THE FUTURE OF REGULATION

Transcription

1 THE FUTURE OF REGULATION AN ANALYSIS OF DEVELOPMENTS IN EU TELECOMS MARKETS AND THE IMPLICATIONS FOR THE EUROPEAN COMMISSION S REVIEW OF RELEVANT MARKETS February 2014 SPC Network Chapel House Booton Norwich NR10 4PE United Kingdom Tel Webb Henderson LLP Parchment House 13 Northburgh Street London EC1V 0JP United Kingdom Tel

2 Strategy and Policy Consultants Network Ltd 2014 Webb Henderson 2014 This report has been prepared for ECTA by SPC Network Ltd and Webb Henderson. The views expressed herein do not necessarily reflect those of ECTA or its members. ECTA The Future of European Telecoms Regulation

3 TABLE OF CONTENTS 1. EXECUTIVE SUMMARY INTRODUCTION REVIEWING BROADBAND MARKET DEVELOPMENTS INDUSTRY PERFORMANCE: WHAT HAS ACTUALLY BEEN DELIVERED TO CONSUMERS AND INVESTORS? INDUSTRY STRUCTURE: HOW COMPETITIVE ARE EUROPEAN FIXED BROADBAND MARKETS? CUSTOMER BEHAVIOUR TECHNOLOGY TRENDS REGULATION OF EU MARKETS RECOMMENDATIONS FOR FUTURE REGULATION IN EUROPE THE EXISTING EU REGULATORY FRAMEWORK WORKS WELL THERE IS NO CASE FOR DE- REGULATION OR REGULATORY FORBEARANCE IN WHOLESALE ACCESS: THE PRESENT STRUCTURES WORK COMPETITION LAW ALONE IS NOT SUFFICIENT TO DEAL WITH ENDURING ACCESS BOTTLENECKS THE LADDER OF INVESTMENT REMAINS CRITICAL THE EC RECOMMENDATION ON RELEVANT MARKETS ANNEX VECTORING - TECHNICAL DESCRIPTION ECTA The Future of European Telecoms Regulation

4 1. EXECUTIVE SUMMARY Market Performance The European broadband story, like that of European telecommunications, is generally one of success. Consumers have benefited materially from increasing broadband competition over the past ten years: access speeds have increased, retail prices have fallen 1, while choice has expanded and European consumers enjoy faster access speeds and lower prices than their American counterparts. Notwithstanding the increased 40 competitiveness of retail markets, 30 incumbents remain dominant at 20 Europe the wholesale level. The success in 10 USA retail broadband markets has 0 come about largely because access xdsl Cable FTTx regulation has allowed entrants to Data Source: SamKnows.com gain access to economic bottlenecks owned by the incumbent. In particular, access to networks at the physical level - through local loop unbundling (LLU) - has enabled entrants to innovate and differentiate their services from the incumbents. Had entrants been unable to gain access to economic bottlenecks on regulated terms, the incumbent would have been able to foreclose the market, such that entrants would not have been able to compete effectively and drive the consumer gains above. Mbps 50 Actual Dowload Speeds: Europe and USA There is some work to do to ensure that these competitive gains are not lost in the move to fibre access. In particular, recent technological developments, such as vectoring, and the regulatory push for virtual, rather than physical, unbundled access (VULA) to new fibre networks, have led to concerns that the competitive gains that have arisen from LLU could be reversed. This is because VULA and bitstream access over vectored VDSL do not allow entrants as much flexibility to set their own quality of service parameters. Instead they have to rely on the access speeds and other parameters set by the incumbent operator. It is important that SLU continues to be made available and, where possible, physical unbundled access to new fibre networks, in order to encourage infrastructure investment and innovation by alternative providers. In other words, the various rungs on 1 This is despite increases in wholesale access prices in certain countries, for example in Italy, the effect of which has been to reduce significantly the margins earned by alternative providers. 1/80

