Rewheel. Telcogroups' protective pricing widens digital divide between poor and wealthy EU member states

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1 Rewheel o n e s t e p a h e a d Telcogroups' protective pricing widens digital divide between poor and wealthy EU member states Rewheel EU27 smartphone tariff competitiveness 2012 report supplement, PUBLIC VERSION Presented and submitted to EU Commission, DG Competition and DG Connect Brussels, February 2013 Rewheel Ltd. All rights reserved

2 Disclosures The comparative analysis carried out by Rewheel Ltd. during December 2012, solely on its own initiative, does not constitute an investment, legal or tax advice and is not intended in any way to give any direct or indirect recommendations regarding current or future stock transactions that any party might undertake after reading this report. This report does not make, imply or suggest direct or indirect claims of anti-competitive practices undertaken from any of the mobile network operators or operator groups covered herein. Rewheel Ltd. and/or its affiliates, and their respective officers, directors and employees accept no liability whatsoever for any direct, indirect or consequential loss arising from their use of this report or its content. The authors of the report make no buy, sell or hold recommendations regarding the stock of the companies covered in this report. Rewheel Ltd. is not a certified financial advisory and is not currently regulated by any financial investment authority. The viewers of this report should consider this publication as only a single factor in making business or regulatory decisions. The data used in this comparative analysis are based solely on public information posted on mobile network operator websites. We believe the tariff information posted on mobile network operator web sites to be reliable but no representation is made by us that the row data used are complete, accurate, fully representative, fit for purpose, or were up to date at the time of collection. The data collection team made subjective judgments when translating, interpreting and screening for tariff interdependencies in the mobile network operator web sites. Such subjective interpretations and judgments of tariff conditions, Google translations and of our qualification rules were the sole discretion of the data collection team and of the report authors. Rewheel Ltd. accepts no liability for omissions, errors or simply for not being able to discover on the mobile network operator website a tariff with lower price that met the qualification criteria. We welcome feedback and suggestions from mobile network operators for existing or newly launched tariffs that meet our qualification criteria and which were not considered in our analysis. The findings, conclusions and correlations that the authors of this comparative analysis have reached are solely attributable to their subjective interpretations of Google translations, tariff conditions, qualification rule interpretations and mobile network operator classification & clustering rules. The recipients of this report adhere not to publish or reproduce in any other documents parts or the full report without Rewheel s prior written explicit consent. Slide 2

3 Digital agenda goals Where are we? Slide 3

4 DAE goal - EU single market The difference between roaming and national tariffs to approach zero by 2015 Slide 4

5 Roaming in EU Italy Germany Spain Greece Czech Republic Hungary Sweden Luxemburg Belgium Portugal Slovak Republic France Poland Slovenia Denmark Netherlands Ireland Finalnd UK Austria Estonia In Italy the lowest price is 10 DAE goal - EU digital single market ǀ so where are we in voice & SMS? ComReg published Teligen data* - Lowest price of no.1 & no.2 MNOs 100 calls basket NOTE: Teligen research exclude the lowest market share, often the cheapest MNOs EU Digital Agenda target will be soon met for voice & SMS There is NO independent challenger MNO in the market, only incumbents and E5 group members There is an independent challenger MNO in the market or there is still long way to go? * Based on official OECD approved methodology, also referenced by the EU Digital Agenda scoreboard The EU 2014 tarrif (voice & SMS roaming caps) are almost at the same price level as in protected markets. Or up to 5 times more expensive that the price level in progressive competitive markets! Slide 5

6 Roaming in EU CZECH REPUBLIC GREECE HUNGARY GERMANY PORTUGAL CYPRUS SPAIN LUXEMBURG BELGIUM MALTA NETHERLANDS SLOVENIA SLOVAKIA IRELAND BULGARIA FRANCE DENMARK SWEDEN UK ITALY POLAND FINLAND LITHUANIA LATVIA AUSTRIA ROMANIA ESTONIA DAE goal - EU digital single market ǀ and what about smartphones? Rewheel data - Lowest price among all MNOs 2GB & 200 off-net mins 438 A universe apart... The EU caps will yield 110 wholesale price level for this basket in Not exactly a single a market! There is NO independent challenger MNO in the market, only incumbents and E5 group members There is an independent challenger MNO in the market In the lowest price most competitive markets (Finland, Austria and Estonia) it costs more or less the same to subscibe to both a 100 calls plan and to a 100calls - 2GB plan! For a single fully functional digital EU market price convergence on national smartphone tariffs must be also achieved across member states. Slide 6

