.
Operators are generally concerned by the OTT risk on mobile and see OTT content as
an opportunity. They are not standing on the sidelines in this respect. The most
effective moves expected from telcos are: 1) price bundling which we think can
basically halve the risk of cannibalisation of mobile operators legacy revenues;
2) tiered pricing, in mobile but also in fixed to make sure that revenues increase in
line with traffic growth; 3) leveraging the box, in fixed-line; and 4) developing wholesale
revenues from OTT providers, although this is difficult to quantify except for the CDN
activity, a relatively small opportunity.
33
Telecom Operators
As shown in the chart above, three quarters of companies surveyed consider over-thetop services as a risk to mobile operators voice and SMS revenues (NB: The 11%
responding that OTT voice is an opportunity are mainly new entrants/challengers i.e.
operators that have the opportunity to gain market share from a change in consumer
habits these are the disruptive players in the market). On the other hand, more than
half consider OTT content services as an opportunity, versus 26% a risk.
Figure 34: Interview feedback OTT a risk or an opportunity?
Voice
Messaging
Opportunity
11%
Neutral
26%
Neutral
15%
Content
Opportunity
0%
Risk
74%
Neutral
21%
Risk
74%
Risk
26%
Opportunity
53%
34
Telecom Operators
Figure 35: OTT players are strong innovators, continuously adding services
ClassicTelco
services*
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
Video conference
9
9
9
9
9
Advanced
management
Integration with
social networks
9
9
mVoIP
Voice
Voice chat
Call out
Phone No.
Redirection
Voicemail
Conferencing
Other
Video/Data
Block callers
IM
SMS
File
transfer
Voice
chat
Video call
9
9
9
9
9 (normal call)
9 (B2B)
9
9
9
9
9
9 (B2B)
9
9
In m
680
663
Comments
Independent OTT
~20% of worldwide
international calls
660
Messaging only (no Skype
integration on mobile)
440
425
420
400
380
17m users in
9 months
5% of world SMS
360
350
50
50
50
Only major
OTT service
belonging to
telco
35
40
23
20
13
20
0
Skype
facebook Gmail
(mobile)
BBM
Whats
app
NimBuzz mig33
ooVoo
Tango
JaJah
RebTel
The number of active users is much lower, and switching barriers are low so users
often use several applications. We estimate that the penetration of mVOIP applications
in the European mobile customer base currently stands at less than 2% (c.5%
penetration within smartphone customers).
35
Telecom Operators
Skype has been a feature on the fixed-line for years but has failed to take off on
mobile devices because of a combination of 1) operators initiatives to block mVOIP on
their networks, 2) quality issues, and 3) high mobile termination rates, meaning that
Skype-Out calls have remained relatively expensive.
However, the penetration of OTT applications on mobile phones is likely to rise strongly
in the coming years due to a combination of factors:
1) the rising penetration of smartphones,
2) the progressive rollout of 4G/LTE networks, which will dramatically improve the
quality of voice over IP on mobile,
3) the reinforcement of net neutrality rules in Europe (see page 51),
4) the competition from mobile challengers, which are often first-movers in promoting or
allowing VOIP with their customers (e.g. 3 UK with Skype several years ago),
5) the likely viral effects which will take place when the OTT customer base will
increase (e.g. WhatsApp experience in the Netherlands).
Voice and messaging applications are likely to develop, but we believe that the largest
risk lies with SMS. Indeed:
regarding voice, mVOIP can be very appealing because it promises to cut the
customers main expense in mobile, namely voice (voice still represents 63% of bills in
Europe). However, quality of the service remains an issue. Except for specific calls like
international calls to friends and family, customers are not ready for lower voice quality
or dropped calls. While the quality of mVOIP has improved greatly, carrier class quality
is not expected before 4G is rolled out.
regarding SMS, handling a short data message such as a SMS is very easy and does
not suffer from quality issues. As well as being free, messaging applications propose a
superior user experience compared to basic SMS. Finally, in addition to rapidly spreading
applications such as WhatsApp, new messaging systems are embedded into handset
(e.g. Apples iMessenger). We therefore believe that unless operators take decisive
action (see page 50), SMS revenues could be rapidly cannibalised.
36
Telecom Operators
Figure 37: WhatsApp one of the most downloaded paid applications on the Appstore (rank)
Country
27 Jan 12
28 Feb 12
NL
SP
AT
CH
IR
BE
GR
DE
IT
PT
UK
SE
FI
FR
DK
NO
1
1
1
1
1
1
1
2
1
2
2
1
2
2
3
3
3
3
4
4
6
6
6
6
>10
>10
>10
>10
>10
>10
>10
>10
The charts below, which compare the number of searches in Google for WhatsApp to
the well established Skype reference (and also to Viber), show the strong take-off of
WhatsApp throughout 2011 in particular in the Netherlands and Spain, and to a lesser
extent in the UK, and the lack of take-off in France. They also show that the interest for
Viber remains far smaller.
Figure 38: The growing popularity of WhatsApp according to Google Trends, depending on countries
Netherlands
Spain
UK
France
37
Telecom Operators
Microsoft has been established in messaging services for a long time (Microsoft
Messenger) and has more recently acquired Skype. Skype could be fully integrated into
Windows (on fixed-line and smartphones) and into the Xbox environment.
Apple: the groups core business is to sell hardware (iPhone, iPad, etc.) but it also
develops services (in particular iTunes and the AppStore) as an additional revenue
stream and as a side benefit to its hardware activity. Unlike Google and Facebook,
Apple has a billing relationship with customers via iTunes so it is a bigger threat
regarding paying services. Facetime is an example of the power of Apples platform.
Amazons core activity is e-commerce, in particular selling content (originally
books), but the group sees any means to boost its content business as an opportunity
to develop new revenues. For instance, it is leveraging its powerful IT infrastructure
with its cloud offering (Amazon Web Services), and pushing into the mobile device
arena (Kindle, Fire). Like Apple, Amazon has a billing relationship with customers.
Figure 39: Positioning of key internet leaders in communication services
Original business &
main revenue driver
Business: Web search
Revenues: Ads
Business: Social
network
Overall strategy
Revenues: SW licences
Revenues from HW
(c.30-40% margin per
device)
Business: eCommerce,
cloud
Revenues: low margin
in all businesses
Web
search
Customer
identity
Google
account
Billing
relationship
Free services to
attract users and
gather data
Core activity is to
make users
communicate with
other users
Facebook
website
(c.800m)
Facebook
account
Development of
virtual money
( Facebook
credits )
Try to sustain
position in PC
ecosystem
Skype buy-out
probably to
integrate to Office
& Xbox
environment
Windows,
Xbox Live,
Hotmail
(330m)
United
profile with
Windows 8
For business,
monthly fees
(Office 365) ; not
regular revenue
for non-corporate
Integrated HW
ecosystem ;
Extension of
services
through SW
HW opportunities :
iPhone , iPad
HW
devices
iTunes
account
Credit-card
number for iTunes
Still limited in
services
Apple
stores
Selling content,
getting in the
cloud
Leverage
infrastructure for
cloud services
HW
devices
Amazon
account
Credi-card number
of eCommerce,
One-clic shop
Grow new
revenue fields
Business: HW & OS
Customer
gateways
Digitalization
of the world to
gather and
monetize data
Revenues: Ads
leveraging user data
Business: OS &
productivity
Communication
services
Gmail
(c.200m)
Website,
Kindle
service
Limited
monetization of
users
Android market
Could cannibalisation affect mobile operators, for voice and/or for SMS?
The voice and SMS revenues most at risk of cannibalisation are the out-of-bundle and
prepaid parts which are directly driven by usage, unlike the in-bundle voice and SMS
usage which could be impacted over time, but a bundling strategy with data can
protect them. Consumer out-of-bundle and prepaid revenues represented respectively
12% and 26% of Vodafone Europe service revenues in Q4 11 (see chart below).
38
Telecom Operators
In our core scenario, mobile service revenues are expected to decline by 2.4% per year
until 2015e but in a bear case with a strong cannibalisation of voice and text
revenues by OTT applications, we estimate that the mobile service revenue decline
could more than double, to -6.7% per annum until 2015e.
Figure 40: Assessing operators revenue exposure to voice and text cannibalisation
Split of Vodafone Europe service revenues, Q4 11
Other
5%
Enterprise
30%
Consumer
prepaid
26%
Consumer
contract,
incoming
5%
Consumer
contract, out
of bundle
12%
Consumer
contract, in
bundle
22%
0
SP
NL
IT
DE
PT
BE
FR
UK
DK
2011e
2012e
2013e
2014e
2015e
25.2
16.5
2.0
14.6
8.6
4.2
4.4
24.3
14.7
1.4
13.3
9.6
4.2
5.5
23.3
12.7
0.7
11.9
10.6
3.9
6.7
22.8
11.0
0.5
10.4
11.8
3.5
8.2
22.5
9.5
0.5
9.0
13.1
3.0
10.1
(9%)
(11%)
(11%)
(11%)
0%
(25%)
0%
(25%)
(6%)
(13%)
0%
(25%)
0%
(12%)
(15%)
(15%)
(15%)
0%
(31%)
0%
(44%)
(9%)
(20%)
0%
(39%)
0%
(15%)
(19%)
(19%)
(19%)
0%
(38%)
0%
(63%)
(10%)
(27%)
0%
(54%)
0%
(17%)
(23%)
(23%)
(23%)
0%
(44%)
0%
(81%)
(10%)
(34%)
0%
(68%)
0%
(17%)
(28%)
(28%)
(28%)
0%
(50%)
0%
(100%)
(9%)
(41%)
0%
(83%)
0%
22.9
14.8
1.8
13.0
8.1
3.7
4.4
21.3
12.5
1.2
11.3
8.8
3.3
5.5
19.8
10.2
0.6
9.6
9.6
2.9
6.7
19.0
8.4
0.4
8.0
10.6
2.3
8.2
18.7
6.8
0.3
6.5
11.8
1.8
10.1
38%
5%
2%
51%
16%
8%
67%
28%
18%
82%
39%
32%
95%
50%
48%
150%
140%
130%
120%
110%
(0.2%)
(0.9%)
(2.6%)
(5.0%)
(7.5%)
39
Telecom Operators
This is based on a scenario whereby 50% of smartphone users i.e. 48% of the
population by 2015e would use such OTT services, and these would:
reduce the out-of-bundle usage of voice and text to zero for contract customers
(hence including international and roaming revenues, but also a large part of the
national out-of-bundle revenues). We have used the above-mentioned data published
by Vodafone;
40
Telecom Operators
Figure 42: Evolution of over-the-top video content services and key figures for
the German market
1st Generation
2nd Generation
PC
Set-top box
3rd Generation
Multiscreen
The latest trend is the rise of connected TVs, with consumer electronics manufacturers
such as LG or Samsung now launching a second generation of such TVs. Once
connected to a broadband line (with no need for a box), smart TV sets aggregate
content from a variety of sources, including OTT video services such as Netflix or
Youtube, but also integrate communication services such as Facebook. These players,
in particular Samsung, also forge local content partnerships and have widgets of local
content producers and broadcasters in their app stores.