5 the ladder of investment must be preserved to foster and drive competition and innovation in retail markets. There is also work to be done to ensure that business customers are able to secure the services they require on regulated terms and are thus able to benefit fully from competitive provision and are not forgotten in the race to meet the European Commission s consumer- focused Digital Agenda targets 2. Investment The picture for investors and for investment in the industry in the EU is also a positive one. Over the past five years, entrants have seen Earnings before Interest and Taxation (EBIT) margins rise from an average of 8% in 2008 to 15% in 2011 before falling back to 10% in Over the same period, incumbents have seen a fall in EBIT margins from around 19% to 13% in 2012, but Deutsche Bank expects incumbents EBIT margins to rise to 16.8% in 2014 whilst entrants margins will increase to 11.9%. Over the same period entrants and incumbents have been able to maintain capital expenditure at between 14% and 19% of sales. Existing regulatory framework The European regulatory framework follows the principles of competition law and economics and applies regulation only where there is evidence of Significant Market Power (SMP) in relevant markets. In order to secure some degree of uniformity across the EU, National Regulatory Authorities (NRAs) are required to conduct ex ante market reviews of those markets identified in the European Commission s Recommendation on relevant markets susceptible to ex ante regulation. There are seven markets listed in the current version of the Recommendation. With one exception, these markets are all at the wholesale level. Very few NRAs have found the complete absence of SMP in the relevant markets, indicating that there is still a general problem of SMP across all seven markets. In the limited number of cases where an NRA has found that no provider has SMP, this has been due largely to circumstances that are specific to the Member State concerned. 2 WIK- Consult, Business communications, economic growth and the competitive challenge, 16 January /80

6 Recommendations for the future of regulation in Europe From our evidence- based review of the performance of the market to date we conclude that there is no case for an extensive overhaul of the current regulatory framework. On the contrary, there is every reason not to make changes to a regime that is working well. Europe is not, as is argued by some doom mongers, falling behind other areas of the world. In fact it is keeping up with and exceeding the performance of many countries. Any unjustified withdrawal of regulation at this stage would be detrimental. Reliance on competition law alone would be insufficient and would risk harming the future development of the market, except in very specific situations and after careful consideration. It is also our view that the ladder of investment remains a valid concept and is critical to the continued development of the market. Without entry- level wholesale access products available, for example Wholesale Line Rental and bitstream, entrants are unable to develop a base position from which to invest further in the market and to compete at a deeper level, thereby enabling them to innovate more effectively and better meet consumers needs. New entrants often use the number of customers on bitstream in an exchange area as a key criterion when deciding whether to invest in LLU. This investment ladder must also be replicated in the fibre world to the greatest extent possible, in particular if the political objective is to create a single market in which operators can successfully enter other European markets and build a pan- European footprint. Proposed changes to the list of relevant markets As a general point, it is important to recognise that the conditions of competition are not uniform across the EU. There is a danger in removing markets from the list of recommended markets based on market developments which might have an uneven impact across the EU, i.e. be more prevalent in one Member State (or even in one region within a Member State) than another. Although individual NRAs are not precluded from regulating markets which are not included on the list of recommended markets (and the European Commission expressly acknowledges this in the draft Explanatory Note accompanying its proposed revised Recommendation on Relevant Markets), the removal from the list gives a strong de- regulatory signal to NRAs. The risk is that the de facto outcome of removing certain markets from the list of relevant markets will be that these markets are de- regulated, potentially prematurely. At the very least, there is likely to be a degree of uncertainty as 3/80

