the economics of telecoms - 2015 ed.- full version

“The Economics of

Telecoms” 2015 Report

Full version

November 2015 Arthur D. Little

7, place d’Iéna

75116 Paris

France

T: + 33 1 55 74 29 00

www.adlittle.com

2

Key messages

Proposals from the Fédération Française des Télécoms to strengthen

telecom operators and digital in France and Europe 5

European and French digital demand is highly developed enabled by high

quality networks 2

Telecom operators are the basis of the current and future digital supply 3

5 key levers to develop a strong digital offer in France and in Europe 4

Unlike other regions, Europe suffers from a significant digital imbalance 1

3

Key messages

Proposals from the Fédération Française des Télécoms to strengthen telecom

operators and digital in France and Europe 5

European and French digital demand is highly developed enabled by high quality

networks 2




4

The spreading of the digital to the entire economy will deeply transform the

impacted sectors

Source: Arthur D. Little analysis

Education

Digital as a

complement to

on-site lessons

Insurance

Management

and forecast of

risks by

software

Travel

/ transport

Digital

distribution

and sharing

economy

Retail

Online

shopping

transforming

retail

Manu-

facturing

Optimization of

the supply chain

Healthcare

Digitalization of

the

administration,

beginning of

robotic

surgery

Utilities

Management of

client portfolio

and of

information

flow

Digital wave

Today

Next ?

Substitution of

on-site lessons

by MOOCs

Use of the

Internet of

Things to better

prevent risks

and to foster

loyalty

Digitalization

of the customer

experience

and dis-

intermediation

Digital in

physical stores

through

connected

stores

« Industrial

revolution »

started by 3D

printing

Big Data to

predict, robotic

to cure;

telemedicine to

follow

Decentraliza-

tion of

production –

consumers able

to produce,

monitor and store

Examples

5

Comparing digital supply and demand helps identifying a “digital surplus” and a

“digital deficit” in different regions of the world


Digital services consumption

(VoD, music streaming, …) and

digital products (phones,

computers, tablets, …) in a region

Sales of digital players on a

given region according to their

HQ location

Local

demand

Local

supply

Digital

deficit

Elements on the balance between digital supply and demand

A digital deficit means

that the demand in a

given region is being

met by foreign

players

Demand

supply

Supply | Demand

6

Unlike other regions, Europe suffers from a significant digital imbalance

Source: Digiworld Economic Journal 1 Includes social networks, search engines, cloud computing, mobiles applications, advertising,

e-commerce and non-managed VoIP

% = (regional consumption – global revenue of regional players) / regional consumption

2009 2010 2011 2012 2013

50%

-50%

-100%

100%

150%

EU28

United States

Asia

Imbalance between supply and demand in the Internet services sector1

Asia-USA-Europe, 2009-2013

Regional

supply

>

Regional

demand

Regional

demand

>

Regional

supply

Supply | Demand

7

Key messages



European and French digital demand is highly developed enabled by high

quality networks 2




8

Appetite for telecom and digital services is especially strong in France – the French

are « early adopters »

Source: IHS, European Commission, desk research, Arthur D. Little analysis

Internet wave Digital wave

country worldwide for

IPTV penetration

European country for

VoD penetration

Market worldwide for Airbnb

and 2nd in Europe for Uber

1st 1st 2nd

Origin of

champion players ?

