Holger forst

FTTH Council Europe 2013 presentation

Investor Day, 19th February 2013

FTTH Council Europe 2013 presentation

February 2013

FTTH Europe Council 2013

ContentsFiber market overview and trends

• Infrastructure investment is one of the key drivers of Ernst & Young’s telecoms risk landscape

• Strong growth is expected in FTTx worldwide but Europe is lagging other regions

• In Europe, fiber is better established in CEE countries ; smaller markets will lead in penetration by 2016

• The European regulatory landscape for fiber is shifting

• A number of risks and opportunities present themselves for operators investing in

• Capex guidance remains cautious as operators stagger their fiber network investments 9

Fiber issues in Europe: country case studies

• Fiber network sharing model in France

• Incumbent network separation to accelerate the investment in fiber

• Open network model for the Dutch fiber market

• Co-financing project to develop the Swedish fiber market

• Private and EU laws promote investments of fiber network in Lithuania

EY Point of view

• Ernst & Young recommendations for successful

• A greater emphasis on metrics can support new messages to the market on

• Ernst & Young experience in advising operators on approaches to


Infrastructure investment is one of the key drivers of Ernst & Young’s telecoms risk landscape 4

worldwide but Europe is lagging other regions 5

In Europe, fiber is better established in CEE countries ; smaller markets will lead in penetration by 2016 6

The European regulatory landscape for fiber is shifting 7

A number of risks and opportunities present themselves for operators investing in fiber 8

guidance remains cautious as operators stagger their fiber network investments 9

11

Incumbent network separation to accelerate the investment in fiber 12

Open network model for the Dutch fiber market 13

financing project to develop the Swedish fiber market 14

Private and EU laws promote investments of fiber network in Lithuania 15

Ernst & Young recommendations for successful fiber strategies 17

A greater emphasis on metrics can support new messages to the market on fiber progress 18

Ernst & Young experience in advising operators on approaches to fiber investment 19

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Page 3

Fiber market overview and trendsFiber market overview and trends

3


Infrastructure investment is one of the key drivers of Ernst & Young’s telecoms risk landscape

1. Failure to shift the business model from minutes to bytes

2. Disengagement from the changing customer mindset

3. Lack of confidence in return on investment

4. Insufficient information to turn demand into value

5. Lack of regulatory certainty on new market structures

6. Failure to capitalize on new types of connectivity

7. Poorly formulated M&A and partnership strategy

8. Failure to define new business metrics

9. Privacy, security and resilience

10. Lack of organizational flexibility

Top 10 risks in Telecommunications

Fiber investment touches on many of the themes highlighted in our sector risks program► Lack of confidence in return in investment has seen fiber capex constrained in recent years in Europe► Lack of regulatory certainty on fiber market structure e.g. competing infrastructures, wholesale access has also held back i► Metrics to help evaluate national progress are lacking► Business model risks are pronounced in the fiber environment e.g. ability to charge premiums for fiber access


Infrastructure investment is one of the key drivers of Ernst &

Disengagement from the changing customer mindset

Lack of confidence in

return on investment

Lack of regulatory certainty on new market structures

Privacy, security and

resilience

Poorly formulated M&A and strategic

partnerships

Failure to define new business metrics

Failure to capitalize on new types of connectivity

Insufficient information to turn demand into value

Failure to shift the business model from

minutes to bytes

Lack of organizational

flexibility

investment touches on many of the themes highlighted in our sector risks programconstrained in recent years in Europe

Lack of regulatory certainty on fiber market structure e.g. competing infrastructures, wholesale access has also held back investment

Business model risks are pronounced in the fiber environment e.g. ability to charge premiums for fiber access

4


Strong growth is expected in FTTxother regions

1. Point Topic, October 20122. OVUM, April 2012


20,0%

60,6%

2.9%

16.5%

CableDSLFTTHFTTX

Worldwide Fixed Broadband Subs (%) by Technology, Q2 2012¹

Global Consumer FTTH/FTTB subscriptions by area²

0

50

100

150

200

250

2009 2010 2011 2012E 2013E 2014E 2015E 2016E

Americas Europe Asia-Pacific Middle East & Africa

48 M

226 MCAGR: 25%


FTTx worldwide but Europe is lagging

5FTTH Europe Council 2013

► ADSL is still by far the most popular access technology on a global basis.► Asia –Pacific continues to be the biggest overall region accounting for 45% of

global fixed broadband connections in 2011► Fixed broadband growth is slowing in many markets (i.e. Western European

countries and US) as a result of increasing saturation and the continued strong growth of mobile broadband.

► Fiber could to take over cable in 2013 if it maintains current take-up rates.

1ADSL remains the dominant broadband technology worldwide

► Global FTTH/B broadband connections will total 226 million in 2016, growing at a CAGR of 25% between 2009 and 2016.

