Allianz Dresdner Economic Research
Working Paper
Nr.: 66, June 1, 2006
Author:
Werner Heß
_________________________________________________________________
The telecommunications market:
The dawn of a new era
Content
Abstract
1. Introduction
2. Networks, providers and markets – an overview
2.1 Network infrastructure: More bandwidth, more competition, more convergence
Box 1: Regulating VDSL networks: yes or no?
2.2 Market players: Various forms of vertical integration with differing interests
2.3 Dynamic market growth
3. Fixed-line market facing profound changes
3.1 Lack of competition in the German broadband market
Box 2: DSL business models – still no bitstream access in Germany
3.2 Voice over Internet Protocol: Revolution in voice transmissions
3.3 Triple Play: More bandwidth – higher sales?
4. Mobile telephony: New growth in the wake of higher sales per customer
4.1 Pressure on providers is growing
4.2 Setting the sights on new sales sources
5. The megatrend: Convergence
5.1 The Next Generation Network – flexible applications at falling cost
5.2 Decoupling the stages in the value-creation chain will intensify competition
6. Outlook
Literature
1
Abstract
In the eight years since the German telecommunications market was opened to competition in
1998, it has witnessed very dynamic development, with average annual sales growth just under 6½
%. By the end of the decade, however, we expect average annual growth to have retreated to 3 %.
The continued decline in traditional fixed-line telephony and the difficulties currently being experienced on the mobile communications market, where it is proving impossible to sustain the sales increases of recent years in the face of threatening market saturation and price pressure from lowcost providers, will both contribute to curbing the dynamism. Nevertheless, mobile communications
remains a growth market, benefiting from the increased popularity of cellular phones. The same
applies to broadband-related business. The services that have been facilitated by VDSL (triple
play) are, in particular, likely to keep market share losses in fixed-line services in check.
The number of households with broadband access in Germany increased more than five-fold between 2001 and 2005, from almost 2 million to over 10 million, which represents around 30 % of all
households. The most widespread form of access is DSL, which accounts for 97 % of connections.
However, the market for broadband communication is still a long way away from being truly competitive. It would therefore be wise to promote both intermodal competition between the various
forms of broadband technology, and competition on the market for DSL access (intramodal competition), thus enabling Germany to catch up with other countries in terms of broadband coverage.
This is a fundamental precondition to facilitating the spread of Voice over Internet Protocol (VoIP).
The increasing acceptance of VoIP will have a considerable impact on the development of innovative infrastructures and services, and will lead to radical changes in the telecommunications market. The main advantage of IP telephony is the huge increase in productivity for voice connections.
It may therefore be expected that cost pressures will force most network operators to switch to IP
technology over the next few years. Unbundling DSL and telephone connections will provide a major stimulus for VoIP market opportunities.
Converting network infrastructures to IP technology also allows customers to watch television via
the internet (IPTV), which in turn enables the Triple Play business model for bundling voice and
internet services along with television and video services over a single connection, although this
requires considerable bandwidths with a high quality of service right down to the end customer.
Cable television networks, traditional telephone networks and mobile communications networks all
represent viable platforms for Triple Play. Provided they can offer appropriately up-to-date infrastructure – a process requiring billions of euros in investments – cable network operators and DSL
providers in particular will become direct competitors in the battle for Triple Play customers. This
competition is, however, unlikely to be particularly intense for the time being. In the medium to long
term, established telecommunications groups will see their sales and earnings figures being increasingly affected by successful Triple Play marketing strategies. After all, the pressure on the
2
traditional fixed-line telephony is increasing – due in part to the cheaper VoIP offers, and also to
competition from mobile communications.
Although the mobile communications market is still witnessing a clear growth trend, the sector
will have to prepare for harder times in the next few years, for two reasons in particular: Firstly because prices for mobile communications services are facing increasing pressure from low-cost providers, and secondly because mobile communications companies are seeing dramatic declines in
their profit margins due to the reduction of the fees payable by fixed-line providers for fixed-tomobile calls, but also as a result of pressure from the European Commission to lower international
roaming charges for consumers.
Faced with this predicament, the mobile communications sector is searching for new sources of
revenue. Technical innovations are one option that are being considered in this respect. Whilst the
mobile communications industry has concentrated predominantly on voice communication over the
past few years, increasing attention is now being paid to the transmission of information in the form
of text, images and multimedia. The bundling of mobile communications and television is also
offering new prospects. On the basis of market research and experiences in other countries, we
believe that a monthly surcharge of around €10 would be acceptable for television via cell phones.
In addition to using supplementary services to increase revenues, mobile communication companies are also pinning their hopes on mobile communications replacing the fixed line. According
to estimates, the proportion of all telephone calls attributable to mobile communications in Germany is set to more than double by the end of the decade, from the current 16 % to between 40 %
and 50 %.
In an attempt to buck this trend, fixed-line operators are coming up with solutions to combine mobile and fixed-line communications. The aim of this fixed-mobile convergence (FMC) is to offer
person-specific telecommunications services independent of network infrastructure. The integration
and replacement of existing public telecommunications networks (fixed-line, mobile and data networks) using IP technology will play a key role in this process. This concept, known as nextgeneration network (NGN), will allow voice, data and multimedia services to be transmitted over a
single network, thus rendering the current practice of separate networks redundant. This would
open up substantial potential savings for network operators.
Users would, above all, benefit from the increased application possibilities and convenience offered
by NGN.
The convergence of different technologies, channels of communication, and media is leading to
changes all along the value chain in the telecommunication market, which together will bring about
fundamental changes. Over the next few years, the vertical network-oriented value creation structure that still dominates will gradually be replaced by a horizontally integrated structure. The value
creation levels will be separated from one another and services will no longer be provided dependent on specific network access technologies, instead they will be based on an integrated access
3
platform. Consequently, competition on the market for telecommunications services will also become more intense, as market entry barriers for alternative providers become lower. The structure
of value creation will also change as the convergence progresses. The value added by the networks business will decline and the services on offer from network operators account for a greater
proportion of end-customer sales. The changes in the value creation structure will cause the telecommunications market to become more fragmented. This means that the power of the customer
will increase, and thus content and customer benefit will take priority over technology.
In the long term, the trend towards convergence will also mean a merging of the telecommunications sector and IT, the media, and consumer electronics (market convergence). In principle, this
trend will lead to a new definition of electronic services and applications. In the future they will have
to be seen increasingly as a combination of content production (music, film, and publishing), content editing (online, internet, and media services), content distribution (telecommunications), and
content presentation (end device industry). This is why an increasing number of strategic partnerships can be expected in the future between telecommunications and media companies, but also
with financial services providers. The consolidation within the telecommunications sector will also
continue. Ultimately, it is necessary to achieve economies of scale in the use and expansion of the
network infrastructure as well to set standards.