7 to what will happen in those EU Member States where continued regulation might in fact be warranted. Against that background, our conclusions on the specific markets included in the existing Recommendation on Relevant Market are as follows: Fixed Voice Access and Origination Markets (Markets 1 and 2) We do not consider that there is any case to withdraw Markets 1 and 2 from the list of relevant markets, as proposed by the European Commission. Incumbent operators remain dominant in the retail fixed access market in most countries and in the wholesale voice calls market. If regulation were withdrawn from these markets, incumbents would not be subject to any effective constraint on their behaviour. There is no evidence to date to justify a finding that, at EU level, the markets for fixed access or fixed call origination are no longer characterised by high barriers to entry and tend towards effective competition. The factors cited by the European Commission in the Explanatory Memorandum to its draft revised Recommendation on Relevant Markets are not borne out by the evidence or the detailed engagements we have had with market participants in developing this report. For example, the European Commission cites the increased availability/usage of managed VoIP services. However, it fails to note that only around 61% of European households have broadband access and that, for the remaining 39% of EU households, managed VoIP services are not a substitute. Nor would competition law tools prove adequate to deal with any issues in these markets: competition law enforcement typically takes too long and is too complex to provide an effective and sufficiently timely remedy against the likely harm caused. Wholesale line rental (WLR) remains an important remedy for both residential and business users. The continued availability of WLR would allow entrants to offer an alternative to the incumbent where LLU is uneconomic or still not available; to customers who do not have broadband; and to business customers for whom VoIP is not an effective substitute on quality, availability or cost grounds. Although the usage of Carrier Selection (CS) and Carrier Pre- Selection (CPS) has declined, it is important that these products remain available and, as discussed later in this report, research has shown that they have acted as an important competitive constraint on fixed call prices. The continued regulation of Market 2 is also important to ensure the continued competitive provision of call origination services for value- added services (e.g. Freephone numbers). 4/80

8 Fixed and Mobile Voice Termination Markets (Markets 3 and 7) There have been no market developments which justify the removal of voice call termination markets from the Recommendation. Each operator continues to have a monopoly in respect of call termination on its own network and, as things stand, the withdrawal of regulation would enable network operators to set termination charges without any effective competitive constraint, which would be likely to have a detrimental impact on consumer welfare and could lead to competitive distortions. Physical and Bitstream Access (Markets 4 and 5) The European Commission has proposed replacing the existing Market 4 with a new wholesale local access market, which would comprise both physical unbundled access and virtual access. It has also proposed replacing the existing Market 5 with a new wholesale central access market, comprising wholesale bitstream access. The regulation of physical access has proved to be one of the most effective actions by policymakers to encourage investment in differentiated and innovative services by entrants and incumbents alike. It therefore remains critical that entrants can continue to gain access to bottleneck physical assets on regulated terms, on a level playing field basis and at affordable prices. Concerning the suggestion to include virtual access on higher speed technologies (fibre and/or vectored VDSL) within the same market as physical unbundled access, it is important to note that virtual access, while an essential access product for some market segments and particularly where the network topologies deployed by incumbent operators do not currently allow for physical unbundling, does not provide the opportunities for innovation that are critical to the market and that only physical unbundling products can offer. Virtual access products should therefore not be seen as a sufficient alternative to physical unbundled access. NRAs should consider the superior characteristics of physical unbundled access remedies (e.g. LLU, SLU and fibre unbundling) over virtual access remedies and impose and incentivise the use of physical access whenever possible as a matter of priority. Nevertheless fit- for- purpose virtual access remedies, which emulate to the maximum extent the characteristics of physical access products, must be made available notably in those cases where physical unbundling is currently not possible. The introduction of vectoring should also not be used as a justification for the withdrawal of SLU, which should continue to be available as a remedy to provide opportunities for alternative providers to roll- out FTTC. NRAs should identify rules for 5/80