► Significant revenue dilution is not expected as fiber penetration increases –Global FTTH/B revenue will reach $73 billion by the end of 2016 with a 2009-2016 CAGR of 23%.

► Asia -Pacific is the one region of the world where fiber emerged as a serious broadband platform thanks to positive government intervention – and is expected to account for the majority of FTTx subscriptions going forward

► Fiber is still a marginal technology outside of some markets in Asia, US and Russia:

► Europe accounted for 11.4% of global FTTH/FTTB subscriptions and 8.3% of FTTH/FTTB revenues in 2011

► However, Europe accounts for a greater proportion of global wholesale fiber connections (20.7%) and revenues ( 25.7%), reflecting more established equality of access legislation compared to other regions

1European fiber connections are seen lagging other developed markets


1. IDATE and FTTH Council Europe, October 20122. Heavy Reading, “European FTTH Forecast 2011-2016, February 2012

European FTTH/B + LAN Household Penetration (%), 1H12¹

In Europe, fiber is better established in CEE countries and smaller markets are seen leading in FTTH penetration by 2016

> 10% 5% - 10% 1% - 5% <1%

Leading European FTTH markets by in 2016E²

15,2%

42,1%

0,0% 10,0% 20,0% 30,0% 40,0% 50,0%

NetherlandsRussia

BulgariaPortugalSloveniaEstonia

DenmarkLatvia

SlovakiaSwedenNorway

Lithuania

Household penetration %


In Europe, fiber is better established in CEE countries and smaller markets are seen leading in FTTH penetration by 2016

66

Eastern European markets are leading fiber growth► The growth of Europe’s FTTH/B market is driven by the countries of Central

and Eastern Europe due to favourable economic and demographic circumstances e.g. Ukraine

► In the first semester 2012, Lithuania was the FTTH/B market leader reaching over 30% household penetration, followed by Norway (18%) and Sweden (14.5%) and Bulgaria (12%) and Slovenia (10.5%).

► Over in Western Europe, Sweden, together with Norway, remain the largest FTTH/B markets:

► In Sweden, a policy of open access was rapidly adopted leading to healthy competition between providers, with FTTH offered as long ago as 1998

► Other Nordic countries have learnt from the Swedish approach► Incumbents only account for one-third of fibre homes passed in Europe

Smaller markets to remain ahead of the penetration curve► FTTH/B connections will reach over 32 million of European households in

2016 driven by a strong progress in many Eastern European countries, such as Russia, Ukraine, Bulgaria and the Baltics

► Lithuania will confirm its leadership reaching over 42% penetration followed by Norway (28.2%) and Sweden (26.6%).

► Analysts predict Italy, Germany, UK and Spain will still be under 10% penetration by 2016

► Meeting the EU target of 30 Mbps for all households and 100 Mbps for half of households will prove challenging

► There is increasing scope for FTTx rollout by local authorities and regional power companies in Western Europe


The European regulatory landscape for fiber is shiftingAmbitious FTTx penetration targets underpin EU policy► EU is putting pressure on operators to accelerate broadband investments. The EU Commission’s Digital Agenda expects all Europ

households to have access to broadband speeds of at least 30Mbps by 2020, with half the population able to access speeds of mthan 100Mbps.

► Implied rollout costs are high (nearly 100% of homes passed and 50% of homes with subscribers) is ► Introducing modest levels of infrastructure sharing and reuse can bring

Regulatory Issues

► In Europe, regulation is historically less supportive of investment compared to other regions where governments have providedheavy subsidies (Japan, South Korea) or the US, which offers protection for private investment via a hands

► A number of regulators have ignored the EC’s directive to unbundle fiber as there has been little interest from alternative operators. These contradictory trends underline that there is still debate surrounding the importance of network competition,that it will continue for at least the next few years.

► In late 2008 the EC consulted on its regulatory strategy to promote NGA networks in Europe. New broadband VAS services requirhigher bandwidths which can effectively be supplied only through fiber (NGAs) or hybrid fiber/VDSL networks (local loop).

► Regulation continues to be a significant barrier to fiber access deployment in Western European countries, with mandates for unbundling and access to NGA networks for competitors, since regulation obliges incumbents to provide access to their networkand so prevent them from creating monopolies trough the new infrastructure.

► NGAs are regulated by individual NRAs and some of these have already adopted access obligations on incumbents to NGA infrastructure (i.e. France, the Netherlands for FTTH).

Measures have been taken to create an environment more favourable► Ensure a stable pricing environment for wholesale copper access as incumbents migrate to fiber► More flexibility in next-generation wholesale products allowing altnets

rivals as well as facilitating access to the national broadband network to extend competition (i.e. Latvia, Ukraine, Austria► Promote public-private funding models such as in Switzerland (co-operation model), Sweden (co

(EU funding) where local regulator encourages incumbent to create partnership with other more and more the deployment of the next-generation telecom infrastructure (i.e. fiberamong operators such as in France


The European regulatory landscape for fiber is shifting

7

EU is putting pressure on operators to accelerate broadband investments. The EU Commission’s Digital Agenda expects all Europeanhouseholds to have access to broadband speeds of at least 30Mbps by 2020, with half the population able to access speeds of more

Implied rollout costs are high (nearly 100% of homes passed and 50% of homes with subscribers) is €192bnIntroducing modest levels of infrastructure sharing and reuse can bring € 10bn savings

In Europe, regulation is historically less supportive of investment compared to other regions where governments have providedheavy subsidies (Japan, South Korea) or the US, which offers protection for private investment via a hands-off approach.