4
1. Introduction
It is unlikely that another market is experiencing a more profound change than telecommunications.
Whilst the driving forces behind the changes in the last decade were in particular digitalization, deregulation, privatization, and globalization, the current challenge is to bundle as many telecommunication services as possible in a single package for the end customer. In order for this to be possible, data networks based on Internet Protocol and traditional telephone networks have to be converged into one highly efficient communications network (Next Generation Network). This convergence process makes innovative electronic services possible and thus also opens up lucrative
business opportunities for new market participants. At the same time, the core business of established telecommunications groups is shifting, as they gradually transform from technology providers
to service providers. So the transformation process continues.
This paper provides an overview of important structural and technological developments which are
set to shape and change telecommunications in the coming years. Following an overview of the
network infrastructure, the providers in the sector, and the structure and development of the telecommunications services market as a whole, we focus on the fixed-line business. It is currently experiencing a renaissance with the rapid proliferation of broadband technologies, but in the longer
term is faced with dramatic change through the convergence of voice and data services.
The mobile communications market is heading for harder times in view of saturation trends and
aggressive competition. Providers are therefore attempting to tap new sources of revenue through
technical innovations and the increase in the proportion of mobile communications in the total volume of telephone calls made. The spotlight is thus increasingly on the integration of fixed line and
mobile communications, but also on the general trend towards the convergence of different technologies, channels of communication, and the media which is triggering a drastic structural change
in the telecommunications market.
2. Networks, providers and markets – an overview
The telecommunications business largely consists of providing telephone, data, and internet connections for the transportation of voice, data, and digital content. This is based on an extensive
global telecommunications network. In line with the different network levels and the variety of products on the supply side many companies are acting with contrasting interests and different degrees
of vertical integration. In the eight years since liberalization in 1998, the market for telecommunications services as a whole in Germany has seen extremely dynamic development.
5
2.1 Network infrastructure – more bandwidth, more competition, more convergence
Telecommunications networks comprise several hierarchical levels. These levels include international networks, national wide area networks (transport networks), the regional and local distribution level (connection networks), and the local access level (access networks). Transport and connection networks are often grouped together under the term “backbone”. They consist of fiber optic cables with high bandwidths1 , which are able to cope with the heavy data traffic (comparable
with highways for street traffic). In contrast, the access network has pairs of copper wire connecting each individual participant’s access point to the local exchange. Known as a local access line
or local loop, this is divided into two sections from the local exchange or the central office to the
feeder distribution interface, and from there to the end device (see Chart 1).
DSL technology (Digital Subscriber Line) was developed to enable the existing pairs of copper
wires to be used for broadband data exchange as well as telephony; this uses normal telephone
lines to transfer data up 250 times faster than a traditional ISDN connection. The standards ADSL
(whereby download speed is higher than upload) and SDSL (with the same speed for downloading
and uploading) transfer data at 1 to 3 megabits per second (Mbit/s). The latest ADSL2+ technology
uses the existing copper cables with up to 25 Mbit/s.
The next new standard VDSL (Very High Speed Digital Subscriber Line) allows data transfer of up
to 50 Mbit/s via normal telephone lines. However, the speed decreases the longer the line. The realization of VDSL connections therefore requires substantial investment in fiber optic cables to
bring the technology closer to the customer. Deutsche Telekom is planning to extend the fiber optic
network in 50 cities beyond the central offices (approx. 2,000 meters away from customers) up to
the feeder distribution interfaces (approx. 300 meters from the customer), so that copper cable will
only cover the remaining few meters to the customer. As soon as the DSL improvements reach
their limit in future, the access network will need to replace the pairs of copper wire with fiber optic
cables (Fiber to the Home – FTTH).
1
Bandwidth refers to the transmission capacity of a connection. The bigger the bandwidth, the
more information units can be transferred within a certain period of time. In general, the forms of
technology classified as broadband are those with transfer rates above ISDN technology. These
include in particular fixed line technologies such as Digital Subscriber Line (DSL), Fiber-to-theHome (FTTH), and internet access via cable modem or electric cable (Powerline Communications,
PLC). However, mobile communications technologies such as Universal Mobile Telecommunication Systems (UMTS), Wireless Local Area Network (WLAN), and Worldwide Interoperability for
Microwave Access (WiMAX) are also classified as broadband.
6
Chart 1
Use of glass fibre and copper in connection network
Local exchange
with main
distribution
frame
app. 1. 700 m
Feeder
distribution
interface
app. 300 m
End customer
Backbone
ADSL-connection
Glass fibre
Copper c able
Glass fibre
Glass fibre for VDSL
VDSL-connection
Copper c able
FTTH-connection
Glass fibre to the home
Source: Bundesnetzagentur.
Despite the fact that all of Deutsche Telekom’s around 7,900 central offices are equipped with fiber
optic cables, around 20 % of them are currently offering limited or no DSL services for technical
and economic reasons. This rises to 40 % in some areas of the east German states. A possible
DSL alternative to close this gap with a wireless solution for the last mile is the relatively new wireless technology WiMAX, which is characterised by relatively high transfer speed and a theoretical
range of up to 50 kilometers.
Box 1
Regulating VDSL networks: yes or no?
The planned expansion of the fiber optic network has for some time been the subject of a
controversial discussion between the European Commission, the German government and
Deutsche Telekom. The reason for this is the current regulation policy. As the former monopolist,
Deutsche Telekom is subject to regulation by the Federal Network Agency. This means that it is
obliged to offer its existing networks to competitors at prices fixed by the regulating authorities.
Deutsche Telekom is no longer willing to accept this for the new network. Its €3.3 billion
investments in a new VDSL network are subject to the proviso that that fixed prices will not apply at
least for a certain period. Deutsche Telekom says that it is in its best interests to cooperate with
other companies that wish to use its network, but wants to conduct bilateral negotiations with these
companies itself, and not be forced by regulation to open up the network. On the other hand,
Deutsche Telekom’s competitors fear a monopoly with the new network and are in favor of
regulation.
7
In accordance with European law, Deutsche Telekom is protected against regulation only if it is
offering new products via the VDSL network which cannot be realized with other forms of
technology. The draft amendment to the Telecommunications Act (Telekommunikationsgesetz –
TKG) submitted by the government allows only new markets to be exempt from sector-specific
regulation. Telekom believes that the offers enabled by the new network, such as high-resolution
television and extended internet applications, constitute a “new market”. It is up to the Federal
Network Agency to decide whether or not this is the case in a market analysis. However, it has
already indicated that it does not intend to loosen the regulation of the telecommunications market
in favor of Deutsche Telekom. Instead, the Federal Network Agency believes that opening up the
monopoly network is exactly what is needed for investments and dynamic market growth. However,
its examining competence is, in practice, restricted, because the European Commission can veto
its decision, and therefore has “the final say”. The Commission has also announced that it will not
accept a new monopoly by Deutsche Telekom.
