The Operators of the Future - Alternatives when connectivity becomes - PowerPoint PPT Presentation

Presentation prepared for the Brussels Internet & Telecom Seminars (Bits) – Wholesale-only operators, in Brussels 12 December 2018 The Operators of the Future - Alternatives when connectivity becomes a commodity Bengt G Mölleryd Swedish Post and Telecom Authority

Changing operator landscape • Mature industry with European operators high capital intensity 20 • Transition to all IP 15 networks, competition 10 from OTTs Percent 5 • Customers requiring more data at lower cost 0 which drives network 5 6 7 8 9 0 1 2 3 4 5 6 7 0 0 0 0 0 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 -5 2 2 2 2 2 2 2 2 2 2 2 2 2 upgrades (capex) -10 • Connectivity has Sales growth Capex-to-sales become a commodity Revenue weighted average: BT, DT, Orange, KPN, Swisscom, Telefonica and Telia Company Source: Bloomberg

Which direction to chose

Vertically integrated operators expanding to media, bank, health… “… services beyond connectivity offered “This ability to bundle, whether it where TV/Video is the main driver … be TV Everywhere, whether it’s cognitive intelligence will add more value to DTV Now, whether it’s the ability to our customers bringing loyalty, improving get all your video on your phone is efficiency and opening new opportunity.” making a huge difference.” José Maria Álvarex-Pallete López, Chairman and CEO Telefonica** John J Stephens, CFO AT&T* * AT&T Q2 2017 Earnings call, Bloomberg Transcripts 2017-07-25 4 ** Telefonica Q2 2017 Earnings call, Bloomberg Transcripts, 2017-07-27

OTTs spend significantly more on R&D R&D to sales 30 25 20 Percent 15 10 5 0 O m n T T e m r T e k e t f & T o l o n B o l o M g p o o n N o o T z s o p o k c f e a b o A e e o A C a l e m e r l d l G o c e e c T o A i D T a T M V F e K T T h S N c s t u e D 2015 2016 2017 Source: Bloomberg

Dec 2017 broadband subscriptions, Dec 2017 Percentage of fibre connections of total Source: OECD, broadband portal, http://www.oecd.org/sti/broadband/broadband-statistics/ 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% Belgium United Kingdom W i f Austria h n Germany o o l Ireland t e Italy s c a a Poland l b e Canada l e o France p d United States p o Netherlands o m Switzerland r t i Czech Republic n u a n Mexico t i Hungary e t y s OECD – Luxembourg Denmark Slovak Republic New Zealand Slovenia Australia Estonia Portugal Spain Finland Sweden Latvia Lithuania Japan Korea

Annual growth of fibre subscriptions 2017 Percent Source: OECD, broadband portal, http://www.oecd.org/sti/broadband/broadband-statistics/ 100 120 140 20 40 60 80 0 Ireland Australia France United Kingdom New Zealand growth Ireland outcompetes with 420% Switzerland Luxembourg Belgium Spain Germany Poland Italy Canada Austria Portugal Hungary Sweden Slovenia Norway United States OECD Netherlands Finland Denmark Czech Republic Estonia Slovak Republic Korea Latvia Japan Lithuania

A wide range of Wholesale-only entities National Broadband Networks Network sharing Utilities Municipals networks Structural separation Tower companies Wireless Functional separation

Wholesale-only mobile operator The Red Compartida in Mexico: “A wholesale, neutral …telecommunications infrastructure sharing network to offer the largest coverage, capacity and quality in wireless services. Red Compartida is not the “4th mobile carrier” but a network in service to all carriers.” Red Compartida is a PPP between ALTÁN Redes and the Organismo Promotor de Inversiones en Telecomunicaciones (Promtel – telecommunications investment promotion agency.) The network currently covers 32% of the population, 5.8 million of the rural population Source: https://www.altanredes.com/en/why-choose-red-compartida/ 9

”Smart people buy dumb pipes” “We sell dumb pipes. We don’t sell value added services” “The service we sell is a commodity and as such we strive to have the lowest cost of production in order to be profitable in a commodity business.” Dave Schaeffer, CEO Cogent Communications* * Goldman Sachs Communacopia Conference, Bloomberg transcript, 2017-09-12 10

KOSC Telecom a new player in France • Provide wholesale DSL and fibre services to B2B operators, thanks to a dedicated wholesale-only network connecting 180 town and cities in France. • Offers Connectivity as a Service to BtoB carries which can get access to a complete wholesale offer in France. • Kosc has signed a long-term agreement with Orange to co-invest on a nationwide fibre infrastructure, and is aiming to strike partnerships agreements with all major French infrastructure operators and Public Initiative Networks.

Utilise the balance sheet by increasing gearing 8.00 7.00 6.00 Net debt/EBITDA 5.00 4.00 3.00 2.00 1.00 0.00 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 European operators American Tower CELLNEX TELECOM SAU Chorus Netlink Source: Bloomberg European operators is a revenue weighted average of BT, DT, Orange, KPN, Swisscom, Telefonica and Telia Company

Declining Return on Invested Capital (ROIC) 14 12 10 Percent 8 6 4 2 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 European operators American Tower CELLNEX TELECOM SAU Chorus Netlink Source: Bloomberg European operators is a revenue weighted average of BT, DT, Orange, KPN, Swisscom, Telefonica and Telia Company

Risks with wholesale-only business • If there are limited number of service providers and vertically integrated operators control the market • Depending on the timing of the launch, existing platforms and customer base • Level of competition from other infrastructure providers • Increased fixed mobile substitution is a challenge for wholesale-only fibre networks • Risk for policy makers: long term investment incentives

Advantages with wholesale-only • Utilise the balance sheet by attracting long term investments • Long term customer relationships and lower risks • Improved broadband coverage through cost effective rollout • Increased utilisation of networks, reduced costs • Facilitate intense downstream competition with third party service providers and operators • Favourable treatment by regulators

Concluding • Open networks that provide wholesale access at efficient prices could contribute to improved competition for the benefit of users. • Competition on the wholesale market is vital in order to maintain investment incentives. • Wholesale-only operators could be consolidator and attract long term investments.

Q&A Thanks! Contact: bengt.molleryd@pts.se

Concept Definition Capital Funds used to acquire intangible or physical assets Expenditures (Capex) EBITDA Earnings before interest, taxes, depreciation and amortization Free cash flow Operating cash flow minus capex Net debt Netting the value of a company’s liabilities and debts with its cash and other liquid assets Revenues/Sales The amount of money that a company actually receives during a specific period ROIC Return on Invested Capital, indicates how effectively a company uses the sources of capital (debt and equity) invested in its operation Source: Bloomberg

www.oecd-ilibrary.org/science-and-technology/development-of-high-speed-networks-and-the-role-of-municipal-networks_5jrqdl7rvns3-en