McKinsey
& Company
Telecom in Europe
Industry perspective
Halldor Sigurdsson I March 2019
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibite
Overall industry perspectives for
telecom in Europe
Perspectives on deployment and
sharing of fixed infrastructures
in Europe and Iceland
McKinsey & Company 2
European telcos have invested more than EUR 500 billion in the last 10 years
but at the same time seen revenues fall by ~20% ^
Yearly capex1
EUR billions
Yearly revenues, changes between 2008 and 2017
EUR2?
Europe -20%
U.S.
2008 2017
+50%
1 Excluding licenses, Ovum
2 Capex and licenses
3 Percent households, DESI 2018; 4 % households, >30M bps overall NGA coverage considered (VDSL , FTTP and DOCSIS 3.0), DESI 2018
Source: Ovum; European Commission Digital Economy and Society Index Report 2018 McKinsey & Company 3
... which in turn has led to a dangerous decline in return of capital for the
industry
Evolution of European MNOs return on invested capital
Percent
1 Does not include M ovistar (Telefonica) figures for Spain in 2015 due to the tem porary im pact o f a plan for vo luntary em p loym ent suspension
Without and
inversion of trend,
further investment
in the sector would
look increasingly
unattractive
Source: Bloomberg; annual reports McKinsey & Company 4
Recently profit-pool of telecom operators is being squeezed as relevance of
connectivity diminishes
Distribution of economic profit by Tech, Media
and Telecom sub-sector1, 2005-14
USD billions
IoT market outlook 2020 by vertical
EUR billions
Services/ r n
applications =
90.0 I 70.0 I 14.1 I 12.9 I 13.0 I 7.2 I I I I 210.0
Connectivity ((<*>)) 0.6 I 0.5
Software
Enablement
platform
6.5 2.4 4.2 0.5 0.4 1.7 0.3 0.6 0.5
E
Cloud infra-
structure ■ 0.3 0.5 0.1 0.0 0.1 0.0 0.1 0.1
Connectivity r i
hardware @
1.6 2.0 1.1 0.2 0.1 0.3 0.5 1.8 0.5 1
Total 102.1 74.7 19.8 14.2 14.1 9.8 6.9 4.2 4.0 249.9
Source: Machina; MGI McKinsey & Company 5
• Overall industry perspectives for
telecom in Europe
Perspectives on deployment and
sharing of fixed infrastructures
in Europe and Iceland
Selective deep dive today
Deployment of FTTH across Europe varies ^
and getting to 80% will cost EUR >200 billion
1
There are four primary models available for
sharing of FTTH access networks
2
Sharing and wholesale affect the profit
distribution and nature of competition
3
Out-side-in reflections on Icelandic telecom
market
McKinsey & Company 7
BACKUP
Broadband demand and supply are expected to continue to follow
exponential demand curves
Multiple bandwidth demand forecasts
Mbit/s
Leading speed offer on fixed
Mbit/s logarithmic scale
M oore's Law
M arket leaders
100,000 r
10,000
1,000
100
10
0.01
0.001
0.0001
2014: NTT *
launches 1
Gbps FTTH NTT
1994:
USRobotics
14.4 kbps
2018: TDC
launches
1 Gbps on HFC
& FTTH
youSe
2003:
“BT is to trial a new home-based
IMbps ADSL service in the autumn
which, if successful, could be
rolled-out as a full . . _ ^
commercial service”
CN co oo CN
C O C O C O C O C D C D C D C D
C D C D C D C D C D C D C D C D
CO OO
CD
CD
O
O
O
CNJO O
O O
CO 00 O O O O
CNJ CO 00
C N J C M C N J C N J C M C N J C N J C M C N J C N J
O
CSJ
O
CSJ
1
Source: Cisco UK VNI, McKinsey team analysis McKinsey & Company 8
1
FTTH deployment varies greatly across Europe despite common objectives
| BACKUP
Source: OECD broadband statistics, June 2018 McKinsey & Company 9
1
Sweden is an example of F ^ H success and migration
BACKUP
Source: WIK, 2018 McKinsey & Company 10
Covering lowest cost 70% of EU households with FTTH will cost additional
+EUR 140 billion
Penetration, September 2017
Latvia
Sweden
Lithuania
Iceland
Romania
Spain
Portugal
Bulgaria
Estonia
Finland
Slovenia
Denmark
Netherlands
Slovakia
Luxembourg
Hungary
France
Poland
Czech republic
Italy
Germany
Croatia
Ireland
Austria
Total
Population
Millions
# of HHs
Millions
Fiber
penetration Q3
2017
Required fibre