The next key steps could involve: 1) a launch by Apple of its own TV set, iTV as
reported by the press, and 2) a further push by Google on the Google TV concept
with the strategic aim of lodging its OS and services in connected TV sets (similar to
the Android push into smartphones) with for instance Sony having signed a
partnership to launch Google TV in the UK in 2012. Another sign that Google is
seriously looking at the TV market is the report that the company is seeking permission
to establish a satellite dish station in the US, able to receive satellite-based content
feeds from TV stations.
In terms of services, beyond Youtube (which is getting content of its own, and evolving
towards HD etc.), the most successful services are:
A few independent services such as Netflix (24m customers in the US at end
2011), just launched in the UK and other countries in Europe should follow. Netflix is
hardware agnostic i.e. it is available on the PC but also on the TV if connected to the
PC or via the leading game consoles (Wii, PS3, Xbox360, Vita). In the UK, competitors
include notably Lovefilm (owned by Amazon) and Blinkbox (owned by Tesco).
Services launched by content owners and TV stations such as Hulu in the USA,
BBC iPlayer and ITV Player in the UK, M6 Replay in France, maxdome by
ProSiebenSat1 and Mediathek by ZDF in Germany, or ipla in Poland.
41
Telecom Operators
In Western Europe, the number of screens available per person has grown from 1.7 in
2000 to 3.6 in 2011e. This has mainly been driven by PCs, mobile phones and other
mobile devices (such as tablets) while the number of TV sets grew only slightly.
These additional screens are a key driver for new ways to access video content:
TV viewing continues to increase in Western Europe, but Internet delivery is capturing
most of the growth in terms of time spent.
This is made possible by the digitalisation of content and the all-IP nature of networks
and devices, combined with the increases in broadband speeds (in particular with the
advent of super-fast broadband on cable, and progressively on telcos).
For example, a UK Ofcom report in 2011 showed that customers who migrated from
classic broadband to super-fast broadband increased their usage of OTT content
services: +63% for streaming of HDTV programmes or films, +54% for streaming of
SDTV programmes or films, +35% for watching short video clips (e.g. on Youtube).
Figure 43: Key trends in content consumption
Hours spent per media per week (Western Europe)
Number of screens
per person
CAGR
48,2
48,0
12.0
12.3
+5.74%
3.9
3.8
-2.78%
4.9
4.7
-1.98%
13.2
12.4
1.7
2.6
3.3
3.6
1,477
11.3
8.8
4.0
4.5
5.2
5.3
13.0
14.8
Installed screens
(in millions)
1,335
1,021
158
-0.78%
144
583
541
678
405
151
14.5
2004
15.3
2006
14.2
2008
Internet
Radio*
Magazines
Television*
14.8
313
258
320
0.34%
63
2000
2010
Newspapers
352
363
123
184
218
2005
2010
2011
335
Mobile phones
TVs
PCs
Finally, there is a strong generation effect at play: 1) in the US, consumers aged 18-34
watch twice as much video on the internet than those aged 50-64, on average, and
they spend 30-40% less time watching TV, according to Nielsen; 2) in Germany, 90%
of the 14-29 years old access online video, versus only 24% of the 50+ years old. As
under-25s grow older, they are likely to keep some key consumption habits.
Overall, we believe that Europe is progressively getting ready for the rise of OTT TV,
with a few countries at the forefront.
This is notably the case of the UK, where customers have been accustomed to OTT
content thanks to the BBC iPlayer, and the first country where Netflix has launched in
Europe. The company has recently described its UK launch as very successful
(Were seeing faster member growth than we did when we launched [in] Canada). In
Central and Eastern Europe, OTT video has also seen significant success, with
multiple independent and broadcaster-backed platforms competing for audience (e.g. in
Poland alone there are at least five platforms such as ipla, and Romania also has
multiple OTT platforms, amongst others dolce.tv).
42
Telecom Operators
43
Telecom Operators
in any case, OTT players are likely to focus their offers on cheaper content rather
than premium content including free-to-air TV and relatively inexpensive channels,
catalogues of older movies and shows, and a few high profile content propositions.
This means that OTT services should position themselves in a similar way as telcos on
IPTV. Despite early challenges and hiccups, most telcos have been able to grow into
successful triple-play providers. They do not compete head-on with the very high-end
of premium content satellite players, but they do a good job versus the basic-TV
offerings of cable operators.
90
4,000
3,500
80
25,000
3,000
70
2,500
60
20,000
2,000
50
1,500
15,000
1,000
40
30
500
10,000
20
(500)
5,000
10
(1,000)
Cable (big 4)
Satellite
IPTV
Subscribers
Q3 2011
Q1 2011
Q3 2010
Q1 2010
Q3 2009
Q1 2009
Q3 2008
Q1 2008
Q3 2007
(1,500)
Q1 2007
Q3 2011
Q2 2011
Q1 2011
Q4 2010
Q3 2010
Q2 2010
Q1 2010
Q4 2009
Q3 2009
Q2 2009
Q1 2009
Q4 2008
Q3 2008
Q2 2008
Q1 2008
Net adds
Source: IEAA Mediascope 2010, Arthur D. Little, Exane BNP Paribas estimates
As shown on the left above, customer numbers at the traditional US pay-TV players
(the four big cable operators plus satellite players) have dipped since Q4 10. However,
including IPTV customers, the total number of pay-TV customers in the US has
continued to rise by c.1%. This is slightly down from +2% in 2009 and H1 10, but given
the economic environment it is hard to attribute the slowdown to the OTT factor alone.
The situation is not so advanced in Europe with pay-TV penetration at 52% so the
risk of cannibalisation should be milder. We have nevertheless modelled the sensitivity
of the overall sector top-line to alternative scenarios on pay-TV. A bear case assuming
no increase in pay-TV penetration between 2011 and 2015e (stalling at 52%) and
ARPU decreasing to EUR22/month in 2015e (compared to EUR27 in our core
scenario) would deflate the total sector revenue CAGR (including fixed+mobile+payTV) by 1% (-2.8% versus -1.8%).
44
Telecom Operators
-1.8%
52%
22
27
32
-2.8%
-2.2%
-1.6%
-2.6%
-2.0%
-1.4%
-2.5%
-1.8%
-1.2%
-2.3%
-1.7%
-1.0%
64%
-2.2%
-1.5%
-0.8%
Pay-TV players have identified the risk and are developing initiatives to fend off the
OTT risk on their core business. For instance:
in France, Canal+ has launched an SVOD service (subscription video-on-demand)
called Infinity, which is available to SFR and Free broadband customers (soon on
Bouygues Telecoms Bbox) for EUR9.99/month with no commitment. This pre-empts
potential moves from OTT players and widens the potential customer base of Canal+ to
all French broadband households;
in the UK, as of now, BSkyBs online streaming service Sky Go is only open to Sky
customers, but the company plans to launch a standalone OTT service in H1 12,
available to non-Sky customers, with no minimum commitment. Sky announced
accessibility for a wide range of devices (PCs, tablets, mobile phones, game consoles,
connected TVs), a flexible pricing scheme (choice between unlimited access, pay
monthly or pay-for-use) and selective access to Skys content portfolio. Separately,
BSkyB is also letting catch-up TV services from the BBC (iPlayer) and ITV onto its box,
with less control over the user interface and editorial control of front pages.
0%
13
18
8
-4.5%
-4.5%
-4.4%
45
-4.2%
-4.0%
-3.9%
-4.0%
-3.6%
-3.3%
-3.7%
-3.2%
-2.7%
80%
-3.5%
-2.8%
-2.2%
Telecom Operators
OTT as an opportunity to differentiate Telcos could use the new OTT trend to be
more disruptive in the pay-TV market i.e. to differentiate themselves from legacy payTV players. Opportunities include:
striking partnerships with OTT providers and bundling their services into their tripleplay packages. For instance, this is what TeliaSonera, Orange France, KPN or SFR
(France) are doing on the music side with Spotify or what Orange could do in France
via its partnership with Dailymotion (in which it has acquired a 49% stake);
pushing the multi-platform angle i.e. making content available on any device,
anywhere, in a seamless way. For instance this is the type of service proposed by
Mobistars Starpack offer in Belgium (not successful so far due to activation issues and
its reliance on satellite), or by the latest Bouygues Telecom Bbox in France.
These opportunities to differentiate could be especially relevant: 1) in markets where
telcos have failed so far to grow in triple-play and where existing TV providers are well
entrenched (e.g. Italy, the UK or Germany). For instance, in the UK, the Youview JV
could help BT and TalkTalk to expand further into triple-play; 2) more generally, for
mobile-only operators which have yet to significantly enter the triple-play market.
In any case, the sensitivity of incumbents revenues to a bull case is relatively limited.
For instance, if we assumed that they would be able to seize their fair share of the
pay-TV market i.e. that their customer market share of pay-TV would in the long run
equate their customer market share in broadband (42%e), this would point to revenue
CAGR of -3.0% versus -3.6% in the core scenario.
Indirect positive impact on broadband - A positive impact from the development of
OTT for the sector (including both telecom and cable operators) could be to drive
broadband revenues by:
1) expanding fixed broadband penetration potentially enabling a stabilisation or even
a return to growth in the number of fixed lines in the markets which have suffered most
from fixed-mobile substitution (e.g. Telekom Austria growing its number of fixed lines by
21k in 2011, admittedly from a low base);
2) pushing towards faster speeds and hence potentially driving broadband ARPU up,
even if no direct pay-TV revenue is captured by telcos.
As one interviewee put it, OTT content is pulling broadband, which is good. This is a
similar phenomenon as that observed on mobile, with the Apple iPhone and AppStore
driving mobile data traffic: even though mobile operators are not getting any revenue
from applications, they are getting a benefit from increased mobile data usage and
customers moving from higher speed services.
Indeed, OTT video services require up to 3.8Mbit/s of actual streaming speed for HD
quality video, as shown in the table below.
Figure 47: Broadband speeds required by different OTT video services
Service
Netflix HD
Netflix SD
BBC iPlayer
Hulu
M6 Replay HD
SeeSaw
Blinkbox
2.6-3.8
0.375-1.5
0.8-3.2
0.48-0.7
>1
Up to 0.5
0.27-1.1
46
Telecom Operators
According to Akamai, the average speed of broadband access in Europe has increased
by 26% yoy, to 5Mbit/s, but there are still only 29% of customers getting an average
speed in excess of 5Mbit/s and this percentage is below 20% in France, Italy and
Spain. This clearly highlights the need for faster broadband speeds for customers
willing to use OTT services providing a competitive edge to operators able to provide
faster speeds. This is currently mainly cable operators (e.g. in the Netherlands,
Belgium and Portugal), but as detailed in our 2011 report, we believe that telecom
operators also need to accelerate the rollout of super-fast broadband services.