9 the coordination of ISPs willing to implement vectoring in the same cabinet area and to work with equipment vendors to resolve the technical issues to multi- operator vectoring. It is also essential for a bitstream ADSL product to remain available and this should be mandated where it is not provided voluntarily on Evolu^on of Copper Access Line by Type 70,000 competitive terms. Around 10 60,000 million broadband users across 50,000 Incumbent Europe are still connected via Retail 40,000 LLU wholesale bitstream and the 30,000 withdrawal of bitstream may leave these consumers with no choice of broadband supplier. 20,000 10,000 0 Bitstream Further, bitstream access remains an important first rung on the ladder of Data Source: Informa Telecoms and Media Access Lines (x1,000) 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 investment that allows new players to enter the market and build up a customer base before making the larger investment need to develop a network based on LLU. Critically, bitstream access is also an essential input for the effective provision of services to business customers in many instances. It has been suggested that the wholesale central access market (which is proposed to replace the existing Market 5) should be defined on a sub- national basis by default and should only be regulated where there is insufficient competition based on LLU or other means of access 3. We would make the following points in relation to the possibility of defining sub- national markets: First, it is essential that any geographic market analysis is rigorous and based on hard evidence of competitive conditions in different areas. The fact that the specific national circumstances justified the definition of sub- national markets in the UK does not mean that such an approach would be justified in other EU Member States. Geographic markets should only be defined following a rigorous and evidence- based market analysis and a stringent test of availability of relevant upstream products and the use of upstream wholesale remedies. Secondly, NRAs need to recognise that competition in business retail broadband markets is critically dependent on the existence of effective, and consistent, wholesale remedies across the whole country, due to the fact that multisite businesses typically purchase at 3 Ecorys, Future electronic communications markets subject to ex ante regulation, Final report, 18 September 2013, p.24. 6/80

10 multiple locations (headquarters, other business sites and for home workers) and many of these sites may be outside the LLU footprint. Even if a business site is within an LLU provider s footprint, the LLU provider may only offer consumer broadband products. Finally, if regulation is withdrawn in some geographic areas, this might give rise to the possibility for incumbents to engage in abusive behaviour, for example by using their pricing flexibility in unregulated areas to undermine competition from new entrants. NRAs should ensure that there is adequate and robust protection against this occurring before any move to sub- national markets. Leased lines (Market 6) and Business Grade Bitstream The European Commission has proposed a new wholesale high quality access market, which would encompass both wholesale terminating segments of leased lines and other wholesale business grade access products. It is important to note that wholesale bitstream access is unlikely to be substitutable for leased lines in most cases, given that such access typically provides asymmetric (rather than symmetric) upload and download speeds and uncontended (rather than dedicated) access. We agree, however, to defining a separate market covering business grade bitstream access, which is distinct from the provision of mass market bitstream access, given the different competitive conditions in residential and business retail broadband markets. We note that two NRAs (in the Netherlands and Austria) have previously defined separate wholesale broadband access market for residential and business customers. In both cases, the incumbent was found to have SMP on a nationwide basis. A much more detailed analysis of the requirements of business markets is included in other recent reports, in particular a report by WIK- Consult 4. 4 WIK- Consult, Business communications, economic growth and the competitive challenge, 16 January /80

11 Overall conclusion The overall conclusion of this report is that, whilst there are opportunities for changes to the list of recommended markets, these changes are very limited. It is vitally important for the future of innovation and investment in the electronic communications sector that entrants continue to be able to gain access to key wholesale inputs on regulated terms, including LLU, SLU, WLR, CPS/CS and bitstream services. There have been material gains under the present regime and these continue to be felt. Investment is increasing and consumers are paying prices, and benefiting from speeds, which compare well on international comparators. Now is not the time to rock the boat. It is particularly important to continue to focus on regulating ongoing access bottlenecks and not to rush to remove markets from the list of relevant markets before the impact of changes in market dynamics are clearly demonstrated. Indeed, there is an argument that for those access services that remain bottlenecks, there is a greater need for regulatory rigour and attention from NRAs, notably in the transition to a Next Generation Access Networks (NGA) environment. 8/80