investment to
reach 70%
penetration
EUR billions
1.9 0.9 52% 0
10.3 4.7 43% 2
2.8 1.3 43% 0
0.4 0.2 35% 0
19.6 8.9 35% 4
46.3 21.0 34% 10
10.3 4.7 28% 3
7.0 3.2 27% 2
1.3 0.6 26% 0
5.5 2.5 25% 1
2.1 0.9 22% 1
5.8 2.6 19% 2
17.2 7.8 18% 5
5.4 2.5 18% 2
0.6 0.3 17% 0
9.8 4.4 16% 3
65.1 29.6 15% 21
38.0 17.3 4% 15
10.6 4.8 4% 4
60.8 27.6 3% 24
82.8 37.6 3% 33
4.1 1.9 2% 2
4.9 2.2 2% 2
8.9 4.0 2% 4
139
1 Key assum ptions - population o f selected 10 countries: 316 m illion; average household size: 2.5; ta rge t coverage: ~90% o f households; ro ll-out cost/household: EUR 1,300; w ire line EBITDA 10 operators:
EUR 28 billion; EBITDA CAGR: -3.6% ; FCF % o f EBITDA: 50%
2 Estim ated upgrade cost o f EUR 1,000-1,400 per household (HH). A ssum es 50% FTTH and 40% FTTC coverage
Source: IDATE DigWorld 2017 ; McKinsey team analysis McKinsey & Company 11
Selective deep dive today
Deployment of FTTH across Europe varies
and getting to 80% will cost EUR >200 billion
There are four primary models available for
sharing of FTTH access networks
Sharing and wholesale affect the profit
distribution and nature of competition
B Out-side-in reflections on Icelandic telecom market
McKinsey & Company 12
Different options for FTTH wholesale
Description Implications
co
?Q.
O
U )
c
c3n
c
3
Bitstream
VULA
LLU /
dark fiber
Duct access /
co-digging
Network provider
Attacker connects to incumbent network
through an IP connection
Lower duplication of investments but limits
SPs ability to differentiate services or drive
innovation
Unbundling of virtual line from central
office to end users
Attacker connects customer lines to own
CPE
SPs keep control over home gateways,
but loose some independence with regard
to QoS assurance and multicast IPTV etc.
SP gets access to fiber strand from
distribution frame in co-location /
exchange
SP invests in full active equipment access,
core and IT
Full flexibility of SP to drive service
differentiation and innovation but at the
cost of duplication of active equipment
SP rolls-out fiber network utilizing
available ducts
Same as LLU but SP has to blow / invest
in own strand of fiber in ducts
■ ■
■
McKinsey & Company 13
35% PA TRAFFIC GROWTH SCENARIO BACKUP
Application of wholesale models varies between countries based on situation
FTTH coverage against DOCSIS3.0 coverage 2014 Wholesale FTTH access regulation
</)d)<a
EQ)
CL
O
Q)O)
20)>
o0
1 I- I-
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
I
0%
SG
1HK
♦
JP
♦
LT
KR PT
s
S E ^
l v * e e _
♦
♦ INU
s s * ‘ DK
NZ
s
0co
♦
1
' ♦
NL
SK
♦ *n c
'u Fl
' r i ♦ US
RU HR
IT ♦ T f ^
1 VV
FR AU ♦ 1
HU C M
3R UA
♦--------♦—
R O ^ ' f UK CZ AT\ OE
♦ ♦ ♦
BE
0% 20% 40% 60% 80%
DOCSIS3.0 coverage (% of premises)
100%
Country Remedies
I
Symmetric /
Passive Active
asymmetric
n * 30Duct access D ark fibre
Belgium * x / A sym m etric
/
/ S ym m etric fo r dark
France Geographical
component
X fib re; asym m etric for
du c t access
N etherlands
X
No ducts
/ / 31 A sym m etric
)c
New Zealand x Busíness offer
only; no residential
offer until 2020
/ A sym m etric
Portugal / X X32 A sym m etric
S ingapore / / / A sym m etric
Spain / X / 3 3 A sym m etric
SOURCE: Analysys Mason Research, June2011, *2015 McKinsey & Company 14
2 Future development includes harmonization and growth of
wholesale products
Source: W IK McKinsey & Company 15
Selective deep dive today
Deployment of FTTH across Europe varies
and getting to 80% will cost EUR >200 billion
There are four primary models available for
sharing of FTTH access networks
Sharing and wholesale affect the profit
distribution and nature of competition
Out-side-in reflections on Icelandic telecom
market
McKinsey & Company 16
Historically, regulators have forced separation, today separation
happens voluntarily
Wave 3
Wave 1
Separation driven by regulatory
push, or government investments
conditioned by separation
1?
