Investment incentives in an
environment of dwindling voice
revenues*
Harald Gruber
Presentation for Conference
“The Future of Voice” Geneva 15-16 January 2007
*The opinions expressed are of the author and need not necessarily reflect those of the EIB.
1
Outline
•
•
•
•
•
Sector overview
Fixed line trends
Investment
Role of regulation
Conclusion
2
Past drivers for investment and
growth
• Technology
– Cost reduction
– Performance increase
• Regulatory change
– Liberalisation
– Changes in market structure
• Fixed: cost based access prices, service competition
• Mobile: new licenses, facility based competition
3
Fixed line market
• Slow revenue growth:
– Pressure on tariffs
– Switch to flat fees
– Fixed-mobile substitution
• Increasing role of data/broadband revenues
• Pressures on profit margins
• Customer access as key revenue source
4
Fixed line revenues in EU
160,000
140,000
EUR M
120,000
100,000
Data
80,000
Voice
60,000
40,000
67%
64%
62%
59%
57%
2003
2004
2005
2006
2007
20,000
-
Source: EITO
5
Decline in investment
Fixed line telecommuncations in EU
30
25
m EUR
20
15
10
5
0
2001
2002
2003
2004
Source: London Economics
6
Fixed line regulation
• Bottleneck in local loop access
• Asymmetric access regulation of DSL
(unbundling) vs. cable modem
• Regulatory remedy: open access at cost based
prices:
– Service based competition: bitstream, resale
– Facility based competition: Full LLU, shared access
7
Ladder of investment theory
• Short term goal of service based
competition
• Long term goal of facility based
competition
• First service based entry…
• …then facility based entry
8
DSL retail. Shares by type of access
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Facility based
Service based
2002
2003
2004
2005
Source: EU Commission
9
Investment incentives
• Increasing investment profile for new
entrants.
• Investment effect on incumbent uncertain
10
Investment ladder without investment?
New entrants' market shares in EU
35%
30%
25%
Lines (DSL)
20%
Investment (fixed
lines)
15%
10%
5%
0%
2002
2003
2004
Source: EU Commission, LE
11
Is there a paradox?
• Does data communication require less
investment or are investment incentives
diminished?
• Is unbundling complement or substitute for
new entrants’/incumbents’ investment?
• There is empirical evidence (for US) that
inter-platform competition has significant
positive effects on diffusion of broadband
12
EU is moving away from platform competition
Shares of broadband access types in the EU
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
DSL
Cable modem
Other
2003
2004
2005
Source: European Commission
13
A counterexample
South Korea: Broadband access, by type
70%
60%
50%
DSL
40%
Cable
30%
Other
20%
10%
0%
2002
Source: OECD
2003
2004
2005
14
Share of broadband platforms
Source: OECD
15
Platform competition
• May not be feasible to the same degree for
all EU countries because of absence of
cable networks
• Look for alternatives, e.g. radio based
technologies
• Scope for issuing spectrum licenses
16
Regulatory challenges for
fixed line sector
•
•
•
•
Encourage more investment
Issue of “forbearance” on new investment
What to do with countries with single platform ?
Consider non-uniform regulation across EU?
– Mandatory unbundling (possibly limited time horizon)
for countries without alternatives to DSL
– Deregulation in countries with platform competition
17
Conclusion
• Data revenue increase share in total
revenues and profit margins for traditional
voice business decline
• Regulation has strong effects on investment
behaviour
• Regulation should not represent a
permanent claim on incumbents assets
• Stimulation of facility based competition
18