12 2. INTRODUCTION It is now the ten years since the European Union adopted the new regulatory framework, which was updated in Since then, there have been substantial changes in the services used by consumers and businesses, but a remarkable consistency in the underlying network services and wholesale market structures. Regulation has facilitated market entry at retail level and supported innovation, but the underlying economics of networks has meant that firms that dominated the wholesale market in 2003 still hold that position today 6. Thus, companies that are household names today, such as Twitter, Facebook and Skype, did not exist in 2003, but they rely on infrastructure providers whose antecedents stretch back over decades or even centuries. This report has been prepared by SPC Network and Webb Henderson on behalf of ECTA as a contribution to the debate on the future of European regulation. Much has already been written by many parties, and we seek to contribute to the debate by presenting, to the greatest extent possible, an empirically- based assessment of the progress of competition and the interplay between market developments and regulation. The purpose of the report is to separate myth from reality so that more objective decisions can be made at this critical time. We have prepared this report using data from a variety of sources, in particular from Informa Telecoms and Media, a leading provider of research on the telecoms and media industries who collate data on, among other things, consumer and technological trends, network investment and industry performance. We have also conducted telephone interviews with a cross section of twelve competitive operators in Europe 7. The interviews were qualitative and have been used to inform our discussion and understanding of the issues, although the views expressed in this report are our own. Detailed results are not provided in this report. We are grateful to the interviewees who agreed to take part in the survey. Our report is structured as follows: Section 3 reviews the performance of the broadband and narrowband markets from the perspective of both the consumer and the investor. We also discuss some key developments in consumer behaviour and technology trends. 5 Directive 2002/21/EC (Framework Directive), Directive 2002/20/EC (Authorisation Directive), Directive 2002/19/EC (Access Directive), Directive 2002/22/EC (Universal Service Directive), Directive 2009/140/EC (Better Regulation Directive). 6 This is illustrated by Figures 9-12 below, which show the evolution in the market share of incumbents in EU broadband and fixed voice markets over the period from 2003 to Companies interviewed were: Bouygues, Fastweb, Free, LGI, SFR, Sky, TalkTalk, Tele2 (Netherlands), Tele2 (Sweden), QSC, WIND, Vodafone Group. 9/80

13 Section 4 reviews the current state of regulation in EU. Section 5 sets out recommendations for the future of regulation in Europe, in particular with regard to the list of relevant markets susceptible to ex ante regulation. 10/80

14 3. REVIEWING BROADBAND MARKET DEVELOPMENTS The European broadband story is generally one of success. European consumers have benefited from increasing broadband competition over the past ten years: access speeds have increased, retail prices have fallen (notwithstanding increased wholesale access prices in certain countries, thus reducing the margins of alternative providers) and choice has expanded. European consumers generally enjoy faster access speeds and lower prices than in other parts of the world, including their American counterparts. Consumer behaviour has also changed as usage has switched, in certain instances, to data services and more consumers buy bundled services. However, incumbent operators have maintained high and relatively stable market shares, in particular in the fixed voice market and wholesale broadband markets, and incumbents still charge high wholesale access charges in some cases. Recent technological developments, such as vectoring, have led to concerns that the material competitive gains that have arisen from local loop unbundling could be reversed in the next generation environment. 3.1 Industry Performance: What has actually been delivered to consumers and investors? The fixed broadband market across the EU28 has grown from around 15 million subscribers at the start of 2003 to just under 153 million by the end of 2013, representing about 68% of households. Figure 1 shows the number of access lines by principal technology 8. DSL remains the primary access technology, followed by cable and fibre 9, which is still in the early stages of deployment in the EU as a whole. 8 Source: Informa World Broadband Information Service. The current 28 countries of the EU are included for all periods. 9 The definition of fibre here (FTTx) includes fibre to the premises (FTTP), i.e. fibre to the home (FTTH) and fibre to the building (FTTB) but excludes fibre to the cabinet (FTTC). 11/80