k
S w
openreach^ SKanova NetLinkTrust
# # < i
Wave 2
Pioneering voluntary
divestment and separation
►CETI N axiat a
New wave of voluntary
separations
==TIM
teLenor telenor telenor
Increasing focus and discussions are
causing PE and operators to explore sharing
leading to expectations of deal trend
Source: McKinsey analysis McKinsey & Company 17
3
Increasing number of wholesale only FTTH deployment
S to ka b
Urban, public, 90%
households, 100%
enterprises connected';
€ 5 4 0 m (1 9 9 4 -2 0 1 2 ) J
McKinsey & Company 18
3
Different objectives result in different Service Provider and InfraCo roles ...
Customer
Platforms
Access
Infra-
structure
Description
What you
need
to belive
Scenario 1:
Passive InfraCo (dark fiber) + heavy SP
Fixed Mobile
HFC DSL Fiber 2/3/4G
C P E / STB C P E / STB O N T / STB Spectrum
+ + +
installation installation installation
TV content IPTV Routing VAS
Headend PSTN CORE
CMTS+ DSLAM GPON RAN
spectrum
Coax Copper + FTTH Towers
cables Local exch.
■ ServCo maintains majority of the benefits of
integrated operations, Netco, with non-strategic
infrastructure, can be spun off. Limited value
creation in Netco but ability to establish long term
agreements and enjoy financial multiple benefit
■ Most value in competitive advantage of integrated
connectivity, content, and services in ServCo
■ Financial markets value long term commitments of
infrastructure NetCo
Scenario 2:
E2E transmission NetCo (VULA)
Fixed Mobile
HFC DSL Fiber 2/3/4G
C P E / STB C P E / STB ONT / Spectrum
+ + STB
installation installation +
installation
TV content IPTV VAS
Headend PSTN Routing CORE
CMTS+
spectrum
DSLAM GPON
RAN
Coax
cables
Copper +
Local exch.
FTTH Towers
■ ServCo maintains full control over customer facing
activites while NetCo is streamlined around end-
to-end transmission activites incl. QoS of service
delivery. NetCo and ServCo maintain a
outsourcing like long term relationship based on
volumes and KPIs
■ Long term value is in transmission services and
infrastructure
■ ServCo needs to compete and differentiate on
integrated content and services against OTT, etc.
Scenario 3:
Heavy NetCo + MVNO like SP
Fixed Mobile
HFC DSL Fiber 2/3/4G
Price plans, customers, call center etc.
C P E / STB C P E / STB O N T / STB Spectrum
+ + installation + installation
installation
TV content IPTV Routing VAS
Headend PSTN CORE
CMTS+ DSLAM GPON RAN
spectrum
Coax Copper + FTTH Towers
cables Local exch.
■ ServCo is limited to customer facing activities
based on ”MVNO like” wholesale products from
NetCo. Netco defines and offers all services on
wholesales basis
■ NetCo can capture additional market share from
local service providers beyond ServCo by
providing variety of wholesale products incl. White
label offerings
Source: McKinsey analysis McKinsey & Company 19
3
... as a result different wholesale prices highly affect profitability
Top-down EBITDA simulation
Before: Integrated operator After: ServCo DK & NetCo (in-going hypothesis)
W holesa le charging
EBITDA
Revenue
COGS
& opex
EBITDA
Scenario 1:
Passive InfraCo (dark fiber) + Scenario 2
heavy SP
Scenario 3:
Heavy NetCo (BSA) + MVNO like
E2E transmission NetCo (VULA) SP
100.0
59.6
40.4
Revenue
COGS
& opex
EBITDA
89.5
38.0 24.6
Revenue 1 21.1
COGS
& opex
EBITDA 2.3 0-20%
62.0
Source: McKinsey analysis McKinsey & Company 20
Selective deep dive today
Deployment of FTTH across Europe varies
and getting to 80% will cost EUR >200 billion
There are four primary models available for
sharing of FTTH access networks
Sharing and wholesale affect the profit
distribution and nature of competition
Out-side-in reflections on Icelandic telecom
market
McKinsey & Company 21
J* Overall growth in the industry, both in revenue and investment
Income from telecommunication1
ISK millions
Fixed network
Fixed network phone
Mobile network
Data transfer and Internet service
Television services
Other income
Investment in telecommunication1
ISK millions