Figure 48: Broadband speeds in Europe, according to Akamai
Country
% >5Mbit/s
YoY
IT
FR
SP
AT
UK
SE
DE
FI
PT
NO
CZ
DK
CH
BE
NL
14%
15%
18%
30%
31%
31%
33%
36%
40%
40%
50%
51%
51%
54%
68%
4.0
3.8
4.0
5.4
5.1
5.3
5.3
5.7
5.1
6.2
7.3
6.3
7.5
6.2
8.5
3.3
3.3
2.8
3.7
4.0
4.9
4.3
4.4
4.0
4.9
5.5
5.0
5.4
4.8
6.3
22%
15%
45%
47%
26%
7%
24%
29%
29%
26%
33%
25%
40%
28%
34%
Weighted average
29%
5.0
3.9
26%
The table below shows the sensitivity of the overall sector revenue CAGR to
assumptions regarding super-fast broadband penetration and ARPU in the long run.
Our core assumptions are 20% penetration of the broadband base by 2015e (versus
4% today) and an incremental ARPU of EUR10. Massively increasing the penetration
to 40% of the broadband base and assuming an incremental ARPU of EUR15 would
lead to a bull case scenario whereby the sectors revenue would decrease by a milder
1.2% versus -1.8% in the core scenario.
Figure 49: Sensitivity of the sectors revenue CAGR to super-fast broadband
2015e penetration, % of broadband customer base
10%
20%
30%
40%
2015e incremental
ARPU (EUR/month)
-2.1%
-2.0%
-1.9%
5
10
15
-2.0%
-1.8%
-1.7%
-1.9%
-1.7%
-1.4%
-1.8%
-1.5%
-1.2%
50%
-1.8%
-1.4%
-1.0%
Another opportunity for telcos associated with OTT could be to generate wholesale
revenues by charging them either for bandwidth or for additional services (e.g. CDN,
billing, etc.): we discuss these in page 57.
47
Telecom Operators
48
Telecom Operators
In any case, this risk of disintermediation should not be ignored, notably when
operators make strategic decisions about distribution or SIM-only.
Given the importance of devices for customers (the device is king), the player in
control of the distribution of devices has a stranglehold over the value chain. The
balance of power, previously in favour of telcos, could change further if they were to
significantly reduce their retail footprint and/or device subsidies to cut costs, while
players like Apple develop their own retail networks.
SIM-only leads to separating the handset from the service provider and could also
be a strategic risk for telcos. At this stage, we estimate that SIM-only represents less
than 5% of the customer base in Europe, and less than 15% of gross additions. But
there are two types of exceptions: 1) some markets have had no subsidies historically
(Italy, Belgium), and 2) a few others are currently moving away at least partially from
subsidies (Denmark and France).
CAGR
PB per Month
35.000
Internet video
+48%
File sharing
+23%
+29%
Video calling
+41%
Online gaming
+43%
30.000
25.000
20.000
15.000
10.000
5.000
49
+4%
+132%
Telecom Operators
50
10
15
20
25
30
35
40
45
50
Telecom Operators
In our view the most effective responses are: 1) price bundling, which we think can
basically halve the risk of cannibalisation of mobile operators legacy revenues;
2) tiered pricing, not just in mobile but also in fixed, to ensure revenues increase in line
with traffic growth; 3) leveraging the box, in fixed-line; and 4) developing wholesale
revenues from OTT providers, although this is difficult to quantify except for the CDN
activity, which is a relatively small opportunity.
Leader
Challenger
Partner with
VoIP provider
Impose a
surcharge
Prohibit use
of VoIP
In any case, European regulators have said that they are opposed to such blocking,
citing net neutrality rules. In the UK Ofcom has recently put pressure on operators
banning Skype.
The European parliament passed a Net Neutrality Resolution in November 2011,
which points to the potential of anti-competitive and discriminatory behaviour in traffic
management, in particular by vertically integrated companies and underlines that
ensuring quality in time-critical service traffic shall not be an argument for abandoning
the best effort principle.
On the other hand, the resolution states that as of now, there is no clear need for additional
European-level regulatory intervention on net neutrality. It also said it will wait for the
publication of new guidelines by BEREC (the body comprises all European national
regulators) in Q2 12 before deciding whether further regulatory measures are needed.
51
Telecom Operators
45%
80%
40%
70%
35%
60%
30%
50%
25%
40%
20%
30%
15%
20%
10%
10%
5%
0%
0%
Q4 10
Q1 11
Smartphone penetration
Q2 11
Q3 11
Q4 11
Europe
Smartphone penetration
52
UK
Revenues from integrated bundles
Telecom Operators
Such an approach should in our view keep the risk of revenue cannibalisation in check.
For instance, assuming that operators would be able to reduce the share of out-ofbundle revenues from roughly a third of consumer contract revenues to less than 10%
by 2015e, and assuming that prepaid tariffs would also be increasingly integrated
(i.e. selling voice, SMS and data top-ups together), the sensitivity of operators revenue
to cannibalisation would be drastically reduced. The impact of our bear case
cannibalisation scenario on operators revenue would be at least halved.
Adding OTT services into the bundles to add value
To defend against the threat of becoming dumb pipes, another pricing response from
operators is to bundle core services with specific OTT services with which they have
partnered. This would increase the perceived value of the whole bundle, to better
defend the operators core revenues.
This approach is popular among industry participants: of 93 interviewees, 27 talked
about the opportunity of developing partnerships with OTT players. And there are
already many examples of such an approach, both in fixed broadband and in mobile:
in mobile, the bundling of music services, for instance Deezer with Orange France
and Orange UK, and Spotify with 3UK or SFR in France;
in fixed-line, the bundling of video content services such as BBC iPlayer and TiVO
by Virgin Media, and also music services such as Deezer with Orange France, and
Spotify with TeliaSonera in Sweden and KPN in the Netherlands.
The value added here, notably on the fixed-line front, is that the offer can include
enhanced service quality relative to that available from an independent OTT offer,
because the operator can integrate the specific content in its core proposition (see
specific point on the box strategy below). The risk here is that operators could fail to
convince the consumer of the value added of such service bundles.
53
Telecom Operators
Figure 54 below shows how we have calculated the implied price of mobile data on a
subset of mobile contract pricing examples in France, the UK and the Netherlands, by
comparing the price of bundles with equivalent voice and text allowances but different
data allowances.
Figure 54: Mobile data pricing examples from six European markets
EUR per GByte, including VAT
70
65
60
55
50
45
40
35
EUR24
30
25
EUR13
EUR8
20
15
10
5
0
0.25-0.5GB
>0.5-1GB
>1GB
Offer 1
Price
Data
Orange France
Style 120*
Star 120
Star 180
Star 300
29
37
45
55
0.5
2
2
2
SFR (France)
Web 120
Web 180
37
43
1
2
Bouygues (France)
Relax 120
Smartphone 120
Smartphone 120
Smartphone 180
Smartphone UL
B&You
B&You
22
35
35
39
69
38
38
Orange UK
Panther 100
Panther 400
Panther 600
Vodafone UK
Offer 2
Price
Data
EUR/GB
Zen 120
Style 120
Zen 180
Zen 300
21
29
29
37
0
0.5
0
0
16.0
5.3
8.0
9.0
Connect 120
Connect 180
24
34
0.25
0.5
17.3
6.0
0.35
1
1
1
1
1
1
Classic 120
Classic 120
Relax 120
Relax 180
Relax UL
B&You
B&You
18
18
22
31
64
25
33
0
0
0.35
0.5
0.5
0.1
0.5
11.4
17.0
20.0
16.0
10.0
14.4
10.0
20.5
31
36
0.5
0.75
1
Dolphin 100
Dolphin 400
Dolphin 600
15.5
26
31
0.1
0.25
0.25
12.5
10.0
6.7
300 min
600 min
900 min
900 min
20.5
26
31
36
0.25
0.5
0.5
0.75
300 min
600 min
900 min
900 min
15.5
20.5
26
26
0
0
0
0
20.0
11.0
10.0
13.3
T-Mobile UK
300 min
600 min
900 min
25.5
30.6
35.8
0.5
0.5
0.5
300 min
600 min
900 min
15.3
20.4
30.6
0
0
0
20.4
20.4
10.2
KPN NL
100 min/SMS
200 min/SMS
350 min/SMS
450 min/SMS
30
37.5
47.5
57.5
0.1
0.25
0.75
1
100 min/SMS
200 min/SMS
350 min/SMS
450 min/SMS
20
28.5
40
50
0
0
0
0
100.0
36.0
10.0
7.5
Vodafone NL
125 min/SMS
225 min/SMS
325 min/SMS
28.5
36.5
44.5
0.3
0.5
0.7
125 min/SMS
225 min/SMS
325 min/SMS
20.0
29.3
39.0
0
0
0
28.3
16.1
8.5
* Origami Style 120 includes unlimited access to Deezer Premium (EUR4.99/month), which generates data consumption.
Source: Arthur D. Little, Exane BNP Paribas estimates
54
Telecom Operators
In our industry revenue model, we have used an average revenue per GByte of EUR26
for 2012e, with the figure falling to EUR6 for 2015e. In the long run, average traffic per
smartphone is expected to reach 1.9GB/month, so the revenue per GByte of EUR6 that
we have used actually assumes only a limited price decline compared to todays offers
for the heaviest users (EUR8.4 per GByte).
However, the adoption of fully tiered data pricing is not a given, given the competitive
pressures in many mobile markets. For instance, the well structured tiers launched by
UK and French operators could be disrupted by the respective push on unlimited data
pricing from 3 and T-Mobile in the UK (e.g. T-Mobiles Full Monty bundle including
unlimited texts and unlimited internet with no fair usage policy), and from Free Mobile in
France (EUR19.99/month for unlimited voice, unlimited SMS and 3GBytes of data).
55
Telecom Operators
Twitter calling(@call@)
56
Telecom Operators
57
Telecom Operators
The CDN opportunity - All large operators have made moves in this direction: AT&T
launched its own CDN in 2008, Deutsche Telekom has been partnering with Edgecast
for IPTV since 2009, BT has a CDN offer through BT Wholesale, KPN launched its own
CDN in 2009 with JetStream, Telecom Italia has a partnership with CDNetworks and
Telefnica launched its own CDN in 2010.
Telcos have two reasons to play the CDN market: 1) the monetisation of content
delivery, i.e. being paid by content providers to cache content closer to the customer,
and 2) the reduction of network costs: replicating the most heavily demanded content at
the edge of the network reduces the need for network capacity. Telcos have a
competitive advantage compared to global pure CDN players: they can cache content
in many more places, and are hence closer to the customers.