A number of regulators have ignored the EC’s directive to unbundle fiber as there has been little interest from alternative operators. These contradictory trends underline that there is still debate surrounding the importance of network competition, and

In late 2008 the EC consulted on its regulatory strategy to promote NGA networks in Europe. New broadband VAS services require higher bandwidths which can effectively be supplied only through fiber (NGAs) or hybrid fiber/VDSL networks (local loop).

Regulation continues to be a significant barrier to fiber access deployment in Western European countries, with mandates for unbundling and access to NGA networks for competitors, since regulation obliges incumbents to provide access to their networks and so prevent them from creating monopolies trough the new infrastructure.

NGAs are regulated by individual NRAs and some of these have already adopted access obligations on incumbents to NGA

favourable to investmentEnsure a stable pricing environment for wholesale copper access as incumbents migrate to fiber

altnets to get equal treatment when accessing the network of incumbent rivals as well as facilitating access to the national broadband network to extend competition (i.e. Latvia, Ukraine, Austria)

operation model), Sweden (co-financing project), Lithuania and Latvia (EU funding) where local regulator encourages incumbent to create partnership with other telcos, cablecos and utilities and it drives

generation telecom infrastructure (i.e. fiber-optic network) developing a cost-sharing model


A number of risks and opportunities present themselves for operators investing in fiber

§ A wide range of supply- and demand-side uncertainties:§ Customer willingness to pay a premium for fiber§ Costs of deployment, civil engineering works and

managerial execution§ Market dynamics and the evolving competitive

situation such as the degree of competing infrastructures§ Macro-economic pressures (i.e. public debt,

recession for some European countries)§ Alternative technologies: Technologies such as LTEcould

reduce the appeal fiber in areas where there aren’t sufficient fixed broadband infrastructures (i.e. rural areas)§ Competition : Cable operators leveraging DOCSIS 3.0

technology who have enjoyed a traditional speed advantage§ National broadband policies of some European countries

relating to the fiber roll out remains unclear, hampering the development of new broadband technologies§ The lack of profitability in the fiber business could be a

deterrent to its roll out (i.e. retail prices for fiber-based access products are below those of copper in Sweden)

Risks


A number of risks and opportunities present themselves for

88

2

Opportunities

§ New service opportunities for telcos and content delivery players are driving demand for high-speed broadband infrastructure e.g. HD/3D TV, time-shifted video recording§ Fiber is a national productivity driver: FTTx can support

social policy in a country (i.e. health care, education, social media) as well as accelerating the socio-economic benefits of e-government services (smart grids, e-science, e-commerce)§ Increased scope for co-operation between operators

themselves and players from different industry verticals to share/reduce the costs of rollout and improve the reach of new infrastructure§ Technology improvements: Vectoring and bonding

techniques are capable of producing greater performance levels from VDSL infrastructure§ Increased role of public funding to stimulate fiber

investments by ensuring the availability of affordable high-speed broadband in rural and especially in more remote areas§ Opportunity for cablecos: to develop the fiber deploying it

to the location of the last amplifier which is located at the foot of buildings (FTTB)


Capex guidance remains cautious as operators stagger their fiber network investments

Fixed Operators CapEx/Revenues ratio by Region, 1Q10-2Q12¹

1. OVUM, September 20122. Ernst & Young, The future of the network, January 2013

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

Americas Europe Asia-Pacific MEA

Capex demand is the leading issue facing operators today²

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

Capex demand due to data growth

Need to improve margins

Regulation

Other

Spectrum availability

Increased competition

Percentage of respondents citing issue

FTTH Europe Council 2013 9

guidance remains cautious as operators stagger their fiber

Capex has been controlled in a challenging industry climate► Revenue weakness has forced capex cutbacks both in Europe and North

America.► Telcos continue to work to transform their cost structures, and that will affect

both capex and opex trends going forward.► The capex/revenue ratio average of fixed operators was about 13% worldwide

in 2Q12. Europe, including Russia, had the highest ratio with 15.7% despite the European economic crisis of the last quarters, reflecting pent-up capexdemand and top-line weakness

► Capex demand remains the leading issue facing operators today – well ahead of margin management and regulation

Capex management will remain a leading operator concern:► Incumbent operators will have to increase CapEx spending to bolster their

networks in order to accommodate the expected growth in demand for VAS services.

