1. 1 Investment incentives in an environment of dwindling voice revenues* Harald Gruber Presentation for Conference “The Future of Voice” Geneva 15-16 January 2007 *The opinions expressed are of the author and need not necessarily reflect those of the EIB.

2. 2 Outline Sector overview Fixed line trends Investment Role of regulation Conclusion

3. 3 Past drivers for investment and growth Technology –Cost reduction –Performance increase Regulatory change –Liberalisation –Changes in market structure Fixed: cost based access prices, service competition Mobile: new licenses, facility based competition

4. 4 Fixed line market Slow revenue growth: –Pressure on tariffs –Switch to flat fees –Fixed-mobile substitution Increasing role of data/broadband revenues Pressures on profit margins Customer access as key revenue source

5. 5 Fixed line revenues in EU Source: EITO

6. 6 Decline in investment Fixed line telecommuncations in EU Source: London Economics

7. 7 Fixed line regulation Bottleneck in local loop access Asymmetric access regulation of DSL (unbundling) vs. cable modem Regulatory remedy: open access at cost based prices: –Service based competition: bitstream, resale –Facility based competition: Full LLU, shared access

8. 8 Ladder of investment theory Short term goal of service based competition Long term goal of facility based competition First service based entry… …then facility based entry

9. 9 Source: EU Commission

10. 10 Investment incentives Increasing investment profile for new entrants. Investment effect on incumbent uncertain

11. 11 Source: EU Commission, LE Investment ladder without investment?

12. 12 Is there a paradox? Does data communication require less investment or are investment incentives diminished? Is unbundling complement or substitute for new entrants’/incumbents’ investment? There is empirical evidence (for US) that inter-platform competition has significant positive effects on diffusion of broadband

13. 13 Source: European Commission EU is moving away from platform competition

14. 14 A counterexample Source: OECD

15. 15 Share of broadband platforms Source: OECD

16. 16 Platform competition May not be feasible to the same degree for all EU countries because of absence of cable networks Look for alternatives, e.g. radio based technologies Scope for issuing spectrum licenses

17. 17 Regulatory challenges for fixed line sector Encourage more investment Issue of “forbearance” on new investment What to do with countries with single platform ? Consider non-uniform regulation across EU? –Mandatory unbundling (possibly limited time horizon) for countries without alternatives to DSL –Deregulation in countries with platform competition

18. 18 Conclusion Data revenue increase share in total revenues and profit margins for traditional voice business decline Regulation has strong effects on investment behaviour Regulation should not represent a permanent claim on incumbents assets Stimulation of facility based competition