58
Telecom Operators
In m$ (2010)
Akamai
1.023
In bn$
CAGR
12
12
+46%
183
Limelight
10
8
115
Internap
6
Highwinds
+27%
100
4
Amazon Cloudfront
75
Level 3
60
Cotendo
2
0
2006
20
2008
2010
2012
2014
59
2016
Telecom Operators
Energy
Smart Metering & Smart Grid
Mobile
Devices
Includes:
- Medical Equipment
- Assisted Living
- eHospital
- Sports/Training
Smart
Home
Smartization
Smartization
Areas
Areas
Industrial Retail
Vending MachiProcesses nes & POS
60
Includes:
- Appliance Automation
- Security/Surveillance
- Consumer electronics
- Media
- Infrastructure
Moving Objects
Includes:
- Connected cars
- Commercial fleets
- Freight / Containers
- Logistics & Tracking
Telecom Operators
Telecom. Equipment
0.2%
0.9%
2.4%
2.5%
Telecom. Services
Energy: 3.8%
Solid Fuels
Liquid Fuels
Health: 4.0%
Heat Energy
Hospital Service
0.7%
0.1%
0.2%
0.5%
1.7%
1.8%
Electricity
Pharmaceutical Products,
Medical Appliances & Equipment
1.3%
Gas
1.5%
Outpatient Service
Transportation: 13.4%
6.7%
61
Telecom Operators
However, these are SIM cards with very low ARPU (for instance, Mobistar, which is in
charge of M2M for the Orange group, has released figures showing that in 2011, it
generated revenues of EUR13m with an end-of-year SIM card base of 417k, up from
193k a year earlier, pointing to ARPU of EUR34/month in 2011).
Our analysis of the largest verticals, as detailed in the following pages, point to
verticals altogether bringing revenues equivalent to between 2% and 5% of the telecom
sectors revenues by 2015e (more by 2020e) see table below.
Assuming a reasonably successful strategy built upon existing connectivity capabilities
and other strengths, and by partnering with existing service providers, large incumbents
would capture 75% of the verticals revenues, which would represent incremental
revenue of c.4% by 2015e. However, if these incumbents are more aggressive,
particularly if they move quickly, catch up and dominate the value chain, potentially by
acquiring other providers, they might achieve a higher proportion of revenue (up to 9%).
Figure 63: Overall view of telcos diversification opportunities
Sceptics case
EURm
Believers case
2010
2015e
20102015e CAGR
2015e
20102015e CAGR
97
254
58
111
84
150
114
20-40
898
664
800
177
343
258
847
989
409
225
4,713
47%
26%
25%
25%
25%
41%
54%
69%
39%
1,685
2,017
496
754
447
1,395
1,978
1,203
480
10,454
77%
51%
54%
47%
40%
56%
77%
109%
63%
228,561
229,460
0.4%
207,661
212,374
2.3%
-1.9%
-1.5%
-
207,661
218,115
5.0%
-1.9%
-1.0%
-
101,885
75%
674
102,559
0.7%
84,767
75%
3,535
88,302
4.2%
-3.6%
-2.9%
-
84,767
75%
7,840
92,608
9.2%
-3.6%
-2.0%
-
Connected cars
Fleet and freight telematics
Smart metering
Building automation
Vending machines
m-payment
Cloud
CDN
Others (including e/m-health)
Total
62
Telecom Operators
M2M
Cloud
Security
eHealth
Fin. Serv.
Orange
Energy
Deutsche Telekom
eHealth
Cloud
Energy
Cloud
eHealth
Vodafone
M2M
NFC
Advertising
New services
Verticals
VF "new services"
BB connectivity
Internet Access
Addressable market
Others
Group
growth
objectives
Revenues (bn)
61
3
11
63
5
15
CAGR
47 other business
43
2010-13: -2.9%
Connected Home
Revenues (bn)
Revenues (bn)
46
8
6
50
Addressable
market (bn)
10,00
62
6
13
Revenues
(bn)
1
4
2 1
8
10
7
2010
2013F
2010
2015F
2011
63
2015F
2010
2020
Telecom Operators
The chart below shows which verticals are seen as most promising by interviewees,
compared to OTT content delivery (see pages 40-50) i.e. financial services (mpayment), smart metering and moving objects.
Figure 65: Interview feedback Index reflecting the perceived size of the revenue
opportunities of different verticals
Average scores based on 86 responses, using: 0 for <1% of revenues by 2015, 1 for 1-4%, and 2
for 5%+.
OTT content delivery*
Financial services
Smart metering
Moving objects
Health
Home automation
mCommerce/mAdvertising
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
* OTT content delivery is not a vertical as per this section, but is included in this chart as a reference in terms of
revenue expectations.
Source: Arthur D. Little, Exane BNP Paribas estimates
It is important to keep in mind that these verticals are at different levels of maturity:
smart meters and cloud services are already at the commercial level; connected cars
are just moving to commercial, as are m-payment services based on NFC technology;
e-health is at the stage of pilot projects as are electric cars; smart home and smart
city are more in the concept/initial consultation phase.
64
Telecom Operators
What do telcos bring to the table? Beyond the core network capabilities, key
areas include:
their customer relationships including their access to a large customer base, billing
capabilities and trust from customers. However vertical partners such as utilities also
have access to large customer bases, so this may or may not be an asset that telcos
can monetise, depending on the specific vertical market;
their ICT capabilities, datacenters and more generally their ability to handle big
data. Here again, some telcos are well positioned but some verticals are dominated by
large IT services companies such as IBM.
In any case, telcos need to enter into JVs with other players in the ecosystem of each
vertical, i.e. potentially both the industry specialists (car manufacturers for connected
cars, banks for financial services, etc.) and other partners able to offer specific skills
(e.g. tech/equipment specialists bringing specific medical equipment in the eHealth
space, IT services/software companies/datacenter specialists in the big data field).
Based on our interviews with both telcos and their potential partners and competitors in
these verticals, we believe that the main challenges for telcos are: 1) their ability (or
lack thereof) to innovate and execute in new markets, 2) the uncertainty over the
willingness of different players in each ecosystem to collaborate with telcos (many see
them as potential competitors and would prefer telcos to only provide connectivity on a
wholesale basis), 3) the uncertain ability to expand their brand beyond the core telecom
business and 4) their willingness/ability (or lack thereof) to invest in areas that are less
profitable than their core business.
Key success factors for telecom operators in this area include in our view:
A significant adaptation of organisational structures, necessary to foster disruptive
innovation within large groups such as telcos. Operators need to create dedicated
business units with dedicated responsibilities for verticals, with appropriate
specialisation by vertical (matching the size of the organisation to the size of the target
market). The benefits of creating such dedicated business units include the ability to
attract talent and capital, and avoid interference from regulated areas.
Appropriate capital commitment. This is for instance the case when setting-up a
specific JV, as for instance the m2o city JV by Orange and Veolia to develop smart
metering in water distribution (said to aim at equipping 5m meters within 10 years).
Another example is the Telefnica Digital partnership with the cloud services company
Jovent, with Telefnica contributing to its latest USD85m fund raising.
65
Telecom Operators
Strong partnering. Telcos need to develop partnerships with the vertical industry
players driving the IP-isation of the sector.
A strong effort to build machine-to-machine platforms that can be leveraged across
verticals and across national borders.
The most advanced example of such an organisational move is that of Telefnica,
which regrouped all its OTT activities under one business unit called Telefnica Digital,
based in London, encompassing notably Jajah, Terra, Tuenti and O2 Media.
Figure 67: Telefnica Digital case study
Pooling of activities
in a dedicated
structure
Avoiding conflicts of
interest with other
businesses
Apps
Social
network
TV
VoIP
with appropriate
capital commitment
Manage investments in
new digital business
Coordination with
internal capital fund
Amerigo, Wayra and VCs
2,500 staff
in an attractive
location
HQ London:
Cosmopolitan workplace,
proximity with start-ups
Local government support
(Silicon Roundabout)
2012 Olympic games: trial
of new technologies &
services
Regional offices: Madrid,
Sao Paulo, Silicon Valley,
Asia
As discussed in pages 106-107, size matters in the verticals game and large
incumbents are best placed.
First, they have greater financial and personnel capabilities. While some verticals are
local and specific (e.g. healthcare and smart metering), others offer direct cross-border
scale synergies (e.g. smart vehicles). In addition, the ability to leverage platforms
across several countries and/or several verticals can be an advantage, as seen with
the worldwide M2M competence centre by Mobistar in the Orange group;
Second, incumbents core businesses are facing greater challenges than other industry
players (such as altnets and cable, which are still growing through market share gains).
They are hence more interested in exploring potential additional growth avenues.
Industry participants share the view that the best placed are the largest telcos such as
Vodafone, Telefnica, Deutsche Telekom, France Telecom, and their US counterparts.
66
Telecom Operators
2011
M2M
Aggregation
platform
Enverionment
Safety
2015F
70
Media/Content
Finance/
Payment
Commerce
e/m-Health
210
180
60
270
180
4
28
10
70
10
70
3
30
15
2011: 352bn
45
2015: 903bn
67
Telecom Operators
Landmarks
Parking
Remote
&
Proximity
Remittances
Vending
Travel
Member cards
Key ID
68
Telecom Operators
69
Telecom Operators
Google wallet uses embedded (in the phone) NFC chips for
enabling proximity payments at PoS
Existing credit cards can easily be added
Multi level Security is provided
Phone lock and Google pin
70
Telecom Operators
Banks see telcos mainly as partners, but some do also see them as potential future
competitors. Even though they do not see this as an immediate concern, banks
obviously want to maintain their customer relationships. Although payment services are
a core function of banks, this is not a key profit driver for them (e.g. there is pressure
from regulators on commissions between banks) so they see payment more as a tool to
enable the securing of clients.
The attraction of the payment data is indeed what drives global internet giants such as
Google into this field, and it is also an opportunity for telcos so competition for these
data is likely to be fierce.
71
Telecom Operators
Vending machines and other payment terminals Still value to play for
Besides the development of NFC and m-payment, another area related to payment will
generate revenues for telcos: vending machines and payment terminals.
In this B2B market, telcos provide M2M connectivity to retail/vending machine
operators, hotels and banks. The market can be segmented according to the different
types of services provided: alarm systems, online authentication/payment, performance
measurement, re-fill and repair notification.
For instance, embedded M2M modules in unmanned gas stations, vending machines
or parking meters can improve maintenance and repair with remote diagnosis, and also
ensure that vending machines are appropriately stocked with enough supplies to meet
demand. Connectivity can be made in unexpected places: Orange Business Services
will provide M2M connectivity for Nespresso. The companys B2B revenues heavily
depend on the adequate supply and reliability of its coffee machines.