■ Fixed network H Mobile network
I Fixed network phone | Data transfer and Internet service
Television services
Support services
32,086
2016 2017 2018
1 Figures are half-year figures, based on latest availability for 2018
27,667 27,546 5,301
4,951 4,982 1,810
7,4072,198 2,076
8,021 7,830
6,150
5,117 5,315 5,238
1,825 1,931
5,554 5,412 6,180
CAGR 2016-18
3.5%
-9.3%
-3.9%
9.6%
69.4%
5.5%
CAGR 2016-18
4,447
2,017
835
835
2016
5,454
2017
5,189
2018
9.4%
-38.8%
9.4%
34.8%
1.6%
-6.8%
SOURCE: Iceland Post and Telecom Authority McKinsey & Company 22
SFiber is growing fast with Vodafone in the lead but Síminn and Nova gaining ground
Broadband
connections in
Iceland xDSL
and fiber
Thousands
Share of fiber
market
Percent
101 105 107 110 112 116 118
123 127 132 134
Fiber xDSL
76 86 7® Q
23
40
3 11 98 40-3 _ 1 1 _ 2 3 ____
53
53
1
23 26 30 34 42 57 64
76 85 95 99 98 95 93 89 90 89 89 85 76 70
2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 2018
100.0 100.0 100.0 V odafone Hringdu
■ Sím inn H 365
■ Nova ■ Others
■ Vodafone is losing
ground to Síminn and
Nova
■ Acquisition of 365
slowed down decline
■ Hringdu‘s market share
has remained stable
58.4
7.4 2 .1 = ^
13.2
13.8
5.2.
14.4
8.6
12.7
13.0
.4.4.
22.1
14.8
2.2-
11.3
2016 2017 2018
Source: Icelandic Post and Telecommunications Authority; Telegeography; press search McKinsey & Company 23
J* Unique situation with 100% FTTH penetration in capital area
OR OrkuveitaReykjavíkur
GAGNAVEITA
REYKJAVlKUR
Fiber coverage1
Orkuveita Reykjavíkur (OR) is the municipality owned
energy utility in the capital area
It operates fiber in its energy footprint under the brand
Gagnaveita Reykjavíkur
It then wholesales this fiber broadband to other
TelCos (notably Vodafone, Nova, Hringiðan and
Hringu) under the name Ljósleiðarinn
Plans to expand to Greater Reykjavík Area (e.g.
Reykjanesbær and Árborg)
■
■
■
■
90,000 HP in mid 2018
(~65% of national total)
100% HP in Capital Area
EoY 2018
Plans to increase footprint
by ~24,000 HH in next two
years
■ OR refuses to sell
raw fiber wholesale
■ Síminn has elected
not to purchase
bitstream access
■ As a result, Míla
has been over-
building fiber in
the capital area
Síminn V
Síminn’s subsidiary Míla operates the parent
company’s network and wholesale activities after a
regulator push to separate retail and wholesale within
the incumbent
Currently has the smaller fiber footprint within
Reykjavík area (biggest market by far)
Has a solid nationwide fiber backbone, strengthening
its mobile network and xDSL offering outside the
capital
Uses GPON2 technology
55,000 HP in EoY2017
with 12,000 HC
60% HP in the capital area
in EoY 2017
FTTC to 92% of HHs
nationally
14,000 subscribers mid
2018
Local utilities
outside the capital
area have some
fiber footprint in
competition with
Míla but they are
fragmented and
cover less than a
third of the market
1 Based on m ost recent available inform ation from provider, e.g. com pany w ebsite or annual reports
2 G igabit Passive Optical Network
SOURCE: Press search; company websites; Iceland Post and Telecom Authority McKinsey & Company 24
McKinsey
& Company
Halldor Sigurdsson is a Partner at McKinsey & Company
where he serves clients on a broad range of technology,
operations and strategic topics.
Halldor specializes in telecom and leads McKinsey’s telecom
network transformation service line globally where he has
supported over 50 clients. He has supported telecom
operators, vendors, TowerCos, regulators and 3rd parties in
Europe, Middle East / Africa, Asia and Americas.
Before joining McKinsey, Halldor worked at Microsoft
Research Asia, Iceland Telecom, and Icelandair Engineering.
He holds a Ph.D. and a M.Sc./Civ.Ing. in Telecom
Engineering and Economics from the Technical University of
Denmark, as well as a B.Sc. in Mechanical Engineering from
the University of Iceland
Contact information:
Halldor Sigurdsson@McKinsey.com
+45 51368514
mailto:Halldor_Sigurdsson@McKinsey.com