► Analysts predict European telecom companies will have to invest €60 billion more on network CapEx in addition to the €100 billion currently projected through 2014. Most of this is likely to be financed with debt.

► Some companies with tighter headroom within existing financial ratios may have to reduce shareholder payments to accommodate the network investment.

► The deployment of fiber still leads to high initial costs due to the complexity and costly nature of splicing fiber optic cables in comparison to welding copper

► There are new routes to capex control - Some companies are starting to use several enhanced copper compression technologies, such as pair bonding, vectoring and phantoming, to double current ADSL speeds as an interim step while they delay investments in FTTH

Page 10

Fiber issues in the European rCountry case studies

in the European region:

10


Fiber network sharing model in FranceKey findings:► Despite the relatively weak financial position of the French consumer in last quarters and high levels of competition in the

market, there are aggressive fiber deployments. Shared next generation network ► France’s fiber infrastructure is among the more developed in Western Europe. Much of the success of fiber in France has been

efforts of companies such as Numéricable and Free (using different fiber architectures) as well as municipalities and power utilities: nonincumbent players have notable fiber ambitions

► FT’s fiber deployment strategy, which predicts an investment budget of EUR2bn over the 2010► Presence in 3.600 district across 220 metropolitan areas by 2015► Offering access 10 million households in 2015 and 15 millions in 2020 or 60% of French households

► Among other network operator, SFR has formed a number of fiber sharing partnerships to dramatically reduced its investment bu► A shared deployment agreement with Bouygues Telecom in densely populated areas► An agreement with France Telecom to pass 9.8 million homes by 2020 in less densely► Populated areas, with SFR passing 2.3 million homes and France Telecom passing 7.5 million► Using government subsidies to deploy services in rural areas

► The fiber market outlook is uncertain given the participation of altnetsthrough partnerships, and the increasing competition ahead of Iliad’s mobile launch in 2012.

► Barriers in deploying FTTH technologies that may limit its growth in the French market:► The cost of deploying fiber networks is far higher than that of many other high► Wireless technologies including LTE► Other services competing for resources (IPTV, DSL-based internet services, mobile)► Municipal councils are contrary to invest in fiber

Regulatory Topics

► In 2008 ARCEP's decision recommended last-mile network sharing opened the way for negotiations around FTTH deployments between France Telecom, Iliad, SFR, and Bouygues Telecom. Rival operators could access to FT’ ducts to deploy optical fiber.

► In October 2011 the French government's funding scheme was given the green light which enables operators to take advantage of€750m for the development of NGA in less populated areas of the country.


Fiber network sharing model in France

11

Despite the relatively weak financial position of the French consumer in last quarters and high levels of competition in the telecoms Shared next generation network rollouts are not the sole preserve of mobile operators.

France’s fiber infrastructure is among the more developed in Western Europe. Much of the success of fiber in France has been due to the and Free (using different fiber architectures) as well as municipalities and power utilities: non-

FT’s fiber deployment strategy, which predicts an investment budget of EUR2bn over the 2010-2015 period, includes:Presence in 3.600 district across 220 metropolitan areas by 2015Offering access 10 million households in 2015 and 15 millions in 2020 or 60% of French households

Among other network operator, SFR has formed a number of fiber sharing partnerships to dramatically reduced its investment burden:Telecom in densely populated areas

An agreement with France Telecom to pass 9.8 million homes by 2020 in less denselyPopulated areas, with SFR passing 2.3 million homes and France Telecom passing 7.5 million

altnets in the FTTH rollout, the potential of cable to improve its position through partnerships, and the increasing competition ahead of Iliad’s mobile launch in 2012.Barriers in deploying FTTH technologies that may limit its growth in the French market:

The cost of deploying fiber networks is far higher than that of many other high-speed networks

based internet services, mobile)

mile network sharing opened the way for negotiations around FTTH deployments Telecom. Rival operators could access to FT’ ducts to deploy optical fiber.

In October 2011 the French government's funding scheme was given the green light which enables operators to take advantage of750m for the development of NGA in less populated areas of the country.


Telecom Italia’s network separation to accelerate the investment in fiberKey findings:► A lack of cable competition provides a strong enabling environment for fiber, with 400k subscribers and more than 2.55 millio

already passed by fiber in mid-2011. The Italian local loop infrastructure is denser than other markets, with short local loop la high number of local exchanges as well as lower per-capita infrastructure costs in the country’s densely populated cities.

► The Italian fixed incumbent Telecom Italia is looking to spin off its network in order to facilitate the removal of the remaiobligations on TI’s retail business which affect the role played by network technologies.

► The TI’s network separation aims to seek new sources of profit, to reduce its debt, and to share costs with other operators. These factors could incentive Telecom Italia to invest in fiber making more realistic the EU Digital Agenda targets.

