Axel Desmedt, Member of the Council, BIPT

Consumer broadband markets in an NGA context – the Belgian case

Axel Desmedt Member of the Council BIPT

WIK Conference Brussels, November 18, 2014

TélécomTelecom Media Radio Outline

• Market context • Regulation in Belgium • Broadband • Broadcasting (cable) • Impact of regulation • Court decision of 12 November 2014 • Further thoughts

TélécomTelecom Media Radio I. Market context in Belgium  NGA deployment in Belgium

Belgium has one of the largest coverages of NGA networks in EU: - 89% VDSL2 - 93% Eurodocsis 3.0

Source: Cullen, November 2014

TélécomTelecom Media Radio I. Market context in Belgium

TélécomTelecom Media Radio I. Market context in Belgium:

Key role of multiple play in retail market(s):

Number of bundles sold Source: BIPT, 2014 MS per type of product Source: BIPT, 2014 Alternative broadband operators can’t compete effectively without television component

TélécomTelecom Media Radio I. Market context in Belgium: broadband  National network coverage for the incumbent  Broadband market players:  Belgacom (now Proximus, incumbent)  4 cable operators (each in their respective footprint)  Several alternative operators (OLOs) that offer broadband internet

Source: BIPT TélécomTelecom Media Radio I. Market context in Belgium: broadband

70 80

74 74

60 70 DSL Belgacom

50 58

40 Kabel

30 xDSL OLO

10 FWA

Thousands

14 10 14 21 30 15 14

13 21 12 35

- - - -10 - -20 -30 -40 -50 S1 2011 S2 2011 S1 2012 S2 2012 S1 2013 S2 2013

Due to the lack of a TV offer, OLOs are losing market share with continued negative net adds since 2008. In the longer run, without adequate regulation, only two network operators would remain on the market (1 DSL operator with national footprint and 1 cable operator on its footprint).

TélécomTelecom Media Radio

I. Market context in Belgium: broadband

. Declining use of (subloop) unbundling due to: . The introduction of VDSL vectoring . Closure of major LEX’s (Local Exchanges) VDSL <50 Mbps Docsis 3 Vectoring > 100 Mbps >50Mbps

Sale of fixed broadband wholesale lines by Belgacom Source: BIPT, July 2014 TélécomTelecom Media Radio I. Market context: price evolution broadband Evolution nominal broadband prices Telenet Evolution nominal broadband prices Belgacom €70 €70 4 MB 10 MB 30 GB 30 GB €60 30 MB €60 Unlim 120 MB Unlim

€50 €50 4 MB 10 GB 5 MB 10 GB 30 MB €40 Unlim €40 60 MB 100 GB 0,5MB 0,5MB 0,4GB 0,3GB €30 30 MB €30 30 MB 150 GB 100 GB

€20 0,5MB €20 1 MB 0,4GB 0,4 GB 30 MB 30 MB 100GB 25 GB €10 €10

€- €- Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 2005 2006 2007 2008 2009 2010 2011 2012 2013 2005 2006 2007 2008 2009 2010 2011 2012 2013

BasicNet Comfort/Basic Express/ Fiber Turbo/XL BasicNet Comfort/Basic Express/ Fiber Turbo/XL Speeds and volumes have significantly increased, but prices of Belgacom and cable-operators have remained stable or even increased. Similarity of the range of offers and prices between Telenet and Belgacom. Belgacom offers only one speed. For an equal price, Telenet provides higher speeds

TélécomTelecom Media Radio I. Market context: Divergent price evolutions mobile versus fix, but both below CPI

10 TélécomTelecom Media Radio I. Market context: Broadcast

 4 cable operators each in their own coverage area:  Telenet (Flanders and Brussels)  Brutélé (Wallonia and Brussels)  Tecteo (Wallonia)  Numéricable (Brussels & Hainaut, ex AIESH)

 Three IPTV-operators:  Belgacom TV, operating nationwide since 2005  BASE through the brand SNOW (based on a commercial multicast offer)  Billi (based on unbundling offer), only in 19 communities.

