Strategic Review of Digital

Communications

Sharon White, Chief Executive

11 May 2015

Introducing the review

Clive Carter, Director of Strategy

Yih-Choung Teh, Competition Policy Director

11 May 2015

2

The last ten years

3 3

2005 2015

Unbundled lines < 200k

Average bb speed < 1Mbit/s

No smartphones

Unbundled lines: 9.7m

Average fixed bb speed: 23Mbit/s

Smartphone take-up: 66%

Virgin began

upgrading

network to

50Mbit/s

GPL

implemented

on copper

BT commercial

rollout reached 66% BT announced

£1.5bn SFBB

roll out

BDUK

announced

£530m SFBB

programme

Merger of

Orange

and T-

Mobile to

form EE

T-Mobile /

3 network

sharing 4G spectrum

auction

competed

Mast

sharing

Vodafone

& O2

BBC iPlayer

launched

Netflix UK

launched

iPad

Now TV &

You View

launched

BT Sport

launched

Lovefilm

launched

Virgin

announced

£3bn

expansion

project

BSkyB enters

broadband

market

BT’s share of

retail voice

<50%

Cable

acquires

Virgin mobile

iPhone

2010

Much has happened in the past ten years

Telecoms

Strategic Review

– Openreach

created

New pricing rules

on BT margins Regulated

access for

BT to Sky

Sports 1 &2

BT mobile

launched

90% geo

coverage

obligations

on 2G/3G

QoS remedies

imposed on

Openreach

Access to

BT ducts

for NGA

build

Market

Developments

Regulatory

milestones

Developments

in mobile

Developments

in fixed

Deregulation in

the retail voice

market

End users’ use of comms services has changed

significantly since 2005

4

82%

34%

0% 0%

31%

0% 0% 0% 0%

59%

10%

29%

4%

99% 95%

78% 73%

78%

27%

60%

67%

56%

86%

27%

63%

23%

Mo

bile

b'b

and (

3G

)

LL

U r

each

Supe

rfast b'b

and

Mo

bile

b'b

and (

4G

)

Tota

l b

'ban

d

Supe

rfast b'b

and

Sm

art

phon

es

Mo

bile

b'b

and d

ata

Co

nne

cte

d T

Vs /

ST

Bs

Co

nsum

ers

onlin

e

Onlin

e A

V u

se

All

bun

dle

s

Trip

le p

lay

Availability Take-up and usage

Source: Ofcom Communications Reports, 2005-2015 * Percentage of premises connected to an LLU enabled exchange

*

Consumers’ experience of communications services has

been good, but there is scope for improvement

5

Consumers’ growing value for money in broadband

Price and value trends, 2000-2012

Source: Ofcom / operators / Pure Pricing.

Notes: All stated in real terms; adjusted to Average broadband and

cheapest broadband package exclude line rental. Dotted line is

indicative trend.

£31.79

£16.38

£11.74

£6.49

£57.03

£2.4bn

£3.8bn

0

1

2

3

4

5

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

£bn per year (2012 prices)

£ per month (2012 prices)

Total household spending on fixed

internet and broadband

Average spending on

residential fixed broadband

Cheapest available standalone

residential fixed broadband

Quality of service has been a concern

Fault repair performance on LLU lines, as found in

2014 FAMR

Source: Ofcom analysis of BT data submitted to the

OTA. Chart indicates compliance with Care Level 2,

which require faults to be cleared by the end of the next

working day. FAMR 2014

MPF

SMPF

SMEs are experiencing some issues, with superfast

broadband availability a key concern

6

58%

29%

16%

13%

4%

1%

1%

No problemsexperienced

Poor service reliability

Slow download speeds

Slow upload speeds

Poor customer service

Unexpected charges

Mis-selling

Source: Jigsaw, Nov 2014

42% of SME internet users experienced problems

SMEs’ internet issues experienced (last 12 months)

75% 83%

22%

56%

67%

16%

0%

20%

40%

60%

80%

100%

UK Urban Rural

All premisesAll SMEs1-9 eployees10-49 employees

UK England N.I. Scotland Wales

Premises 75% 77% 77% 61% 55%

All SMEs 56% 59% 69% 40% 37%

But SME availability of superfast broadband is

improving

SFBB coverage, Jun 2014

Source: Ofcom, Nov 2014

7

What does the future hold?

