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Þingmál lagt fram: 27.11.2018 Tegund þingmáls: Þingsályktunartillaga Fjöldi umsagna við þingmál: 12 Fjöldi umsagnarbeiðna við þingmál: 31 Ferill þingmálsins á althingi.is Sendandi: McKinsey & Company Viðtakandi: Umhverfis- og samgöngu­nefnd Dagsetning: 11.04.2019 Gerð: Upplýsingar
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