1. 1 Regulatory Challenges of Next Generation Networks Regulatory Policy Institute Annual Competition and Regulation Conference 2008 Oxford, 15 th & 16 th September 2008 Marcus Weinkopf, Deutsche Telekom

2. April 24, 2008Marcus Weinkopf – Deutsche Telekom2 Invest: 2000 €, Depreciated over 5 years Nutrition: 500 € p.a. Output: 3000 Liter p.a. Regulator fixes  Rate of Return Calculates efficient  Investment  Depreciation  Variable Costs  Common Costs divides by output Price per Liter Cost-Based Price Regulation: Basics

3. April 24, 2008Marcus Weinkopf – Deutsche Telekom3 Next Generation Milk 1€ The Next Generation: New Colors for the Market Next Generation Access  Same starting position for all network operators  Substantial investments needed  High risk of investments Invest: 2000 €, Depreciated over 5 years

4. April 24, 2008Marcus Weinkopf – Deutsche Telekom4 Next Generation Milk 1€ Cost-Based Regulation with Multiple Business Models ? Reseller / “Bitstream Access” Next Generation Milk 1€ “Committed Investor” Invest: 2000 €, Depreciated over 5 years Despite strongly differing risks, traditional „cost-based“ regulation would lead to equal prices for both business models! !

5. April 24, 2008Marcus Weinkopf – Deutsche Telekom5 Next Generation Milk 1€ Next Generation Milk 1€ When Regulation Makes No Difference: Why Should One Take Risks?

6. April 24, 2008Marcus Weinkopf – Deutsche Telekom6 Cost-Based Regulation for New Infrastructures: A Perfectly Regulated Access to Nowhere?

7. April 24, 2008Marcus Weinkopf – Deutsche Telekom7 FTTH/B: Europe Lags Behind Asia and the U.S. Anzahl der Glasfaser-Nutzer in Mio. 0 2 4 6 8 10 12 Europe USA Asia 2004 1 2006 1 2004 1 2006 1 2004 1 2006 1 2007(E) 2 18 Number of fiber-based subscribers in Mio. Subscribers in Mio.  Recent trends show: Fiber-based infrastructure grows in all regions, but at significantly different rates.  Only slow increase of fiber access users in Europe. Significantly faster growth in the U.S. and in Asia.  In 2004, European fiber network roll- out was still ahead of the U.S. Since 2006, the picture changed dramatically and with massive fiber investments, the U.S. left Europe far behind.  While Europe passed the 1 million barrier of fiber-connected homes thanks to a 30% increase in 2007, the dynamic is still much faster in the U.S. and in Asia. 1 Source: IDATE (2007). Europe: EU-5 +NL+SW; Asia: Korea, Japan 2 Source: Estimates of the FTTH Council for 2007

8. April 24, 2008Marcus Weinkopf – Deutsche Telekom8 Demand for Bandwidth Will Increase Significantly Growth of data traffic in fixed networksDevelopment of network performance Source: Alcatel Lucent 2006-2007; Cisco, Global IP Traffic Forecast and Methodology, 2006-2011 Ø Bandwidth per user Development fixed networks Factor 10-25 Factor 10-25 Factor 10-25 Development mobile networks Time Tera Byte/Month Growth of data traffic in mobile networks UMTS HSxPA LTE EDGE IMT Advanced ADSL ADSL2+ VDSL FTTH (NG-GPON) FTTH (GPON)

9. April 24, 2008Marcus Weinkopf – Deutsche Telekom9 Next Generation Networks need Next Generation Regulation  Deutsche Telekom starts with close to 100% fixed network market share  Existing State-of-the-art Network Redistribution of market shares  Decreasing retail prices  Regulation of existing networks:  Access  Wholesale Prices Regulation Market  Strong broadband competition  Substantial investments in NGA & NGN needed  Same starting position for all network operators ? 1998 PSTN / DSL 2008 NGN & NGA (FTTX)‏ Regulation Market

10. April 24, 2008Marcus Weinkopf – Deutsche Telekom10 Deutsche Telekom’s Move towards NGA: T-Entertain / VDSL  TV for the mass market launched in 2007  Eoy 2007: IP TV via VDSL in 27 cities, ADSL2+ in 750 cities; Plan 2008: IP TV via VDSL in 40 cities, ADSL2+ in 1000 cities; Mid term: VDSL in up to 50 cities  IP TV “Entertain”: 150 TV channels, 2600 VoD titles  T-Home “Entertain” coverage: 44 % / 17 Mio. Homes. Target for 2008: 20 Mio. Homes

