Introducing Analysys Mason
Expertise and Experience in Applying Economic
Analysis
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As a company, we have both expertise and experience in
applying economic analysis to a wide variety of issues for
clients
Expertise

Our economists and analysts have worked
with public regulatory bodies and private
companies worldwide

We have worked on cutting edge issues,
including:


economic benefits of advanced network
solutions (e.g. WiMAX, SLU)
understanding the market dynamics for
future spectrum usage
Experience

We have applied our knowledge and
expertise to help clients solve “real world”
problems relating to:

market definition

market review

existence of market power

competitive pricing

merger support

deregulation
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Analysys Mason has the capability to conduct a variety of
forms of economic analysis for both regulators and
operators across all our core sectors of expertise
Broadband &
Media
Operators
Litigation
Other
bodies
Valuation
Economic
benefits
Regulators
Regulatory
Mobile
Pricing
Merger support
Competitive analysis
Costing
Market reviews
Spectrum management
Policy work
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Some of our most significant applications of economic
analysis are presented in the following case studies
Economic analysis projects
Case studies Client type
Project type
Summary
Case study 1
Fixed operator
Merger support
Measuring the impact of the Verizon /
MCI merger on the competition in the
Internet backbone market
Case study 2
Regulator
Economic benefits
Economics of sub-loop unbundling (SLU)
in the Netherlands
Case study 3
Government
body
Competitive analysis
Factors explaining broadband retail price
differences across countries in Europe
Case study 4
European
Commission
Market review
Supporting the European Commission
preparing the next steps in the regulation
of e-communications in the EU
Case study 5
Regulator
Pricing and costing
Development of retail and
interconnection charging models for the
regulator of an African regulator
Case study 6
Regulator
Spectrum
management
Recommendations for awarding the ‘3G
expansion band’
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Case studies: Merger support
5
Case Study 1: Measuring the impact of the Verizon / MCI
merger on the competition in the Internet backbone
market
Business challenge
•
The Internet backbone market is not regulated – rather it is governed by commercial interactions in a competitive market. As a result, it has received
significant scrutiny in every merger involving a large operator, as governments and competitors seek to ensure that the market remains competitive
post merger
•
In the case of Verizon and MCI, we were retained by these two operators to provide an expert opinion regarding the impact of their merger on the
Internet backbone sector.
Approach
We gathered data to show the impact of the merger on the market share
of the combined company:
•
•
MCI business IP revenues against industry wholesale IP revenues (2000–03)
this data included proprietary data from the two companies that
we requested and analysed
We also assessed the competitive trends impacting the Internet
backbone sector, including:
•
falling prices for Internet access
•
increases in backbone capacity resulting from fibre builds and
new technology
USD (billions)
•
12
35%
10
30%
25%
8
20%
6
15%
4
10%
5%
•
increases in peer-to-peer traffic between end-users
2
•
increased use of technology such as Internet caches.
0
2000
2001
2002
2003
MCI business
revenues
MCI as % of
total
Industry
business
revenues
0%
Benefits and results
•
Two declarations were delivered and filed at the Federal Communications Commission (FCC), as well as analysis used to support the merger in
front of the US Department of Justice and the European Commission
•
The FCC agreed with our assessment that the merger was not likely to increase anti-competitive actions in the Internet backbone market, an opinion
which was also shared by the US Department of Justice and the European Commission. As a result, unlike previous Internet backbone mergers
involving MCI, the combined company was not required to divest any assets or comply with any other costly conditions.
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Case studies: Economic benefits
6
Case study 2: Study to investigate the economics of SLU in
the Netherlands following KPN’s decision to decommission
its local exchanges
Business challenge
•
We were asked by OPTA to conduct a study to investigate the business case for providers using sub-loop unbundling (SLU) and / or wholesale
broadband access (WBA) following the implementation of KPN’s next-generation network (All-IP)
•
As part of its All-IP implementation, KPN was intending to dismantle the vast majority of its local exchanges, and the Main Distribution Frames
(MDFs) contained within them. As a result, KPN will no longer be able to offer unbundled access the MDF level, and alternative providers will be
forced to use SLU and/or WBA
Approach
•
•
We firstly provided an overview of the options that alternative providers
have available to them, in terms of:
Incremental cost of deployment options for an alternative operator
•
geographies covered – urban vs. suburban vs. rural
1400
•
co-location options – build second cabinet vs. co-locate with KPN
1200
•
backhaul options – build own backhaul vs. lease backhaul
We developed a model of the incremental costs and revenues faced by
an alternative provider using SLU/WBA, rather than continuing to use an
existing LLU solution. This was done for a range of scenarios
The study concluded that the use of SLU by an alternative provider is
not economically viable as an alternative to continuing to use LLU,
except under very optimistic conditions (55% market share of all
broadband lines and an ARPU increase of EUR10 per month)
NPV (EUR millions)
•
Core network
MDF-MCL Link
Co-location
MDF equipment
SDF-MDF Link
SDF equipment
Line rental
1000
800
600
400
200
0
SLU
WBA
LLU
Benefits and results
•
The results of the study gave OPTA an understanding of the economics of SLU, LLU and WBA. In particular, the importance of affordable backhaul
from the MDF to the street cabinet was highlighted. OPTA is currently using the study’s results to help formulate its policies regarding this matter
•
The study and the accompanying model has been published by OPTA on its Web site (http://www.opta.nl/asp/en/newsandpublications/research/)
•
This study has been widely referenced across the industry, including the Spanish regulator (CMT) in its consultation on next-generation access
networks, and by the European Regulator’s Group (ERG) in its consultation on regulatory principles of next-generation access
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Case studies: Competitive analysis
7
Case study 3: Investigating what factors explain broadband
retail price differences in Europe
Business challenge
•
Analyse the structural determinants of the price of broadband Internet access and triple-play in Belgium and six other European countries (Austria,
France, Germany, the Netherlands, Sweden and the UK ) for the Maatschappelijke Integratie – Intégration Sociale (MI-IS), a division of the Belgian
government
Approach
Framework of two ‘lots’ of work:
20%
France
Germany
15%
Netherlands
10%
Sweden
5%
Sep-06
Jun-06
Mar-06
Dec-05
0%
UK
Sep-05
Factors affecting retail prices in general (e.g. incumbent cost of
capital, VAT).
Belgium
Jun-05
•
Extent to which retail prices are related to csots and the drivers of
these effects (e.g. level of competition, broadband churn)
25%
Mar-05
•
factors influencing the costs of supply (e.g. PC penetration, levels
of demand)
Austria
Dec-04
•
30%
Sep-04
Lot 2: an analytic study to consider a wide variety of potential factors
that could explain the differences found between the offers in the
countries in Lot 1 and identify those having a material impact e.g.
differences in
Jun-04
•
Mar-04
Lot 1: a comparative study of retail prices in the residential markets
Dec-03
•
35%
LLU as a percentage of DSL
•
Benefits and results