Some trends will continue, others will be unexpected…

8

Growing take-up

and demand

Customer

segmentation and

retention

Non-consumer

demand: business

and IoT

Excluded users

Consolidation

Potential for new

(network) entry

Legacy networks

and closures

Changing balance

of power across

value chain

Bundled services

Fragmenting value

chain - OTT

Network sharing /

shared investment

Cloud /

virtualisation

strategies

Network upgrades

New architectures

Network

convergence

Geographic

differences in level

of competition

End users Market structures Strategies Technologies

Some trends will continue, others will be unexpected…

9

Growing take-up

and demand

Customer

segmentation and

retention

Non-consumer

demand: business

and IoT

Excluded users

Consolidation

Potential for new

(network) entry

Closure of legacy

services and

networks

Changing balance

of power across

value chain

Bundled services

Fragmenting

value chain - OTT

Network sharing /

shared investment

Cloud /

virtualisation

strategies

Network upgrades

New architectures

Network

convergence

Geographic

differences in level

of competition

End users Market structures Strategies Technologies

10

End users: demand and use of services is expected to

grow significantly

No-one knows what demand will be, but everyone agrees on the direction of travel

As speeds grow, so does usage

Data use vs. average broadband speed, 2013

Source: IRU 2013

ADSL2+ customers All technologies

Source: Analysys Mason 2014

Total demand will grow

Traffic forecasts per broadband connection, 2010-24

End users: customer segmentation and targeting will

continue

11

15%

14%

17%

13%

26%

15%

High involvement in

technology; extremely

online savvy

Consumers’ attitude to communications services is frequently defined by attitudes

Ofcom customer segmentation analysis, 2013

Most likely to switch and

to bundle services.

Pragmatic

Digitally confident and

capable using a range of

devices, but have

concerns (e.g. privacy)

Socially active but

technically un-engaged. Will

wait for a cheaper prices,

but do not seek deals

Perform limited

traditional online

activities; less

inclined to try new

Connection to the world

is via TV, radio, landline

or standard mobile: 1/3

are 75+.

Strategies: New propositions and services mean

existing business models will change

12

Over the top service delivery

Potential future messaging volumes 2010-2018F

0

100

200

300

400

500

600

700

800

2010 2011 2012 2013 2014 2015 2016 2017 2018

SMS OTT messaging

Me

ssag

es (

bill

ions)

Source: Analysys Mason

Bundling and vertical integration

An increasing number of quad play strategies

Fixed voice

and

broadband

Mobile

TV platform

Market structure: mergers and acquisitions continue

across connectivity providers and beyond

13

Fixed / mobile convergence In market consolidation Cross country

Vodafone / KDG (2013)

Vodafone / Ono (2014)

Three / O2 Eire (2014)

Three / Orange, AT (2013)

Vodafone / C&W (2012)

O2 / Eplus (2014)

Numericable / SFR (2014)

Telenor / TeliaSonera DK (2015)

Liberty / Virgin (2013)

BT / EE (2015)

Three / O2 UK (2015)

Altice / PT Portugal (2015)

American Movil / KPN (2014)

Liberty / Ziggo (2014) TeliaSonera / Tele2 (2015)

Liberty / BASE (2015)

Illiad / Orange CH (2014)

Key

Orange / Jazztel (2015)

Selected recent European M&A, finalised and planned

Market structure: continued experimentation with new

network deployments and entry

14

Tech Company Cost Notes

FTTC BT, UK £130 19.3m premises (res and bus,

commercial deployment)

Deutsche

Telekom, DE

£190 Aims for 80% household

coverage

FTTP

Vodafone /

Orange, ES

£140 Up to 6m homes

Free (Iliad),

FR

£200 Original 2006 cost estimates,

4m households across Paris

CityFibre,

York

£500

(est)