Appetite for

innovative services

in France

+

Supply | Demand

9

The French have strong expectations regarding new digital services

Source: Ipsos, Future Source Consulting, Opinion Way, Arthur D. Little analysis

e-Administration

Mobile payment

of the French are ready to use their mobile

phone as a payment method ˃ Among advantages highlighted by respondents, speed of payment

is the first reason

of the French consider that connected devices

help prevent fires ˃ 71% expect that connected devices improve safety for children

89%

26%

74%

Connected homes

Connected stores

61%

of the French would be willing to access

services of geolocalisation to get directions

when shopping ˃ 59% are interested in virtual fitting rooms

Video on Demand 750,000 Netflix subscribers in France in less than a

year ˃ Canalplay had 700,000 subscribers in France as of S1 2015, 4

years after launch

of the French are ready to conduct their

administrative procedures online ˃ 86% for 65+ year old people

Supply | Demand

10

Very High Speed fixed broadband subscriptions grew strongly in France in

2014 – with a high level of quality

Source: ARCEP, OECD, companies, Arthur D. Little analysis

Connectivity and equipment in France – Fixed broadband

1 Bundle subscriptions with TV and Internet access

2 Speed >= 30 Mbps 3 Fixed broadband and other subscriptions

+63%

Q2 2015

3.8

Q2 2014

2.4

Very High Speed2 broadband

subscriptions

(Millions of subscriptions)

Multiplay1 subscriptions

(% fixed broadband subscriptions)

+4%

Q2 2013

65% 69%

Q2 2014

68%

Q2 2015 Q2 2012

62%

Average speed3

(Mbps)

27 Mbps

+6 Mbps

21 Mbps

USA France

Required

speed

4K video

1-5 Mbps 2-5 Mbps

(SD or HD) 25 Mbps

Supply | Demand

11

The French mobile market is very dynamic with a rapid development

of data usage and equipment

Source: WCIS, ARCEP, operators, Arthur D. Little analysis

Average monthly data

consumption Smartphone penetration

(Millions of smartphones)

Connectivity and equipment in France – Mobile

4G active cards

(Millions of active cards)

39

33

22

+35%

2014 2013 2012

+186%

Q2 2015

15.6

Q2 2014

5.5

X%

34% 51% 60% 8% 24%

% of the population

1.5 Go

400%

4G 3G

300 Mo

Supply | Demand

12

€47€45

€30€26€20€20

French telecom operators continue to offer the cheapest services vs. other large

countries

Source: operators, Arthur D. Little analysis

60 offerings compared

US SP UK IT AL

In € / month incl. taxes

€20 €43 €30 €69 2014 › €39 €43 €20 €24 €29 €54 €45 €28

Fixed (Triple Play)1 Mobile2

Offer benchmark – Main operators

October 2015

€74

€47€42

€30€25

€202015 ›

1 Triple play offers only; unlimited calls to fixed lines at least; unlimited high-speed Internet via xDSL or fibre; TV included, except for additional

packages; operators with > 10% market share; 2 Unlimited calls when available (otherwise >500 minutes), unlimited SMS/MMS,

2 Go Internet at least; offers excluding device, free of engagement when available; operators with > 10% market share

Supply | Demand

13

Key messages




networks 2




14

Development of Internet services

Europe has developed a strong offer during the telecom wave but was not able to

compete with the USA during the Internet wave


Internet wave Digital wave

Spreading of the digital

to the entire economy

Development of telecom

infrastructures and services

Champion

regions

Supply | Demand

? +

15

Globally, the digital ecosystem has enjoyed a strong growth over the period despite

a slight slowdown over the past 2 years

Source: Thomson Reuters, Arthur D. Little analysis

1 Top 30 per category by 2014 revenues

Illustrative

companies

Revenues of the digital ecosystem by sector1

World, 2010-2014

11191251

1361 1375 1378

442

495524 526 534

328327 321 298215 266 318

214218

322

Equipment

+21%

Network

operators

Devices

Software and

IT services

Content

Internet

2014

4179

1466

(35%)

184

2013

4137

1454

(35%)

195

2012

4045

1407

(35%)

210

2011

3790

1332

(35%)

169

2010

3446

1216

(35%)