Potential revenues for telcos - We have made an estimate of the opportunity for
telcos in vending machines based on the revenues they can drive from network access
revenues, which typically represent 20% of the value chain, as well as the potential
upside in online authentication/payment enabling, system integration and service
provision. Telcos development in m-payment (NFC) would give them an incentive to
also target this B2B market, and synergies here could allow them to capture half of it by
2015. We estimate the opportunity at c.EUR450m by 2015e.
72
Telecom Operators
CAGR
+118%
250
200
229
235
2019f
2020f
197
150
169
CAGR
+109%
135
100
108
Mass take-off
Germany
88
50
51
74
65
57
Start UK
Start France
0
2010
Italy:
Spain:
Sweden:
Others:
2011f
2012f
2013f
2014f
2015f
2016f
2017f
2018f
Upgrade+ Replacement
34.6 m
7.8 m
5.5 m
4m
Figure 72: Smart meter installed base estimates in key countries, based on
public announcements
Country
2010
2015e
2020e
CAGR
1015e
CAGR
1020e
Germany
France
UK
Italy
Spain
Sweden
Total
0.3
0.3
0.1
34.2
7.8
5.5
48.2
7.9
7.3
10.2
46.8
18.2
5.5
95.9
35.2
35.0
53.0
50.4
26.0
5.5
205.1
92%
89%
164%
6%
18%
0%
15%
61%
61%
91%
4%
13%
0%
16%
Comment
Electricity
Electricity
Electricity & Gas
Electricity & Gas
Electricity
Electricity
Compared to the number of households in each market, many of these figures point to
penetration rates of more than 100% because they include 1) both electricity and gas
meters in the UK and Italy and 2) both residential and professional premises.
73
Telecom Operators
2) Telcos and their wireless modules (2G, 3G) are not the only possible connectivity
solution and sometimes lack coverage to reach in-building meter locations in cellars
and stair cupboards. Alternatives include the International Scientific and Medical
technology (but risk of interference with ISM equipment) and WiFi (although this would
need the customer to have a fixed broadband connection nearby), and last but not least
Powerline Communication (sending data along the electricity cable).
3) Telcos need to adapt their networks to the quality requirements of utilities networks,
notably to be able to provide guaranteed data collection from smart meters to ensure
the appropriate billing of customers.
Customer care capabilities, billing and customer trust. Payment services would
be the main value proposition (e.g. operators could propose a package of network
connectivity and billing), but the revenue opportunity on billing is very small: estimated
at only EUR1 per year per meter, and so not a meaningful addition.
Ability to develop and run the platform. Possible role of enabler of smart
solutions/smart grid. In addition to transport and billing, they could position themselves
on the design of the platform, data collection and aggregation, and could even support
utilities with "dynamic pricing". However, telcos are not the only ones able to do that.
The revenue opportunity is difficult to assess and more project-based than recurring.
Figure 73: The evolving smart metering/smart grid value chain
The debate in the industry regarding the potential role of telcos in the value chain is
quite open, and solutions will vary across markets given their different organisation.
B2B or B2C model? Both look possible in theory, but it is difficult to imagine many
utilities letting telcos operate their core business, so the B2B model looks more likely.
Many interviewees are very sceptical about telcos ability to get beyond the mere
connectivity layer, i.e. they would have a limited role in the value chain. Indeed the
smart metering business is seen as too distant from their core business, and they are
often seen as not having the competency.
A few interviewees, mostly large incumbents, highlight the need for telcos to fight to
provide "complete solutions" rather than just SIM cards and connectivity and try to
become the key enablers of smart grids. In any case, telcos need to collaborate with
utilities on the system integration and service enabler roles.
74
Telecom Operators
Sweden: the utilities control the rollout but often adopt turnkey solutions, and telcos
are active in this field, e.g., the Telenor-Fortum JV, competing with Telvent-Vattenfall
and Telven-E.On. The law requires only monthly readings of meters, but many utilities
have enabled hourly reading, creating an opportunity for value-added services.
Italy: Enel basically controls the whole value chain, on both the utility and ICT
fronts. It developed its own smart meters using a hybrid system including the Echelon
Power Line Communications technology but also machine-to-machine on 2G. The total
investment has reached EUR2.1bn. The focus is mainly on efficiency benefits for Enel
rather than on developing VAS for consumers.
France: ERDF controls all elements in the value chain, including the smart meters
(Linky, developed by ERDF). These will be connected to low-voltage posts through
Power Line Communications technology, then data will be carried over the air to the
control centre, via a M2M MVNO agreement (GPRS). Telcos will therefore get only
connectivity revenues, although the system design is open i.e., third party services can
interact with the smart meters, potentially opening longer term service opportunities.
Germany: the utility market is very fragmented (although with some major regional
players such as RWE, e-on, EnBW) and there are attempts at launching independent
metering operators. The meter rollout is based on customer demand rather than a
centralised push, resulting in a very limited rollout at this stage. The utility provides a
smart meter but the customer can choose any player on the market to offer metering
services instead of the utility. This offers opportunities for telcos. For instance,
Deutsche Telekom plans to offer Energy Box for metering management and services.
Figure 74: Examples of smart metering market organisation
Sweden Competitive market for DSOs and connectivity
and service providers
DSO = Distribution System Operator; DECC = Department of Energy & Climate Change; Ofgem = Office of Gas and electricity Markets
(UK regulator); DCC = Central Data and Communications Company
Source: Arthur D. Little, Exane BNP Paribas estimates
75
Telecom Operators
UK: a Central Data and Communications company (DCC) is due to oversee access
to the data (privacy issues). There will be tenders to build wide area network and data
services to support smart meters, with service fees over the duration of the contracts
worth a total of GBP4.59bn (over 920 years). DCC controls the network operators and
service providers. Companies that win the tender will have to partner along the value
chain to offer a turnkey solution, so the role of telcos may be to provide only the
connectivity. Each large mobile operator hopes to get its fair share of this market.
Spain: Endesa is implementing a proprietary solution based on Enel technology. The
rollout of the system, which includes power line communication (PLC) combined with
GPRS machine-to-machine communication is being performed by the company itself
with little cooperation from telcos. Iberdrola is also developing its own PLC technology
in collaboration with technology firms. Both companies are developing their networks,
which should be fully rolled out by 2016, with a focus on grid and operations efficiency
at this stage. Customer services will be rolled out gradually.
Home automation
Home automation refers to the process of turning conventional products and
appliances into smart, networked, IT-empowered devices, potentially enabling solutions
in security, lighting, air conditioning, home energy and home appliances. Of the various
fields, security and home energy management appear as the most interesting for
customers, according to recent surveys.
The development of this market is driven by the growing penetration of fixed and
mobile connectivity, the decreasing prices for connectivity components, the increasing
appetite of customers (multi-screen households, digital natives) and the ability to meet
existing and growing needs in energy efficiency and safety solutions.
Still, demand has not fully matured, and is thus difficult to forecast. The market size for
Home automation in Europe is estimated at USD1.4bn (USD5bn worldwide), and could
reach USD3.5bn in 2015 and USD8.4bn in 2020 (ABI Research, Facit Research).
As shown in the chart below, many different types of players are involved in this
market. Smart home solutions require products and technologies from a wide range of
areas and players: electrical power distribution, automation and controls, humanmachine interface, wireless and fixed-line communications, etc.
Large equipment players including LG, Honeywell and Johnson Controls have
developed smart home concepts, often focusing on energy efficiency. The smart home
controls company Philips Dynalite offers solution to control all domains of a smart
home, with a focus on ambient living and lighting control. LG has developed HomNet,
a comprehensive solution encompassing entertainment, communications, online portal,
utilities and appliances control.
76
Telecom Operators
All these devices and services use various communication protocols, which can be IPbased (WiFi, Ethernet, Powerline) or non-IP based (ZigBee, DECT, Z-Wave, etc.).
Figure 75: Main groups of players in the smart home market
Electrical Power
Distribution/ Building Automation
& Application Players
Smart Building
Specialists
Service Providers
(Telecom Operators,
Utilities)
Smart Home /
Home Automation
Market
SW, IT, Communication
Equipment Players
Household Appliances
Players
In this complex communication ecosystem, telcos have a natural potential role as home
area network manager, but they also aim to develop the platform managing the
services and selling it as a bundle or as an extra to connectivity.
Several European telcos have launched home automation services, though often
limited to security, e.g. Telekom Austria (aonAlarmServices: alarm system), SFR
(HomeScope: home remote monitoring with camera) and Telecom Italia
(Energy@Home with Electrolux, Enel, Indesit). Energy management solutions are also
being proposed by some telcos, e.g. Bouygues Telecom (Bbox Energie in partnership
with Ijenko).
Telcos are now launching more ambitious and integrated home automation solutions.
For instance, Deutsche Telekom is developing its Smart Connect platform (launch
expected by mid-2012), in partnership with two of the four main energy providers in
Germany (e.on and EnBW), as well as Miele and eQ-3. This move is part of the groups
commitment to develop into four Intelligent Network fields (smart energy,
telemedicine, media distribution and connected car see page 63).
77
Telecom Operators
The system, which should provide home energy management and device automation
functionalities, is based on a box (Smart Connect Box) which supports various types of
connectivity (ZigBee, Z-Wave, KNX, etc.) and is linked to a cloud services platform via
ADSL. Deutsche Telekom expects 50% of German households to have at least one
smart application in 2020 and says that its home automation solution can provide
energy savings of up to 20%.
US telcos are already active in this field. AT&T recently set up a separate organisation
(AT&T Digital Life Services) and acquired Xanboo, a home system specialist. Verizon
launched a home monitoring and control service offering different packages.
To secure revenues beyond the provision of mere connectivity into the home (which telcos
already provide anyway), some operators are participating in the shaping of the home
automation platforms. For instance, Telefnica is a member of the Beywatch project, a
European funded project on home energy management involving eight partners, including
EDF, Fagor and Gorenje. Telcos ability to monetise this market will depend on their level of
commitment in the ecosystem. They could play the role of integrator of the smart home
solution and provide assistance to customers. This could involve designing a dedicated box
or an extension of the functionalities of their current boxes.
Telcos also have activities in B2B markets, where they provide M2M for security firms,
government or facility management companies. M2M modules can enable various
services such as the remote management of machines, surveillance, alarm sensors,
access control and asset tracking.
For instance, BT established a dedicated business unit, BT RedCare, to provide
complete security solutions to local authorities, police and public transport companies.
Vodafone is proposing M2M connectivity to facility management firms and services
companies, with for instance remote diagnosis and preventive maintenance for
elevators and printers.
Potential revenues for telcos All these services ultimately need network access, but
the extent to which telcos can drive significant revenues from these services depend on
their involvement as enabler, service integrator and provider. Managed network access
could represent c.20% of the addressable market, but if some operators decide to
provide extended solutions, they could tap other parts of the value chain. Most telcos
are operating in this market in partnership or conjunction with other parties, given the
extent of on-site presence involved in installation, emergency attendance, support, etc.