► Other operators are proposing a shared FTTH network based on pointproportion of the population. Metroweb plans an extensive fiber rollout to 30 large Italian cities by 2015, and in November 2012 agreed with WIND and Vodafone Italy for the latter operators to use its infrastructure to provide FTTH services in Milan.

► In September 2012, Fastweb announced plans to invest €400 million to extend its next generation fibercountry's homes and businesses by 2016 as well as the cooperation for fiber investment with Telecom Italia to network rollout. Fastweb already covers around 2 million premises with its FTTH network and plans to spend to expand its FTTS network.

Regulatory insights

► The local regulator recently announced Telecom Italia is obligated to provide physical and virtual fiber unbundling and according to a January 2012 decision regulating wholesale access to TI's NGA network. This applies to the fiber terminating segments of the FTTH network, as well as the copper terminating segments of TI's FTTB network.

► ‘Fibre for Italy’ project, promoted by NGN Committee, aims to bring fiber to 20 million people in 15 of the largest cities by 2015. Telecom Italia is, in addition, committed to bringing FTTH/FTTB to a further 138 cities by 2018.

► In November 2010, Fastweb, Vodafone and Wind subsequently signed an several other telcos (including TI, Tiscali, H3, BT Italia) to set up a vehicle company (local regulator was charged with developing a regulatory framework for equal access to the open infrastructure, focused on arwhere no operator has scheduled fiber roll out.

► Despite having a high speed broadband target that is in line with the EC's Digital Agenda goal, Italy currently hasn’t a cleanational broadband plan


Telecom Italia’s network separation to accelerate the investment in

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A lack of cable competition provides a strong enabling environment for fiber, with 400k subscribers and more than 2.55 million homes 2011. The Italian local loop infrastructure is denser than other markets, with short local loop lengths and

capita infrastructure costs in the country’s densely populated cities. The Italian fixed incumbent Telecom Italia is looking to spin off its network in order to facilitate the removal of the remaining retail obligations on TI’s retail business which affect the role played by network technologies.

aims to seek new sources of profit, to reduce its debt, and to share costs with other operators. These factors could incentive Telecom Italia to invest in fiber making more realistic the EU Digital Agenda targets.Other operators are proposing a shared FTTH network based on point-to-point access in order to provide coverage to a significant

plans an extensive fiber rollout to 30 large Italian cities by 2015, and in November 2012 agreed with WIND and Vodafone Italy for the latter operators to use its infrastructure to provide FTTH services in Milan.

400 million to extend its next generation fiber-optic network to 20% of the country's homes and businesses by 2016 as well as the cooperation for fiber investment with Telecom Italia to minimise capital costs of

already covers around 2 million premises with its FTTH network and plans to spend €130 million by end-2013

The local regulator recently announced Telecom Italia is obligated to provide physical and virtual fiber unbundling and bitstream, according to a January 2012 decision regulating wholesale access to TI's NGA network. This applies to the fiber terminating segments of the FTTH network, as well as the copper terminating segments of TI's FTTB network.

for Italy’ project, promoted by NGN Committee, aims to bring fiber to 20 million people in 15 of the largest cities by 2015. Telecom Italia is, in addition, committed to bringing FTTH/FTTB to a further 138 cities by 2018.

, Vodafone and Wind subsequently signed an MoU with the Ministry of Economic Development and , H3, BT Italia) to set up a vehicle company (FiberCo) to oversee passive infrastructure. The

local regulator was charged with developing a regulatory framework for equal access to the open infrastructure, focused on areas,

Despite having a high speed broadband target that is in line with the EC's Digital Agenda goal, Italy currently hasn’t a clear


Open network model for the Dutch fiber marketKey findings:► The Netherlands is one of the most competitive broadband markets in Europe, where cable operators have the first mover advant

super fast broadband via 90% + DOCSIS3.0 coverage. The two largest fixed broadband and quad-play strategies are well developed for many players.

► The Dutch fixed broadband market has developed well in recent quarters, driven primarily by the increasing number of retail fconnections. FTTH accounted for 4.5% of fixed broadband connections in 1Q12 according to regulatory data.

► Incumbent operator KPN dominates the fixed broadband services in the Netherlands and is rolling out FTTH to build a superior through an “open network” approach that mitigates capex risk in order to promote fiber and VDSL broadband with associated service bundles.

► In the consumer market, KPN plans to deploy a mix of fibre-to-the-kerbplans to engage in selective regional FTTH initiatives, partnering with building corporations and municipal governments.

► Netherlands-based fiber provider Reggerfiber (in which KPN has a 51% stake) wants to expand its municipalities across the country and deploy a dedicated ultra-high-download speeds of up to 1Gbps and will be open for access by all operators. Work on the network is expected to be concluded

Regulatory insights

► In line with the EC’s Digital Agenda for Europe, the Dutch government introduced the digital cities agenda for 2011government plans to build open NGA networks in the major cities of the country.

► Following regulatory approval, the incumbent operator KPN established a joint venture with infrastructure provider 2011 to initiate FTTC and FTTH rollout.