Whilst access network operators hold supremacy over the local loop, connection network
operators do not have this key final part of the network up to the customer. They “take over” their
customers’ telephone or data traffic in the nearest local exchange, and channel it through their
network via preselection or call-by-call. They pay the relevant access network operator a fee
fixed by the regulatory authorities for use of the local loop. Both access network operators and
connection network operators use the transport network operators’ lines and services. These
establish and operate backbones across Germany and internationally, and sell their line capacity to
other telecommunications companies.
The creation of interoperability between various network systems makes it possible for the same
telecommunications services to be offered via different networks. and thus to enter for alternative
network systems into infrastructure competition with the Public Switched Telephone Network
(PSTN). Television cable networks are a prime example of alternative networks in the access
area. In contrast to Germany, many other countries use the cable network much more for access to
the internet, in addition to DSL (see figure 5).
But in Germany, too, the cable network represents a potential alternative platform for
telecommunications and internet access, as almost 70 % of households are connected to the cable
network – a very high proportion by international standards. It is true that some cable network
operators are currently preparing their networks to be an alternative broadband option to DSL, but
the upgrade is hampered by the fragmentation of the network into different levels each with
different owners. As the cable network operators have no direct access to many end customers –
the local loop is often owned by building cooperatives or other operators who have no interest in
network upgrade – they are currently testing various types of transmission technology (including
WiMAX) to reach their end customers directly.
8
Other possible access networks in competition with PSTN are Wireless Local Loops (WLL), and
the low-voltage electric mains which can transmit telecommunication signals via Powerline
Communication (PLC).
The mobile communications network comprises in particular the mobile distribution network and
the access network. The mobile distribution network enables the wired transfer of signals
between the fixed facilities of the mobile communications network, primarily via fiber optics
(sometimes via the same connection networks that also transport the traffic from the fixed line
access networks). The signal is not actually transmitted wirelessly until the local loop of the access
network (also known as “air interface”), (Stellung) between a mobile communications antenna and
the mobile end device.
Second and third generation mobile communications networks are currently in operation in
Germany. Second generation networks (2G) are capable of transferring data, but are still geared
more towards voice transmission. The most important 2G standard is GSM (Global Systems for
Mobile Communication). The third generation was introduced gradually; first of all an interim
standard (2.5G networks) was created with GPRS (General Packet Radio Service), which enabled
package-based data transmission in the mobile distribution network. The introduction of 3G
networks suitable for data transmission aimed to increase data transmission speed and also
eliminated the problem of capacity for voice transmission. The most important 3G standard is
UMTS (Universal Mobile Telecommunications System).
In addition to the public telephone network, a large number of data networks have been /laid over
time, and integrated into a worldwide network – the internet. This is made up of different subnetworks and computers that exchange data at central junction points. The technical basis is a universal protocol available on every computer, known as Internet Protocol (IP). This is an accumulation of rules that set important standards for data transmission on the internet and make sure that
the information to be transmitted is divided into individual data packages, thus enabling it a smooth
passage through the network. The overlap between telephone and data networks is continually increasing due to the digitalization of voice transmission. A convergence between the two network
worlds, based on Internet Protocol is to be expected in the long term (Next Generation Network).
2.2 Market players: Various forms of vertical integration with differing interests
The companies active on the telecommunications market can be roughly grouped into network operators, and service and content providers. There are many different types of network operators.
In many European countries, the former monopolists (incumbents) among them maintain a dominant position, as is the case with Deutsche Telekom in Germany. It is the market leader in all major market segments (infrastructure, voice transmission, internet services, and mobile communications). Since Deutsche Telekom is the only company to have a nationwide infrastructure at the level
9
of local access, all fixed line competitors have to rely on its existing infrastructure if they want to
serve customers nationwide too.
The some 200 competitors who operate their own fixed line infrastructures include long-distance
and data network operators such as BT Ignite, Colt Telecom, and mediaWays, which target
solely corporates, national long-distance and access network operators such as Arcor, which
are also active in the private customer market, and regional and local access network operators
such as Hansenet and NetCologne. Known as city carriers, their business models are predominantly based on renting local loops from Deutsche Telekom. Moreover, cable television network
operators are increasingly offering internet and telephone service in addition to television.
Along with the fixed line providers in Germany, there are four mobile communications network
providers; T-Mobile, Vodafone, E-Plus, and O2, which have also built up UMTS networks in addition to their GSM networks. They are thus competing with fixed-line providers in the broadband access market. Other player include Mobile Virtual Network Operators (MVNO), who use third
party networks, but present themselves to customers like network operators (see Chapter 4.1).
Aside from companies with their own network infrastructure, there are many providers without their
own network, such as debitel or MobilCom. These service providers and resellers purchase or
rent network capacity from fixed line or mobile communications network operators, and sell it on to
their customers, bundled with their own basic or value-added services. There is only a thin line distinguishing service providers from network operators, as service providers are increasingly investing in their own network blocks too. In the course of the convergence of voice and data communication, the internet service providers in particular are increasingly penetrating the traditional telecommunications areas, whilst on the other hand, the established telecommunications groups are
increasingly offering internet and IT services.
2.3 Dynamic market growth
Revenue on the telecommunications services market in Germany has climbed consistently
since the beginning of liberalization in 1998, from over €44 billion to around €68 billion in 2005 (see
Chart 2). This represents average annual growth of almost 6½ %. The market segment with the
highest revenue remained fixed line access services with over 36½ %. These comprise revenues
by network operators (including valued-added services), resellers of voice services, and internet
service providers without networks. The fixed line business has been showing clear signs of a recovery since 2002, after years of decline. This is a result of revenue growth from the marketing of
broadband services (see Chapter 3.1).
10
Chart 2
Telecommunication services turnover
in Germany
EUR b n
80.0
70.0
66.7
64.2
62.1
60.6
51.1
9.6
7.4
50.0
48.2
44.2
40.0
6.1
2.5
6.4
0.9
7.9
1.0
1.0
1.0
1.2
1.2
2.3
1.8
1.1
1.2
9.5
13.1
23.4
21.9
21.2
21.3
22.5
1998
1999
2000
2001
2002
30.0
7.5
7.1
6.6
6.3
3.0
2.9
2.8
2.8
2.6
4.6
9.5
2.7
4.9
7.8
7.9
8.2
60.0
68.3
22.8
23.5
24.0
24.7
25.1
2003
2004
2005e
21.1
17.4
19.2
19.9
20.0
10.0
0.0
Other
Cable TV
Carrier services (Interconnection)
Rental lines
Mobile telephone service
Fixed line services
Source: Bundesnetzagentur.
