Economic Analysis by Kamal_Fouad


									Introducing Analysys Mason

Expertise and Experience in Applying Economic
Chip Shooshan

Q3 2007

As a company, we have both expertise and experience in
applying economic analysis to a wide variety of issues for
                Expertise                                    Experience
   Our economists and analysts have worked      We have applied our knowledge and
   with public regulatory bodies and private    expertise to help clients solve “real world”
   companies worldwide                          problems relating to:
   We have worked on cutting edge issues,            market definition
                                                     market review
        economic benefits of advanced network
        solutions (e.g. WiMAX, SLU)                  existence of market power
        understanding the market dynamics for        competitive pricing
        future spectrum usage
                                                     merger support


Analysys Mason has the capability to conduct a variety of
forms of economic analysis for both regulators and
operators across all our core sectors of expertise
               Broadband &                  Mobile               Regulatory

Operators              Litigation         Pricing
                                                             Merger support
                      Economic            Competitive analysis
                       benefits            Costing
Regulators                                                  Market reviews

                                          Spectrum management
  bodies                                  Policy work


Some of our most significant applications of economic
analysis are presented in the following case studies
  Economic analysis projects

  Case studies Client type        Project type           Summary
  Case study 1   Fixed operator   Merger support         Measuring the impact of the Verizon /
                                                         MCI merger on the competition in the
                                                         Internet backbone market
  Case study 2   Regulator        Economic benefits      Economics of sub-loop unbundling (SLU)
                                                         in the Netherlands
  Case study 3   Government       Competitive analysis   Factors explaining broadband retail price
                 body                                    differences across countries in Europe
  Case study 4   European         Market review          Supporting the European Commission
                 Commission                              preparing the next steps in the regulation
                                                         of e-communications in the EU
  Case study 5   Regulator        Pricing and costing    Development of retail and
                                                         interconnection charging models for the
                                                         regulator of an African regulator
  Case study 6   Regulator        Spectrum               Recommendations for awarding the ‘3G
                                  management             expansion band’

Case studies: Merger support                                                                                                                                              5

    Case Study 1: Measuring the impact of the Verizon / MCI
    merger on the competition in the Internet backbone
        Business challenge
        •   The Internet backbone market is not regulated – rather it is governed by commercial interactions in a competitive market. As a result, it has received
            significant scrutiny in every merger involving a large operator, as governments and competitors seek to ensure that the market remains competitive
            post merger
        •   In the case of Verizon and MCI, we were retained by these two operators to provide an expert opinion regarding the impact of their merger on the
            Internet backbone sector.

        •   We gathered data to show the impact of the merger on the market share      MCI business IP revenues against industry wholesale IP revenues (2000–03)
            of the combined company:                                                                                                     35%
               •   this data included proprietary data from the two companies that
                   we requested and analysed                                                            10                               30%   MCI business

                                                                                       USD (billions)
        •   We also assessed the competitive trends impacting the Internet                                                               25%
            backbone sector, including:                                                                                                  20%   MCI as % of
               •   falling prices for Internet access                                                   6                                      total
               •   increases in backbone capacity resulting from fibre builds and                                                              Industry
                                                                                                        4                                10%
                   new technology                                                                                                              business
               •   increases in peer-to-peer traffic between end-users                                  2                                5%    revenues
               •   increased use of technology such as Internet caches.                                 0                                0%
                                                                                                             2000   2001   2002   2003

        Benefits and results

        •   Two declarations were delivered and filed at the Federal Communications Commission (FCC), as well as analysis used to support the merger in
            front of the US Department of Justice and the European Commission
        •   The FCC agreed with our assessment that the merger was not likely to increase anti-competitive actions in the Internet backbone market, an opinion
            which was also shared by the US Department of Justice and the European Commission. As a result, unlike previous Internet backbone mergers
            involving MCI, the combined company was not required to divest any assets or comply with any other costly conditions.