 A few operators operating via satellite

 OTT content providers (e.g. Netflix, Stievie)

TélécomTelecom Media Radio I. Market context: Broadcast

 Market shares of cable operators in their geographical markets are superior to 70% and remain high despite presence of Belgacom TV since 2005  Belgacom : market share has grown steadily over the past few years towards 10%-20%, depending on the coverage area  TV Vlaanderen, Télésat (satelite) and Alpha Networks (IPTV offer via LLU) have a very low combined marketshare 4,00 3,50

3,00 2,50 2,00 1,50 1,00

Subscribers (millions) Subscribers 0,50

0,00

2006 2007 2008 2009 Q1 2010 Q1

TélécomTelecom MediaIPTV Anlogue + DigitalRadio (cable) Analogue only I. Market context: entry & exit Market entry Market exit DSL DSL

“With SNOW, KPN Group Belgium will enable consumers only to pay for what they really want and customers can personalize their package à la carte.” Market entry Cable “Mobistar sets cable rivals deadline to open networks” Reuters, January 2014 “Mobistar’s new television and broadband Internet services over the cable network are expected before the end of this year. These services will be among the first of this type in Europe to be based on regulated cable networks.” Mobistar corporate, September 2014

TélécomTelecom Media Radio II. Broadband Regulation  The Belgian 2011 market analysis

Broadband Broadcast

BGC SMP BGC SMP Cable SMP on analogue & digital Market 4 Market 5 Bitstream incl. Resale Digital TV Resale LLU Multicast analogue transmission broadband

TélécomTelecom Media Radio II. Broadband Regulation  Broadband markets: approach in Belgium

Retail Wholesale

Product: The retailmarket includes broadband access services of all speeds (including ADSL, Definition VDSL; EuroDOCSIS 3) Geographical: national market

Relevant Relevant upstream markets: M4 and M5 market (excluding cable)

SMP The incumbent Belgacom is found having analysis SMP on both markets

Access (incl. Price Remedies Transparency Bitstream control & Non-Discr. (cost and orientation) multicast) TélécomTelecom Media Radio II. Broadband Regulation

 Lack of indirect constraints: DSL vs Cable

 Cost share of wholesale price is below 50% => OLOs can absorb (part of) a wholesale price increase  Critical loss analysis: Actual loss < Critical loss  Price elasticity lower than in other European Countries  OLOs subscribers could significantly migrate to Belgacom

 In a greenfield situation, Belgacom would not increase its internal wholesale price (no non-discrimination remedy in greenfield analysis) and thus its own retail price  Belgacom would also attract part of the net adds coming from OLOs  Easier to migrate from DSL to DSL than from DSL to cable (modem, internal cabling)

 In the past, Belgacom proposed wholesale prices’ increases and challenged cost oriented wholesale price reductions (no evidence of constraint having an effect on wholesale prices)

TélécomTelecom Media Radio II. Broadband Regulation  Transparency  Non-discrimination  Cost orientation / no price squeeze

 Access: Belgacom ethernet-network sub-divided into 5 zones with 2 Local loop unbundling interconnection points in each zone connected to the local Imposition of Multicast (or equivalent) LEX’s (Source: Belgacom) Market 4/5 – VULA / Bitstream VULA & Bitstream are both enhanced active remedies Belgian Bitstream has two interconnection points: Local at parent Ethernet node (MDF level) Regional at distant Ethernet node (5 main cities) Local Bitstream is equivalent to VULA

TélécomTelecom Media Radio III. Broadcasting (cable) regulation  Broadcasting markets: approach in Belgium Retail Wholesale

Product: The retailmarket for the delivery of TV signals Definition Geographical: corresponding to the operator’s footprint

Relevant market for ex ante regulation Relevant market 3 criteria test

SMP SMP of the main cable operators analysis

Resale of Digital TV Remedies Resale of analogue transmissio broadband TV n

TélécomTelecom Media Radio III. Broadcasting (cable) regulation  Relationship with the Commission recommendation (2007) Broadcasting market was (and is) not listed in the Recommendation on relevant markets:

3 criteria test High non-transitory barriers to entry Network and economies of scale/scope (including analogue functionality) not easy to duplicate for new entrants No tendency to effective competition  High market shares (above 70%)  Stable or increasing prices  Impact of bundles Efficiency of competition law  Refusal of access (and other remedies) are difficult to tackle with competition law alone  Long delays and unpredictability of competition cases