► Access to fiber local loop for residential use (FTTH) is regulated and the local telecom authority is encouraging competitionallowing alternative operators to offer multi-play bundles over the secured network.

► Regulator recently adjusted the existing access price caps in order to promote investments in NGN infrastructure but the reuncertainty due to the short term applicability of these tariff principles is reducing the levels of interest among operators

► Local regulator OPTA imposed obligations on KPN in the high-quality wholesale broadband access market, including fiber access and a fiber unbundling obligation as a result of KPN’s peer


Open network model for the Dutch fiber market

13

The Netherlands is one of the most competitive broadband markets in Europe, where cable operators have the first mover advantage in super fast broadband via 90% + DOCSIS3.0 coverage. The two largest cablecos, Ziggo and UPC, continue to take market share within

play strategies are well developed for many players. The Dutch fixed broadband market has developed well in recent quarters, driven primarily by the increasing number of retail fiber connections. FTTH accounted for 4.5% of fixed broadband connections in 1Q12 according to regulatory data.Incumbent operator KPN dominates the fixed broadband services in the Netherlands and is rolling out FTTH to build a superior offering,

risk in order to promote fiber and VDSL broadband with associated service

kerb (FTTK, based on VDSL technology) and FTTH. Furthermore, KPN plans to engage in selective regional FTTH initiatives, partnering with building corporations and municipal governments.

(in which KPN has a 51% stake) wants to expand its fibre-optic network to an additional 50 -speed FTTH network. The new network is expected to provide

download speeds of up to 1Gbps and will be open for access by all operators. Work on the network is expected to be concluded in 2015.

In line with the EC’s Digital Agenda for Europe, the Dutch government introduced the digital cities agenda for 2011–15. The government plans to build open NGA networks in the major cities of the country.

Following regulatory approval, the incumbent operator KPN established a joint venture with infrastructure provider Reggefiber in

Access to fiber local loop for residential use (FTTH) is regulated and the local telecom authority is encouraging competition byplay bundles over the secured network.

Regulator recently adjusted the existing access price caps in order to promote investments in NGN infrastructure but the regulatory uncertainty due to the short term applicability of these tariff principles is reducing the levels of interest among operators.

quality wholesale broadband access market, including fiber bitstreamaccess and a fiber unbundling obligation as a result of KPN’s peer-to-peer network plans.


Co-financing project to develop the Swedish fiber market Key findings:► Sweden is one of the world’s leading countries for fiber deployment due to the concentration of population within the greater

the three largest cities as well as being the first country in EU to develop widespread local access fiber infrastructure.► The consumer FTTH/B accounted for 31.2% of the total consumer fixed broadband connections at the end of 2011, with 929 thousa

subscriptions and 7% of household penetration.► Numerous networks open to a range of content and service providers have been built by organizations other than

municipalities, regional governments, housing associations and local utilities.► Fiber sector has been promoted by the co-financing model supported by several players (government, public entities, local regulator,

energy and telecom operators). ► Sweden has adopted a pragmatic hands-on approach to the delivery of fiber, with residents even instigating the engineering side

projects (digging trenches). This opens the possibility for homeowners to go one step further and deploy their own fiber connthrough which to connect to service providers.

► In recent years, the incumbent operator TeliaSonera planned to collaborate with external operators, municipalities, building owners and housing co-operatives to launch one of Sweden’s largest infrastructure projects, including fiber network.

► TeliaSonera owns the largest share of fiber in Sweden, with about 45% of total coverage. Existing competition is based on local networks,and there is no practical competition in the national market for fiber.

Regulatory insights

► According to the 2010 decision, TeliaSonera has to provide access to both its fiber and copper infrastructure applying costpricing for these services based on an LRIC model.

► As far as wholesale broadband services is concerned, TeliaSoneraand fiber networks as imposed by the regulator.

► The local regulator, PTS, has been focusing on improving the adoption of fibernetwork deployment costs in cooperation with the local municipalities and other operators (utilities, telecoms).

► In October 2010, the Swedish government promoted the Rural Development Program under which PTS will coincurred towards deployment of fiber broadband networks in rural areas. As of mid($13m) aid for co-financing broadband deployment in 19 counties across the country. The government further plans to allocate SEK75m ($11m) to the PTS, to be spent under the Rural Development Program in 2012


financing project to develop the Swedish fiber market

14

Sweden is one of the world’s leading countries for fiber deployment due to the concentration of population within the greater areas of the three largest cities as well as being the first country in EU to develop widespread local access fiber infrastructure.The consumer FTTH/B accounted for 31.2% of the total consumer fixed broadband connections at the end of 2011, with 929 thousand

Numerous networks open to a range of content and service providers have been built by organizations other than telcos, including municipalities, regional governments, housing associations and local utilities.

supported by several players (government, public entities, local regulator,

on approach to the delivery of fiber, with residents even instigating the engineering side of projects (digging trenches). This opens the possibility for homeowners to go one step further and deploy their own fiber connections

planned to collaborate with external operators, municipalities, building owners and operatives to launch one of Sweden’s largest infrastructure projects, including fiber network.owns the largest share of fiber in Sweden, with about 45% of total coverage. Existing competition is based on local networks,

and there is no practical competition in the national market for fiber.

has to provide access to both its fiber and copper infrastructure applying cost-based

TeliaSonera must set the same tariffs for bitstream access over both copper

The local regulator, PTS, has been focusing on improving the adoption of fiber-based broadband services by co-financing the network deployment costs in cooperation with the local municipalities and other operators (utilities, telecoms).

