Innovation and Regulatory Risk
ANACOM-ENISA Workshop on Risk and Innovation
Lisbon, 22 January 2010
Antonio Robalo de Almeida
- Executive Board Chairman, ETNO
Presentation slides, not a full record of remarks made
Contents
Introduction to ETNO
Innovation is driving force in telecoms sector
Innovation requires balance of risk and reward
Regulatory framework allows for reduction in investment risk
2
Introduction to ETNO
Innovation is driving force in telecoms sector
Innovation requires balance of risk and reward
Regulatory framework allows for reduction in investment risk
3
4
ETNO comprises leading telecoms operators
• In 2008, total turnover in the EU telecoms sector was €290.6 billion (0.8% growth year-on-year)
• ETNO members‟ revenue was €267.5 billion of this tally
• ETNO members devoted 12.4% of their revenues to investment, accounting for 71% of total sector investment
• Shrinking revenue growth, alongside with economic and regulatory uncertainty, has started impacting investment.
• For the first time since 2003, negative investment growth (-1% in 2008)
Telecoms sector and ETNO members are struggling to maintain growth and investment
Source: IDATE for ETNO “Facts & Figures” (2009)
ETNO members continue to invest, accounting for 71% of sector CAPEX
2008 CAPEX in Europe
Total
Fixed
Mobile
non
ETNO
telcos
ETNO
members
non
ETNO
telcos
ETNO
members
non
ETNO
telcos ETNO
members
€ 46.5 b
€ 24.7 b
€ 21.8 bSource: IDATE for ETNO “Facts & Figures” (2009)
Introduction to ETNO
Innovation is driving force in telecoms sector
Innovation requires balance of risk and reward
Regulatory framework allows for reduction in investment risk
7
Innovation is a driving force in the telecoms sector
Source: Gartner (2009)
ILLUSTRATIVE
. . . across its business across as well as with its products and services
Source: McKinsey; ETNO analysis
Understandvalue anddesires
Selecttarget customers
Value proposition
Designproduct/process
Procure,manu-facture
Distri-bute
Basic business system
Service PriceDefinebenefits/price
Salesmessage
Marketing & sales
Adver-tising
Promo-tion/PR
Areas for innovation• Service delivery
• Business models
• Pricing models
• Point of sales
• Customer service
Areas for innovation• Customer segmentation
• Market research
NON-EXHAUSTIVE
Technological innovations launched NON-EXHAUSTIVE
20009894 96 20040293 95 97 991992 01 03
SMSVoice
mailGSM GPRS MMS
IP
Phone
Dual-
bandContest SMS
Clam-shell
phone
Change-
able
cover
WAP EMS
Poly
ring tone
compos.
CDMA
20001X
Digital ring tone
service
Full
rate voice
codec
i-modeDown-
loads
Video
camera
Camera with opti-cal zoom
Audio stream-
ing
DMB120
for mobileJava Edge
HS-
CSDSDPTT
CDMA data
serviceLBS
Poly-
phonic
Quad-
band
GSM
PTT
3+ mega pixel
cameraMP3
Mobile
content
Mobile
payment
Color
displaySymbian IM
CDMA Photo cameraMiDi
FM
W-LAN
PhoneT9
Pre-
paid
Ring
tone
Tri-
band
W-
CDMACDMA PTTCaller ID
Linux ?
UMTS ?
Blue-
toothSkins ?
Video
streamsTV tuner Black-berry ?
Source: McKinsey (2006)
Mobile industry has produced a large number of innovations
First launch
of services
c.1983
. . . and is considered as one of the most innovative industries
61
55
39
Handset
manufacturers
Computer software
Computer hardware
Mobile network
operators
21
12
39
48
Car industry
Internet service
providers
Healthcare
pharmaceuticals
Food and drink
31
44
Fixed-line
network operators
Percent ranking in top two of industry choicesweb-based primary survey research in Germany, Japan
Source: McKinsey (2006)
NGA – and the services they support –represent a major innovation in the industry
Saving time
Doing new things Doing more
Source: Plum Consulting for Broadband Stakeholders Group
Consumer opportunities
• Video calling
• HD video
• HiFi voice
• Video presence
• Multiple video streams
• Games libraries
• Video blogging and
messaging
• Download-and-go
• Upload-and-go
• Back-up services
• Network storage
Business opportunities
• Video conferencing
• HD video conferencing
• Collaborative working
• More capable teleworking
• Network-hosted applications,
e.g., „cloud computing‟
• Back up services
• Network storage
12
13
For example, FTTH will enable Portugal Telecom to offer bundles of a wide range of advanced services
Home Management premium services
> Video surveillance> Total computer
equipment maintenance> Home automation
management
> Video conferencing> Video and picture sharing> School services> Multiplayer games
High speed internet
> 100 Mbps, 200 Mbps, up to 1 Gbps download> 20 Mbps, 100 Mbps,
200 Mbps upload
TV and enhanced TV features
> Basic and premium channels> HDTV> PVR> VoD> RF Overlay
Advanced communication services
Source: Portugal Telecom
13
…but business case is plagued by risks
14
Demand risk
• Which services will be accepted in the market?
• How will demand develop over time (stable, increasing, decreasing)?
NGA business case profitability?
Technological risk
• Which investment will be „future proof‟?• Which services will be accepted in the
market?• How will demand develop over time (stable,
increasing, decreasing)?
Uncertain price development
• Will end-users be willing to pay a premium for higher bandwidths offered by fibre?
• Will value-based pricing be feasible in market and allowed by regulator?
Regulatory risk
• What access will be imposed?• Will network security & safety be preserved?• Will regulated prices reflect risk and give fair
return on investment?• What will happen to pricing of legacy network
if/when it becomes obsolete?
