The Economics of Telecoms - 2015 ed.- full version

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 supply3 5 key levers to develop a strong digital offer in France and in Europe4 Unlike other regions, Europe suffers from a significant digital imbalance1
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 Source: Arthur D. Little analysis 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
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 2015Q2 2012 62% Average speed3 (Mbps) 27 Mbps +6 Mbps 21 Mbps USAFrance 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% 201420132012 +186% Q2 2015 15.6 Q2 2014 5.5 X% 34% 51% 60% 8% 24% % of the population 1.5 Go 400% 4G3G 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 USSPUKITAL In € / month incl. taxes €20 €43€30 €692014 › €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
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 Source: Arthur D. Little analysis 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 1119 1251 1361 1375 1378 442 495 524 526 534 328 327 321 298 215 266 318 214 218 322 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 Source: Thomson Reuters, Arthur D. Little analysis South America Europe Oceania Asia North America 681 694 700 668 1 316 1 494 1 614 1 721 1 825 1 371 1 521 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 Source: Thomson Reuters, Arthur D. Little analysis 382 343 299 247 2014 590 2010 681 Europe Network operators Other Internet players1 410 541 961 2014 1 674 1 133 2010 1 371 Asia 354 500 962 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
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 Source: Arthur D. Little analysis Network security Connection speed and latency Service reliability Network capacity Driverless trucksImmersive GamingRemote 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 trucksImmersive GamingRemote 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 ProtectionInfrastructure 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 3mx3,2 Less than 5% of the French do not trust telecom operators for data protection vs. 67% for « Internet giants » Supply | Demand
29 5 levers favor the development of a strong digital supply Source: Arthur D. Little analysis 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 Source: Arthur D. Little analysis 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 Source: Arthur D. Little analysis 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% FranceOCDE 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 FranceSource: 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 waveInternet wave Supply | Demand
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 ProtectionInfrastructure 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 3mx3,2 Less than 5% of the French do not trust telecom operators for data protection vs. 67% for « Internet giants »
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