TélécomTelecom Media Radio III. Broadcasting (cable) regulation

 Cable: Geographical segmentation on the base of cable operator’s coverage zones as opposed to Broadband where the market is national:

 Lack of demand– and supply substituability between cable networks (located in different geographical zones).  No chain substituability demonstrated: Cable operator A Cable operator B => When Belgacom decreases its price with 10% the cable operator will follow. Chain substitution => But Belgacom won’t decreases its price ✗ ✔ when one cable operator decreases the price with 10%, because the revenue loss due to price decrease will be larger than the revenue Belgacom loss due to customer churn.  Heterogenous competition circumstances between different cable coverage areas : differences in prices, offers (see backup slides) and marketing approaches, market shares and the technical state of cable networks.  Regulatory differences (e.g. must carry)

TélécomTelecom Media Radio III. Broadcasting (cable) regulation

 3 types of access remedies are imposed on all SMP operators:  Access to an analogue TV resale offer  Access to digital TV platform  Access to a resale of the Broadband offer

 Pricing: retail minus (Wholesale price = (retail price VATincl – VAT – content cost) x (1 – Minus%)) and upfront fee  Remedies are imposed in the respective areas of territorial jurisdiction by each media regulator  Special treatment of Belgacom  excluded from access to digital platform & resale broadband offer  Included in access to analogue resale offer (but ultimately chose not to use this)

TélécomTelecom Media Radio III. Broadcasting (cable) regulation

 Retail minus:  It is expressed as a percentage of the reference tariffs  The appropriate reference is the ARPU  Minus is then applied on nominal retail tariffs (WS price = Retail tarif excl. VAT & content – Minus)  Cost categories which have to be deducted:  Content cost  Billing and bad debt  Marketing, sales and customer service  Modems and set-top boxes  Installation and repair (customer side)  Incl. 5% RoS  The promotional value of the barker channel (self- promotion) is deducted in the analogue minus

TélécomTelecom Media Radio IV. Impact of regulation  Impact of the cable regulation:  Creates opportunity for cable operators to extend their coverage area to region where they do not have an own infrastructure  Mobistar, Base & other OLOs can use cable networks next to Belgacom’s network to offer bundels internet+tv to customers;  Possibility for OLO to migrate from infrastructure  Impact of the broadband regulation:  Maintaining and reinforcing existing regulation  Multicast/“sharing” IPTV platform to enable OLO’s to offer triple-play.  Problem with content?  Is content a new bottleneck?  Negotiation of content rights seems to be a problem for new entrants  In a market where 3-play is a flagship product, content is a key component of the offer

TélécomTelecom Media Radio V. Court decision of 12 nov 2014

On 12 November 2014 a judgement on the merits was rendered on the broadcasting market analysis; some selected items:

. Handling of EC comments notably requesting to analyse the related wholesale broadcasting market also (which the regulators did in response to EC comments) does not require a re-opening of the whole market analysis procedure (with consultation etc.); analysis and additional detailed motivation was enough . Relevant services market: exclusion of satelite and DVB-T from the broadcasting market (analogue and digital) was correct (notably considering subsequent failure of satelite offer of Mobistar and divestment of Telenet on DVB-T) . Relevant geographical market definition based on network coverage was confirmed (including finding of lack of chain substitution between cable operators in different geographical areas, despite national presence of Belgacom)

TélécomTelecom Media Radio V. Court decision of 12 nov 2014

. 3 criteria test + SMP analysis were upheld: e. g. Barriers to entry issue: . modified greenfield test is mainly applicable on vertically intergrated markets (not as regards the relationship between retail broadcasting and multicast remedy in ex- market 5) . In practice: multicast has not lead to removing barriers to entry . Switch from analogue to digital offers leveraging power (vast majority of analogue clients go to the same operator in digital) . Prices continued to raise over the years (up to 2014) notwithstanding competition (from IPTV and other platforms) . OTT platforms (online TV) are still complementary and not included in the relevant market . Remedies: . Proportionality of remedies was upheld . Resale of internet: even though remedy is not on the “relevant market” it is possible to impose ancillary remedies when necessary to address the market on which market power exists => in this case, in view of importance of bundles, imposition of access remedy on TV-only was not enough.