Conclusion: Lot 1 concluded that the price of broadband Internet access and triple-play offers in Belgium when compared to the benchmarked
countries has changed in recent years. From being in the vanguard for high speeds, Belgium now finds itself with prices which are above those
offered in the Netherlands and France, and indeed above the average of the benchmarked countries for three out of the four speed categories
considered

Lot 2 concluded that Belgian retail prices are above average for most download speeds due to low market competition, especially low LLU take-up

Both lots are available on the MI-IS website (http://www.mi-is.be/themes/participation/digitale%20kloof/index_fr.htm)
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Case studies: Market analysis
8
Case Study 4: Report to support the European Commission
preparing the next steps in the regulation of electronic
communications in the European Union
Business challenge
•
The directives adopted as part of the European Regulatory Framework for electronic communications require a periodic review of how they function.
In 2006, the Commission was seeking to review this framework
•
We worked with Hogan and Hartson to support the Commission in preparing its review by: identifying obstacles to the Internal Market; undertaking
an examination of the harmonisation mechanisms for ex ante regulation of certain markets; investigating consumer protection aspects; and
identifying possible amendments to the regulatory framework
Approach
• Addressing these key areas called upon a wide set of skills and
experience, and required precise, professional and clearly expressed
analysis
• In order to achieve the objectives of the study, we conducted a small
scale survey of companies active in the market and consumer
organisations, forecast the development of the electronic
communications services sector, and reviewed a number of issues of
current and future interest.
• We made a number of recommendations ranging between detailed
points regarding consistency between Directives, important procedural
issues (for example, timetabling for market reviews), and some more
significant policy issues (for example, regarding whether structural
separation should be in the list of applicable remedies).
Informationgathering activities
Stakeholder
survey
Review data
held by the
Commission
Forecast sector
developments
Review of key
issues in
implementation
Key areas
Conclusions
Identify
obstacles to
internal market
Harmonisation
methods for exante regulation
Possible
amendments to
the Framework
Consumer
protection
Benefits and results
•
Our report presented a number of clear and detailed recommendations to the Commission concerning the regulatory framework and was published
on their website*
•
Our efficient approach combining Analysys Mason market and regulatory experience with the legal expertise of Hogan and Hartson ensured that the
Commission obtained a detailed overview and analysis of the key issues. The Commission also benefited from our noted expertise with a number of
key issues such as spectrum policy and voice over IP
•
Our client is considering our recommendations whilst considering its future policy
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* http://ec.europa.eu/information_society/policy/ecomm/doc/info_centre/studies_ext_consult/next_steps/regul_of_ecomm_july2006_final.pdf
Case studies: Pricing and costing
9
Case study 5: Development of retail and interconnection
charging models for an Africa regulator
Business challenge
•
This particular telecommunications market was the fastest growing in sub-Saharan Africa, but there had not yet been the chance to properly develop
its regulatory framework. Also retail prices did not seem to be falling at the rate expected. The regulator was determined to put a more robust and
forward-looking framework for interconnection and retail price regulation in place, and to realise the benefits as fast as possible
•
We were awarded the six-month contract to evaluate the regulatory price control regime for telecoms services in the country. The fundamental
objective of this study was to devise a set of recommendations for regulatory intervention in retail and wholesale telephony services to best
encourage effective competition and, ultimately, produce the optimal outcome for domestic telephony consumers and the market as a whole
Approach
Monthly cost of ownership for a subscriber with
market-average usage on each of an operator’s prepaid tariffs
An approach with two workstreams was adopted. Firstly, determine the
economic / policy goals and then revise regulations and licences to
empower the regulator to achieve those goals.
• This was undertaken by
• identified limitations in the legislation and powers of the regulator
• recommended introduction of new interconnection services to