Conversely, the second-largest segment, mobile communications services, with a market share
of almost 34½ %, has recorded uninterrupted growth since 1998, which in comparison with the
telecommunications market as a whole, is well above average at almost 14 % per year. The same
applies to the carrier business, whose market share in the period under review increased by 7½
percentage points to over 11½ %, which represents average annual increase of 23½ %. The carrier
business comprises connection and access services provided in fixed line and mobile communications networks for the interconnection of their networks. The TV cable network operators and
leased line business account for a relatively small share of the telecommunications market with
just under 4½ % and 1½ % respectively. Other telecommunications services (11½ %) includes in
particular data communication and radio transmission services, trunked radio, wireless data, and
paging services.
The next two sections present the key structural and longer-term developments in the fixed line
business (see Chapter 3) and in the mobile communication market (see Chapter 4).
11
3. Fixed-line market facing profound changes
The classical telephony business of the major fixed-line providers is clearly running out of steam.
Whereas the number of fixed-line call minutes (via dialed analog and ISDN connections) virtually
doubled between 1997 and 2002, reaching 355 billion, it has been declining since 2003 (see Chart
3). In 2005, the volume of narrowband traffic was down to 337 billion minutes. Between 2001 and
2005, Deutsche Telekom lost almost one third of its call minute volume, while its rivals boosted
their volumes by a total of 56 %.
Chart 3
Fixed-line call minutes in Germany:
Severe losses for Deutsche Telekom
in bn.
400
345
350
354
346
337
301
300
245
250
200
355
114
144
150
174
178
91
53
197
178
12
178
185
192
210
232
211
194
172
159
1997
1998
1999
2000
2001
2002
2003
2004
2005e
150
100
50
0
Deutsche Telekom
Competitors
Source: Bundesnetzagentur.
There are two main reasons for the decline in fixed-line call minutes. The first is increasing competition from mobile telephony. For five years now, the number of mobile telephones has exceeded
that of fixed-line channels, and it is also rising much faster (see Chart 4). The second is that internet traffic is shifting away from narrowband telephone connections to broadband technologies (see
Chapter 3.1). The growing number of broadband connections is helping to turn internet telephony
into a mass market (see Chapter 3.2), and that, too, is putting increasing pressure on classical
fixed-line telephony. To combat early signs of falling sales, the established providers are pinning
their hopes on the “Triple Play" business model (see Chapter 3.3).
12
Chart 4
Telephone market in Germany:
Mobile connections exceed fixed network channels
in millions
80
70
60
50
Fixed network channels
40
30
20
Mobile connections
10
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004 2005e
Source: Bundesnetzagentur.
3.1 Lack of competition in the German broadband market
The number of broadband connections in Germany has risen dramatically. Between 2001 and
2005 it soared more than fivefold, from just under 2 million to over 10 million. In other words, some
30 % of households now have a broadband connection. The most widespread form of broadband
technology in Germany is DSL, which accounts for 97 % of all connections. Only 2 % of all broadband connections are linked via TV cable. Other technologies, such as satellite or PLC, do not play
a significant role at present.
Despite a number of measures adopted to open it up, the broadband communications market is
still far from being competitively organized. In nearly all countries, the former monopolies dominate
the DSL market, since they are the main owners of the fixed-line system. In Germany, Deutsche
Telekom has by far the largest share of the DSL market, i.e. 43 %, followed by United Internet (17
%), Arcor (11.5 %), AOL (10.5 %), Freenet (6.5 %) and Hansenet (just under 5 %). Given this level
of dominance, government broadband sales campaigns which promote DSL in preference to alternative broadband technologies are somewhat questionable in terms of competition policy. Indeed,
some people even see them as “subsidization of old monopoly structures”.
Empirical studies show that competition between different broadband infrastructures (intermodal
competition) is a key prerequisite for the widespread distribution of broadband connections. After
all, intermodal competition leads to a race among the infrastructure providers, who all want to be
the first to dominate the market. The providers are therefore keen to expand as quickly as possible,
which ultimately accelerates the spread of broadband. Against this backdrop, it is hardly surprising
that the number of broadband connections per 100 inhabitants in Germany – which has very little
13
intermodal competition – is lower, at 10.2, than the OECD average (11.8 as at June 2005). Germany is thus close to the bottom of the league table, far behind the leaders South Korea, the Netherlands and Denmark (see Chart 5). The kind of infrastructure competition that could be triggered
above all by the cable network would, then, be welcome. It should be promoted in order to boost
the number of broadband connections in the country.
Chart 5
Broadband internet connections:
Germany lagging far behind
% of population
South Korea
13.9
Netherlands
13.6
Denm ark
25,5
22,5
13.2
Sw itzerland
21,8
12.7
Canada
20,3
9.4
19,2
Finland
16.3
Belgium
18,7
11.0
Norw ay
18,2
14.8
18,2
Sw eden
11.3
16,5
Japan
11.0
16,4
USA
5.5
14,5
UK
9.7
France
11.9
Austria
12,5
10.4
OECD
11,8
7.2
Australia
11,8
8.5
Germ any
9.9
Italy
9.4
5.1
Spain
Greece 0.8
12,8
7.0
Luxem bourg
Portugal
13,5
10,9
10,2
10,0
9,9
7.0
9,3
0,8
DSL
Cable, other
Source: OECD, as of June 2005.
Intensification of intermodal competition between the different broadband technologies is not the
only factor here. Competition in the market for DSL connections (intramodal competition)
should also be encouraged. The technical and regulatory arrangements for this vary according to
the extent to which the former monopoly is obliged to provide upstream services for its competitors.
The more comprehensive these upstream services are, the less opportunity rival providers have to
compete on the strength of higher-quality services (see Box 2).
14
Box 2
DSL business models – still no bitstream access in Germany
DSL resale
The business model with the most comprehensive upstream service for a DSL connection is DSL
resale. Competitors buy in the entire range of products from Deutsche Telekom, and then resell
those services in an unmodified form to end users in their own name and for their own account.
The reseller is unable to change the technology underlying the service. DSL resale enables
competitors to offer one-stop broadband access without having to build up an extensive
infrastructure of their own. In this sense, of course, resale does encourage competition. But it does
not allow competition for innovations, since providers have to use the products supplied by
Deutsche Telekom.
Subscriber line rental
Under the fully free-standing subscriber line business model, competitors rent the entire
subscriber line and sell only their own services to the end user. This gives competitors much more
freedom, but it also forces them to invest heavily in their own infrastructure. It is hardly surprising,
then, that competition based on subscriber line rental is still relatively limited.
Line sharing
Line sharing is based on the fact that ISDN and DSL lines use different frequency bands. This
means that Deutsche Telekom can still handle telephone traffic, while a competitor rents only the
frequency band for data transmission. That competitor can also change the technology of the DSL
connection (which is not the case in DSL resale). The prerequisite for line sharing is, however, that
the end user still has a telephone connection provided by Deutsche Telekom.