15 Figure 1: EU Broadband Lines by Principal Technology Broadband Lines (x1,000) 160, , , ,000 80,000 60,000 40,000 20,000 0 Total Broadband Subscribers EU28 by Principal Technology 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 xdsl Cable Fox Data Source: Informa Telecoms and Media The speed technically available to broadband subscribers has also increased markedly since broadband was first launched. In particular, the download speed available on both fibre, including fibre to the cabinet with VDSL, and cable has increased massively, whilst ADSL 10 has reached a peak of about 20 Mbps. Figure 2 shows the average highest 11 advertised speed by principal technology over the period from 2003 to It shows the massive increase in speeds on fibre and cable, the latter with the roll- out of DOCSIS 3.0. Figure 2: Average Highest Advertised Speed by Technology Mbps Average Highest Adver^sed Speed by Technology 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 ADSL FoX Cable Data Source: Informa Telecoms and Media / Author's calculazon 10 Including ADSL Defined as the highest advertised download speed per technology averaged across all 28 Member States. 12/80

16 European broadband consumers not only enjoy higher access speeds today compared with ten years ago, they also enjoy substantially lower prices per megabit of download speed. At the headline level the average price of the most popular package has fallen from around 38 per month in 2003 to 29 in 2012 in nominal terms. However, when the increase in download speed is taken into consideration, prices have fallen dramatically. In 2003 the average price per megabit was approximately 22 per month, today it is about 0.65 (again in nominal terms). Figure 3 plots both the headline price of the most popular package and the weighted average price per megabit. This price development is in line with other technology industries. For example, the average price of personal computers in the 1990s fell from $2,500 to around $ whilst the computing power increased massively. The download speed of broadband within each access technology is not directly correlated to the cost of deployment. For example, once ADSL2+, DOCSIS 3.0 or fibre is installed, there is no cost difference between offering the lowest and highest speeds of which each technology is capable 13. Figure 3: Broadband Price Development Q03 4Q03 3Q04 2Q05 1Q06 Broadband Price Development 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 Weighted Avg price per Mbps Weighted Average Data Source: Informa Telecoms and Media Today s European consumer is therefore in a substantially better position than her predecessor was ten years ago and also fares well by international standards. The research organisation SamKnows gathers data on the actual speeds obtained by users in the EU and USA. Although these data are not available over time, a snapshot shows that, across all access wireline technologies, EU consumers receive on average higher download speeds than their American counterparts. 12 Dedrick, Jason, and Kenneth L. Kraemer. "The Impacts of IT on Firm and Industry Structure: The Personal Computer Industry." (2005). 13 Additional backhaul capacity may be required for increased data volumes. 13/80

17 The difference is most marked in cable, where EU consumers obtain speeds nearly twice as fast as American consumers. American Internet Service Providers (ISPs), however, tend to be more accurate in their advertising, stating a speed much closer to that actually obtained 14. Figure 4: Comparison of EU and USA Broadband Speeds 50 Actual Dowload Speeds: Europe and USA Mbps Europe USA 0 Data Source: SamKnows.com xdsl Cable FTTx Similar data from Akamai show six European countries in the global top ten for average broadband connection speeds as at Q No European countries in Akami s sample are below the global mean. For European consumers, therefore, broadband has undoubtedly been a success story. This is confirmed by a recent report from the ITU 16 that shows that nine of the top ten countries with the highest level of broadband penetration are European, although for mobile penetration, the picture is more mixed. 14 Source: SamKnows Quality of Broadband Services in the EU, March Report prepared for DG Communications Networks, Contents and Technology: agenda/en/news/quality- broadband- services- eu- march Source: Akamai The State of the Internet, Second Quarter Downloaded from Akami is a provider of cloud platforms and gathers data on connection speeds that it publishes in its State of the Internet report. 16 International Telecommunications Union (2013) The State of Broadband 2013: Universalising Broadband. 14/80