We model revenues from this segment rising to up to EUR750m by 2015e if telecom
operators can achieve significant expansion beyond their current role. There is
uncertainty on the pace of this market development, not least because security service
retail (above and beyond the M2M component) has in the past proved sensitive to
economic growth as it is linked to the housing market.
78
Telecom Operators
Technical assistance
The development of smart home networks and appliances generates increasing
complexity for households. This could lead to increased demand for technical
assistance services provided to the home. This area is increasingly considered by
telecom operators as well as other players (e.g. distributors, other services companies)
as a way to generate additional revenues and also increase client stickiness.
Technical assistance refers to services aiming at facilitating the installation, repair and
use of communication and electronic devices and services, including
telecommunications products (internet access, IPTV, smartphone/PDA, etc.), home
networking (domestic network configuration, WiFi networking, etc.), IT assistance (PC
configuration, virus removal, etc.), digital home integration (PC-TV, media centre-TV,
gaming console-internet, TV-internet, etc.). It also includes training as well as insurance
and warranties (hardware repair, theft insurance, substitution, first aid assistance, etc.).
The size of the potential market is difficult to estimate since it is heavily linked to the
hardware, software and connectivity markets, and is thus hard to reconstruct. Some
sources expect the US market for premium assistance to reach USD3bn in 2012.
For many market players (e.g. distributors or independent service providers), the
decision to enter the technical assistance market is driven by customer demand for this
type of services. For hardware vendors and for telcos, such a decision is also driven by
the need to ensure a satisfactory total consumer experience. In particular, telcos can
expect to drive some revenues and also use the opportunity to differentiate itself from
the competition, improve customer satisfaction, reduce churn, and ensure the take-up
of new services.
Figure 77: Main groups of players in the assistance market
Telecom operator
Distributor
Marketplace
Vendor Ecosystem
79
Telecom Operators
80
Telecom Operators
Fleet management and supply chain services are already worth hundreds of millions of
Euros in revenue to telcos, one of the largest contributors to M2M divisions today.
We estimate that connectivity revenues could reach EUR800m by 2015e the base
case of what telcos can capture while in a more assertive case, in which telcos also
capture a 35% share of the enabler, system integration and solution providing roles
from established players, revenues may exceed EUR2bn by 2015e (through deep
partnerships with a lead telco role, or M&A).
Given the trans-national nature of transport fleets in Europe, large incumbents with
wide geographic footprints appear best positioned in this market.
Navigation and information: navigation, parking space finder and other location
based services, advertising, environmental information, etc.
Communication and entertainment: voice communication, personal messaging,
address book, calendar, music, video & games, voice control, access to cloud storage,
applications, internet radio, etc.
81
Telecom Operators
Hybrid model: includes both an embedded SIM for the car-related services and the
integration of the customers smartphone for multi-media services and apps. Both
platforms are secured by firewalls to ensure security.
Figure 78: Connected car installed base estimates, Western Europe
30
25
million
20
15
10
0
2010
2011
2012e
2013e
2014e
2015e
Source: Berg Insight, iSupply, Arthur D. Little, Exane BNP Paribas estimates
82
Telecom Operators
This range of outcomes highlights that if operators can successfully play the
aggregation, service provision, integration and middleware roles for a car manufacturer
and displace (or acquire) the existing suppliers there is very significant value to be
created, but if telcos are relegated to a SIM supplier role for telematics solutions
(positioning, simple e-Call, maintenance info), then the opportunity is smaller. At this
stage, there are moves in both directions hence visibility is low.
Figure 79: Major European telcos are already active in connected cars
Entity in
charge
Activities
M2M competence
center
Orange Business
Services
M2M City with focus on telematics in passenger cars and fleet & process management
Network Provider for TomTom and Digicore (European wide connectivity management)
Installed base: 200,000 BMW cars with M2M solutions (e.g. BMW Connected Drive)
Global M2M
M2M City
Connected Car
business unit
M2M- competence center with focus on Connected Car & Digital Home
Sales of Fleet Management products through Kuantic (FR) und Aeromark (UK) with a focus
on Tracking & Tracing and Navigation
Network Provider in Connected-Car field
Content
Network
Service
enabler
System
integrator
Service
provider
Sales
OEM
OEM
OEM
Telcos managed
HW Partnership
Ext. Provider
Ext. Provider
Embedded
services
Embedded SIM
Provider of
Smartphones
Standard HW
Integration
Smartphone
Telco
OEM
Partner
Management &
Integration
Smartphone
Management of
Providers
Centralized
Connected Car
Platform
Interfaces &
Vehicle integration
White Label
Service
provisioning
Given the cross-border nature of these services, we think most of the value will go to
the largest global telcos (e.g. covering a third of the world population or more) who can
offer the best deals for global car manufacturers, and can minimise the roaming
element of service costs if bandwidth usage from vehicles rises rapidly in the future.
Examples of operators participating in industry alliances aimed at developing the
connected car market include:
Ertico a global development platform founded by the European Commission in
1991, which is notably working on the definition of eCall (due in 2014). Members
include Allianz, BMW, Cobra, Continental, Efkon, Ericsson, Fiat, Honda, Logica,
Mitsubishi, NEC, Nissan, NXP, TomTom, Vialis, VW, Volvo, and among operators:
Telecom Italia and Vodafone.
83
Telecom Operators
Connected Car Forum created by the GSMA in 2011, a platform between telcos
and car manufacturers. Members include Orange, NTT DoCoMo, KPN, Telenor,
Telefnica, Vodafone, AT&T, Telecom Italia, Bell Canada, and, on the manufacturers
side: Jaguar/Land Rover, Toyota, Nissan, Audi, Hyundai, BMW China and Fiat.
Ireland: Advanced
integration studies, smart
grid integration
Ireland
Dublin
Denmark
Cork
Copenhagen
/ Bornholm
UK
London
Berlin
Poland
Germany
Barcelona: electric
mobility service citizen
office, e-motorbike
demonstration
Paris
Karlsruhe
Strasbourg
France
Budapest
Hungary
Pisa
Madrid
Malaga: embedment in
smart city concept,
vehicle-to-grid, buildingto-grid, charging stations
Karlsruhe/Stuttgart: smart
grid features, bi-directional
charing, corss-border
connection with Strasbourg
Barcelona
Rome
Spain
Strasbourg:
Plug-in hybrid vehicles, crossborder connection with
Karlsruhe/Stuttgart
Italy
Malaga
Greece
Kozani
However this is a very long term project and the government objectives point to still
very low penetration by 2020. For instance, at the EU level, the objective is that electric
cars represent 3-10% of sales by 2025, and aggregating the targets published by
different countries for different timeframes, we estimate that the installed base of
electric cars could remain below 5m in Europe by 2015e, below 10m by 2020e and
below 20m by 2025e. The contribution of this segment to telcos revenues should
therefore be negligible by 2015e.
84
Telecom Operators
Figure 83: Government targets regarding hybrid and electric cars (installed base)
Targets (m)
2014e
2015e
2020e
2030e
2040e
France
Germany
Netherlands
Spain
Sweden
UK
1.0
-
0.01
-
2.0
1.0
3.3
0.2
-
0.6
1.55
Disease Management
Weight loss
Fitness
Young Families
Allergy tracking and
analysis
Managing pediatrician
appointments
Vaccination management
Holistic management of
family health issues
85
Telecom Operators
86
Telecom Operators
The development of eHealth implies adding new players to the ecosystem that are
specialised in telecommunication and integration. Integrated eHealth solutions, conceived
in partnership with healthcare professionals, will cover a larger part of the value chain and
provide customized turn-key solutions to healthcare practitioners (e.g. hospitals).
Figure 85: Value chain example in e-Health Medical imaging solutions
As for the other verticals, telcos primary role can be to provide connectivity, as they
already do, and to expand connectivity services from fixed-line to mobile. Beyond that,
opportunities include: 1) managing the devices, particularly new mobile connected
devices; 2) managing medical data (a cloud-related opportunity); and 3) possibly
becoming full service providers, jointly with partners (mentioned in a few interviews; this
opportunity was estimated in one interview at EUR200m+ in Germany by 2015e); this
view was however not shared by most, who see the healthcare market as very distant
from telcos core business.
According to some sources, telcos providing only connectivity could access up to 20%
of the value of the m-Health market, a proportion that could rise up to 45% if they were
able to provide end-to-end solutions (Business Insights).
Figure 86: Possible business models for telcos in eHealth
87
Telecom Operators
Source: Orange
Deutsche Telekom: eHealth is one of the four growth areas identified by the group.
Several products are already available: digital patient file on tablets (Checkpad MED)
medical conferences on the internet (in T-City), CardioMessenger (remote reporting for
ill health patients).
Telefnica created a global e-Health unit in 2010, with 80 projects in nine countries.
It focuses on three areas: 1) ICT for hospitals, 2) remote medicine (chronic patients
monitoring, remote rehabilitation, collaborative tools for health practitioners) and 3)
remote care (Mobile Telecare: location and emergency alerts for dependent people).
Vodafone consolidated its health activities in 2010 into Vodafone mHealth
Solutions. It provides solutions for remote care, living assistance (Alzheimer and elderly
people), and is working with Baxter on a remote infusion monitoring service
(immunoglobulin treatment).
Swisscom proposes several Connected Health products e.g. Medgate (24/7 doctor
consultation via phone or internet, chronic care management), Evita (electronic health
dossier), Emporia (emergency call function on specific mobile phone), TeleAlarmS12
(wireless alarm system to call emergency assistants).
In the US, Verizon launched a cloud-based Health Information Exchange in 2010,
and AT&T has set up a healthcare unit focusing on m-Health and cloud-based services.
Overall, we believe that the opportunity for telcos is a long-term one. Indeed, the value
chain is complex, with players coming from different backgrounds (healthcare, IT,
governmental bodies, etc.). Due to the sensitive nature of these activities, regulation
plays an important role, and is mostly national-based. It can also be challenging to get
a strong commitment from the various types of caregivers. Furthermore, the economic
equation is complex, since the paying authorities are often distinct from the players
benefiting directly from e-Health projects (i.e. patients and caregivers). Thus, a strong
impetus at the national level is necessary for successful implementation.
88
Telecom Operators
89
Telecom Operators
ICT suppliers
90
Telecom Operators
Figure 90: Beyond the cost, what are the benefits of adopting a cloud architecture?
Enabling mobility is the top reason for adopting SaaS
In %
In %
Backup/recovery
Storage
Production-ready application
deployment
Data mining/analysis
Database provisioning
2010
2011
Other
2010
2011
Batch processing
EURbn
50
40
30
20
10
0
2009
2010
2011
2012e
2013e
2014e
2015e
2016e
2017e
2018e
Source: Gartner, Business Insights (analysts consensus), Arthur D. Little, Exane BNP Paribas estimates
91
Telecom Operators
Examples
IaaS
PaaS
SaaS
Communication, collaboration,
messaging and e-mail
Communication, collaboration,
messaging and e-mail
Communication, collaboration,
messaging and e-mail
T-Systems Database and
Middleware Environments
92
Telecom Operators
Figure 93: Telcos trying to expand their presence in the cloud value chain
Finally, in terms of market segment, the sweet spot for telcos should be SMEs. Indeed:
consumers are seduced by powerful OTT players such as Google, Apple, Yahoo;
large corporate clients have existing relationships and value the dedicated service
provided by major IT players;
SMEs often value their trusted telco/local partner and are somewhat wary of global
ICT players. Overall, the SME segment is expected to represent more than half of
telcos cloud revenues in the next few years.