128

CAGR

2010-2014

-2%

-4%

+5%

+5%

+26%

+5%

$ billion

Supply | Demand

16

Europe is the only region which does not benefit from the growth of the digital

ecosystem


South

America

Europe

Oceania

Asia

North

America

681 694 700 668

1 316 1 494 1 614 1 721 1 825

1 3711 521

1 638 1 656 1 674

590

2014

+5%

4 179

66

24

2013

4 137

68

24

2012

4 045

67

26

2011

3 790

54

27

2010

3 446

56

21

Revenues of the digital ecosystem (telecoms + other players1) per region2,3

World, 2010-2014

$ billion CAGR

2010-2014

+4%

-4%

+5%

+9%

+3%

1 Includes Internet, content, software, devices and telco equipment

2 Top 30 per category by 2014 revenues 3 Nationality according to HQ location

Supply | Demand

17

Telecom operators are the basis of the current and future digital supply but their

revenues decreased in Europe, as opposed to those in other regions


382 343

299247

2014

590

2010

681

Europe

Network

operators

Other Internet

players1

410 541

961

2014

1 674

1 133

2010

1 371

Asia

354500

962

2010

1 316

1 825

2014

1 325

North

America

CAGR 2010-2014

Network operators -3% +7% +9%

Revenues of the digital ecosystem (telecoms + other players1) per sector2,3

World, 2010-2014

$ billion

1 Includes Internet, content, software, devices and telco equipment

2 Top 30 per category by 2014 revenues 3 Nationality according to HQ location

Supply | Demand

18

1% 9%

1% 2%

87%

1 Revenues declared in France or released in the press 2 Adjusted data to account for estimated revenues of international players in France

3 Investments of Nokia’s mobile business unit are reported with Microsoft following the acquisition of this unit by the latter in 2014 4 Income tax and taxes. 2013 figures because data for 2014 are not available

12%

13%

15%

3%

58%

Telecom operators are central to the French digital ecosystem accounting for ~60% of

revenues, 75% of employment and ~90% of investments and taxes

Source: Diane, annual reports, Arthur D. Little analysis

5 content

players

5 Internet OTT

players

Relative size of sub-sectors in the digital ecosystem

France, 2014

5 telecom

operators

5 equipment

vendors

5 device

manufacturers

4%

14%

1%

6%

75%

4%

3%

4%

1%

88%

Revenues1,2

€69 B

vs 59% in

2013

Direct jobs

156 000

vs 77% in

2013

Investments3

€7 B

vs 91% in

2013

Taxes4

€4 B

vs 81% in

2012

Supply | Demand

19

The decrease in revenue in the telecom sector is starting to result in a decline of

investments

Source: ARCEP, Arthur D. Little analysis

108

83

129

70

80

90

100

110

120

130

140

2010 2011 2012 2013 2014

Revenues

Operators investments

(excluding frequency acquisition)

Telecom operators investment and revenue evolution

France, 2010-2014

Base 100 in 2010

Investment effort Operators investments (excluding frequency

acquisition) / operators revenues

Supply | Demand

20

Network

operators

6.8

Railways

5.0

Tr. / ditrib.

of electricity

4.7

Highways

1.7

On average, telecom operators invest 7 billion euros each year, which represent a

significant weight in the economy

Source: companies, desk research, Arthur D. Little analysis

Telecom operators investments vs. other sectors

France, 2008-2014, 7-year annual average

Investments1

230 TGV trains

2000 locomotive

17 Millau viaducts

19 Stades de France

500 high schools

1 Network operators: ARCEP figures (excluding frequency acquisition); Electricity: RTE (2009 to

2014) and ERDF; RFF; Highways: ASFA (Sanef, SAPN, ASF….)

equivalent to the

following

investments,

each year…

€ billions

Supply | Demand

http://www.google.com/url?url=http://www.alundi.com/l/viaduc-de-millau-12543&rct=j&frm=1&q=&esrc=s&sa=U&ei=cp8QVPq-H4_darOUgegE&ved=0CDIQ9QEwDg&usg=AFQjCNFXFg3EUjJPwquyMB6vZo7ERguxDw