Introduction to ETNO
Innovation is driving force in telecoms sector
Innovation requires balance of risk and reward
Regulatory framework allows for reduction in investment risk
15
16
Innovation is particularly challenging in telecoms sector
Source: OECD; ETNO analysis
ILLUSTRATIVE
Innovation =
the implementation of a new or
significantly improved product
(good or service), process,
business practice or workplace
organisation
Critical return on investment
• Massive capital base
• Rapid technological change
• Rapid business model evolution
• Rapid changes in demand and
price elasticity
• High risk that regulatory
burdens can reduce or
eliminate profitability
17
Bringing an innovation to market depends on a risk/reward nexus
Clear enough future
Alternative futures
1
23
Range of futures
True ambiguity
?
Source: McKinsey, S.Godin, ETNO analysis
ILLUSTRATIVE
18
Regulatory risk can easily undermine the investment equation
ILLUSTRATIVE
No legal/regulatory certainty
no investment
no innovation
no increase in customer welfare
?
For NGA, the investment calculus is straight-forward
Fibre investment will take place*, when
Annualised costs of fibre < operating cost of copper
+
incremental revenue from fibre
+
wholesale revenue gained from competitors
+
wholesale and retail revenue protected from
competitors
* In relation to the replacement of copper by fibre in an access network, this is a static-form formulation
Source: Cave (2009)
19
Introduction to ETNO
Innovation is driving force in telecoms sector
Innovation requires balance of risk and reward
Regulatory framework allows for reduction in investment risk
20
21
• Decision on broadband markets, defining geographical segmentation of the wholesale market (bitstream)
• ANACOM report on the regulatory framework applicable to NGA
– Competitive areas• Obligation to give access to
ducts• Access to fibre (own or dark)
only if there is no space in ducts• Virtual access to network as last
resort (advanced bitstream)
– Non competitive areas• Access to ducts• Access to fibre (own or dark)• Virtual access to network
(advanced bitstream)
Regulator (ANACOM)
• Resolution of the Council of Ministers, defining NGA as strategic priority and establishing objectives for 2009 / 2010
• Protocol signed between the Government and operators, as a result of the Resolution, foresees the possibility of multiple NGA networks
• Decree-Law which defines the legal regime governing the construction, access and installation of networks and infrastructure of electronic communications, promoting the development of next generation networks
Government
Clear political and
regulatory environment for FTTH in
Portugal
In Portugal, the Government and regulator have worked to create legal and regulatory certainty
Source: Portugal Telecom 21
22
• Applying state-aid rules rigorously, not allowing public funding to „crowd out‟ private
investment
• Allowing commercially-negotiated agreements to pre-empt economic regulation
• When finding ex ante regulation warranted,
- Ensuring technological neutrality for network upgrades and new deployments
- Taking into account varying competitive conditions in sub-national markets
- Applying a graduated approach to access obligations
- Allowing value-based pricing at retail level
- Allowing differentiated wholesale access prices and conditions based on risk
sharing (e.g., upfront payments, volume, length of contract)
Regulators across Europe are should follow suit and create incentives for private investment
23
DIRECTIVE 2009/140/EC (amended Framework, Access and Authorisation
Directives)
- to be transposed by 25 May 2011
Recital 8
“In order to achieve the goals of the Lisbon Agenda, it is necessary to give
appropriate incentives for investment in new high-speed networks that will
support innovation in content-rich Internet services and strengthen the
international competitiveness of the European Union. Such networks have enormous
potential to deliver benefits to consumers and businesses across the European Union.
It is therefore vital to promote sustainable investment in the development of these
new networks, while safeguarding competition and boosting consumer choice
through regulatory predictability and consistency.”
. . . giving priority to protecting innovation from regulatory risk, as done in the revised Framework
Thank you for your attention
For any follow-up questions or other inquiries, please contact ETNO Communications Manager Thierry Dieu:
24
Annex
Extracts from ETNO “Facts & Figures about
European Telecoms Operators,” Oct. 2009
Selected data points for European telecoms sector
Source: IDATE for ETNO “Facts & Figures” (2009)
• In 2008, total turnover in the EU telecoms sector was €290.6 billion (0.8% growth year-on-year)
• ETNO members‟ revenue was €267.5 billion of this tally
• ETNO members devoted 12.4% of their revenues to investment, accounting for 71% of total sector investment
• Shrinking revenue growth, alongside with economic and regulatory uncertainty, has started impacting investment.
• For the first time since 2003, negative investment growth (-1% in 2008)
Growth of telecom services vs. GDP growth in EU27
0%
1%
2%
3%
4%
5%
6%
2004 2005 2006 2007 2008
telecom services GDP
Source: IDATE for ETNO “Facts & Figures” (2009)
Telcos facing an unprecedented (non-)growth challenge
ETNO members account for 71% of CAPEX in European telecoms sector
2008 CAPEX in Europe
Fixed and Mobile
Fixed
Mobile
non
ETNO
telcos
ETNO
members
non
ETNO
telcos
ETNO
members
non
ETNO
telcos ETNO
members
€ 46.5 b
€ 24.7 b
€ 21.8 bSource: IDATE for ETNO “Facts & Figures” (2009)
ETNO capex: first contraction since 2003
ETNO members‟ tangible CAPEX (EUR b)
0
5
10
15
20
25
30
35
2005 2006 2007 2008
fixed
mobile
Source: IDATE for ETNO “Facts & Figures” (2009)
CAPEX as
percentage of revenue
by geography
0%
4%
8%
12%
16%
20%
EU-15 12 NMS EU-27 ETNO perimeter outside EU-27
0%
4%
8%
12%
16%
20%
fixed + mobile fixed mobile
CAPEX as
percentage of revenue
by network type
ETNO capex: 12% revs on average
Source: IDATE for ETNO “Facts & Figures” (2009)