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Julienne Liang, France Telecom
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International perspectives for internet
fixed – mobile substitution*
Julienne Liang, economist, France Telecom
June 15th 2012
*This presentation represents the analysis of the author and not necessarily a position of France Telecom.
2
Summary
1 Empirical observation of Fixed Mobile Substitution (FMS)
2 FMS by technological evolution of fixed and mobile broadband
3 Fixed mobile bundling mitigates FMS?
4 Mobile to fixed offloading as efficient cost reduction
5 Investment incentives in mobile network
6 Specific case: fixed monopoly vs. competitive mobile market
7 Future research: Consider LTE as a threat to ADSL and FTTH?
8 Conclusion
3
Empirical observation of Fixed Mobile Substitution (FMS)
In 26 out of 27 countries of the European Union, current regulations assume that the fixed and mobile broadband markets are complementary or independent
The Austrian case has a exceptional broadband market policy due to the fact that the European Commission admitted that ADSL, cable and broadband mobile belong to the same market in Austria.
The model aims to show that fixed and mobile are highly interdependent even though they are not equivalent.
Austria broadband market:
50% of broadband subscription are 3G mobile
Mobile BB price Fixed BB tariff.
> 94% population covered by one of 3G operators
CAPEX on 3G in Austria is twice the European average: Austria has perhaps the densest mobile network in Europe
50% 3G
50%
fixed
Source: RTR Austria telecom regulator
4
Empirical observation: “Mobile Only” users
French and European market in 2011 *:
74% of population in France have both fixed and mobile offers (62% in Europe**)
15% of population only have a fixed offer ’’fixed only’’ (9% in Europe)
10% of population only have a mobile offer ’’mobile only’’ (27% in Europe)
1% has none (2% in Europe)
In countries where the fixed network is nationwide covered, the existence of « Mobile only » users reveals the presence of fixed mobile substitution
*http://www.arcep.fr/fileadmin/uploads/tx_gspublication/rapport-credoc-diffusion-tic-2011.pdf
** http://erg.eu.int/doc/berec/bor/bor11_54_FMS.pdf “REPORT ON IMPACT OF FIXED-MOBILE SUBSTITUTION IN MARKET DEFINITION”
5
Technical characteristics of fixed and mobile broadband
LTE*
3G
mobility
data volume
WiFi Community
ADSL LTE&ADSL
vm vf
gf
gm
FTTH
Characteristics of fixed & mobile broadband access
Fixed access offers high data volume but very reduced mobility. Mobile offers high mobility and low
data volume
Vm of LTE generates a higher substitutability LTE becomes alternative of ADSL
WiFi Community : Mobile to fixed offload & Mobility of fixed network (alternative of mobile network)
Vf increases with FTTH, thus increasing the differentiation between fixed and mobile access
mf
fm
mf
vg
gg
vv
elementsshared
networkLTE&3Gmobilityhigher
volumedatafixedhigher
3G&ADSL
LTE & WiFi Community
based on fixed network
3G&ADSL
6
Game Theory: Timing of the game
Two integrated operators A & B, both offer fixed and mobile broadband
• Stage 0: operators A & B fixe their prices, pfA, pmA, pfB, pmB
• Stage 1: consumers make their choice between 2 mobile offers mA & mB,
• Stage 2: consumers choose whether to purchase fixed and mobile from
the same operator and benefit from the discount , to purchase the fixed
service from the other operator, or not to purchase at all at this stage. The
consumers who do not purchase at this stage become “mobile only”
7
Model : Utility function
)1( ytpvgU
typvgU
BBBB
AAAA
mmmm
mmmm
mA mB
0
1
)1(
)(
xtpvvUU
txpvvUU
BABAAB
AAAAAA
fmfmmf
Afmfmmf
fA fB
)1()( xtpvvUU
txpvvUU
Bfmfmmf
fmfmmf
BBBBBB
ABABBA
Mobile
only
fA fB Mobile
only
Consumers do not know their preferences for fixed offer. They form an
anticipation
on the fixed offer with expected utility.