Bitstream access
Bitstream access is not yet available in Germany. With this upstream product, the network
operator provides broadband transmission capacity (e.g. via DSL) between the end user and a
defined point of interconnection in the competitor’s network, enabling that competitor to take over
the datastream (bitstream) and to offer its own products to end users on that basis. In other words,
bitstream access (like line sharing) enables competitors to control their relationship with the end
user directly (they can offer their products in a different form from the network operator) and also
means (unlike line sharing) that they can offer one-stop connections and broadband services. The
advantage of bitstream access is that it allows competitors to enter the market gradually. It puts
them in a position to offer broadband access independently of the telephone connection without
having to invest immediately in extensive infrastructure, which is the case with the subscriber line
rental model).
The key factor in the further spread of broadband connections and the promotion of competition in
the German DSL market remains consistent regulation of upstream products by the Federal
Network Agency. The agency’s decision in summer 2005 to reduce charges for line sharing and
subscriber lines is a key prerequisite for greater competition.
15
3.2 Voice over Internet Protocol: Revolution in voice transmissions
The continuation of this regulatory policy will boost the DSL market and help Germany to make up
further ground on other countries in the provision of broadband access. This, in turn, will pave the
way for voice transmission via the internet – so-called VoIP (Voice over Internet Protocol) – to become a mass market. The increasing use of this technology will have a significant impact on the
development of innovative infrastructures and services, and will trigger sweeping changes in the
telecommunications market. IP technology makes it possible to split the “production” of voice
transmission between a number of different market players: competitors can offer telephone services without needing the infrastructure of a network system.
It is hardly surprising, then, that (above all) Internet Service Providers, new special providers like
Skype and software companies like Microsoft are now seeking to gain a share of the telephony
market by offering lucrative VoIP services. The established network operators, who generate most
of their sales with traditional telephony, face serious falls in their market share if they do not adjust
to the new competitive environment. The incumbents must find strategic answers to the new
technology – not merely by adapting their network infrastructure to offer VoIP, but also by providing additional services, such as Triple Play (see the next section).
The main advantage of VoIP is that it allows enormous productivity increases in the “manufacture” of voice traffic. In conventional technology, a telephone call occupies a line, which cannot
then be used for other purposes although its capacity is by no means being fully utilized by the
voice traffic. In IP technology, on the other hand, the voice traffic “floats” along as a series of data
packages in the larger data stream. However, it only takes up the network capacity it needs, which
means that a large amount of capacity is still available for other applications. Network capacity is,
then, used more efficiently, significantly reducing the price of the individual transmission.
VoIP thus offers many established telephone companies, too, the opportunity to reduce their costs.
Calculations have shown that the British provider BT, for example, could cut its network operation
costs by more than 40 % if it switched entirely to VoIP. Prices for voice traffic could then be reduced accordingly. It therefore seems likely that cost pressures will force most network operators to move over to IP technology in the coming years. Deutsche Telekom, for example,
plans to make the full transition from conventional telephone technology to the Internet Protocol by
the year 2012. Fixed-line operations face their biggest upheaval since the telephone was first invented.
The shift to IP-based telephony is now inevitable. However, two major obstacles still have to be
overcome before it becomes a mass market in Germany:
16
•
The number of broadband connections must be increased, since they are indispensable for
VoIP. As mentioned above, there were only 10 broadband connections per 100 of the
population in Germany in mid-2005 (see Chart 5).
•
An even more important factor in improving the market outlook for VoIP is the possibility of
renting a DSL connection independently of a telephone line. Customers who exclusively wish
to use VoIP do not need a conventional telephone line. All they need is a DSL connection. In
Germany, this technology has so far been based exclusively on upstream service products
provided by Deutsche Telekom, which still offers them only in conjunction with its telephone
lines. This is a further factor that makes it very difficult for IP telephony to replace conventional
technology in Germany. The much-discussed bitstream access technology is the only way out
of this impasse (see Box 2), since it would allow companies to offer a stand-alone DSL connection. It is up to the Federal Network Agency to force Deutsche Telekom to uncouple DSL
access from its telephone lines.
In view of the current situation, experts expect IP telephony in Germany to have an approx. 30 %
share of the private fixed-line market by 2010.
3.3 Triple Play: More bandwidth – higher sales?
The conversion of the network infrastructure to IP technology will also enable companies to offer
so-called Triple Play. This technology provides customers with voice, internet and video services
via a single line, but it requires significant bandwidth with a high degree of reliability all the way
through to the end user. Triple Play will mean that TV via the internet will be able to seriously challenge the classical channels of cable, satellite and terrestrial aerial. Three platforms are currently
available to provide Triple Play (see Chart 6): the TV cable networks, the conventional telephone
networks, and the mobile phone networks (see Chapter 4.2).
17
Chart 6
Triple Play platforms
Cable-TV network
Telephony
Internet
TV
Telephone network/DSL
Mobile network
VoIP
Analog
ISDN
VoIP
Broadband
internet
Broadband
internet
Mobile
broadband
internet (UMTS)
IPTV
Mobile TV
TV
Mobile telephony
Source: Bundesnetzagentur.
Cable network operators who intend to expand their core business (the transmission of broadcasting signals for TV and radio) to include broadband internet and voice telephony will have to
make their networks, which are currently designed to carry only TV transmissions, return-channel
compatible. Today, some 53 % of German households are linked to the TV cable network, and the
potential is just under 70 %. Although approx. 6 million households (18 %) were in a position to be
equipped with a return channel at the end of 2005, only 240,000 customers were using the internet
via a cable modem. By the end of 2007, approx. 45 % of all connectable households could be able
to use TV, internet and telephony services via cable.
However, telephone network operators who wish to add broadband internet services and internet
TV to their core business (classical fixed-line telephony) will have to modernize their networks,
which are currently equipped with conventional DSL connections. Relatively high bandwidths (i.e.
higher than ADSL2+ or the even faster VDSL standard) are needed to transmit moving images and
several parallel TV programs to households in very high definition (HDTV).
If they modernize their infrastructure – and that will mean investments running into billions
– operators of cable networks and DSL providers will become direct competitors in the battle for potential Triple Play customers. Customers will have to decide whether they wish to use a
DSL connection or a TV cable as their central telephone, TV and internet link. The provider of the
mode selected by the customer will generate sales from all three segments. There is much more at
stake here for DSP providers than for the cable network operators, for two reasons. First, by entering the telephone and internet segment, the cable industry is attacking a market which is approx.
ten times the size of the TV market which the telephone and internet providers are targeting with
their entry into the TV market (probably in mid-2006). And second, the cable operators are adding
18
to their range of services two activities which generate high average sales, while the telecommunications providers will be gaining only one single service (IPTV) with relatively low average sales.