93
Telecom Operators
Figure 94: Many telcos have concluded that the SME segment is a key focus area
Equinix (US)
Rackspace Hosting (US)
Strato (DE)
TerreMark Worldwide (US)
Concur Technologies (US)
Taleo Corp. (US)
Salesforce.com (US)
Rightnow Tech (US)
United Internet (DE)
Amazon Cloud Services (US)
45%
34%
33%
29%
24%
22%
18%
17%
16%
4%
Such margins could prove slightly dilutive to telcos margins initially, but the cloud
should in the long run be accretive to absolute EBITDA, and telcos should get other
benefits from such initiatives, in particular stronger customer relationships (churn
reduction) which could improve profitability in other activities.
94
Telecom Operators
Geographic footprint
Local
Infrastructure
Services
Infrastructure play
Local hero
Mega-operator
Global
We believe that:
the mega-operator approach can in theory create the most value in the long term,
but it is the most difficult to execute (need for capital and multi-faceted competitive
challenges), so the most risky. In any case only a handful of European telcos can play;
the local hero could lead to a slightly better top-line than the infrastructure play,
but it comes with additional opex and capex in the next few years, and execution risks.
the infrastructure play is the least risky but also brings the lowest returns in the
long term. In any case, it cannot be implemented by operators lacking opex flexibility.
We look at the key prerequisites for telcos to succeed, in our view:
1) a leaner cost base, with notably a substantial opportunity from the online
transformation of the business model, which we estimate could reduce a typical mobile
operators total opex by 9% by 2015e;
2) a strong infrastructure. This requires continued capex, notably on FTTx and 4G
hence local scale will be of increasing importance. Different types of network
consolidation can enable typical mobile operators to save 10-30% on network opex and
capex in the coming years.
95
Telecom Operators
As shown in Figure 97, combining these two opportunities could theoretically enable an
operator with revenues declining by 2.4% pa until 2015e (in line with our industry
scenario) to limit the decline in its EBITDA and OpFCF to less than 3% pa.
Figure 97: Mobile opex and capex opportunities, comparing to a flat opex and capex scenario
Theoretical scenario
with flat opex & capex
EURm
2011e
2015e
CAGR
Mobile revenues
107,069
97,124
(2.4%)
(69,272)
37,796
35.3%
(69,272)
27,852
28.7%
0.0%
(7.3%)
(9%)
(11,778)
(11.0%)
(11,778)
(12.1%)
0.0%
(15%)
24,115
22.5%
14,171
14.6%
(12.4%)
EBITDA-Capex
EBITDA-Capex / revenue
% reduction
Potential scenario
EURm
2015e
CAGR
97,124
(2.4%)
6,211
6,211
(63,061)
34,063
35.1%
(2.3%)
(2.6%)
1,767
(10,011)
(10.3%)
(4.0%)
7,978
22,148
22.8%
(2.1%)
Finally, we conclude that global scale will become more significant in the long run, both
in terms of cost (global purchasing, global pooling of IT infrastructure) and as a
commercial differentiator (in a few market segments).
Since each operator has room to optimise its strategic footprint and pressures on the
top-line will not ease quickly, we predict a flurry of M&A: at the local level (fixed-fixed,
mobile-mobile, fixed-mobile), vertical (acquisition of incremental capabilities to serve
adjacent markets), but also cross-border (most probably small moves rather than big
jumps, even though large moves cannot be entirely ruled out in the medium term).
Figure 98: Interview feedback What are the characteristics of potential longterm winners?
Strong infrastructure
Large global footprint
Large local market share
Depends on execution
Integrated (F+M)
Full service
OTT players
The leanest
Strong brands
Deep pockets
0
10
12
14
16
96
Telecom Operators
In 2011, European telecom operators average EBITDA margin was c.34%, with most large
telcos in the 30-40% range, depending on their revenue mix, geographic footprint and scale.
Given the revenue pressure expected at the sector level (-2% CAGR):
if opex were to be flat over the same period, EBITDA would fall by 23% between
2011 and 2015e;
at the other end of the spectrum, to maintain EBITDA in absolute terms between
2011 and 2015e would require telcos to cut their total opex by 12% in four years.
Can operators achieve such massive opex reductions in a four-year timeframe?
We believe that beyond the classic benchmarking exercise that all operators do
regularly on key cost elements, telcos have not fully exploited two fundamental
improvement opportunities which could bring radical upside:
1) Front-end: leveraging the rise of online applications and the virtualisation of
interactions with customers;
2) Back-end consolidation, including network sharing on a country-by-country basis and
optimisation of IT resources on a cross-border basis.
100
70%
90
60%
Opex % of revenue
80
70
0%
Index
60
-12%
50
40
30
50%
40%
30%
20%
0%
20
10%
-23%
10
0%
Mobile
2011
EBITDA
2015e
with flat
opex
Integrated
2015e
with flat
EBITDA
Interconnect
SARC
Opex
Other opex
97
Telecom Operators
Online sales channels have already been developed by operators, but we see large
potential to boost them by: 1) improving the convenience/ease of use of portals, 2)
providing a more personalised/real-time approach to each customer, and 3) integrating esales with other sales channels to provide a seamless cross-channel experience. Some
cable and mobile operators already do three quarters or more of their sales online.
Cost items that can be reduced thanks to online include 1) commercial costs (reduction
in indirect sales commissions), and 2) customer sales functions including retail shops
(number of shops and/or headcount in shops). As online progresses, the structure of
operators distribution channels could change, with a reduction in the number of shops,
notably franchises, potentially moving to a model with fewer but larger, flagship, stores.
Self-care can be expanded by 1) increasing the number and types of tasks that can be
performed by the customer itself, online rather than offline; 2) increasing the number
and types of channels that the customer can use e.g. websites but also smartphone
apps, social media, etc.
98
Telecom Operators
These moves can significantly reduce the cost of call centres both in their customer
service function (i.e. enabling customers to change their offer, to add or remove
options, etc.) and in their after sale function (i.e. help for customers facing problems,
fault handling, etc.).
Marketing costs can also be reduced by online initiatives, for example by 1) simplifying
the product portfolio, 2) enhancing up- and cross-selling opportunities, but also 3)
shifting marketing and campaigns to online tools, which are more cost effective.
In particular, engaging with users via social media (e.g. by creating digital communities)
is a great way to learn directly from users (product feedback etc.), to enlarge the reach
of the brand and even to have clients work for the operator (for instance they can
provide help for other users in forums). Online can reduce time-to-market for new
offers, and reduce market research costs and advertising spend.
Finally, billing can be moved online even more extensively with potential to save
costs in bill processing (printing, sending, etc.) and payment (move to direct debit).
For instance: 1) Telefnica has publicly committed to increase the proportion of online
transactions with customers from 16% in 2010 to 29% in 2013e, at the group level; 2)
in France, existing mobile operators created new sub-brand offers available only on the
web (Orange Sosh, SFR Red, Bouygues Telecom B&You) in anticipation of the launch
of Free Mobile.
Depending on the operator and the context, we estimate that the savings could reach
1025% on relevant cost categories, notably customer sales, customer service, aftersales call centres, acquisition and retention costs, marketing and billing. Overall, in this
example, total savings are equivalent to a 9% cut in the operators total opex, i.e. an
EBITDA margin uplift of 580bp, all other things being equal.
Figure 100: Assessing the potential savings from online centric move
Index
Before
Potential savings
After
Revenue
100.0
0%
100.0
Interconnect
Other direct costs
SARC
Marketing
Customer sales & customer service
After sale call centres
Billing
Access installation & repair
Network operations
IT service
G&A
Total opex
-7.7
-4.4
-6.1
-3.3
-15.5
-1.3
-2.6
-6.9
-9.5
-3.9
-3.9
-65.0
0%
0%
-12%
-11%
-26%
-25%
-15%
0%
0%
0%
0%
-9%
-7.7
-4.4
-5.4
-2.9
-11.4
-1.0
-2.2
-6.9
-9.5
-3.9
-3.9
-59.2
EBITDA
Margin
35.0
35%
17%
5.8%
40.8
41%
99
Telecom Operators
The strong growth in data traffic volumes gives an advantage to the stronger
infrastructure players, i.e. operators boasting networks with the fastest speed and
largest capacity. These will be able to provide a better quality of service to customers,
and to be the lowest unit cost operators.
This is true on the fixed-line side (need to invest in FTTx and upgrade capacity) but
also on the mobile side (need to boost 3G+ capacity, buy spectrum and roll out 4G).
For instance, O2 Germany had to face customer complaints on its network quality, and
T-Mobile Germany used these concerns on O2s network quality in one of its
advertising campaigns. In the USA, network quality has also been a strong commercial
argument for Verizon for several years.
100
Total
Number 3+4
Number 1+2
Base
Belgium
Mobistar
Belgacom
Spain
Yoigo
Vod Sp
Orange Sp
Telefonica
3 IT
Italy
Wind
TIM
Vod IT
O2 G
Germany
Vod G
E-Plus
T-Mo G
France
SFR
Bouygues
Orange F
0%
Telecom Operators
Switzerland
Orange-Sunrise
CHFm
US
AT&T-Mobile
USDm
445
5
8.3%
200
5
3.7%
145
12.3%
47
na
300
8.4%
153
na
620
5
19.7%
570
6
12.2%
100
13.3%
65
7.8%
545
8.9%
265
4.2%
>3,000
4.6%
600-800
11.5%
140
11.2%
9,000
13.9%
3,500
3,200
>40,000
Such merger benefits on the radio access network side can also be achieved via
network sharing agreements.
We expect the rollout of 4G networks to be a key driver of a new wave of network
sharing in Europe, given the need for additional capex in a context of tougher pressure
at the revenue level. As seen above, there are many examples of challenger mobile
operators which have not secured 800MHz spectrum, while some others have secured
such spectrum but at a high cost compared to their size creating a natural incentive
for network sharing.
101
Telecom Operators
The table below includes a sample of network sharing agreements struck in Europe over
the past years. Sweden is, in our view, one of the most advanced countries in terms of
network sharing, with currently three out of four mobile operators in the country engaged
in network sharing in three joint ventures: Net4Mobility (Tele2 & Telenor) for 2G and 4G,
SUNAB (TeliaSonera & Tele2) for 3G, and 3GIS (Telenor & 3) for 3G.