x1
x3
x2
x4
Consumers of mA above
can buy fA, fB or nothing
Discount accorded to
consumers of mAfA
Consumers of mB above
can buy fA, fB or nothing
Discount accorded to
consumers of mBfB
x
x
0
0
1
1
Mobile
choice
Fixed
choice
y
8
Consumers anticipate utility gains coming with a purchase at the second stage
at the second stage, consumers have the choice between fA, fB or nothing. at the 1st stage, They do not know their preferences for fixed offers and form anticipation about the fixed offers with expected utilities EUA or EUB
Utility to buy A or B at the first stage is
The expected utility is calculated by taking the weighted average of all possible outcomes
Hypothesis of the model : expected utility
BmB
AmA
EUUU
EUUU
B
A
1
0
1
0
4
2
3
1
)()(
)()(
xmmf
x
mmfB
xmmf
x
mmfA
dxUUdxUUEU
dxUUdxUUEU
BBBBBA
AABAAA
where
9
Game resolution by backward induction 1/2
1x 2x3x 4x
B AA B
3
1
xUU
xUU
ABA
AAA
mfm
mfm
A B
y
yEUUEUU BmAm BA
4
2
xUU
xUU
ABB
BAB
mfm
mfm
Stage 1
Mobile
choice
Stage 2
Fixed
choice
10
Game Resolution by backward induction 2/2
1x 2x3x 4xB AA B
A B
y
ycp
xycp
xycp
AA
AA
AA
mm
ff
fAfA
)(
)1)((
)(
2
1
)1)((
)1)(1)((
)1()(
4
3
ycp
xycp
xycp
BB
BB
BB
mm
fBf
ffB
Stage 0: profit maximization equilibrium prices
11
Results in duopoly with two integrated operators
)2
()1(tt
v
t
v
D
mf
mobileonly
t
vvt mf
A4
)(
2
2
t
vv
t
vvv
t
vt
BABAB
B
fffff
f
A
62
)(
42
2
Expression at
equilibrium
Intuition
Demand for “mobile only” vfB=vfA=vf; vmB=vmA=vm ; B= A =
linear approximation on A & vmA
Dmo is increasing with technical progress in mobile network vmA and decreasing with A. “mobile only” is reduced thanks to discount A.
Profits
vfB=vfA=vf; vmB=vmA=vm ; B=
A=0
Technical progress in
mobile network negatively
impacts the profits.
Profitability related to introduction of discount to bundling
vmB=vmA=0; B= A=
linear approximation on & (vfA-vfB)
The bundling is profitable
for the operator that enjoys
the higher valuation of his
fixed network vfA>vfB, and no
impact for whole market.
12
Nash Equilibrium in case of introduction of discount to bundling
Firm B
Firm A
No discount
for joint
purchase
B=0
discount for
joint
purchase
B>0
No discount for joint purchase A=0
0,0
--,++
discount for joint purchase
A>0
++,--
0,0
Pay-off table (profits of firm A)
Individually, the firm
A always has
interest to introduce
a discount to bundle
to obtain higher
profit and whatever
the strategy of firm
B
13
Nash Equilibrium in case of introduction of discount to bundling
Firm B
Firm A
No
discount
for joint
purchase
B=0
discount
for joint
purchase
B>0
No discount for joint purchase A=0
0,0
--,++
discount for joint purchase
A>0
++,--
0,0
Pay-off table (profits of firm A)
Individually, the firm
B always has
interest to introduce
a discount to bundle
to obtain higher
profit and whatever
the strategy of firm
A
14
Nash Equilibrium in case of introduction of discount to bundling
FirmB
FirmA
No discount
for joint
purchase
B=0
discount
for joint
purchase
B>0
No discount for joint purchase A=0
0,0
--,++
discount for joint purchase
A>0
++,--
0,0
Pay-off table (profits of both firms)
In case of two
symmetric actors,
Nash equilibrium is
(0,0) , corresponding to
the situation where
both firms
introduce a discount to
their bundled products.
15
Case: two asymmetric operators: vfA>vfB
FirmB
FirmA
No
discount
for joint
purchase
B=0
discount
for joint
purchase
B>0
No discount for joint purchase A=0
0,0
--,++
discount for joint purchase
A>0
++,--
+,-
Pay-off table (profits of both firms)
Nash equilibrium is
(+,-) , corresponding
to the situation
where both firms
introduce a discount
to their bundled
products.