21

Connected warehouse Advanced Collaboration at work

Remote caring Secure

Home Delivery

Ambient presence for telemedicine

Immersive Gaming

Future advanced services will emerge and will require high performing telecom

networks

Source: Corning, Microsoft, Sprint, DHL, Arthur D. Little analysis

Examples of future advanced services

Supply | Demand

22

Overall, the generalization of digital raises three major challenges which require a

crucial contribution from telecom operators


Network

security

Connection speed

and latency

Service

reliability

Network

capacity

Driverless trucks Immersive Gaming Remote surgery

Telecom operators contribution (examples)

Challenges of the « digital wave »

Value creation Capacity and quality

of networks Users trust

New revenue from substitution

and creation of value

generated by digital

Trust in digital services,

reliability and security of the

data transferred and stored

Quality of the connection, in

line with needs related to

innovative services

1 2 3

Supply | Demand

23

Source: TechCrunch, GP Bullhound, Arthur D. Little analysis 1 « Unicorn » refers to tech companies founded after 2000 (2003 for American

companies) with a valuation above 1 billion dollars

23446

17

40

84

Number of « unicorns1 »

USA-Europe, 2015

With the 3rd digital wave, new “pure players” are emerging and contribute to the

generalization of digital to the entire economy 1

Supply | Demand

25

The development of some innovative digital services requires highly performing

networks regarding security, speed, reliability and capacity

Source: Cisco, Arthur D. Little analysis

2

Network

security

Connection

speed

Service

reliability

Network

capacity

Strong increase in security

needs

– Increase of risks due to

the development of

connected devices (11

billions devices by 2019

vs. 3 in 2014)

– Network security has

been harder to achieve

for the past 2 years

according to ~80% of

cybersecurity

professionals

Need for an uninterrupted

connection to handle new

services

– Deployment of remote

surgery or driverless

car impossible without

the assurance of an

uninterrupted connection

Strong increase in data

consumption

– Data traffic per user x3

between 2014 and 2019

(from 6 GB to 18 GB)

– 80% of internet traffic

will come from videos in

2019 especially HD

videos

Strong demand for Very

High Speed

– Medicine or immersive

gaming requires

massive instant data

exchange

– Average speed 2x

faster in 2019 (43 Mbps

in 2019 vs 20 Mbps in

2014)

Driverless trucks Immersive Gaming Remote surgery

Supply | Demand

26

With the multiplication of digital services, the challenge of “data sovereignty”

became key

Source: IDC, Arthur D. Little analysis 1 1 Zettabytes = 1 000 billion Gigabytes

44

4

2013

x10

2020

Volume of data produced

(Zettabytes1)

Cancellation of the « Safe

Harbor » policy

– Decision from the Court of

Justice of the European Union

in October 2015

– Data collected by American

companies under the “Safe

Harbor” agreement will now

have to stay in Europe

Since October 2015

« Safe Harbor » agreement

Allows American companies

– Transfer the data from their

European consumers to the

USA

– Data protection warranties

based on the trust in American

companies that they will use

the data accordingly with

European laws

Between 2000 and 2015

3

Supply | Demand

27

In essence, telecom operators have a central role to play in the promotion and the

generalization of digital to the entire economy

Source: CrunchBase, Cisco, AT&T, Ipsos / Fédération Française des Télécoms, Arthur D. Little analysis

1 Roadside assistance application

Financing Distribution Service Protection Infrastructure

Investments in

innovative

companies through

Corporate Venture

Acceleration of the

generalization of

innovative digital

services through

partnerships

Development of

infrastructures

capable to meet the

requirements of

innovative services

Development and

launch of new digital

services

Management of

personal data of

Internet users

7m€ Amount raised by

Urgent.ly1 in part

from Verizon

Increase in the

number of subscribers

after partnership

with telecom

operators

Expected increase in

the volume of data

between 2014 and

2019

+40% of cars connected

by AT&T in the USA

3m x3,2 Less than 5% of the French do not

trust telecom operators

for data protection vs.