7 DAE goal Superfast broadband 50 % of the EU to subscribe to broadband above 100 Mbps by 2020 Slide 7

8 DAE goal Superfast broadband Rob Kenny s blog, Fibre to the Home Council Europe UK Think-Tank Calls for End of the Obsession with Internet Broadband Speeds The Superfast and the Furious: Priorities for the future of UK broadband policy Recast the government s headline ambitions for broadband connectivity, focusing explicitly on economic and social outcomes rather than pursuing speed as a proxy for progress. Policy Exchange Superfast Britain? Myths and realities about the UK s broadband future Some of the projections especially those regarding the super-fast broadband impact on the British economy and jobs over the next five years appear fanciful Source The Economist Intelligence Unit Is it time to reconsider EU s targets for superfast broadband? Doubling the broadband speed for an economy increases GDP by 0.3% Source Ericsson and Arthur D. Little Does High Speed Broadband Increase Economic Growth? The (Ericsson Arthur D. Little) paper based on past information rather than the ones assuming about the future shows that there is a boost to growth from the move from dial up to slow broadband (2 Mbits or so) but nothing observable after that. The assumption that faster will mean more growth is just that, and assumption. The real information coming out of this paper is that national broadband is a much better investment than fast broadband. Getting everyone, however rural, up to 2 Mbits produces a much better return on investment than trying to make sure that urban areas have 50 Mbits, or 100. Tim Worstall, Forbes Slide 8

9 DAE goal - Access to internet, affordability for all citizens and member states to increase regular internet usage from 60% to 75% by 2015 and halve the proportion of the population that has never used the internet from 30 % to 15 % by 2015 Slide 9

10 DAE goal - Access to internet, affordability for all citizens and member states Making broadband affordable by 2015, entry-level broadband services should be made affordable in developing countries through adequate regulation and market forces (amounting to less than 5% of average monthly income). Advocacy Target 2, State-of-the-broadband ITU September 2012 report Rewheel data - 2GB & 200 off-net mins Pew Internet Report on Smartphones Under 30, nonwhite, low-income and less-educated smartphone users report "they mostly go online using their phones." Some 87% of them, according to Pew, sometimes use their mobile phones to browse the web, but 38% use their handsets as their primary means to access the Internet. Institute for Communication Technology Management (CTM) at the University of Southern California More than 60% of Latino, black and young smartphone users often or even always use smartphones for their Internet connections. This use of smartphones for Internet browsing is far more extensive than by whites. Unaffordable Smartphone tariff min 2GB & 200 off-net minutes Affordable mobile data is by far more important in bridging the urban-rural and poor-wealthy digital divide than superfast broadband Slide 10

11 DAE goal - Access to internet, affordability for all citizens and member states Rewheel data - 2GB & 200 off-net mins Smartphone tariff min 2GB & 200 off-net minutes In competitive markets smartphone tariff prices have converged to ARPU levels, significantly accelerating mobile broadband penetration Slide 11

12 Competition In half of the EU27 member state mobile markets competition is impaired Slide 12

13 CZECH REPUBLIC GREECE HUNGARY GERMANY PORTUGAL CYPRUS SPAIN LUXEMBURG BELGIUM MALTA NETHERLANDS SLOVENIA SLOVAKIA IRELAND BULGARIA FRANCE DENMARK SWEDEN UK ITALY POLAND FINLAND LITHUANIA LATVIA AUSTRIA ROMANIA ESTONIA Competitive versus protected markets Rewheel data Lowest price in the member states for min. 2GByte data allowance and 200 off-net minutes per month smartphone tariffs There is NO independent challenger MNO in the member state, only incumbents and E5 Group members There IS independent challenger Mobile Network Operator in the member state 40 Source: Rewheel smartphone tariff competitiveness report Average 39 Average 16 0 Only MNOs with incumbent and E5 Group associations PROTECTED MARKETS The lowest available price in member states where all MNOs belong to incumbent telcogroups or the E5 Group (Vodafone, Deutsche Telekom, France Telecom, Telefonica and Telecom Italia) is 140% higher than in member states where there is at least one independent challenger MNO. Presence of independent challenger MNO(s) PROGRESSIVE MARKETS on average 41% higher mobile data penetration July 2012 updated data Slide 13

