0 Funded by the European Union

Wholesale-only model: regulatory

treatment and opportunities

Dr. Bernd Sörries

Amman, 18.06.2019

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Funded by the European Union

Agenda

Definition and motivation of wholesale only business model

Regulatory treatment of wholesale-only business model

Wholesale only models in some EU countries

Comparison of wholesale only provider and vertically integrated operator

Some recent developments in mobile markets

Final remarks

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Funded by the European Union

What are wholesale only business models?

Definition: In a wholesale only model, the network operator deploys an open access

network, and sells wholesale services to other players (such as electronic communication

service providers and enterprises). The network operator does not itself provide retail

services nor is it linked through shared ownership or contractual ties to a specific retail

service provider or group of service providers.

Motivation:

From a commercial perspective, an investor may pursue a wholesale only business

model in order to attract as many customers (e.g. corporate users, service providers)

onto its network as possible.

When public authorities or local communities are involved, another motivation may be

to integrate local economies into digital markets.

Incentive effects: In order to maximize take-up on its infrastructure, wholesale only operators

have a strong incentive to conclude commercial agreements with all access seekers. Unlike

vertically integrated firms, because they do not operate their own retail services or pursue

exclusive ties to a retail provider, there is no incentive to discriminate amongst access

seekers.

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European Electronic Communication Code

(EECC)

Art. 80 EECC:

Undertaking which is absent from any retail markets for electronic

communications services

If the national regulatory authority concludes that the conditions laid

down in para. 1 (no activities at retail level, no exclusive

agreements) are fulfilled, it may impose on that undertaking only

obligations pursuant to Art. 70 and 73 and fair and reasonable

pricing if justified.

Art. 70: non-discrimination obligation; Art. 73: access obligations

The EECC provides for exemptions from access regulation for wholesale

only providers. Limited set of obligations.

Is the special treatment an incentive to establish this model in the

market?

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Early visions: Wholesale only pioneers

Chlo

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hylle

– fo

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Stokab, established in 1994

was one of the earliest

wholesale only initiatives

Stokab now serves more than

100 operators.

Other pioneers around 2006

included Amsterdam Citynet, a

PPP and Reggefiber in NL

However, these NL initiatives

were acquired by incumbent

KPN in 2014

Source: WIK-Consult

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Wholesale only – an expanding business

model

Chlo

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hylle

– fo

tolia

.co

m

Wholesale only

initiatives are

widespread across

Europe

Examples cover

public and private

investment, urban and

rural (with and without

state aid)

Source: WIK-Consult

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How does wholesale only compare with

alternative models?

Chlo

rop

hylle

– fo

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Source: WIK-Consult

Characteristics London Hamburg Madrid Paris Stockholm

No. major infrastructure

providers 2 3-4 3-4 3-4 3

Regulated NGA access VULA Bitstream na na Dark fibre

Incumbent business

model Legal sep Integrated Integrated Integrated Legal sep

Fibre challenger business

model na Integrated Integrated Integrated

Wholesale

only

No. service providers

23

(Openreach) 5+ ~6 ~6

>100

(Stokab)

Duopoly

with legal

separation

3+ with

regulated

wholesale

End-to-end

infrastructure

competition

3+ with

wholesale only

challenger

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Description Impact on profitability

Capacity and

penetration of

access lines

Less incentives to duplicate networks

More efficient use of existing capacity

However, this effect is less interesting in less populated

areas, because in those areas duplication is almost

impossible

Wholesale-only

Integrated

operator

Effect

Integrated

operator

ARPU/ARPL

ARPUs of vertical integrated operator higher

However, certain amount of turnover comes from

wholesale business. Granting access to FTTB/H

networks is important for FTTH/B business case

(impact of cable?)

Margin

Wholesale-only provider might be in a position to

achieve higher EBIDA-margin (no retail business which

might be associated with more competition and

therefore less margin).

Wholesale-only

Integrated

operator

Wholesale-only

Profitability of wholesale-only und vertically

integrated operators

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Description Impact Profitability

Cost of financing

CAPEX in wholesale-only model can be seen as less

risky

Less exposure to regulation and political pressure

Wholesale only

Integrated

operator

Effect

Cost advantages

of vertically

integrated

operator

Higher transaction costs for wholesale-only provider

because of handling many access seekers.