Case studies: Economic benefits                                                                                                                                              6

    Case study 2: Study to investigate the economics of SLU in
    the Netherlands following KPN’s decision to decommission
    its local exchanges
        Business challenge
        •   We were asked by OPTA to conduct a study to investigate the business case for providers using sub-loop unbundling (SLU) and / or wholesale
            broadband access (WBA) following the implementation of KPN’s next-generation network (All-IP)
        •   As part of its All-IP implementation, KPN was intending to dismantle the vast majority of its local exchanges, and the Main Distribution Frames
            (MDFs) contained within them. As a result, KPN will no longer be able to offer unbundled access the MDF level, and alternative providers will be
            forced to use SLU and/or WBA
        •   We firstly provided an overview of the options that alternative providers
                                                                                         Incremental cost of deployment options for an alternative operator
            have available to them, in terms of:
               •   geographies covered – urban vs. suburban vs. rural                                           1400
               •   co-location options – build second cabinet vs. co-locate with KPN                            1200                            Core network

                                                                                           NPV (EUR millions)
               •   backhaul options – build own backhaul vs. lease backhaul                                                                     MDF-MCL Link
        •   We developed a model of the incremental costs and revenues faced by                                  800
            an alternative provider using SLU/WBA, rather than continuing to use an                                                             MDF equipment
            existing LLU solution. This was done for a range of scenarios                                        600                            SDF-MDF Link
                                                                                                                 400                            SDF equipment
        •   The study concluded that the use of SLU by an alternative provider is
                                                                                                                                                Line rental
            not economically viable as an alternative to continuing to use LLU,                                  200
            except under very optimistic conditions (55% market share of all
            broadband lines and an ARPU increase of EUR10 per month)                                              0
                                                                                                                       SLU   WBA   LLU

        Benefits and results
        •   The results of the study gave OPTA an understanding of the economics of SLU, LLU and WBA. In particular, the importance of affordable backhaul
            from the MDF to the street cabinet was highlighted. OPTA is currently using the study’s results to help formulate its policies regarding this matter
        •   The study and the accompanying model has been published by OPTA on its Web site (
        •   This study has been widely referenced across the industry, including the Spanish regulator (CMT) in its consultation on next-generation access
            networks, and by the European Regulator’s Group (ERG) in its consultation on regulatory principles of next-generation access
Case studies: Competitive analysis                                                                                                                                                                                                                               7

    Case study 3: Investigating what factors explain broadband
    retail price differences in Europe

        Business challenge
        •   Analyse the structural determinants of the price of broadband Internet access and triple-play in Belgium and six other European countries (Austria,
            France, Germany, the Netherlands, Sweden and the UK ) for the Maatschappelijke Integratie – Intégration Sociale (MI-IS), a division of the Belgian

        •   Framework of two ‘lots’ of work:                                                                            35%
        •   Lot 1: a comparative study of retail prices in the residential markets

                                                                                           LLU as a percentage of DSL
                                                                                                                        30%                                                                                                              Austria
        •    Lot 2: an analytic study to consider a wide variety of potential factors
            that could explain the differences found between the offers in the                                          25%                                                                                                              Belgium
            countries in Lot 1 and identify those having a material impact e.g.                                                                                                                                                          France
            differences in
               •   factors influencing the costs of supply (e.g. PC penetration, levels                                 15%
                   of demand)                                                                                                                                                                                                            Netherlands
               •   Extent to which retail prices are related to csots and the drivers of                                                                                                                                                 Sweden
                   these effects (e.g. level of competition, broadband churn)                                           5%
               •   Factors affecting retail prices in general (e.g. incumbent cost of
                   capital, VAT).