14 Germany Spain Czech Republic Hungary Portugal Belgium Greece Italy Ireland Slovak Republic Luxemburg Netherlands Sweden Denmark Poland Finland France Slovenia UK Austria Estonia The lowest price is 16 Italy Germany Spain Greece Czech Republic Hungary Sweden Luxemburg Belgium Portugal Slovak Republic France Poland Slovenia Denmark Netherlands Ireland Finalnd UK Austria Estonia In Italy the lowest price is 10 Protected markets have much higher voice prices as well - Teligen data Comreg published Teligen data - Lowest price of no.1 & no.2 MNOs 100 calls basket (NOTE: lowest share, cheapest MNOs often excluded) There is NO independent challenger MNO in the market, only incumbents and E5 group members There is an independent challenger MNO in the market Average 28 Average Comreg published Teligen data - Lowest price of no.1 & no.2 MNOs 300 calls basket (NOTE: lowest share, chepest MNOs often excluded) Average 53 Average 24 The same pattern is also present; prices are much higher in protected markets (up to 7 times), when we perfom the Rewheel analysis with the OECD defined voice baskets and Teligen s tariff data Slide 14

15 And Rewheel smartphone tariff findings are confirmed by Teligen data The same pattern, prices are highest in protected markets is also present when used the OECD defined voice & data baskets and Teligen s tariff Data for; 100 calls & 500MB 300 calls & 1GB 100 calls & 2GB 300 calls & 2GB The Teligen report Telecoms Price Developments (2011 OECD mobile baskets) has been referenced in the Digital Agenda Scoreboard 2012 report. Slide 15

16 Why are prices higher and penetration lower in protected markets? Prices (lowest available) are highest in 3 MNO markets where both Vodafone and Deutsche Telekom are present. Average prices are highest in 3 MNO markets where Vodafone is present. Slide 16

17 18.7% 25.9% 26.6% 27.2% 32.1% 32.7% 33.6% 34.0% 34.6% 35.2% 37.0% 38.7% 39.5% 43.5% 44.1% 47.8% 48.0% 48.4% 56.0% 59.5% 62.2% 65.4% 67.5% 70.4% 74.6% 91.8% 95.7% 102.6% According to the Digital Agenda Commission it is because of fragmentation Digital Agenda Commission - Kroes With all that fragmentation, no wonder mobile broadband penetration diverges so much across Europe: from around 25% in some countries to 100% in others. source Neelie Kroes speech/13/159 Event Date: 26/02/2013 Source EU Digital score board 120.0% Mobile Broadband penetration - all active users, July % 80.0% 60.0% 40.0% 20.0% 0.0% HU BE RO PT SI LT SK LV IT MT BG DE EL CY FR EU ES AT CZ EE UK LU NL PL IE DK FI SE We fail to understand what fragmentation has to do with low MBB penetration in Belgium and Hungary. Penetration is lowest in 3 MNO markets dominated by E5s and highest in countries where no E5s are present. So does the Commission suggests that if consolidation was allowed and E5 take control in all markets the penetration gap will be bridged? The facts suggest otherwise. Slide 17

18 Policy adjustments What needs to be changed or blocked Slide 18

19 Operator consolidation ǀ Stakeholders do not seem to agree? Digital Agenda Commission - Kroes having a few strong pan-european operators would not necessarily be bad for competition, and that protecting consumers was more than just ensuring a given number of operators in one country source Reuters Competition Commission - Almunia I think consolidation at EU level, especially across national borders, can be a good thing if it brings new services, more choice and lower prices to customers Press release 12 th December 2012 Research shows that users pay up to ten times more to use their smartphones in those member states that there is no challengers to the big European operators Speech 28 th February 2013 Vodafone - Colao let consolidation happen and only step in if there is market failure, Colao believes the region should move towards a single telecoms regulator, shifting control towards Brussels Mobile World Congress 2013, Guardian ETNO - Gambardella Fostering a so-called single market for telecoms in Europe would require that the Commission allows in-market consolidation as a first step to rationalise the fragmented mobile and fixed landscape in Europe Reuters Independents Tony Barber Financial Times European editor In this light, cross-border mergers within Europe start to look appealing. But if they happen, they must happen not to satisfy defensive-minded ex-monopolies but because they drive innovation and are good for customers and shareholders Financial Times The facts Around 80 per cent of EU mobile customers have subscriptions with the four largest groups Vodafone, Deutsche Telecom, France Telecom and Telefonica (E4) source Almunia press release 12 th December 2012 Prices in member states where all MNOs belong to incumbent telcogroups or the E5 Group is 140% higher than in member states where there is at least one independent challenger MNO, source Rewheel Slide 19

20 Myth In competitive markets with low prices operators loose money and they do not invest so networks are crappy and digital economy is faltering * Finnish MNOs invest as much and are profitable. While Finns enjoy the best EU mobile network... Telenet an MVNO in Belgium is selling smartphone tariffs more expensive than MNOs ( 70) *ARPU is very poor revenue indicator... and pay three time less than Belgians. Belgium is a protected non competitive exploited market with very high prices and the second lowest penetration. Finland is the most vibrant (highest penetration & usage) and competitive (among lowest price) mobile market in EU27 where all operators are profitable. Slide 20