In October 2010, the Swedish government promoted the Rural Development Program under which PTS will co-finance the costs incurred towards deployment of fiber broadband networks in rural areas. As of mid-October 2011, PTS had granted SEK88m

financing broadband deployment in 19 counties across the country. The government further plans to allocate SEK75m ($11m) to the PTS, to be spent under the Rural Development Program in 2012–14.


Private and EU laws promote investments of fiber network in Lithuania Key findings:► FTTX has overtaken ADSL to become the most popular fixed-broadband access platform, a testament to the country’s investment in t

next-generation telecom infrastructure in recent years. ► The country has one of the highest FTTH/B penetration rates in the world (30% in 2Q12), as the broadband sector s highly comp

meaning that providers and operators have to be strategic and innovative to win customers for their products. In 2011, fiber grew two percentage points, the fastest rate in Europe.

► FTTB is more prevalent as it is more cost effective than FTTH as the fiber connection is shared among a number of end users athe overall cost of FTTH/B generally limits construction to high-density areas and

► In Lithuania fiber installations have the advantage that many residents live in buildings with often several stories of apartmakes the FTTP business case more attractive, as well as labour costs lower than Western European countries.

► Lithuania’s incumbent operator TEO provides 300Mb/s converged service bundles, one of the fastest in Europe in the fixed broamarket.

► TEO is continuing in deployment of its next-generation fiber-optic network thanks to existing funds, though the company was ablethe provisions of the Law on Corporate Profit Tax. TEO deployment of FTTH started in multiwhile now the network is being spread to single houses where business cases are composed.

► In 2008, Lithuania introduced “The Rural Area Information Technology Broadband Network”, project financed by allows FTTX providers (TEO, Dokeda, Cgates, Elekta, Splius and others) to offer services through the network on a wholesale basis.

Regulatory insights

► The government has supported FTTH through tapping into EU funding to build a fiber backbone network across the country such as the Rural Area Information Technology Broadband Network.


Private and EU laws promote investments of fiber network in

15

broadband access platform, a testament to the country’s investment in the

The country has one of the highest FTTH/B penetration rates in the world (30% in 2Q12), as the broadband sector s highly competitive, meaning that providers and operators have to be strategic and innovative to win customers for their products. In 2011, fiber penetration

FTTB is more prevalent as it is more cost effective than FTTH as the fiber connection is shared among a number of end users although density areas and greenfield developments.

In Lithuania fiber installations have the advantage that many residents live in buildings with often several stories of apartments, which costs lower than Western European countries.

Lithuania’s incumbent operator TEO provides 300Mb/s converged service bundles, one of the fastest in Europe in the fixed broadband

optic network thanks to existing funds, though the company was able to use . TEO deployment of FTTH started in multi-residential buildings and business centres

while now the network is being spread to single houses where business cases are composed.In 2008, Lithuania introduced “The Rural Area Information Technology Broadband Network”, project financed by EU funding, which

and others) to offer services through the network on a wholesale basis.

The government has supported FTTH through tapping into EU funding to build a fiber backbone network across the country such

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Ernst & Young recommendationsErnst & Young recommendations

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Ernst & Young recommendations for successful fiber strategies

► Operators should focus more and more on marketing and communication strategies dedicated to their services, products and solutions promoting the benefit of new broadband technologies.

► Consider multiple network strategies (fixed and mobile broadband) to provide convergent services, devices and platforms (i.e. TDC in Norway) to create a consistent customer experience regardless of device access type

► The ROI for a fiber deployment is likely to be realized over a period of five to fifteen years, depending on market conditions. Telecom operators have to consider fiber deployment as a longbeyond the short-term financial burden to the opportunities for long

► The migration of all customers to fiber in a short term would maximize FTTH network efficiency and minimize risks associated with the payback period. Western European rollout and customer migration.

Innovative Processes, Future Strategies

► Sharing networks or using existing infrastructure can cut strongly transforming the fiber business model

► Partnership among incumbents and smaller operators or potential partners such as local municipalities or utilities would be a good strategy to reach positive outcomes for all market players

► Alternative operators, including those supported by large mobile operators, can form JVs with peers and/or prioritize access to existing ducts (wholesale business model) as well as focusing their rollouts in very specific places (cities or even streets) where demand is likely to be high. This will involve isolating regulatory and financial incentives

► Mobile players could act as consolidators for smaller fixedinfrastructure to offload mobile data traffic and support quad

► Co-financing program supported by telecoms, public entities and other operators could support the fiber deployment in a region or area in order that involved players can divide risks and costs of infrastructure.