In the first instance, however, the competition for Tripe Play customers is unlikely to be very intense. The cable network operators’ scope for expansion is limited – at least in the medium term –
by the limitations they face in modernizing their cable networks. And on top of that, the market potential of TV via DSL (IPTV) will probably be quite limited in the early stages due to the wide range
of free TV channels currently available. Transmission rights are a further problem. In the medium
term, the additional business segments of DSL providers will probably be high-quality pay TV or individually accessible TV services. According to estimates, the western European market for Triple Play services will grow from just under EUR 1.5bn in 2005 to EUR 7.5bn in the year 2010.
That corresponds to average growth of over 40 % per year. Most of the sales will probably come
from the DSL infrastructure (see Chart 7). The number of German households using TV via DSL at
the end of the current decade is put at approx. 1.4 million, i.e. some 8 % of DSL customers.
Chart 7
Triple Play sales in Western Europe:
DSL-infrastructure still dominant
10
EUR bn
9
7.5
8
6.5
7
1.4
5.5
6
5
1.0
4.1
4
1.2
0.7
2.5
3
6.1
5.3
2
1
1.3
0.2
0.4
4.5
3.4
2.1
1.1
0
2005e
2006e
2007e
DSL
2008e
2009e
2010e
Cable
Source: Solon Management Consulting.
Before the fixed-line operators can make themselves more attractive to the market by offering Triple Play and other content-oriented services, a number of legal issues (in media law) have to be
clarified, e.g. whether and to what extent telecom companies operating in the TV market are subject to broadcasting regulation. Is IPTV a new telecom service, or is it TV? Where fixed-line operators face excessive restrictions on their services under broadcasting legislation, the government
should step in to deregulate the market. Otherwise, investment in VDSL infrastructure will carry too
high a risk.
The fact that providers are keen to be exempted from regulatory control as they develop Triple Play
and other broadband services is quite understandable. However, Deutsche Telekom’s insistence
19
that its proposed VDSL network should be temporarily freed from regulatory supervision (see
Box 1) is equally controversial. In business terms, an infrastructure provider should have an interest in allowing competitors to use its network, since this creates demand for upstream services
which in turn helps to finance new infrastructure. Furthermore, as past experience with DSL connections has shown, competition would boost demand for higher bandwidths and thus accelerate
the spread of the new access technology. That would significantly reduce the investment risk for
Deutsche Telekom.
If, on the other hand, Deutsche Telekom succeeds in its demand for temporary exemption from
regulation, it could (at least initially) refuse access to competitors who wish to use the VDSL network for their own products. And if, beyond that, products based on VDSL technology force current
ASDL products out of the market – as seems likely – competitors would not merely be excluded
from a future market development: they would also be unable to compete in offering products that
are currently available. If the market develops sluggishly and it then seems necessary after all to allow rival providers to offer VDSL connections, that option would still be open to Deutsche Telekom.
In other words, then: Deutsche Telekom could play a decisive influence in the starting date and extent of any competition. And it is precisely this decision that is the ultimate responsibility of
competition and regulatory policy. In the present case, it should be a fairly simple one. Not
only is it in Deutsche Telekom’s own business interest to grant access to the network: the
opening of the network is the only way to encourage investment and promote dynamic market growth.
In the longer term, IPTV could seriously challenge existing TV transmission channels – especially if it proves possible to combine exclusive content and attractive prices with technological innovations that conventional TV cannot provide. In those circumstances, Triple Play
would have the potential to become a profitable business model. However, if products are to succeed in the Triple Play market, they do not merely have to be constantly developed and refined:
they must also – and above all – be positioned in the market. This latter factor places significant
demands on sales and customer support activities. All told, then, the established companies face
massive technological and organizational upheaval as they make the transition from classical telecom providers to multimedia providers. Over the medium- to long-term horizon, the successful
marketing of Triple Play products will play an important part in the sales and earnings of the
established network operators. After all, their previous core business – fixed-line telephony – is
coming under increasing pressure, not just from less expensive VoIP services, but also from mobile
telephony.
20
4. Mobile telephony: New growth in the wake of higher sales per customer
The German mobile telephony market has continued to grow dynamically in recent years. However, that growth has not been as dramatic as it was in the second half of the 90s. While the number of mobile phone users rose by around 66.5 % per year on average between 1995 and 2000,
the expansion rate slowed to “only” 9.5 % in the period 2001-2005 (see Chart 8). In 2000 only 58 %
of the population had a mobile phone. By 2005, though, the penetration rate had reached 96 %.
Over the next few years, the margins in mobile telephony will come under pressure from various
sides (see Chapter 4.1). The main motor of future growth will be greater use of mobile phones (see
Chapter 4.2), while increases in the penetration rate will prove less significant in view of the current
high level of ownership in western Europe (see Chart 9).
Chart 8
Number of mobile phone users in Germany
in th ousan ds
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004 2005e
Source: Bundesnetzagentur.
In Germany, it will be possible to increase the number of mobile phone customers only by expanding use in special segments (above all children and senior citizens), and by raising the number of
customers who have more than one SIM card (i.e. a second mobile phone). According to a forecast
by Solon Management Consulting, the number of mobile phones in Germany will rise from its current 79.2 million today (2005) to around 100 million by the end of the decade. The latter figure
would mean a penetration rate of 120 %. Over the same period, sales generated by mobile telephony services are expected to rise by an average of just under 5 % per year. That would be a significant slowdown compared with the average annual growth rate of 14 % in the period 1998-2005.
21
4.1 Pressure on providers is growing
Although the mobile telephony market clearly looks set for further growth, the industry faces difficult
times ahead, for two main reasons.
•
Prices for mobile phone services are coming under increasing pressure due to cut-price
providers. According to the Federal Statistical Office, mobile call prices fell by 11 % in 2005.
The mobile phone discounters have no network of their own, but use – as mobile virtual
network operators – the infrastructure of the leading mobile telephony providers. Like internet
providers, they operate as middlemen who buy call time from the network owners and then
resell that time to their customers with a small price premium. The no-frills model they offer
enables customers to use their phones at a standard price and without any monthly standing
charge, minimum use or long-term contract.
Today, pre-defined concepts are available which reduce the technological complexity of
providing a new mobile telephony brand to a minimum. This enables the discounter to focus
entirely on the market positioning and sale of the brand. The network operator (or an
intermediate network provider) handles the technical side (network operation, logistics,
charging) as an upstream service in the name of the discounter. Most mobile telephony
discounters are subsidiaries of the network operators (e.g. simyo, klarmobil.de, simply, Easy
Mobil) or non-telecom companies who draw on the services of the network operators and resell
those services under their own established brandname and via their own sales channels (e.g.
Tchibo Mobil, ALDI-TALK, Viva).
