Contact: Cheryl Krauss
Bain & Company
Telephone: +1 646-562-7863
cheryl.krauss@bain.com

NEXT GENERATION INFRASTRUCTURE COMPETITION DRIVES MARKETS TO GREATER BROADBAND SPEED AND ACCESS

New Study Finds Path to Next-Generation Bandwidth Speed and Coverage More Likely in Markets with Two Competing Fixed Access Infrastructures Complemented by Wireless Competition

Brussels-October 13, 2009- Increasing consumer demand for high bandwidth telecom services has created the need for a new level of infrastructure-based competition for next-generation access (NGA*). Infrastructure-based competition will allow migration to higher bandwidth networks in line with the development of consumer demand and with the ability for European telecommunications providers to recoup their network investments. A new study 'Next Generation Competition-Driving Innovation in Telecommunications'-released today by Bain & Company, developed in conjunction with international cable operator Liberty Global, Inc.-finds that countries with the greatest availability of two competing fixed access infrastructures spur innovation. For example, in the Netherlands, Belgium and Switzerland two fixed access infrastructures cover more than 80 percent of the population, resulting in higher average broadband speeds of 5.3 Mbps compared with 4.0 Mbps in other Western European markets (a 30% higher bandwidth). Conversely, countries in Europe with the lowest fixed access infrastructure competition (for example Greece) exhibit the lowest bandwidth and internet penetration.

Editor's Note: NGA is defined by ultrafast high bandwidth speeds of more than 50 Mbps (million bits per second), a level roughly 10-times greater than average bandwidth speeds currently found in Europe.

The study was presented today to a meeting of telecom industry leaders in Brussels and senior officials from the European Commission. The study will also be presented to Viviane Reding, the European Information Society Commissioner.

The study finds this competitive dynamic has higher probability to develop in approximately 45% of European households where former PTTs, cable operators or in some areas new fiber operators compete directly and may increasingly compete across service categories (e.g. TV, Voice, Broadband). Markets with one single fixed access infrastructure lack the competitive dynamic between access infrastructure owners with the incentives of "first mover investment advantage" and operate with heavier regulations. Although wireless speeds will not achieve those of wireline infrastructure in the foreseeable future, 3G and 4G networks are a reasonable alternative, especially in 'greenfield' markets where a fixed infrastructure is not available to upgrade (e.g., rural areas) or markets with lower bandwidth demands.

"The evolution to next-generation access in Europe will not happen in one single leap," said Michele Luzi, head of telecommunications, media and technology in Europe for Bain and lead author of the study. "Markets will need to operate in more efficient ways to allow telecom providers to innovate and increase bandwidth while earning a reasonable profit along the way."

The high levels of capital investment required, indicate that it is difficult for most markets to support multiple fixed access infrastructures. Therefore, two infrastructures seem to be a more viable environment to promote technology innovation than the alternatives: either a myriad of failures of financially unsustainable players or a monopoly without infrastructure competition to stimulate innovation.

Investment costs for NGA coverage can range widely, from 65 to 1500 euro per household, depending on the underlying technology, the current infrastructure, and the population density. Cable networks (based on DOCSIS 3.0) have a cost advantage as the initial investments to offer NGA bandwidth of over 50 Mbps are significantly lower than upgrading traditional telecom networks to VDSL or FTTH (Fiber-To-The-Home). Studies have estimated FTTH investments to be as high as 70 billion euro in Germany, and 40 billion euro for France and the UK. Bain's analysis shows that under certain assumptions a single, massive upgrade effort based on top-down target setting would require households' telecommunications spending (ARPU) to increase by 57% for FTTH, 19% for VDSL and 11% for DOCSIS 3.0 to recover the high investments of an infrastructure owner.

"With uncertain development of consumer demand for high bandwidth applications, innovation will likely be technology-led rather than a result of consumer pull," said Jens Schädler, a Zurich-based Bain partner and co-author of the study. "But consumers' willingness to pay needs to be the ultimate driver of how fast the investments in network upgrades happen."

For a copy of the European 'Next Generation Competition - Driving Innovation in Telecommunications' study or to schedule an interview with Michele Luzi or Jens Schädler, please contact Cheryl Krauss at email: cheryl.krauss@bain.com or +1 646-562-7863, or Frank Pinto at email: frank.pinto@bain.com or +1 917-309-1065.

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About the Next Generation Competition-Driving Innovation in Telecommunications Study

Bain analyzed the major factors that drove the evolution of telecommunications in the past-including market forces, competitor dynamics, business strategies and the regulatory environment-and then assessed the potential impact of these factors on the future development of telecommunications in Europe. The research accounted for differences in market conditions across the various European countries by evaluating countries with similar conditions. Launching from this point of departure, the authors laid out the potential path the future evolution of telecommunications might take in specific types of markets and presented likely scenarios of future market structures, taking into account the possible evolution of telecom infrastructure and consumer demand.

[Editor's Note: This is the second telecom sector research collaboration between Bain and LGI. In 2007, they co-branded and published 'The Digital Video Consumer: Transforming the European Video Content Market' study. Copies are available upon request.]

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