Sweden
Sweden
Spain
UK
Spain
Sweden
Operators
Tele2 / TeliaSonera
Telenor / 3Sweden
Vodafone / Orange
T-Mobile / 3UK
Telefnica / Yoigo
Tele2 / Telenor
Orange/SFR/
France
Bouygues
Czech Rep. T-Mobile / O2
Austria
T-Mobile / Orange
Denmark
TeliaSonera / Telenor
Poland
TPSA / PTC
Germany
T-Mobile/Vodafone/O2
Austria
T-Mobile / H3G
Announced
Status
Extent of
sharing
Depth of
sharing
Reach of
sharing
# of sites
Which sites?
Structure
Savings target
per partner
2001
2001
Oct. 2007
Dec. 2007
June 2008
2009
Operational
Operational
Operational
Operational
n/a
In deployment
3G
3G
3G
3G
2G/3G
2G/4G
Active RAN
Active RAN
Active RAN
Active RAN
Passive RAN
Active RAN
Nationwide
Ex big cities
Rural
Nationwide
Rural & urban
Nationwide
n/a
n/a
5,000
13,000
4,000
n/a
New
New
New
All 3G
Existing
New
JV
JV
no JV
50-50 JV
no JV
50-50 JV
n/a
n/a
EUR0.2bn / 5Y
GBP2bn / 10Y
n/a
n/a
Feb. 2010
Feb. 2011
April 2011
June 2011
July 2011
Dec. 2011
Jan. 2012
In deployment
In deployment
Operational
Announced
In deployment
In discussion
Announced
3G
3G
3G
2G/3G/4G
2G/3G
Backhaul
3G
Active RAN
Active RAN
Active RAN
Full RAN
Active RAN
Backhaul
Active RAN
Rural
Rural
Rural
Nationwide
Nationwide
Nationwide
Rural
2,500
1,000
Hundreds
n/a
10,000
n/a
n/a
New
New
Existing
All
Existing & new
All
Existing
Roaming
n/a
no JV
n/a
50-50 JV
n/a
no JV
n/a
n/a
EUR30m
n/a
Opex -29% / 3Y
n/a
n/a
There are many different possible options as regards sharing of infrastructure between
mobile operators, and these are summarised in the chart below. In particular, the
depth of sharing is a key factor ranging from the full sharing of the whole mobile
network in a region or even in a whole country for a specific technology (e.g. the
Tele2/TeliaSonera JV on 3G in Sweden), to a limited sharing focused only on masts
(passive infrastructure sharing). In the case of full network sharing, this enables
operators to save not only on the masts and base stations but also on backhaul and
the JV structure can also enable the pooling of spectrum assets, if regulation allows it.
Figure 105: Network sharing deals can vary greatly in scope and ambition
102
Telecom Operators
The depth of sharing is a key determining factor of the potential savings that can be
achieved but also of the complexity of the sharing process (depending on operators
legacy assets) and also of the remaining ability of the sharing operators to continue to
differentiate at the network level.
At one end of the spectrum, the national roaming option means that there is only
one network overall, enabling full synergies but basically annihilating the operators
ability to differentiate on the network side;
At the other end of the spectrum, passive RAN sharing involves sharing only the
passive infrastructure i.e. the tower/mast, shelter and power. The savings that can be
achieved here are small.
103
Telecom Operators
104
Telecom Operators
105
Telecom Operators
The purpose of setting up this JV (called BUYIN) is for the partners to achieve a more
competitive cost position by aggregating demand to vendors. Areas covered by the JV
are purchases in network, equipment and services (including service platforms),
customer equipment (including terminals) and IT. The addressable spend
(capex+opex) is EUR12bn and the target is to save EUR1.3bn annually from 2014
(three years after the start of operations in Q4 11), i.e. a savings rate of almost 11%, of
which >EUR400m for Deutsche Telekom and <EUR900m for France Telecom.
Other examples include: 1) Vodafone Procurement Company formed in 2008, open to
both Vodafone affiliates and external telecom operators; 2) Telefnica Global Sourcing
formed in 2009 as a German company located in Munich. Telefnica and China
Unicom announced an extension of their cooperation in procurement in January 2011.
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Telecom Operators
Another example is the way the Orange group has organised its whole machine-tomachine activity, with a global centre of expertise run by its Belgian subsidiary
Mobistar. In 2011, Mobistar signed more than ten contracts in the US and Europe for a
total commitment of 1.5m SIM cards and interestingly, Mobistar has a 70% market
share on M2M in its home market, Belgium, far ahead of the local incumbent
Belgacom. This illustrates how being part of the Orange gives Mobistar a crucial
advantage. Recently, France Telecom has announced a partnership in M2M with the
US operator Sprint, leading to an expanded global footprint in this market.
OTT services: It will not be easy for operators to compete versus global OTT players
such as Google, Facebook, Apple or even Netflix on new services but we believe that
telcos with a broader footprint should have an advantage, for two reasons:
1) As networks and services become all IP-centric, telcos, like web giants, have the
opportunity to develop services once and then to roll them out across their whole global
footprint. This enables savings, but also faster time to market e.g. France Telecom can
hope to be first to roll out new services in African countries, while if these local operators
were to run locally, they would not have the means to roll out such services as quickly;
2) Forging partnerships with the most advanced start-ups in each specific OTT field is a
challenge, but it will be essential for operators with ambitions to remain ahead of the
game in terms of innovative services. A broad-based operator with substantial means
should have the edge on more local players in terms of finding the right potential
partners (size matters for knowledge), and it will be a more attractive partner than a
small operator as it will offer a larger business opportunity for most OTT innovators.
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Telecom Operators
We conclude that:
the mega-operator approach can in theory create the most value in the long term,
but it is the most difficult to execute given the need for capital and the multi-faceted
competitive challenges and in any case only a handful of European telcos can play;
the local hero could lead to a slightly better top-line but this does not come without
opex and capex in the next few years as well as execution risks.
the infrastructure play approach is the least risky but also brings the lowest returns in
the long run, and in any case cannot be implemented by operators lacking opex flexibility.
108
Telecom Operators
109
Telecom Operators
110
Telecom Operators
25%
Lean B2C
60%
Cable ops.
20%
Capex/sales
Wholesale
50%
40%
15%
30%
Integrated
10%
20%
Pure B2C
Pure B2B
5%
10%
Light assets
50%
Pure B2C
40%
Pure B2B
30%
Light assets
20%
EBITDA margin
Integrated
10%
Lean B2C
0%
Cable ops.
Wholesale
0%
0%
However, such a conclusion in favour of retail versus wholesale providers may be true
for now, but the situation may change in the future given the potential for consolidation
among infrastructure players, to be compared to the risk of increased competition
between retail service providers.
The profitability of the wholesale model strongly depends on the competitive intensity,
in particular on the number of infrastructure players in a given market. In fixed-line,
many markets have only two viable local infrastructure players (incumbent and cable).
This is a more favourable situation than in mobile, where there are three to four players
in each market. Full-fledged consolidation or network sharing could ease competitive
intensity, and hence enhance profitability.
On the other hand, playing on the retail side may currently lead to higher profitability
but this is the part of the telecom market which is the most challenged by new entrants
and OTT players so the profitability level may not be sustainable.
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Telecom Operators
10%
20%
30%
40%
50%
60%
70%
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Telecom Operators
At the very least, we anticipate more network sharing agreements, both in mobile (as
seen on page 101, there is at least one mobile operator without 800MHz spectrum in
most large markets, calling for network JVs on 4G/LTE) and in fixed-line (sharing
required for FTTH rollout).
Spain: the current pressure on FCF generation is a strong catalyst for
consolidation. Potential targets are MVNOs, Yoigo and Jazztel, and potential acquirers
are Vodafone and Orange pointing notably to mobile-mobile and fixed-mobile deals.
Italy: some interviewees see consolidation as almost sure, as several operators
are seen as borderline, hence logical targets for consolidation. Market participants
expect a three operator mobile market in the long run.
Germany: many players continue to talk about local consolidation in mobile. An eplus/O2 merger, the only possible combination, has been rumoured many times in the
past and never happened and the potential regulatory response remains uncertain. In
our view, a more likely outcome is network sharing (e-plus does not have 800MHz
spectrum, while O2 has spare spectrum). On fixed-line, we expect only the most
focused players to succeed (e.g. some city carriers) while the remaining pure play fixed
altnets are repositioning themselves (e.g. Versatel focusing on B2B & wholesale,
shifting away from B2C).
UK: we expect the market structure to evolve towards two (or potentially three)
operators on the fixed-line side (the move to fibre should drive consolidation) and two
operators on the mobile network side in the mid-to-long term. However, we expect
continued fragmentation at the service/retail level (many different service providers),
even though some consolidation is expected amongst B2B service providers. In
addition, a few players expect fixed-mobile integration to occur in the UK in the next
few years and the UK landscape to be affected by asset reshuffles by operators
following the mega-operator path: corporate activity around both Cable & Wireless
Worldwide and Deutsche Telekoms holding in Everything Everywhere support this line
of thought.
France: in the past, the French market has already experienced significant
consolidation in fixed broadband, and then fixed-mobile (SFR-NeufCegetel). Due to the
recent entry of Free in the mobile market, we do not expect consolidation in the short
term but fierce price competition will generate more incentives for network sharing.
Austria: the acquisition of Orange by Hutchison has recently been announced, with
Telekom Austria also acquiring part of the Orange customers (Yess brand). The
regulatory process is expected to be long.
Belgium: in the long run, we see fixed-mobile consolidation finally happening in
Belgium.
Sweden: in the Nordics, we expect further network sharing in mobile, along the lines
of the Telenor-Tele2 joint venture Net4Mobility announced in 2009 (the worlds first 2G
and 4G RAN sharing); three out of four mobile operators in Sweden are engaged in
network sharing. On the retail side, we expect a rapid customer take-up for OTT services
and the development of more partnerships between OTT players and telcos.
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Telecom Operators
Trans-border deals Many small steps rather than one big jump
Even though some believe in the virtue of mega-operators, we do not believe that
mega-deals (along the lines of the failed France Telecom/TeliaSonera acquisition)
should be expected any time soon. However, it is likely that, progressively, smaller
groups will get absorbed into larger ones.
In the meantime (and potentially in parallel), we expect more partnerships and JVs to
be announced between large telcos along the lines of: 1) the France
Telecom/Deutsche Telekom purchasing JV, 2) Telefnicas partnerships with Telecom
Italia (Telefnica owns 46% of Telco, the holding company which in turn owns 22.4% of
Telecom Italia ordinary shares), China Unicom, Bouygues Telecom or Sunrise; 3)
Vodafones partnership with Verizon. Ultimately, some of these partnerships may (or
may not) evolve into the smaller partner being acquired by the larger group.
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Telecom Operators
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Company
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Distributor
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Corporate
links
Analyst's
personal
interest
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Amended
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116
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