TélécomTelecom Media Radio V. Court decision of 12 nov 2014

Exclusion of Belgacom from access to digital TV and internet resale was annulled however: . Court considers that exclusion of Belgacom is not justified and contrary to non-discrimination . No parallelism in M4-5 decision where cable operators are not excluded from access in their own coverage area . Court points at similar handicaps for Belgacom as regards “double connection” if it wants to offer analogue and digital in a multi-TV set environment . Court considers that regulator should have decided to include Belgacom in all remedies . Court annuls this part of the decision without a need to reconsider this decision (note: under Belgian law, the Court has full jurisprudence to take decisions en lieu of the regulator, without there being a need to take a new decision)

TélécomTelecom Media Radio

VI. Further thoughts: Comparison with the new Recommendation

Current regulation of markets 4 & 5 New market recommendation LLU (Physical) Bitstream access Market 3a: Wholesale Market 3b: (Virtual) Local Access (Physical Wholesale Central and/or virtual) Access (Virtual) Local (MDF) Local (MDF) or Local (MDF or street Regional or national regional cabinet) connection (POP) Uncontended Higher contention Uncontended Higher contention Full control Limited control Full control Limited control / Guarantees: / No guarantees / best depends (Choice of effort QoS) Symmetry possible No symmetry Symmetry possible No symmetry

TélécomTelecom Media Radio THANK YOU FOR YOUR ATTENTION

TélécomTelecom Media Radio Backup slides

TélécomTelecom Media Radio Technology Roadmap

>1000M EuroDocsis 1000M 3.1 More fiber in 480M network Converged Cable Access 240M Platform From analog (increase to digital bandwidth efficiency) 120M bandwidth Increase optimization 1000M number of 200M G. Fast nodes Pair bonding 100M Vectoring + DLM 70M Vectoring

50M VDSL2 Digital Line Management (DLM) No extensive FTTH project (only greenfields) because this migration is too expensive (no available ducts, all the cables are buried) and Source: Investor Relations Presentations, 2013 too slow roll out versus upgrading existing TélécomTelecom Media Radio network Belgacom network technical details:

 Roll-out of VDSL vectoring almost complete  Investigating the introduction of FTTH

Belgacom ethernet-network sub-divided into 5 zones with 2 interconnection points in each zone connected to the local LEX’s (Source: Belgacom)

TélécomTelecom Media Radio Cablenetwork technical details

Source: Telenet

TélécomTelecom Media Radio Hybrid Fiber Coax (HFC) Head End PSTN Internet upstream

switch

fiber

coax bidirectional amplifier

Concentration in access network: modems are competing for same bandwidth Source: UGent - IBCN

TélécomTelecom Media Radio Cable vs DSL

DSL is distance dependent HFC is not distance dependent (amplification) DSL is a unique local loop / subscriber HFC is shared

DSL optimised for unicast type activities HFC is optimised for broadcast services

DSL is based on the old PSTN architecture HFC is based on the old TV architecture

Converging onto ALL IP (cost scalability) Converging onto ALL IP (cost scalability)

TélécomTelecom Media Radio Implementing measures: M4/5

 Qualtitative: Multicast reference offer: Belgacom's wholesale multicast reference offer enables the alternative operators to provide digital television by themselves by using the Belgacom TV platform: published BRxx:BRxx is a collective term for all Belgacom's BRUO, BROBA and WBA VDSL2 reference offers: published  Quantitative: Tarification for ethernet/multicast services: to enable an effective Multicast offer the prices of the ethernet transport and multicast services had to be reviewed or determined, this process is ongoing

TélécomTelecom Media Radio Implementing measures: cable

 Qualitative:  each individual operator had to publish a reference offer concerning the imposed access services.  Quantitative:  there was also a decision fixing the prices of these new services to be offered by the cable operator’s All the elements are in place for an OLO to launch its offer from a regulatory point of view.

TélécomTelecom Media Radio