Smaller trials - potential to

expand (c.20-40k homes)

Orange, FR £575

(est)

Plans to extend FTTP to 80%

of households, estimated

costs

Cable Virgin Media,

UK

£750 Project Lightening - 4m

additional households

A number of models for fibre deployment are

being used

Implied cost per home passed, £

A range of models for mobile delivery

Examples of market entry technologies

Source: Ofcom, Enders Analysis, Barclays

Macro cells

Small cells

Femtocell

In-home

femtocells

Wide area coverage

by cellular systems

such as 3G and LTE

In-home and

commercial Wi-

Fi networks

Outdoor local

area coverage

to meet high

demand

Wi-Fi

~10m

~100m

~1000m

Networks: network convergence will be a key theme for

the future

15

Fixed and wireless: substitutes or complements?

Technology’s role depends on demand

Access networks may be converging

Greater use of fibre core to all networks?

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Mb

ps

Number of users

Wireless - shorter term Fixed - today Wireless - longer term?

Few concurrent users Many concurrent users

Potential

substitutes More likely

complements

Wireless. 1km+

Fibre, 2km

Fibre, 2km

Fibre, 2km

Wireless. 100s

of metres

Wireless - in building

Ma

cro

ce

lls

S

ma

ll c

ell

s

Wi-

Fi o

fflo

ad

Copper,

300m

Copper,

300m

Copper,

300m

Source: Ofcom analysis

16

Our strategy: competition, availability

and protection policies

17

Good outcomes for consumers require a range of action

Consumer

protection

Additional measures

to address where

consumers, or

specific groups are

at risk of harm or are

vulnerable

Public policy

Interventions to

secure better social

outcomes for

consumers and

citizens, including

availability,

affordability and

accessibility

Competition

In private sector

markets delivering

good consumer

outcomes on choice,

price, investment,

innovation where

economically

feasible

Delivering good consumer outcomes through well-functioning

markets and targeted interventions

Competitive markets are the cornerstone of our work

18

Consumer choice

Engaged consumers can

take advantage of offers

Innovative services

Ability to differentiate

drives business model

and service innovation

Efficient prices

Competition drives cost

efficiency and value for

money

Efficient investment

Ability to differentiate

Incentivises investment

Quality of experience

Customers will make

choices based on service

quality

But markets need complementary action to deliver good

social outcomes

19

0

20

40

60

80

100

120

0 10 20 30 40 50 60 70 80

Average data downloaded per

month, GB

Average broadband speed, Mbit/s

The case for a 10Mbps USC?

Monthly versus access connection speed, 2014

The market will not deliver to everyone

Cumulative costs of superfast broadband deployment

Source: BSG, Ofcom Infrastructure Report 2014

Our current regulatory actions fit within a broad

strategic framework

20

Promoting the

competitive supply of

comms services –

‘supply side’

Enabling consumers to

take advantage of

competition – ‘ demand

side’

Supporting investment

incentives Regulating for quality

Consumer protection

Competition Availability Quality

• Functional

separation

• Market reviews and

access obligations

• Contestable

investment

opportunities

• Spectrum release

• Switching

• Service quality

information

• Complaints

information

• Pricing freedom and

anchor pricing

• Coverage obligations

• Supporting public

policy interventions

• Quality targets and

enforcement

• Charge control

considerations

Examples

21

Issues for the review

The review will need to consider a range of issues

22

Are there ‘enduring

bottlenecks’ and what does

this mean for future

competition?

How can incentives for

efficient investment be

maintained and

strengthened?

How should our future

competition and demand-

side policy evolve across

communications services?

What does the increasing

pressure of consolidation

and convergence mean for

regulation?

How can quality of service

be secured in future? What scope is there for

future deregulation?

What’s next?

23

Stakeholders opportunities to comment

Focus on

specific policy

areas, including

potential

implementation

options

Discussion

Document

July 2015

‘Initial views’

Document

January 2016

24

Questions?