Wholesale only

Integrated

operator

Profitability of wholesale-only und vertically

integrated operators

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Current development in Germany

German Mobile market and the lack of nationwide LTE coverage

Area coverage with LTE of approx. 80 per cent; less populated areas are not

covered

Leading political parties in the German parliament are committed to improve

area coverage asap; political parties do not rely on market forces and

coverage obligations imposed by the Federal Network Agency

Establishment of a stated owned organization dealing with white spaces (no

voice telephony and no data)

- Deploy passive infrastructure (e.g. ducts, masts) in co-operation with

local authorities

- Mobile operators will be forced by law to install active network elements

(base station, antenna) at those sites

Co-operation of Deutsche Telekom and regional network operator to set up a

wholesale only operator

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Wholesale only in Mexico: In 2017 Altàn Redes

started to build-up Red Compartida.

Red Compartida has the following

rights according to the PPP and

concession contracts

90MHz of unencumbered,

contiguous spectrum in the

700MHz band at a price of

0,002 US$/MHz/pop, well

below int. benchmark

Non-exclusive rights to lease

existing public infrastructure to

deploy the network, including

one pair of fiber on the public

electricity network

MVNE Factory for full and light

MVNOs

national and intern. voice

SMS and MMS termination

IP Transit

national roaming for MNOs

providing capacity and filling

rural and indoor coverage gaps

LTE broadcasting

RAN sharing

Spectrum sharing

Red Compartida has the main obligation to follow tendered population coverage milestones up to the offered max. population coverage of 91%

Key rights of the operator Key obligations of operator Wholesale Products

~91% of pop.

~18.000 towns

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MNOs might chose the WOAN offer for national

roaming for coverage and cost reasons.

Drivers of MNOs’ demand for National Roaming

Coverage and Capacity issues due to Spectrum

available

Cost Savings

Budgetary constraints due to 4xPlay investments

The actual assignments of spectrum vary across bands and regions in Mexico. Movistar lacks spectrum in the 850 band for coverage in the Southern regions, AT&T in the

Northern regions. Telcel is facing capacity constraints and congestions in urban areas

RC removes the resulting competitive distortions especially for AT&T and Movistar without the need for costly spectrum acquisition through future auctions.

In addition RC will be able to provide better indoor coverage than any MNO in Mexico.

Based on the actual spectrum assignment, MNOs will benefit from around 60% cost savings if they opt for National Roaming instead of investing into further Radio Network

infrastructure for coverage and capacity

Such cost advantages become obvious when analyzing LRIC based service costs for mobile broadband services for RC versus the existing MNOs

Due to growing competition, the existing operators will increasingly move towards integrated 4xPlay offerings

These types of product and service innovation require significant investments either through acquisitions (e.g. AT&T and DirectTV) and/or own deployments.

Using RC will free up CAPEX and OPEX for such investments

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Final remarks

Gigabit society and high investments: new business models, questionmarks

with regard to regulation (short-term goals or long-term goals; static or

dynamic efficiency) more co-operation

Wholesale only carriers and end-to-end infrastructure competition can both

be effective in driving FTTH/B, but with different retail outcomes

Infrastructure competition end-to-end associated with converged

operators (fixed, mobile, content) and bundled managed retail services

Wholesale only dark fibre associated with multiple service providers and

standalone retail services – lowers barriers to OTT, 5G mobile, IoT entry

However, vertically integrated operators are still in favour of deploying own

networks (network as an asset); question whether wholesale only operator

can compete with incumbent

When it comes to less populated areas, wholesaling of capacity is vital for a

solid business case (increase capacity, lower unit costs)

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Funded by the European Union

Dr. Bernd Sörries

WIK-Consult GmbH

Postfach 2000

53588 Bad Honnef

Deutschland

Tel.:+49 2224-9225-23

Fax: +49 2224-9225-68

eMail: b.soerries@wik-consult.com

www.wik-consult.com