New Business Approach


Ernst & Young recommendations for successful fiber strategies

17

Operators should focus more and more on marketing and communication strategies dedicated to their services, products and solutions promoting the benefit of new broadband technologies.Consider multiple network strategies (fixed and mobile broadband) to provide convergent services, devices and platforms (i.e. TDC in Norway) to create a consistent customer experience regardless of device access

The ROI for a fiber deployment is likely to be realized over a period of five to fifteen years, depending on market conditions. Telecom operators have to consider fiber deployment as a long-term investment and look

term financial burden to the opportunities for long-term service differentiationThe migration of all customers to fiber in a short term would maximize FTTH network efficiency and minimize risks associated with the payback period. Western European telcos need to speed up network

Sharing networks or using existing infrastructure can cut strongly CapEx for incumbent, completely

Partnership among incumbents and smaller operators or potential partners such as local municipalities or utilities would be a good strategy to reach positive outcomes for all market playersAlternative operators, including those supported by large mobile operators, can form JVs with peers and/or prioritize access to existing ducts (wholesale business model) as well as focusing their rollouts in very specific places (cities or even streets) where demand is likely to be high. This will involve isolating regulatory

Mobile players could act as consolidators for smaller fixed-line providers since they require fixed-line infrastructure to offload mobile data traffic and support quad-play propositions

financing program supported by telecoms, public entities and other operators could support the fiber deployment in a region or area in order that involved players can divide risks and costs of infrastructure.


A greater emphasis on metrics can support new messages to the market on fiber progress

► AMPU: Average Margin Per User► CPGA: Cost Per Gross Add► SUC: Subscriber Up-selling Cost► Average call-handling time► Contact center calls per sub► Capex/sales per sub

► Cost per MB transmitted► OPEX per cell site► BTS downtime %► Dropped call rate %► BTS Single RAN %► Bps/Hz/BTS

► Return on equity► Return on capital employed► Return on invested capital► Equity/assets ratio► Net debt/EBITDA► Operating cash flow margin► FCF yield

Key financial ratios Investor insights

► Profitability of new services► Cost of serving customers► Quality of customer service► Network resilience/efficiency► Spectrum efficiency

Operator performance

EfficiencyKPI domain

Network

Customer


A greater emphasis on metrics can support new messages to the

► Data MB per user per month► RGU per user► M2M customers/end points► M2M ARP-SIM► Average contract lifetime► Kwh per user

► Smartphone/tablet penetration %► Broadband penetration %► Pay-TV penetration %► Cloud/virtual IT penetration %► ARPU % of disposable income

► Revenue per cell site► Kwh per cell site/Terabyte► M2M ARP-SIM per MB► BTS peak capacity %► Network utilization %► On-net traffic %

► FTTH/VDSL homes passed► 4G population coverage %► In-home 3G coverage % ► Points of presence (POP)► Cell site density (BTS per km²)

Investor insights Investor insights

► Data consumption► New forms of connectivity► Cross-selling execution► Network load► Energy consumption

► Incremental revenue potential► Share of customer wallet► Market reach► Network rollout► Network density

Business environment

EnvironmentUsage

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Next generation access

Ernst & Young has extensive experience in advising operators on maximizing the value of their fiber

► Extensive experience in business modeling for complex decision support.

► Developed a bottom-up geographic model for a major European incumbent, building over 1,300 local business cases to schedule the fiber rollout, both in terms of timing and access technology.

► Developed product profitability models that enable ROCE1 analysis by product or bundle. These can be used as an input to bid models and decision-support for fiber investments.

1) ROCE = Return on Capital Employed2) LLU = Local Loop Unbundling

► Helped clients evaluating and improving their process for planning and executing their project portfolio.

► An optimized capex management process results in more transparency, better decisions and reduced process costs.

Decision support

Capexmanagement

Profitability analysis

Consumer demand

The business case for

fiber


Next generation access - The business case for super-fast broadband

19

Ernst & Young has extensive experience in advising operators on investments

► Built a volume, revenue and cost forecasting model for a major fixed-line incumbent, as part of the process of setting their business rates with the tax authorities.

► Conducted consumer research investigating take-up drivers and switching triggers in the European triple/quad play market.

► Assisted both NRAs and operators in economic reasoning to influence regulatory process, eg, in the regulatory market analysis.

► Extensive experience in access pricing for (regulated) wholesale services such as LLU2, wholesale broadband access, and in managing wholesale portfolios.

Regulatory strategy and

pricing

Competitoranalysis

Pricing strategy

Consumer demand

The business case for

fiber

Documents

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