16
Nash Equilibrium in case of introduction of MtoF offloading:
FirmB
FirmA
no offload offload
no offload
0,0
--,++
offload
++,--
0,0
Pay-off table (profits of each firm)
In case of two symmetric
operators, Each firm has individually
interest to introduce
offloading. Nash
equilibrium corresponds to
the situation both firms
introduce MtoF offloading
m
m
f
m cg
gc )1('
17
Case: two asymmetric operators: gfA>gfB (more shared
WiFi connections for firm A) cmA<cmB
FirmB
FirmA
no offload offload
no offload
0,0
--,++
offload
++,--
+,-
Pay-off table (profits of each firm)
In case of two
asymmetric
operators, Nash equilibrium
corresponds to the
situation both firms
introduce MtoF
offloading
18
Investment incentives in mobile network
**
2
)(Am
mf
A
IM
A Av
t
vv
Investment in mobile network improves valuation of data volume
vm vm + Δvm growth of FMS
Increase of « mobile only » consumers
After investment, the profits of integrated operator A (or B) is reduced
Situation of prisoners’ dilemma.
MOm
MO
IM
MO Dt
vDD
19
Impacts on welfare, profit and consumers’ surplus
Welfare Profit Consumers’
surplus
Fixed-Mobile
bundling + 0 +
Mobile to fixed
Offloading + 0 +
Investment in mobile network +
if vf<vm+t/2
- +
20
Fixed monopoly versus a competitive mobile market Firm A integrated operator (fixed monopoly), Firm B mobile operator
2
* mf
f
vvp
t
vvt mf
A4
)(
2
2
Expression at
equilibrium
Intuition
Price of fixed monopoly vfA=vf; vmB=vmA=vm ;
The price for firm A, the market power is reduced by data volume of 3G or LTE (vm)
Demand for fixed monopoly vfA=vf; vmB=vmA=vm ;
The demand for fixed services is also reduced by data volume of 3G or LTE (vm)
Profits for fixed
monopoly
vfA=vf; vmB=vmA=vm ;
The profit of firm A (fixed
monopoly) is therefore
negatively impacted by vm
t
vvD
mf
fixed
mA mB
0
1
fA Mobile
only
fA Mobile
only
Consumers of mA above
can buy fA or nothing Consumers of mB above
can buy fA, or nothing
x
x
0
0
1
1
yStage 1
Mobile
choice
Stage 2
Fixed
choice
21
Future: Consider LTE as a threat to ADSL and FTTH?
Future environment
LTE is nationwide deployed, its data capacity is similar to that of ADSL
network
Only dense areas are covered by FTTH where the backhaul cost for LTE is
considerably reduced
FTTH-LTE Bundling is proposed for FTTH covered areas
Questions
Is it possible that ADSL is excluded from the market by the LTE?
In FTTH covered areas, is it possible that FTTH exits the market in
turn after ADSL?
22
Offer excluded from the market ~ LTE marginal cost
15
No FTTH coverage area
FTTH covered area
LTE marginal cost cl
LTE ADSL FTTH Bundle
LTE ADSL FTTH Bundle
LTE ADSL FTTH Bundle
LTE ADSL
LTE ADSL
cl < c4 ADSL exits the market (4 offers) in FTTH covered areas
cl < c3 Bundle exits the market (4 offers) in FTTH covered areas
cl < c2 FTTH exits the market in FTTH covered areas
cl < c1 ADSL exits the market for no FTTH coverage areas (2
offers).
Only LTE offer is active on the market
LTE ADSL FTTH Bundle
c1 c2 c3 c4
23
Conclusion
With technological progress, mobile broadband access becomes
more competitive compared to the fixed market. A partial fixed-
mobile substitution will be observable worldwide in the future
The discount introduced to bundling mitigates FM substitutability,
reduces then the number of “mobile only” consumers
Bundling could be a profitable strategy for an integrated operator,
provided that the operator has a better fixed network data rate.
When both firms introduce mobile to fixed offloading the operator
has a larger WiFi community earns more profits
Investment in mobile network prisoners’ dilemma
Social welfare increases with bundling and offloading
