1

Investment incentives in an environment of dwindling voice

revenues*

Harald Gruber

Presentation for Conference

“The Future of Voice” Geneva 15-16 January 2007*The opinions expressed are of the author and need not necessarily reflect those of the EIB.

2

Outline

• Sector overview

• Fixed line trends

• Investment

• Role of regulation

• Conclusion

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Past drivers for investment and growth

• Technology– Cost reduction– Performance increase

• Regulatory change– Liberalisation– Changes in market structure

• Fixed: cost based access prices, service competition

• Mobile: new licenses, facility based competition

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Fixed line market

• Slow revenue growth:– Pressure on tariffs– Switch to flat fees– Fixed-mobile substitution

• Increasing role of data/broadband revenues

• Pressures on profit margins

• Customer access as key revenue source

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Fixed line revenues in EU

Source: EITO

67% 64% 62% 59% 57%

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2003 2004 2005 2006 2007

EU

R M Data

Voice

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Decline in investmentFixed line telecommuncations in EU

0

5

10

15

20

25

30

2001 2002 2003 2004

m E

UR

Source: London Economics

7

Fixed line regulation

• Bottleneck in local loop access• Asymmetric access regulation of DSL

(unbundling) vs. cable modem • Regulatory remedy: open access at cost based

prices:– Service based competition: bitstream, resale

– Facility based competition: Full LLU, shared access

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Ladder of investment theory

• Short term goal of service based competition

• Long term goal of facility based competition

• First service based entry…

• …then facility based entry

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Source: EU Commission

DSL retail. Shares by type of access

0%10%20%30%40%50%60%70%80%90%

2002 2003 2004 2005

Facility based

Service based

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Investment incentives

• Increasing investment profile for new entrants.

• Investment effect on incumbent uncertain

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New entrants' market shares in EU

0%

5%

10%

15%

20%

25%

30%

35%

2002 2003 2004

Lines (DSL)

Investment (fixedlines)

Source: EU Commission, LE

Investment ladder without investment?

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Is there a paradox?

• Does data communication require less investment or are investment incentives diminished?

• Is unbundling complement or substitute for new entrants’/incumbents’ investment?

• There is empirical evidence (for US) that inter-platform competition has significant positive effects on diffusion of broadband

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Shares of broadband access types in the EU

0%10%20%30%40%50%60%70%80%90%

2003 2004 2005

DSL

Cable modem

Other

Source: European Commission

EU is moving away from platform competition

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South Korea: Broadband access, by type

0%

10%

20%

30%

40%

50%

60%

70%

2002 2003 2004 2005

DSL

Cable

Other

A counterexample

Source: OECD

15

Share of broadband platforms

0%

20%

40%

60%

80%

100%

Other

Cable

DSL

Source: OECD

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Platform competition

• May not be feasible to the same degree for all EU countries because of absence of cable networks

• Look for alternatives, e.g. radio based technologies

• Scope for issuing spectrum licenses

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Regulatory challenges for fixed line sector

• Encourage more investment• Issue of “forbearance” on new investment• What to do with countries with single platform ?• Consider non-uniform regulation across EU?

– Mandatory unbundling (possibly limited time horizon) for countries without alternatives to DSL

– Deregulation in countries with platform competition

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Conclusion

• Data revenue increase share in total revenues and profit margins for traditional voice business decline

• Regulation has strong effects on investment behaviour

• Regulation should not represent a permanent claim on incumbents assets

• Stimulation of facility based competition