11. 11 German Market: The Fiber Race to the Home has Started Have you found the bottleneck? Not yet.. Source: Wilhelm.tel presentation, November 2006, bubbles by DT  Roll out Start: July 2006  Current Coverage: 10 – 20,000 HH in Cologne  Plan: up to 800,000 HH in 2011  Roll out Start: October 2007  Current Coverage : 600 HH in Munic und Augsburg; in 2008: 110,000 HH  Plan: up to 400,000 HH in 2011  Roll out Start: August 2006  Current Coverage : 90,000 HH in Norderstedt and Hamburg  Further roll out planned  Roll out Start: 2005  Current Coverage : 2000 HH in Westerstede; Lohne under construction  Plan: Roll-out in Oldenburg beginning in 2008 Other announc- ements by

12. 12 FttH: Strong Economics of Density, Nation-wide Roll-out requires Enormous Investments FTTH Coverage (in %)‏ 100 No economically viable roll-out One FTTH Network + Cable Infrastructure Competition FTTH/Cable 204060 80 0 Required Investment per HH Region 1 Region 2 Region 3

13. Next Generation Regulation: Regionalization Appropriate 13 Service-based competition through access to NGA- network Infrastructure competition FTTH/cable Symmetric opening of ducts as enabler No regulation Priority for commercial solutions Subsidiary price- and access regulation with risk- sharing possible No economically viable network roll-out possible Structural funds PPP/tenders Non-discriminatory access Region 1Region 2Region 3 Increasing costs per access line  Regulatory decisions must reflect regional/local conditions of competition  Decisions on access and prices for NGAs must be long-term – no regular short term review of conditions every 2 years  Access conditions must allow for flexible pricing by the regulated operator and fair risk sharing between investor and access seeker

14. 14 Next Generation Regulation: Network Access Today: Regulated Access to each Element of the value chain In- Ho us e Sub- Loop Unbu nd- ling ULL Col - loc atio n Lea sed Lin es Res ale & BS A ZIS P & Gat e & OC IC & Car rier Sel ecti on Access Network Operators ISP Telephone SP In- Ho us e Duct s BS A or Tomorrow: Regulators should focus on only one Type of Access, … ( … and leave room for alternative commercial arrangements.)

15. Wholesale Prices: Investment Risk Must be Taken into Account 15 Proposal for the Review No risk sharing  No mechanism to adequately reflect the investment risk  Investor fully bears the risk of sufficient network utilization  Investment is not profitable in early market phase whereas access seeker can make a profit right from the beginning  Market entry possible anytime (free “option value“) Risk sharing through:  Long-term contracts with committed duration and quantities per time period or  Up-front payments  Access seeker partly takes over the investment risk Risk sharing through risk premium  Access seeker pays price basis plus risk premium for “option value“  Risk premium decreases with growing market penetration  Price squeeze test must reflect the Risk Sharing Mechanism: Wholesale Price > Retail Price Priority of commercial solutions! Regulation of NGA under current regulatory regime Committed Output/ Time Retail price Output/ Time average costs regulate d price Wholesale price Output/ Time Price according to supposed network capacity utilization x** x Retail price x1x1 P1P1 Price depending on duration and quantity of contract Wholesale price average costs Risk premium price basis Wholesale price Price incl. risk premium average costs Amount of risk to be shared between access seekers and investor x* P2P2 x2x2

16. 16 Conclusion:NGAs call for fundamental changes of the regulatory framework Required changes for NGA Network Access  Symmetric: Opening all ducts  No regulation in case of existing or potential infrastructure based competition  Access obligations only for one step of the value chain (ducts or BSA)  Longer approval periods (up to 10 years)  Appropriate risk sharing mechanisms  Stable wholesale pricing also for the remaining life of the copper network Wholesale Price Regulation Retail  No regulation Current Framework  Asymmetric obligations for access to ducts to DTAG only  Regulation also in regions with infrastructure based competition  Parallel network access on several steps within the value chain  Maximum validity period of regulated prices: 2 years.  No mechanism for risk sharing through wholesale pricing  Constant pricing pressure  Regulation

17. 17 Thank you for your attention. Marcus Weinkopf Vice President Regulation Wholesale and Networks Head Office T-Home, Deutsche Telekom AG, D-53105 Bonn marcus.weinkopf@telekom.de