ensure operators could only purchase required unbundled
elements
• developed market forecasts and service cost models in
collaboration with the main telecoms operators, which provided the
basis for identifying operators with dominant market power
• formulated specific remedies, including price controls and glide
paths, and drafted modifications to bring the regulations and
licences up to date with best-practice regulatory tools
Local currency (nominal)
•
1400
1200
Move from per-minute to
per-second billing
1000
800
600
400
200
0
Jan-03
Single prepaid tariff
replaced by three
new tariffs
Jan-04
Jan-05
Two new tariffs
replaced old plans
in late 2006
Jan-06
Jan-07
Benefits and results
•
The project, described by the regulator’s director general as an important watershed in the history of regulation, not only provided policy
recommendations for retail and interconnection price regulation, but also the modifications to regulations and licences needed to empower the
regulator to implement those recommendations. It also produced price-control recommendations that helped stimulate effective competition in the
sector and provided affordable communications services
•
Provided a robust best-practice framework for national price regulation for years to come
•
Importantly, the project left the industry informed about the need for, and nature of, the recommended changes
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Case studies: Spectrum management
10
Case study 6: Recommendations for awarding 2.6GHz spectrum
(the UMTS expansion band) for Ofcom
Business challenge
•
In 2006, Ofcom were reviewing their framework for awarding 2.6GHz spectrum to maximise economic and social benefits
•
Key considerations were the promotion of technology neutrality, recognising technical constraints and the impacts of variance of UK policy from the
CEPT frequency band plan
•
This required consideration of likely uses (e.g. mobile multimedia, cellular, BWA, PMSE), and the potential demand for paired / unpaired spectrum
under a wide range of industry and associated spectrum policy scenarios
Approach
•
This study was focused on the award options for three bands:
• 2500–2690MHz (often referred to as the '3G expansion band')
• 2010–2025MHz
• 2290–2302MHz.
• We undertook an extensive market analysis, including an interview
programme with stakeholders to identify potential uses, interest and
value of the spectrum
• An economic analysis of potential uses of the spectrum was also
undertaken, including the development of a ‘spectrum scarcity’ model
to understand the
• marginal value of spectrum, given the limited quantities available
• likely split of spectrum between uses under particular market
mechanisms, especially the demand for paired and unpaired
spectrum under a number of scenarios
Economic benefit from spectrum scarcity model
BWA
Cellular
All TDD
125MHz
TDD
50MHz
TDD
30MHz
TDD
High demand
assumed for
both services
Benefits and results
•
We are now well established as one of the key advisors to Ofcom on spectrum policy and award assignments, building on a series of related highprofile studies undertaken (for example, the Digital Dividend Review)
•
We have since assisted Ofcom with further policy work on this topic
http://www.ofcom.org.uk/radiocomms/spectrumawards/awardspending/award_2010/
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Recent examples of our diverse work in economic analysis
Country /
Region
Client type
Project scope
Our achievements
United States
Local exchange
carrier
Analyse the cost–benefit arguments for the
promotion of broadband deployment via the
removal or simplification of regulatory roadblocks
Measured the economic benefits of broadband
deployment in a number of US states, surveyed
municipal deployment issues and compared several
case studies to determine the economic return of
broadband deployment versus other municipal
economic expansion options
Singapore
Regulator
Reviewed the mobile interconnection framework,
with focus on the interconnection charging
arrangements. Also highlighted the growing
importance of preparing for regulatory
harmonisation, in light of the trend towards all–IP
and FMC.
Identified and assessed a number of options available
to IDA. Our final recommendations were based on an
assessment in light of the need for harmonisation,
detailed quantitative modelling of the economic impact
on operators, consumers and government
United States
International
carrier
Preparation and presentation of a paper to the
Joint Commission on Commerce and Trade
Telecom Dialogue meeting, focusing on reducing
the capitalisation requirement for entering the
Chinese telecoms market
The paper focused on the economics of IP VPN
deployment as an example of a service that can be
provisioned below the current Chinese capital
requirement of USD250 million
Asia-Pacific
Alternative
operator
Develop a future broadband strategy and assess