•
The mobile telephony companies face sharp falls in profits due to imminent cuts in call prices.
Two factors are relevant here. First, there will be a reduction in the charges which fixed-line
companies pay to have their fixed-line calls routed into mobile networks. These so-called termination rates – which account for up to 30 % of the total sales generated by the mobile network operators – are still around ten times higher than the charges which the mobile telephony
providers pay to have their customers’ calls routed into the fixed-line network. In view of this
major discrepancy, the EU Commission is pushing for a reduction in termination rates – and
will, if necessary, introduce regulatory legislation to achieve this. If the above-mentioned rates
fall by the same rate in 2006 and 2007 as they did in 2004 and 2004 – i.e. by approx. 15 % in
each year – the network operators face a drop in sales/profits totaling over EUR 2 billion.
22
Chart 9
Nearing saturation
- mobile phones per 100 population in 2005 -
118
Italy
Sweden
110
UK
110
102
Finland
98
Spain
Germany
95
88
Switzerland
France
77
74
Japan
71
USA
World
33
Source: Bitkom.
The second relevant factor is the EU Commission’s insistence that prices must be reduced for
calls made abroad, the so-called roaming charges. If companies fail to cooperate, the Commission intends to force through lower prices by law. Mobile telephony providers will then be
prevented from charging higher rates for calls made to a rival mobile network within the EU
than they charge for calls to networks operated by other domestic providers. Since prices for
domestic roaming are generally much lower than those for roaming abroad, this would necessitate price cuts.
4.2 Setting the sights on new sales sources
In view of the problems outlined above, the mobile telephony industry is searching for new sales
drivers. The three prime candidates are as follows:
•
First, the major mobile telephony companies have already begun to secure growth by
acquiring smaller competitors rather than by seeking to expand their sales in established
markets. Telefonica’s takeover of the British O2 and the expansion of France Telecom via the
acquisition of the Spanish Amena were merely the opening shots in this development. As soon
as the first companies begin to experience difficulties due to signs of lower sales and profits,
the consolidation within the industry will continue. That consolidation is vital if European mobile
telephony providers are to remain competitive. The mobile sector is driven by effects of scale:
the more customers a company has, the more cheaply it can offer its services.
23
•
Second, technical innovation will generate new sales. While mobile communication has in
recent years focused above all on voice services, now the transmission of information in the
form of texts, pictures and multimedia is coming to the fore. These media require higher
bandwidth and new technologies to transmit the information, as well as modified forms of end
device and a greater spectral efficiency of the air interface. The launch of UMTS and the
wireless technologies and standards (WiMAX) subsumed under the name of Broadband
Wireless Access (BWA) are designed to cater for this demand.
Another development which is opening up new opportunities for the mobile telephony market is
the combination of mobile telephony and television. Thanks to UMTS technology, it is
already possible to access broadband internet, moving pictures and entertainment content with
videos and TV on mobile phones. However, UMTS is not suitable for mass reception. Even if
the introduction of HSDPA technology (High Speed Downlink Packet Access) in 2006 does
raise the performance of the UMTS networks from their current 384 kbits/s to 1.8 Mbits/s and
eventually to approx. 7 Mbits/s, a UMTS cell would be overloaded if thousands of mobile
phones accessed TV services simultaneously.
One possible solution to this problem is the use of the DVB-H (Digital Video BroadcastingHandheld) and DMB (Digital Multimedia Broadcasting) standards for the reception of TV
content on mobile phones. These two standards – which are not intercompatible but offer
pictures of similar quality – are currently being tested in Germany. DMB can build on the
existing infrastructure for digital radio, and could therefore be developed nationally quite quickly
and at relatively low cost. However, it can only broadcast a maximum of five channels. DVB-H
has a higher capacity and can carry up to 25 channels, but providers would first have to build
up the necessary infrastructure. A number of surveys have shown that there is a relatively high
level of interest in mobile TV. Market research and experience gained in other countries
suggest that it would be acceptable to consumers at a monthly price of approx. EUR 10.
•
Third, sales growth in the mobile telephony market can be achieved not merely by the provision
of additional services, but also by more extensive use of mobile phones. The price slide
triggered by the no-frills providers will play a key role here. The use of mobile phones is
becoming increasingly widespread, and in Germany mobile telephony is now shedding its
premium image. In some countries where prices for mobile phone calls were reduced earlier
than in Germany, the use of mobile phones has grown in line with falling prices.
However, it will be some time before increasing volumes offset lower prices in Germany. That
is why the mobile telephony companies are seeking above all to replace fixed-line services
with mobile services. They are currently trying to encourage their customers to give up their
fixed-line connections and make all their calls on mobile phones. To do this, mobile telephony
providers now offer tariffs that enable customers to make mobile phone calls at more or less
the same price as fixed-line calls when calls are made from near their home. The idea of this
24
strategy is to hold the ARPU (Average Revenue Per User) stable in the short term, and to
increase it significantly in the longer term.
Today, only 7 % of all customers in Germany do without a fixed-line connection. In Finland, by
contrast, the proportion of mobile-only users is as high as one third. Experts estimate that the
volume of mobile phone use will more than double by the end of the decade, rising from its
current 16 % of all phone use today to between 40 and 50 %.
It is, though, doubtful whether this trend will also apply to data, internet and multimedia use. In
terms of the bandwidth-price ratio, developments in fixed-line services are always several
years ahead of those in the mobile sector. In urban areas in particular, the mass provision of
mobile broadband services is currently stymied by serious physical restrictions. Furthermore,
demand for increased bandwidth has by no means peaked yet. The industry has a vision of
providing up to 100 Mbits/s per household. Only fixed-line connections will be able to offer
mass distribution of bandwidth on that scale in the foreseeable future.
5. The megatrend: Convergence
The convergence of the internet and telephony (VoIP) and of internet and television (IPTV) are
specific examples of what is a general trend towards the merging of different technologies, communication channels or media (see Chapter 5.1). Convergence is, then, a multi-faceted phenomenon which will have a significant impact on the structures of value creation and competition in the
telecom market (see Chapter 5.2).
5.1 The Next Generation Network – flexible applications at falling cost
The increasing replacement of fixed-line telephony by mobile services is putting pressure on the
fixed-line providers. To counter this development, they have been coming up with solutions that
combine mobile and fixed-line elements. The aim of this so-called Fixed Mobile Convergence
(FMC) is to offer individualized telecom services independently of the network infrastructure, i.e. to
provide the entire range of services anywhere and at any time. The idea is that customers’ calls
should be routed via the best and cheapest connection at all times without users even noticing it.
Taken to its logical conclusion, this would mean that fixed-line providers and mobile telephony
companies would effectively have to offer the same services across the board.