21 Cross-border consolidation ǀ Perfect platform for a pan-european ring of 4? E4 buyout all independent challenger MNOs and regional incumbents for 100% share? Telefonica Vodafone France Telecom Deutsche Telekom Telefonica Vodafone France Telecom Deutsche Telekom Telefonica Deutsche Telekom Vodafone Telefonica France Telecom France Telecom Vodafone Deutsche Telekom In this simulated example the smallest MNO undercuts the price of its competitors and manages to increase its revenues by grabbing more market share (MNOs depicted in green font in the table above). The bigger MNOs loose market share proportionally and see their revenue in the respective market to decrease (MNOs depicted in red font). However, the price erosion yields a 5% decrease in each market and the pie gets smaller overall in Europe. So while an MNO could increase its revenue in a given country where it is a market challenger overall all groups end up with lower revenue. Clearly not recommended strategy if you are an E4! Independent challenger MNOs could increase their revenue by gaining share when they undercut the price of their competitors even though the market revenue erodes. However, if cross-border consolidation will be allowed and the E4 take over all rest, prices will go up and innovation will stall. Germany Ring share Ring revenue Competitive revenue Competitive share Deutsche Telecom 32.0% % Vodafone 31.0% % TelefonicaO2 21.0% % France Telecom (KPN) 16.0% % Market total 100.0% % Competitive Competitive France Ring share Ring revenue revenue share France Telecom 43.0% % Deutsche Telecom (SFR) 33.0% % Telefonica O2(Bougues+Free) 24.0% % Market total 100.0% % Competitive Competitive UK Ring share Ring revenue revenue share Deutsche Telecom (EE) 35.0% % TelefonicaO2 33.0% % Vodafone (3) 32.0% % Market total 100.0% % Competitive Competitive Spain Ring share Ring revenue revenue share TelefonicaO2 42.0% % Vodafone 32.0% % France Telecom (Telia Sonera) 26.0% % Market total 100.0% % Competitive Competitive Italy Ring share Ring revenue revenue share France Telecom (TIM) 35.0% % Vodafone 33.0% % Deutsche Telecom (WIND+3) 32.0% % Market total 100.0% % Group result Ring revenue Competitive revenue Deutsche Telecom Vodafone France Telecom TelefonicaO Market total Slide 21

22 Policy tools for competition and DAE goals The good the bad and the ugly! The good a) Safeguard network based competition in all EU27 markets Introduce legislation that will mandate NRAs/competition authorities to carry out market analysis and determine the minimum (e.g. 4) national mobile network operators necessary to foster competition (e.g. Ofcom analysis and related measures to ensure 4 credible national wholesalers) b) Promote & protect the presence of at least one independent (mobile only) challenger MNO/market In a single EU digital market takeovers shall not only be scrutinized on antitrust grounds within national borders but also on European level. Encourage and support NRAs in their efforts to increase competition by introducing new entrants. c) Designate mobile broadband as a relevant market during the ongoing 2013 review It is hard to envisage a single EU mobile market where the wholesale level is 10 times higher than retail. It is not possible today to purchase competitive data wholesale from EU MNOs and to offer a pan-european retail service across borders d) Measure-track the competitiveness of all EU27 mobile markets (retail prices & data usage/capita) In order to get much better visibility into the real competitive dynamics of the increasingly smartphone-centric mobile markets NRAs and the European Commission must start tracking and report in the Digital Scoreboard two new indicators; retail prices for mobile baskets and mobile data consumption per capita. Nordic NRAs have already start tracking mobile data usage. e) Allow and promote the creation of pan-european retail mobile operators i.e. single market By ensuring that pan-european retail MNO/MVNOs (e.g. Telecom Austria, Google or Tesco) can purchase cost based (voice+data) wholesale capacity in all EU27 markets EU retail tariff irrespective of the place of residence and travel The competitiveness (i.e. retail price of GB and GB consumption per capita) of EU27 mobile markets that is fuelling EU s digital development must be preserved and fostered by EU s legislative and regulatory framework Slide 22