67% for « Internet

giants »

Supply | Demand

28

Key messages




networks 2




29

5 levers favor the development of a strong digital supply


Levers Lever definition

Fixed and mobile telecom infrastructures allowing the

spreading of usages / digital offers through the high

penetration of various technologies (fibre, 4G)

Required resources for the rolling out of telecom

infrastructures and for the development of innovative

companies

General trends regarding the business environment

for companies in a given country, e.g. the efficiency of

the administration or the level of taxation

Environment that gathers all the stakeholders

resulting in a high level of innovation

Mastering of digital skills (especially advanced skills)

illustrated by a high level of ICT specialists in total

employment

Telecom

wave

Internet

wave

Digital

wave

Attractiveness

Infrastructures

Financing

and tax

Ecosystem

Training

1

2

3

4

5

Supply | Demand

30

United Kingdom

government’s position on

telecom regulation

Cybersecurity training in the

United Kingdom

Access to Venture Capital

in the USA

Ease of administrative

procedures in South Korea

(4 days to create a company)

Development of fibre in

South Korea

The development of a performing supply on the 3 waves can be based on best

practices from leading countries


Telecom wave

Possibility to be financed by

capital markets (e.g. in the

USA)

Telecom Council of the

Silicon Valley

Levers Internet wave Digital wave

Development of dedicated

infrastructures, especially

for the cloud

Silicon Valley in the USA

Leading universities in

computer sciences in the

USA

Dedicated networks and

services for the Internet of

Things

Venture Capital and

Corporate Venture in the

USA

Open innovation

Status of the “Jeunes

Entreprises Innovantes” in

France

Education on an industry

coupled with digital

Attractiveness

Infrastructures

Financing

and tax

Ecosystem

Training

1

2

3

4

5

Supply | Demand

31

The development of a strong digital supply by a region or a country is based on 5

key levers

Source: OECD, Private Equity associations, World Bank, Compass, TechCrunch, Arthur D. Little analysis

Significant roll out of fibre in South Korea (68% of penetration)

Role of telecom operators in the development of the Internet of Things

Examples of best practices (benchmarks)

Venture Capital 3.5x more developed in the USA than in Europe with a stronger

emphasis on digital companies

Startup pool (valued at $294 B) and innovation of the Silicon Valley – inspire

telecom operators in the creation of innovative services

Performance of Israeli startups (« Start-up Nation ») e.g. in cybersecurity

Rapid and simple administration in South Korea (5th most competitive country

to do business vs. 31st for France)

Levers

Strong attractiveness of computer science studies in the United Kingdom and

training programs in cybersecurity

Ability to generate ICT specialists in Sweden (5.3% of total employment1)

Attractiveness

Infrastructures

Financing

and tax

Ecosystem

Training

1

2

3

4

5

1France: 2.8%

Supply | Demand

32

To date, policies do not stimulate players of the three waves enough whereas a

simultaneous action could help balancing the digital supply


Missed opportunity Past lack of focused industrial policies

leading to an underdeveloped digital

supply in France and in Europe

Multiplication of taxes Accumulation of specific telecom taxes

and continued increase of those taxes

(e.g.: « telecom tax »)

Internet

players

Telecom

players

Digital

players Willingness to act Multiplication of fiscal initiatives and

programs favoring the emergence of

innovative startups

Actions that strengthen / weaken

the digital supply

Develop software and

internet offers!

Support the networks

of the future!

Seize the digital

opportunity!