18 Figure 5: Global Average Broadband Connection Speeds Average Connec^on Speed (Mbps) Source: Akami State of the Internet Second Quarter 2013 But what about the investors and shareholders? We have examined the financial ratios of a sample of EU incumbents and entrants along with the incumbents in Australia, New Zealand and the USA over the past five years. All three groups of companies have had a mixed performance. There are many different measures of financial performance and so it is necessary to choose the appropriate measure that gives an objective measure of company performance. A recent report commissioned by the European Parliament considered which measure is most appropriate 17 and concluded that Earnings Before Interest and Taxation (EBIT) provides the best measure. The report explained: For the purposes of assessing the health of the sector from a policy perspective, we believe it is more appropriate to use metrics such as EBIT or operating profit, which are well understood and based solely on operational data. However, when looking at EBIT margins, it is important to look at this metric over the long term because in the short term, results could be distorted if assets or contracts previously perceived to have a certain value are seen to decline in value (in accounting terms, a portion of the value is written off ). 18 Figure 6 shows the unweighted average EBIT margins for three groups of companies: European incumbents, non- EU incumbents and EU entrants over the past five years European Parliament Directorate General for Internal Policies (2013) Entertainment x.0 to Boost Broadband Deployment. 18 Ibid, p The companies in the samples are: 15/80

19 Incumbents comfortably outperformed entrants until 2011 when the profit margins converged before opening up again in In all years EU incumbents have outperformed incumbents in other countries. On a forward- looking basis, EBIT is forecast to diverge again. Deutsche Bank forecasts incumbents weighted average EBIT margins to be 14.6% and 16.8% in 2013 and 2014 respectively, whilst entrants EBIT margin will be 11.0% and 11.9% in the same period 20. Figure 6: Telecoms EBIT Margins 20% EBIT Margins 15% 10% 5% 0% Average EU Incumbents Average Non- EU Incumbents Average EU Entrants Data Source: Informa Telecoms and Media Another measure of financial performance is a company s free cash flow as a percentage of sales. The report for the European Parliament mentioned above says that cash flow is relevant because it provides a real picture of cash available to a company without potential distortions due to accounting treatments, but can be subject to fluctuations if CAPEX is not smoothly expended over time 21. Here we see that EU incumbents have outperformed entrants over the past five years, although there is now some convergence between the two. Non- EU incumbents have performed at about the same level as EU incumbents. The lower free cash flow for entrants in the early years of the analysis coincides with the end of the period of maximum investment in LLU. EU incumbents: Orange, Telecom Italia, Deutsche Telekom, Telefonica, BT Belgacom, KPN, TeliaSonera, Telecom Poland, Czesky Telecom, OTE Non- EU incumbents: Telstra, Telecom NZ, AT&T, Verizon EU entrants: Illiad, Bouygues, WIND, Tele2, TalkTalk, BSkyB, Netia, QSC, Telenet, Jazztel, United Internet 20 Deutsche Bank (2013) European Telecoms Services - Valuation Multiples & Key Metrics October Note that the sample of incumbents and entrants is different. Incumbents are: Belgacom, BT, Deutsche Telekom, Orange, Portugal Telecom, Swisscom, TDC, Tele2, Telenor, Telecom Austria, Telecom Italia, TeliaSonera. Entrants are: Colt, C&W Communications, QSC, Illiad, Freenet, United Internet. 21 European Parliament (2013) op cit. p /80

20 Figure 7: Operating Free Cash Flow as a Percentage of Sales Opera^ng Free Cash Flow as Percentage of Sales 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Average EU incumbents Average non- EU Incumbents Average EU Entrants Data Source: Informa Telecoms and Media Finally, all types of operator have maintained capital expenditure within a range from 14% to 19% of sales over the five years of analysis. In all five years EU entrants have invested more as a percentage of sales than EU incumbents, in particular in 2011 and Entrants tend to have lower levels of sale than incumbents and so incumbents absolute level of Capex is higher than entrants. Figure 8: Capital Expenditure as a Percentage of Sales 20% 15% Capex and Percentage of Sales Average EU incumbents 10% 5% 0% Average non- EU Incumbents Average EU Entrants Data Source: Informa Telecoms and Media 3.2 Industry Structure: How Competitive are European Fixed Broadband Markets? Retail fixed broadband markets have become, on average, less concentrated over the past ten years. A standard measure of market concentration is the Herfindahl- 17/80