        Benefits and results
            Conclusion: Lot 1 concluded that the price of broadband Internet access and triple-play offers in Belgium when compared to the benchmarked
            countries has changed in recent years. From being in the vanguard for high speeds, Belgium now finds itself with prices which are above those
            offered in the Netherlands and France, and indeed above the average of the benchmarked countries for three out of the four speed categories
            Lot 2 concluded that Belgian retail prices are above average for most download speeds due to low market competition, especially low LLU take-up
            Both lots are available on the MI-IS website (
Case studies: Market analysis                                                                                                                                            8

    Case Study 4: Report to support the European Commission
    preparing the next steps in the regulation of electronic
    communications in the European Union
        Business challenge
        •   The directives adopted as part of the European Regulatory Framework for electronic communications require a periodic review of how they function.
            In 2006, the Commission was seeking to review this framework
        •   We worked with Hogan and Hartson to support the Commission in preparing its review by: identifying obstacles to the Internal Market; undertaking
            an examination of the harmonisation mechanisms for ex ante regulation of certain markets; investigating consumer protection aspects; and
            identifying possible amendments to the regulatory framework

        • Addressing these key areas called upon a wide set of skills and                    Information-             Key areas               Conclusions
          experience, and required precise, professional and clearly expressed            gathering activities
        • In order to achieve the objectives of the study, we conducted a small                survey                   Identify
                                                                                                                      obstacles to
          scale survey of companies active in the market and consumer                                               internal market
          organisations, forecast the development of the electronic                          Review data
                                                                                             held by the
          communications services sector, and reviewed a number of issues of                                        Harmonisation                Possible
          current and future interest.                                                                              methods for ex-           amendments to
                                                                                                                    ante regulation           the Framework
                                                                                            Forecast sector
        • We made a number of recommendations ranging between detailed                       developments
          points regarding consistency between Directives, important procedural                                       Consumer
          issues (for example, timetabling for market reviews), and some more                Review of key            protection
          significant policy issues (for example, regarding whether structural                 issues in
          separation should be in the list of applicable remedies).                         implementation

        Benefits and results
        •   Our report presented a number of clear and detailed recommendations to the Commission concerning the regulatory framework and was published
            on their website*
        •   Our efficient approach combining Analysys Mason market and regulatory experience with the legal expertise of Hogan and Hartson ensured that the
            Commission obtained a detailed overview and analysis of the key issues. The Commission also benefited from our noted expertise with a number of
            key issues such as spectrum policy and voice over IP
        •   Our client is considering our recommendations whilst considering its future policy
                 *       Confidential
Case studies: Pricing and costing                                                                                                                                                                    9

    Case study 5: Development of retail and interconnection
    charging models for an Africa regulator
        Business challenge
        •   This particular telecommunications market was the fastest growing in sub-Saharan Africa, but there had not yet been the chance to properly develop
            its regulatory framework. Also retail prices did not seem to be falling at the rate expected. The regulator was determined to put a more robust and
            forward-looking framework for interconnection and retail price regulation in place, and to realise the benefits as fast as possible
        •   We were awarded the six-month contract to evaluate the regulatory price control regime for telecoms services in the country. The fundamental
            objective of this study was to devise a set of recommendations for regulatory intervention in retail and wholesale telephony services to best
            encourage effective competition and, ultimately, produce the optimal outcome for domestic telephony consumers and the market as a whole

        • An approach with two workstreams was adopted. Firstly, determine the                                               Monthly cost of ownership for a subscriber with
          economic / policy goals and then revise regulations and licences to                                          market-average usage on each of an operator’s prepaid tariffs
          empower the regulator to achieve those goals.                                                              1400

                                                                                          Local currency (nominal)
        • This was undertaken by                                                                                     1200         Move from per-minute to
                                                                                                                                    per-second billing
             • identified limitations in the legislation and powers of the regulator                                 1000
             • recommended introduction of new interconnection services to
               ensure operators could only purchase required unbundled
               elements                                                                                               600
                                                                                                                                    Single prepaid tariff
             • developed market forecasts and service cost models in                                                  400            replaced by three             Two new tariffs
               collaboration with the main telecoms operators, which provided the                                                        new tariffs             replaced old plans
                                                                                                                      200                                           in late 2006
               basis for identifying operators with dominant market power
             • formulated specific remedies, including price controls and glide
                                                                                                                       Jan-03       Jan-04              Jan-05     Jan-06             Jan-07
               paths, and drafted modifications to bring the regulations and
               licences up to date with best-practice regulatory tools