the acquisition opportunity, by assessing recent
market and regulatory developments
Assessed the value of a potential acquisition of a local
ISP for realising their broadband strategy and
consideration of the use of fixed wireless technologies
such as WiMAX to provide broadband services
Western Europe
Private equity
firm
Detailed review of the integrated business plan of
a major European cable TV provider, resulting
from the merger of several smaller operators
Helped to refine the assumptions in the business plan
about the capex schedule. Our report served as a basis
in the debt syndication process
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Further examples of our diverse work in economic analysis
Country /
Region
Client type
Project scope
Our achievements
United Kingdom
Regulator
Recommend the most appropriate award
process for spectrum released as part of the
digital switchover
This high profile project included an extensive market,
technical and economic analysis of alternative uses of the
spectrum and consideration of any areas where market
failures may arise
Western Europe
Private equity
firm
Technical and economic assessment of a fibreoptic network
Completed economic valuations of the entire network using
both the replacement value and DCF methodologies,
accounting for obsolescence risks
Luxembourg
Regulator
Litigation support and training the telecoms
team in regulatory, economics and market
competition issues, in partnership with a legal
team
Implemented the New Regulatory Framework in
Luxembourg, including both the wholesale and retail
broadband markets
Lesotho
Regulator
Designed a structured approach to tariff
regulation. Build upon international practices in
market definition and analysis to arrive at
transparent and appropriate regulatory
measures specifically for Lesotho
Recommended tariff regulations (e.g. cost-based
interconnection, price cap regime) based on detailed cost
models of the fixed and mobile operators in Lesotho
United States
Financial
organisation
Valuation of spectrum holdings
Gathered a number of valuation benchmarks based on
similar licences to estimate the total value of the holdings
Western Europe
Mobile operator
Assess the economic impact of the glide path
imposed by the regulator on mobile termination
rates to the mobile operators
Developed a high–level market model for the mobile market
and estimated the impact of the rate reduction imposed by
the regulator on interconnect revenues / costs, EBITDA
margin and termination costs
Latin America
Regulator
Developed a mobile interconnection policy
Completed a qualitative and quantitative assessment of
important pricing issues such as network externality and the
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likely effects on operators and consumers of changing
interconnection prices
13
The modular approach that Analysys Mason has
developed for detailed LRIC modelling is founded on our
competence with economic principles
Conceptual issue in LRIC modelling
Possible relevance of economic theory
What size of operator?
Impact of modelling the costs of actual / hypothetical operators
How efficient an operator?
Understanding efficiently-incurred costs
Based on what technology?
Implication of multiple technology generations
Standalone or vertically integrated network?
Understanding economic costs of retail activities
What depreciation method?
Understanding of economic depreciation
What size of increment?
Impact of increment choice on common costs
Which mark-up method?
Understanding whether Ramsey pricing is suitable
Application of costs to pricing
Appropriateness of externality surcharges
For what year or years are results required?
Implication for the cost evolution trends that can be inferred
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Analysys Mason has the in-house expertise to develop
optimisation models that can understand the dynamics of
complex problems
Business challenge
•
A problem which is not directly solvable due to its sheer complexity e.g. in terms of number of dimensions or possible solutions
•
Cannot be solved using a direct calculation: needs a cyclic calculation which can gravitate towards good solutions (i.e. optimisation)
•
Focus is more about understanding the properties possessed by good solutions, rather than the actual solution itself
Approach
Illustration of algorithms
‘Breeding’ solutions using a genetic algorithm
Construction
phase
Inputs
Output
Algorithms
Model structure (Access core)
Interface
Testing
phase
Interface
Enhancement
phase
Interface
Database
VBA*
First parent
Second parent
Second dimension
Second dimension
1
First dimension
Planning
phase
2
3
4
1
A
B
C
D
E
B
C
D
E
VBA
VBA + C?
5
A
“Crossover”
A
B
C
D
E
2
3
4
5
Options
Option 1
Option 2
Option 3
Option 4
Option 5
Option 6
“Mutation”
Child
Illustrative
Benefits and results