Current policies

(asymmetric stimulation)

Public policies

(symmetric stimulation)

Supply | Demand

33

France can strengthen its share of ICT in the economy by learning from best

practices of leading countries

Source: OECD, Arthur D. Little analysis

Share of the ICT sector in total value added

OECD, 2013

4%4%5%

6%6%7%7%

11%

OECD

average: 5.5%

+7pts

South

Korea Japan Sweden USA

United

Kingdom Germany France Spain

% of the ICT value added in total value added

Supply | Demand

34

5,5%

4,3%

1,3%

France OCDE

If France slightly exceeds the OECD average, it could create 25 billion euros in

value

Potential value creation generated by an optimization of digital ecosystem levers

Potential

value creation +25 billion euros in additional

value added

Current

situation +11 billion1 euros in additional

tax revenue

% of value added of the ICT sector in total value added

1 based on the average tax rate in France Source: OECD, UN, 2013 tax bill, Arthur D. Little analysis

Supply | Demand

35

The spreading of the 3rd digital wave to the entire French economy raises both a risk

and an opportunity to reduce the digital deficit Reminder

2025

+150 to

+200 +350 to

+450 -200 to

-250

2015

1 055

Source: Insee, Arthur D. Little analysis Note: estimated impact by applying the trends observed on the taxi market adapted according to the industry 1 Value added at constant scope excluding organic growth

Impact of the generalization of digital to the entire French economy

Value added1 of

main sectors

impacted by the

spreading of

the digital

Insurance Banking

Retail Tra./Hos.

Catering Manuf.

Education

Administration

Healthcare

Cannibalization

of historical

activities

Development of

digital-related

activities

Net value

added creation

Challenge: develop a French /

European digital supply

€ billions

Supply | Demand

36

Reducing the imbalance on each wave will lead to a creation of value for the entire

economy

Source: Arthur D. Little analysis 1 10 year horizon 2 excluding a risk of value capture by non European players

FRANCE SCOPE

Value creation potential:

+€25 B

Stimulate the telecom sector /

Internet, and rebalance supply

and demand Value creation potential:

+€150 to 200 B1,2

Seize the opportunity of

the 3rd digital wave

Digital wave Internet wave

Supply | Demand

37

Key messages

Proposals from the Fédération Française des Télécoms to strengthen

telecom operators and digital in France and Europe 5


networks 2




38

For a Digital Act!

Align telecom-related policies with the investment and regulatory cycles

Allow a differentiated quality of service for new innovative services

Reduce the tax pressure to favor investments of telecom operators in

infrastructures and in future services and remove counter productive taxes

such as IFER and taxes on investment

Implement accelerated amortization measures for the Very High Speed fixed

and mobile broadband

Favor the use and monetization of data extracted by telecom operators

Promote interoperability and opening of standards and services (including

API) as well as portability of data

Elaborate a plan aiming at developing telecom, Internet players and every

player of the digital wave

Ensure the consistency of digital public policies across the different sectors

Promote and create a label for a European curriculum of digital professions

(e.g.: data science, cybersecurity)

Infrastructures

Financing

and tax

Attractiveness

Ecosystem

Training

1

2

3

4

5

Source: Fédération Française des Télécoms

Infrastructures of the future

Tax incentives

Digital Act

Opening

e-Erasmus

39

Reminder - In essence, telecom operators have a central role to play in the

promotion and the generalization of digital to the entire economy

Source: CrunchBase, Cisco, AT&T, Ipsos / Fédération Française des Télécoms, Arthur D. Little analysis

1 Roadside assistance application

Financing Distribution Service Protection Infrastructure

Investments in

innovative

companies through

Corporate Venture

Acceleration of the

generalization of

innovative digital

services through

partnerships

Development of

infrastructures

capable to meet the

requirements of

innovative services

Development and

launch of new digital

services

Management of

personal data of

Internet users

7m€ Amount raised by

Urgent.ly1 in part

from Verizon

Increase in the

number of subscribers

after partnership

with telecom

operators

Expected increase in

the volume of data

between 2014 and

2019

+40% of cars connected

by AT&T in the USA

3m x3,2 Less than 5% of the French do not

trust telecom operators

for data protection vs.

67% for « Internet

giants »

40

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the economics of telecoms - 2015 ed.- full version

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