To achieve this, the established public telecommunication networks (i.e. fixed-line, mobile and data
networks) will have to be integrated via – and ultimately replaced by – IP technology. High hopes
are riding on this concept, which goes under the name of the Next Generation Network (NGN),
and it certainly promises a number of significant advantages. It makes it possible to transmit lan25
guage, data and multimedia services via a single network, rather than via independent networks,
as has been the case hitherto. This would potentially enable network operators to cut their costs
significantly. For users, the main advantages of the NGN are a greater number of possible applications and increased convenience. Whereas today separate end devices are needed to access services provided by the various communication networks, it will be possible to do so in future with a
single device. Network operators around the world are currently working on the migration of their
PSTN networks to new IP-based network platforms.
In order to integrate the different networks, it will not be sufficient merely to switch to IP technology.
It will also be necessary to introduce IMS (IP Multimedia Subsystem). Only if networks and services
are based on IMS will they be able to provide the full range of applications to end customers via a
single harmonized network. The revolutionary feature of this technology is the fact that it can be
accessed via any network. Thus, IMS operators can offer their services via DSL or UMTS networks, for example. This enables mobile telephony providers to expand their telephony services to
include fixed-line operations, just as fixed-line providers can “mobilize” their operations. For this, a
so-called dual phone is required, which can handle both mobile and fixed-line technologies and
combines the advantages of both. The device works just like a normal mobile phone when users
are on the move, but “turns into” a low-cost cordless phone whenever a wireless link (WLAN or
Bluetooth) is available, e.g. at home, in the office, or in public hotspots, routing all calls into the
fixed-line network.
5.2 Decoupling the stages in the value-creation chain will intensify competition
The convergence of various technologies, communication channels and media will lead to changes
at all stages in the value-creation chain in the telecommunications industry, and will ultimately trigger a sweeping structural realignment. Traditionally, the value-creation chain in the telecom sector
has been largely vertical, with a number of dominant providers controlling the various links in the
chain (backbone, network, services). It has also, typically, been organized according to types of
network platform (fixed-line, mobile telephony, TV cable network) and specialization in the associated services (see Chart 10). One feature of this market structure is the fact that the marketing of
network access, services and end devices is interdependent. The high cost of creating this degree
of integration has traditionally favored the established providers, acting as an entry barrier to competitors.
26
Chart 10
Telecommunication today: network-oriented valued-added structure
Services
Telephony
Connection
networks
2G,
2.5 G
(GSM)
MMS1)
3G
(UMTS)
Mobile platform
Backbone
PIM2)
WLAN
Hybrid
platform
PSTN-Netzwerk
Internet
services
DSL
Telephony
ISDN
Fixed-line platform
TV programs
Cable
TV
platform
Cable
network
1) Multimedia Messaging Service.
2) Personal Information Management.
Source: DETECON Consulting.
However, the transition to IP technology will dismantle these barriers. It will mean that the valuecreation chain can be more clearly differentiated. And, at the same time, standardized interfaces
and protocols will allow new market players from other sectors to penetrate the individual stages of
the chain. The market entry barriers, which have hitherto been shored up by the need for sophisticated technology and high levels of capital, will be weakened, and competition in the telecom market will intensify. On top of this, new forms of network access using innovative wireless technologies (WiMAX) will boost infrastructure-based competition, undermining the quasi-monopoly enjoyed
by the network operators.
The switch to IP technology will, in the final analysis, replace the current vertical network-oriented
structure of the market with a horizontal and integrated value-creation structure (see Chart 11). It
will uncouple the individual links in the value-creation chain. Services will no longer be dependent
on the individual network access technologies, but will be provided on the basis of an integrated
access platform. This uncoupling of the network structure from the provision of services will
enable companies to offer telecom services without a physical network link with the customer.
27
Chart 11
Telecommunication tomorrow: horizontally integrated value-added structure
Services
MMS
VoIP
MoD1)
PIM
Internet
services
VoD2) /
films
IPTV
Integrated access platform
Connection
network
Backbone
3G+
(z.B.
HSDPA)
WiMAX
xDSL
(z.B.
VDSL)
ETTH3)
Cable
IP-network
1) Music on Demand.
2) Video on Demand.
3) Ethernet To The Home.
Quelle: DETECON Consulting.
As the process of convergence continues, the structure of value creation will also change. The
central role of network business in the value-creation chain will weaken, since it will become possible to offer technical services on the network level at lower cost and in a substitutable form. There
are two key reasons for this commoditization of network services. The first is that there will, in
the longer term, be excess bandwidth on all levels of the network. And the second is that the competition between network access platforms will depress prices for broadband connections. As the
significance of network provision declines, the services and/or the content offered by the network
providers will play a much more important part in increasing the revenue per customer. Commercial
success will depend on which services the network operators offer their customers and on whether
the services offered are attractive enough to retain those customers in the long term.
Commoditization will not least influence the relationship between information technology and telecommunications. In future, connectivity will increasingly be bought as an integrative component in
full solutions, rather than as an individual component. Connectivity will thus become more like an
upstream service. Furthermore, cooperation between telecom providers on the one hand and solution providers and systems integrators on the other will become more important.
The changes in the structure of value creation will lead to increasing fragmentation of the telecom
market. At the same time, the power of customers will grow (buyer’s market). They are more interested in what they are getting than in how they are getting it. In other words, content and customer utility will be more important than technology. The potential of what is technically feasible should not blind providers to what the customers really want.
28
6. Outlook
We expect average annual growth in the overall telecommunications market to weaken to 3 % by
the end of the decade (1998 to 2005: +6.5 %). Growth will be dampened both by traditional fixedline telephony business, which will continue to decline, and by the mobile market, where the sales
growth of recent years will not be sustained due to the high level of penetration in western Europe
and the price pressure exerted by the no-frills providers. At the same time, mobile telephony will
remain a growth market thanks to the higher level of mobile phone use. The same applies to
broadband business. In particular, the Triple Play services enabled by VDSL are likely to keep a lid
on the fixed-line providers’ loss of market share.
Innovations in information and communications technology will further boost the trend towards the
convergence of infrastructures, services and end devices. As that happens, services will become
increasingly independent of specific network access technologies. And at the same time, end devices will become less dependent on content and media: multifunctionality will become standard. In the long term, the trend towards convergence will also lead to the merging of telecommunications and IT, the media industry and entertainment electronics (market convergence). This
trend will lead, ultimately, to a redefinition of electronic services and applications. They will, increasingly, become a merger and combination of content production (music, film, publishing), content processing (online, internet and media industries), content distribution (telecommunications)
and content presentation (end device manufacturers).
In future, then, there are likely to be an increasing number of strategic partnerships between telecom companies and media firms, and also with financial services providers. At the same time, the
consolidation within the telecom industry will continue. Ultimately, that process is necessary if effects of scale are to be generated in the use and expansion of the network and standards are to be
set.
29
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