A structured, but upgradeable, environment with which to explore the problem in depth

Ability for the user to explore solutions at a deep level, with several different algorithms included if so desired

Enable the user to understand the key attributes of good solutions to the original problem
* Visual Basic for Applications, the programming language within Microsoft Access
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Industry commentary
The Negroponte Switch: ten years on
In his book Being Digital*, Nicholas Negroponte, the founder of
MIT's Media Lab, predicted that the world was moving from one
where telephone calls were made over fixed wires and
television was delivered wirelessly, to one where just the
reverse obtained. Dubbed 'the Negroponte Switch,' this
prediction caused quite a stir at the time.
In the USA, according to the Federal Communications Commission (FCC),
98% of the population lives in a county with access to three or more mobile
operators, up from 88% in 2000 (the first year in which such statistics were
kept). Mobile penetration stands at nearly 75%, and up to 10% of households
have dropped or have never had fixed-line telephone service (Exhibit 1
compares the USA and other countries).
A little over a decade later, it is timely to assess how prophetic
Negroponte actually was. It turns out that while he missed the
mark in some respects, he was spot on in others.
Research we have conducted in the USA suggests that among mobile
subscribers (as opposed to the population as a whole) the percentage of those
who have ‘cut the cord’ at home is as high as 28%. We have also determined
that even among those who have a fixed line in their homes, a significant
percentage consider their mobile phone as their primary phone and only give
out their mobile number. Mobile calling from home has displaced all types of
fixed-line calling – not simply long-distance calls as is commonly thought.
When asked if they think that their mobile phone would be satisfactory for all
the calls they make or receive in their homes, close to two-thirds of
respondents say it would. Of course, there are some trends to the contrary as
cable television companies, in particular, roll out VoIP offerings in an attempt to
attract and retain their fixed-line cable television subscribers.
50
Mobile-only households (%)
45
40
35
30
25
20
15
10
5
USA
Germany
UK
France
EU25
Italy
Portugal
Finland
0
Exhibit 1: Mobile-only households: EU and the USA (Sources: for EU countries,
Eurobarometer Special – eCommunications household survey, 2006; for the
USA, CTIA and FCC (adjusted))
As for television, Negroponte accurately foresaw the emergence of cable
television as the dominant transmission medium for video programming.
Nearly all US households have access to cable television systems, and over
60% of television households subscribe to cable service. But many households
still rely on over-the-air signals for primary service and/or for additional TV
sets. And Negroponte did not foresee that satellite broadcasting would capture
a sizable segment of the multi-channel video market – with 23% of television
households.
What Negroponte failed to account for altogether in predicting his switch was
the importance of data services and especially the various Internet
applications. Today, fixed-line operators have a decided edge. Wireless
alternatives have been much slower to emerge. But Negroponte was no doubt
on to something and it may be best to revisit things in another decade.
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* Negroponte, N., Being Digital, Alfred A. Knopf, Inc. (New York, 1995)