        Benefits and results
        •   The project, described by the regulator’s director general as an important watershed in the history of regulation, not only provided policy
            recommendations for retail and interconnection price regulation, but also the modifications to regulations and licences needed to empower the
            regulator to implement those recommendations. It also produced price-control recommendations that helped stimulate effective competition in the
            sector and provided affordable communications services
        •   Provided a robust best-practice framework for national price regulation for years to come
        •   Importantly, the project left the industry informed about the need for, and nature of, the recommended changes
Case studies: Spectrum management                                                                                                                                     10

   Case study 5: Recommendations for awarding 2.6GHz spectrum
   (the UMTS expansion band) for Ofcom
       Business challenge
       •   In 2006, Ofcom were reviewing their framework for awarding 2.6GHz spectrum to maximise economic and social benefits
       •   Key considerations were the promotion of technology neutrality, recognising technical constraints and the impacts of variance of UK policy from the
           CEPT frequency band plan
       •   This required consideration of likely uses (e.g. mobile multimedia, cellular, BWA, PMSE), and the potential demand for paired / unpaired spectrum
           under a wide range of industry and associated spectrum policy scenarios

       • This study was focused on the award options for three bands:
             • 2500–2690MHz (often referred to as the '3G expansion band')
             • 2010–2025MHz
             • 2290–2302MHz.
       • We undertook an extensive market analysis, including an interview
         programme with stakeholders to identify potential uses, interest and
                                                                                      Economic benefit from spectrum scarcity model
         value of the spectrum
       • An economic analysis of potential uses of the spectrum was also

         undertaken, including the development of a ‘spectrum scarcity’ model                                                                    BWA

         to understand the

             • marginal value of spectrum, given the limited quantities available

             • likely split of spectrum between uses under particular market
               mechanisms, especially the demand for paired and unpaired                                                                    High demand
               spectrum under a number of scenarios                                                                                         assumed for
                                                                                         All TDD       125MHz    50MHz      30MHz           both services
                                                                                                        TDD       TDD        TDD

       Benefits and results

       •   We are now well established as one of the key advisors to Ofcom on spectrum policy and award assignments, building on a series of related high-
           profile studies undertaken (for example, the Digital Dividend Review)
       •   We have since assisted Ofcom with further policy work on this topic


  Recent examples of our diverse work in economic analysis
Country /        Client type      Project scope                                         Our achievements

United States    Local exchange   Analyse the cost–benefit arguments for the            Measured the economic benefits of broadband
                 carrier          promotion of broadband deployment via the             deployment in a number of US states, surveyed
                                  removal or simplification of regulatory roadblocks    municipal deployment issues and compared several
                                                                                        case studies to determine the economic return of
                                                                                        broadband deployment versus other municipal
                                                                                        economic expansion options

Singapore        Regulator        Reviewed the mobile interconnection framework,        Identified and assessed a number of options available
                                  with focus on the interconnection charging            to IDA. Our final recommendations were based on an
                                  arrangements. Also highlighted the growing            assessment in light of the need for harmonisation,
                                  importance of preparing for regulatory                detailed quantitative modelling of the economic impact
                                  harmonisation, in light of the trend towards all–IP   on operators, consumers and government
                                  and FMC.

United States    International    Preparation and presentation of a paper to the        The paper focused on the economics of IP VPN
                 carrier          Joint Commission on Commerce and Trade                deployment as an example of a service that can be
                                  Telecom Dialogue meeting, focusing on reducing        provisioned below the current Chinese capital
                                  the capitalisation requirement for entering the       requirement of USD250 million
                                  Chinese telecoms market

Asia-Pacific     Alternative      Develop a future broadband strategy and assess        Assessed the value of a potential acquisition of a local
                 operator         the acquisition opportunity, by assessing recent      ISP for realising their broadband strategy and
                                  market and regulatory developments                    consideration of the use of fixed wireless technologies
                                                                                        such as WiMAX to provide broadband services

