The Economics of Telecoms - 2015 ed.- press version

“The Economics of

Telecoms” Report

2015 edition

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

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

4

Key messages



European and French digital demand is highly developed enabled by high

quality networks 2




5

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

6

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

7

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

8

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

9

€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

10

Key messages




networks 2




11

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 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

12

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

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

13

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

14

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

15

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 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

16

Key messages




networks 2




17

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

18

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

19

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

20

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

21

Key messages

Proposals from the Fédération Française des Télécoms to strengthen

telecom operators and digital in France and Europe 5


networks 2




22

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

23

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 »

25

As the world’s first consultancy, Arthur D. Little

has been at the forefront of innovation for more

than 125 years. We are acknowledged as a

thought leader in linking strategy, innovation

and transformation. Our consultants

consistently develop enduring next generation

solutions to master our clients' business

complexity and to deliver sustainable results

suited to the economic reality of each of our

clients.

Arthur D. Little has offices in the most important

business cities around the world. We are proud

to serve many of the Fortune 500 companies

globally, in addition to other leading firms and

public sector organizations.

For further information please visit

www.adlittle.com

Copyright © Arthur D. Little 2015.

All rights reserved.

The Economics of Telecoms - 2015 ed.- press version

Technology