23 Policy tools for competition and DAE goals The good the bad and the ugly! The bad part 1 a) Allow competing mobile network operators in national markets to pool and share spectrum Pooling and sharing spectrum (i.e. capacity) effectively reduces the number of competing network operators and increases market concentration. Moreover, it provides an ideal platform for spectrum collusion. No reason to bid to secure more spectrum if you could achieve the same result by agreeing with your friend to pool your spectrum positions into a larger more efficient chunk for which you paid much less. b) Allow competing mobile network operators in national markets to share active infrastructure Sharing active network infrastructure (i.e. distribution network capacity) effectively reduces the number of competing network operators and increases market concentration. Moreover, it allows operators to have full visibility and control on their competitors variable cost structure removing any incentive to build a cost advantage and use it to gain share by offering lower retail prices. c) Allowing spectrum & network sharing across EU27 national boundaries It is not clear to us how national frequency assets could be authorized across national borders but most importantly we could not see any significant cost savings in sharing infrastructure (distribution networks) across national borders. we've already set out our ideas on the shared use of spectrum, Kroes A possible exception in network sharing could be 2G networks. There are no significant voice coverage or capacity differentiations between 2G networks in most member states today. MNOs could divert valuable capital resources from 2G to 3G and 4G while cutting operating expenditures by jointly operating one 2G network per member state. does not seem to agree, secondary trading and pooling out of scope of LSA (Licensed Shared Access). Source RSPG st progress report Slide 23

24 Policy tools for competition and DAE goals The good the bad and the ugly! The bad part 2 Single energy market legislation requires independent ownership of gas pipes - meaning, the gas supplier should not own and operate them, in order to ensure that no supplier has monopoly over the distribution network. We have the European single market. The single market requires rules for competition. Any operator has to comply with them. Source: European Energy Commissioner Günther Oettinger EU is promoting the diversification of energy supply sources and independent distribution networks. It feels that it will be forced to pay a premium if energy suppliers (e.g. Russia, Iran, Azerbaijan, Turkmenistan) where to pool their gas supplies together and share their distribution networks Slide 24

25 Policy tools for competition and DAE goals The good the bad and the ugly! The ugly a) Allow further (from 4 down to 3 MNOs) consolidation in member state local markets Allow further consolidation in member state local markets that will reduce the number of national mobile network operators (e.g. France Telecom acquires Yoigo in Spain from TeliaSonera) and cripple competition b) Allow cross-border takeovers of challengers from the E4 or other non-eu based incumbents Allow cross-border takeovers of independent challenger MNOs or regional incumbents by the E4s or other international incumbents (e.g. Vodafone, AT&T or America Movil acquiring Free Mobile or TeliaSonera) c) Succumb to E5 pressure to allow consolidation on exchange for mere promises of FTTH investment Succumb to E5 lobby pressure and turn a blind eye to EU s competition law by allowing mobile consolidation for mere promises of FTTH investment so EU s superfast 2020 target might be met The key to EU s digital economy future lies on affordable, reliable, always & everywhere available, open, broadband internet access The speed and price of typical broadband access in EU in 2020 (being 30, 100 or 1000 Mbps) should be left to market forces......and not decided by politicians by looking into E5 made crystal balls Slide 25

26 Rewheel who we are Strategic mobile data advisory Specialising into the mobile data transformation Market modelling & commercial strategy Technology strategy Spectrum valuation & strategy Strategic infrastructure procurement advisory Established in 2009 Team HQ in Helsinki CEO, CTO, CMO, CFO, CSO, shareholder sponsored client engagements 10+ European operator clients (mostly challengers) Several European regulators Several European data-centric non-mno-start-ups 5 European spectrum renewal/acquisition processes (800, 900, 1800, 2100, 2600 MHz multi-band auctions) since H EUR 1 bn+ of European spectrum investments/state proceeds impacted directly by Rewheel s strategic advisory since H Tier 1 and most progressive data challenger clients, mainly in Europe Slide 26

27 Thank you Rewheel o n e s t e p a h e a d Interested in purchasing the full, detailed 50-page research document? Contact us at sales@rewheel.fi / Rewheel is specialised into developing strategies to meet the mobile connectivity needs of Europe s Generation-Y, profitably. Since 2009 we have advised over 10 European mobile operators, including independent players and Tier-1 OpCos, as well as several regulators and a number of private equity and institutional investors and various mobile-date centric startups. Since the onset of the mobile broadband centric 900, 1800 and 2100 MHz license renewal avalanche in 2011 in Europe we have been providing strategy, spectrum valuation and auction theory advice (together with our world class CCA/SMRA auction theorist partners) to five European award processes (operator or regulator side depending on country), including new entrants and acquisitions as well as license renewals in multi-band (typically 800,900,1800,2100 and 2600 MHz) auctions. So far our advisory support has been directly impacting over EUR 1bn of European spectrum investments/state proceeds. Slide 27