The Impact of OTT on USO in the EU: Nothing Yet but Other Concerns - Is EU Losing Out?

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1 The Impact of OTT on USO in the EU: Nothing Yet but Other Concerns - Is EU Losing Out? Presentation for: Pacific Telecommunications Council Conference 2014 Research Workshop: Government vs Industry PM, Sunday 19 January South Pacific 4 Erik Bohlin Chalmers University of Technology, Göteborg, Sweden 1

2 Current State of Play of USO Nothing substantial has happened in the EU USO legislation since 2002 Several consultations on whether to expand USO into mobile and broadband has concluded with a NO No impact of OTT on USO Nothing substantial is on-going in USO with respect to the current major initiative, Connected Continent

3 Overview of the Evolution of the Universal Service in the EU Policy Paper Directive 1987 Green Paper: reserved services were offered on a universal basis 1990 ONP Directive: Harmonization and open network principle must be followed Service Directive: liberalized all services except voice telephony 1993 Green paper on dev. USO for telecom in a competitive environment 1994 Council Resolution on Universal Service Principle 1992 ONP Leased line Directive Declared Leased Line as ONP; a form of universal service was added 1996 Green Paper on Universal Service: USO an evolving concept 1999 Green Paper: issues of majority and social exclusion were raised to broadband 1995 ONP Voice telephony Directive: Declared fixed voice as ONP; common scope of USO was identified 1997 Amending 1990 ONP Directive: definition of universal service identified: minimum set of services regardless of location at affordable price 1998 Universal Service Directive: principles of USO elaborated: fixed PSTN connection for voice, fax, data; affordability defined, USO designated operator defined 2005: Public Consultation on USO 2002 Universal Service Directive: issues of majority and social exclusion added, and periodical reviews of USO mandated 2010: Public Consultation on USO 2009 EU Telecom Reform: amend USO Directive = Major step

4 What is then of Big Concern? Connected Continent proposal, launched in September 2013 supposedly the most significant policy proposal in 26 years (according to European Commission) The loss of EU leadership in ICT In the following, some indicative trends and state of play

5 EU not Strong in ICT Markets ICT Leaders 2011/12 (by revenues) Trends Less than 10 percent of global ICT revenues are generated by European companies. Former market leaders have been picked up by global competitors (Nokia) or have exited market segments (Siemens). Many European industries are increasingly reliant on non-european ICT players. Source: A.T. Kearney, IDATE, Alexa, Financial Times 5

6 Market Capitalization Eroding in EU GLOBAL TELCO GIANTS LEADING EUROPEAN TELCOS GLOBAL OTT GIANTS Ø EV/EBITDA: 5,3x Ø EV/EBITDA: 5,2x Ø EV/EBITDA: 14,1x Market cap in bn EUR ex VZW 1 Market cap in bn EUR Market cap in bn EUR Group CAGR: % Group CAGR: % Group CAGR: % 6

7 Loss of Shareholder Return Annualized Total Shareholder Return (12/ /2012) International Telcos Turk Telekom (25%) Telenor (16%) Verizon (18%) European Telcos AT&T (13%) Softbank (14%) Swisscom (6%) KDDI (10%) Telekom Austria (-11%) Belgacom (-5%) Vodafone (9%) France Teliasonera (-0%) Telecom (-13%) Telekom Polska (0%) Deutsche Telekom (-1%) KPN (-29%) Telekom Italia (-9%) Portugal Telecom (-10%) Telefonica (-12%) Annualized Total Shareholder Return in % (12/ /2012) Source : BCG. 7

8 Decline in Telecom Revenues European Commission: Pressure is growing. IP Traffic Telecom Revenues Western Europe e e North America +836% +966% Western Europe North America e e Asia Pacific Asia Pacific -10% +35% +1,006% +40% e e Source: European Commission (Sep. 2013) Trends While IP Traffic grows, revenues shrink continuously. Despite huge growth in demand for their services telecoms companies in Europe face decreasing revenues. This is in stark contrast to the U.S. and Asia Pacific where revenues are on the rise. Prices in European Markets are under pressure due to regulatory intervention and competition. 8

9 Long Decline in Wireless Revenues Wireless service revenues per capita in the U.S. and Europe Trends EUR US Europe US 25 EU U.S. consumers generate higher revenues per capita for mobile wireless services compared to European consumers. Revenue growth allows U.S. carriers to deploy LTE at a much faster pace than the EU. 20 Mrz 07 Sep 07 Mrz 08 Sep 08 Mrz 09 Sep-09 Mrz 10 Sep-10 Mrz 11 Sep 11 Mrz 12 Sep 12 Source: Bernstein Research (Feb 2013). Exchange rate USD/EUR as of Sep 12. 9

10 Investment Levels also Falling Behind Telecommunications investment in EUR per capita Trends EUR USA EU-15 Asia Pacific e 2013e US Asia Pacific 130 EU Investment of up to 270 bn EUR required to roll-out fibre based high-speed networks in Europe. Long term investment level in Europe is well below the U.S. and Asia/Pacific level. Source: OECD Communications Asia Outlook Pacific: Japan, Asia: South Japan, Korea, South New Korea, Zealand, Australia, Australia. New Zealand. Data estimated for 2012 Source: and OECD

11 Conclusions No link between OTT and USO presently in the EU Major concern now on loss of competitiveness in ICT in the EU Connected Continent Proposal is the political response to the new realization Will this initiative really do what it is supposed to do?