Western Europe   Private equity   Detailed review of the integrated business plan of    Helped to refine the assumptions in the business plan
                 firm             a major European cable TV provider, resulting         about the capex schedule. Our report served as a basis
                                                                                        in the debt syndication process                  288-175
                                  from the merger of several smaller operators

 Further examples of our diverse work in economic analysis
Country /        Client type       Project scope                                       Our achievements

United Kingdom   Regulator         Recommend the most appropriate award                This high profile project included an extensive market,
                                   process for spectrum released as part of the        technical and economic analysis of alternative uses of the
                                   digital switchover
                                                                                       spectrum and consideration of any areas where market
                                                                                       failures may arise

Western Europe   Private equity    Technical and economic assessment of a fibre-       Completed economic valuations of the entire network using
                 firm              optic network                                       both the replacement value and DCF methodologies,
                                                                                       accounting for obsolescence risks

Luxembourg       Regulator         Litigation support and training the telecoms        Implemented the New Regulatory Framework in
                                   team in regulatory, economics and market            Luxembourg, including both the wholesale and retail
                                   competition issues, in partnership with a legal     broadband markets

Lesotho          Regulator         Designed a structured approach to tariff            Recommended tariff regulations (e.g. cost-based
                                   regulation. Build upon international practices in   interconnection, price cap regime) based on detailed cost
                                   market definition and analysis to arrive at         models of the fixed and mobile operators in Lesotho
                                   transparent and appropriate regulatory
                                   measures specifically for Lesotho

United States    Financial         Valuation of spectrum holdings                      Gathered a number of valuation benchmarks based on
                 organisation                                                          similar licences to estimate the total value of the holdings

Western Europe   Mobile operator   Assess the economic impact of the glide path        Developed a high–level market model for the mobile market
                                   imposed by the regulator on mobile termination      and estimated the impact of the rate reduction imposed by
                                   rates to the mobile operators                       the regulator on interconnect revenues / costs, EBITDA
                                                                                       margin and termination costs

Latin America    Regulator         Developed a mobile interconnection policy           Completed a qualitative and quantitative assessment of
                                                                                       important pricing issues such as network externality and the
                                                                                       likely effects on operators and consumers of changing
                                                                                       interconnection prices

The modular approach that Analysys Mason has
developed for detailed LRIC modelling is founded on our
competence with economic principles
  Conceptual issue in LRIC modelling                  Possible relevance of economic theory

              What size of operator?               Impact of modelling the costs of actual / hypothetical operators

            How efficient an operator?                        Understanding efficiently-incurred costs

            Based on what technology?                      Implication of multiple technology generations

    Standalone or vertically integrated network?          Understanding economic costs of retail activities

            What depreciation method?                         Understanding of economic depreciation

             What size of increment?                       Impact of increment choice on common costs

             Which mark-up method?                       Understanding whether Ramsey pricing is suitable

           Application of costs to pricing                   Appropriateness of externality surcharges

    For what year or years are results required?    Implication for the cost evolution trends that can be inferred


Analysys Mason has the in-house expertise to develop
optimisation models that can understand the dynamics of
complex problems
 Business challenge
 •   A problem which is not directly solvable due to its sheer complexity e.g. in terms of number of dimensions or possible solutions
 •   Cannot be solved using a direct calculation: needs a cyclic calculation which can gravitate towards good solutions (i.e. optimisation)
 •   Focus is more about understanding the properties possessed by good solutions, rather than the actual solution itself

 Approach                                                                             Illustration of algorithms
                                                                                         ‘Breeding’ solutions using a genetic algorithm
                              Inputs           Output           Algorithms                                       First parent                    Second parent
        Planning                                                                                                                                                         Options
                                                                                                                Second dimension                 Second dimension
         phase                                                                                                                                                             Option 1
                                  Model structure (Access core)                                                  1   2   3   4       5               1   2   3   4   5

                                                                                          First dimension
                                                                                                            A                                    A                         Option 2
                                                                                                            B                                    B

     Construction                                                                                           C                                    C                         Option 3
                              Interface         Database            VBA*                                    D                                    D
                                                                                                                                                                           Option 4
        phase                                                                                               E                                    E
                                                                                                                                                                           Option 5
                                                                                                                                                                           Option 6
                                   Interface                    VBA
          phase                                                                                                                  A
                                                                                                                                 B                           “Mutation”
     Enhancement                                                                                                                 D
                                   Interface                 VBA + C?                  “Crossover”                               E
        phase                                                                                                                                                        Illustrative

 Benefits and results

     A structured, but upgradeable, environment with which to explore the problem in depth
     Ability for the user to explore solutions at a deep level, with several different algorithms included if so desired
     Enable the user to understand the key attributes of good solutions to the original problem
                   * Visual Basic for Applications, the programming language within Microsoft Access

  Industry commentary
The Negroponte Switch: ten years on
               In his book Being Digital*, Nicholas Negroponte, the founder of                                     In the USA, according to the Federal Communications Commission (FCC),
                MIT's Media Lab, predicted that the world was moving from one                                      98% of the population lives in a county with access to three or more mobile
                where telephone calls were made over fixed wires and                                               operators, up from 88% in 2000 (the first year in which such statistics were
                television was delivered wirelessly, to one where just the                                         kept). Mobile penetration stands at nearly 75%, and up to 10% of households
                reverse obtained. Dubbed 'the Negroponte Switch,' this                                             have dropped or have never had fixed-line telephone service (Exhibit 1
                prediction caused quite a stir at the time.                                                        compares the USA and other countries).
               A little over a decade later, it is timely to assess how prophetic                                  Research we have conducted in the USA suggests that among mobile
               Negroponte actually was. It turns out that while he missed the                                      subscribers (as opposed to the population as a whole) the percentage of those
               mark in some respects, he was spot on in others.                                                    who have ‘cut the cord’ at home is as high as 28%. We have also determined
                                                                                                                   that even among those who have a fixed line in their homes, a significant
                                                                                                                   percentage consider their mobile phone as their primary phone and only give
                                                                                                                   out their mobile number. Mobile calling from home has displaced all types of
                                            45                                                                     fixed-line calling – not simply long-distance calls as is commonly thought.
                                                                                                                   When asked if they think that their mobile phone would be satisfactory for all
               Mobile-only households (%)

                                                                                                                   the calls they make or receive in their homes, close to two-thirds of
                                            35                                                                     respondents say it would. Of course, there are some trends to the contrary as
                                            30                                                                     cable television companies, in particular, roll out VoIP offerings in an attempt to
                                                                                                                   attract and retain their fixed-line cable television subscribers.
                                                                                                                   As for television, Negroponte accurately foresaw the emergence of cable
                                                                                                                   television as the dominant transmission medium for video programming. Nearly
                                            15                                                                     all US households have access to cable television systems, and over 60% of
                                            10                                                                     television households subscribe to cable service. But many households still
                                                                                                                   rely on over-the-air signals for primary service and/or for additional TV sets.
                                             5                                                                     And Negroponte did not foresee that satellite broadcasting would capture a
                                             0                                                                     sizable segment of the multi-channel video market – with 23% of television



                                                                                                                   What Negroponte failed to account for altogether in predicting his switch was
                                                                                                                   the importance of data services and especially the various Internet
Exhibit 1: Mobile-only households: EU and the USA (Sources: for EU countries,                                      applications. Today, fixed-line operators have a decided edge. Wireless
Eurobarometer Special – eCommunications household survey, 2006; for the                                            alternatives have been much slower to emerge. But Negroponte was no doubt
USA, CTIA and FCC (adjusted))                                                                                      on to something and it may be best to revisit things in another decade.

* Negroponte, N., Being Digital, Alfred A. Knopf, Inc. (New York, 1995)

        Chip Shooshan
     Analysys Mason Limited
   818 Connecticut Avenue NW
           Suite 300
   Washington DC 20006, USA
       Tel: (202) 331 3080
       Fax (202) 331 3083


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