Perspectivas internacionales de sustituibilidad: Internet fijo y movil

International perspectives for internet fixed – mobile substitution* Julienne Liang, economist, France Telecom June 15th 2012 *This presentation represents the analysis of the author and not necessarily a position of France Telecom.

Summary

1 Empirical observation of Fixed Mobile Substitution (FMS) 2 FMS by technological evolution of fixed and mobile broadband 3 Fixed mobile bundling mitigates FMS? 4 Mobile to fixed offloading as efficient cost reduction 5 Investment incentives in mobile network 6 Specific case: fixed monopoly vs. competitive mobile market 7 Future research: Consider LTE as a threat to ADSL and FTTH? 8 Conclusion

2

Empirical observation of Fixed Mobile Substitution (FMS) 

In 26 out of 27 countries of the European Union, current regulations assume that the fixed and mobile broadband markets are complementary or independent



The Austrian case has a exceptional broadband market policy due to the fact that the European Commission admitted that ADSL, cable and broadband mobile belong to the same market in Austria.



The model aims to show that fixed and mobile are highly interdependent even though they are not equivalent.

Austria broadband market:

50% fixed

50% 3G

Source: RTR Austria telecom regulator 3



50% of broadband subscription are 3G mobile



Mobile BB price  Fixed BB tariff.



> 94% population covered by one of 3G operators



CAPEX on 3G in Austria is twice the European average: Austria has perhaps the densest mobile network in Europe

Empirical observation: “Mobile Only” users French and European market in 2011 *: 

74% of population in France have both fixed and mobile offers (62% in Europe**)



15% of population only have a fixed offer  ’’fixed only’’ (9% in Europe)



10% of population only have a mobile offer ’’mobile only’’ (27% in Europe)



1% has none (2% in Europe)

In countries where the fixed network is nationwide covered, the existence of « Mobile only » users reveals the presence of fixed mobile substitution *http://www.arcep.fr/fileadmin/uploads/tx_gspublication/rapport-credoc-diffusion-tic-2011.pdf ** http://erg.eu.int/doc/berec/bor/bor11_54_FMS.pdf “REPORT ON IMPACT OF FIXED-MOBILE SUBSTITUTION IN MARKET DEFINITION”

4

Technical characteristics of fixed and mobile broadband mobility

gm

3G

higher fixed data volume v f  vm

LTE*

higher mobility 3G & LTE network g m  g f shared elements g f  vm

gf

LTE & WiFi Community based on fixed network

WiFi Community

3G&ADSL LTE&ADSL

ADSL

vm

3G&ADSL

FTTH

vf

data volume

Characteristics of fixed & mobile broadband access 

5

Fixed access offers high data volume but very reduced mobility. Mobile offers high mobility and low data volume



Vm of LTE generates a higher substitutability  LTE becomes alternative of ADSL



WiFi Community : Mobile to fixed offload & Mobility of fixed network (alternative of mobile network)



Vf increases with FTTH, thus increasing the differentiation between fixed and mobile access

Game Theory: Timing of the game

Two integrated operators A & B, both offer fixed and mobile broadband

6

•

Stage 0: operators A & B fixe their prices, pfA, pmA, pfB, pmB

•

Stage 1: consumers make their choice between 2 mobile offers mA & mB,

•

Stage 2: consumers choose whether to purchase fixed and mobile from the same operator and benefit from the discount , to purchase the fixed service from the other operator, or not to purchase at all at this stage. The consumers who do not purchase at this stage become “mobile only”

Model : Utility function U mA  g mA  vmA  pmA  ty U mB  g mB  vmB  pmB  t (1  y) mA

mB

y

1

0

Consumers of mA above can buy fA, fB or nothing Discount accorded to consumers of mAfA

Mobile choice

fA Fixed choice

0

x

fB fA

Mobile only x1

Consumers of mB above can buy fA, fB or nothing Discount accorded to consumers of mBfB

x3

1

0

x2

Mobile only

x

x4

1

U f AmA  U mA  v f A  vmA  ( p f A   A )  tx

U f AmB  U mB  v f A  vmB  p f A  tx

U f B mA  U mA  v f B  vmA  p f B  t (1  x)

U f B mB  U mB  v f B  vmB  ( p f B   B )  t (1  x)

Consumers do not know their preferences for fixed offer. They form an anticipation on the fixed offer with expected utility.

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fB

Hypothesis of the model : expected utility Consumers anticipate utility gains coming with a purchase at the second stage 

at the second stage, consumers have the choice between fA, fB or nothing. at the 1st stage, They do not know their preferences for fixed offers and form anticipation about the fixed offers with expected utilities EUA or EUB



Utility to buy A or B at the first stage is U A  U mA  EU A U B  U mB  EU B

where

x1

1

EU A   (U f Am A  U m A )dx   (U f B m A  U mA )dx 0

x2

x3 1

EU B   (U f AmB  U mB )dx   (U f B mB  U mB )dx 0



8

x4

The expected utility is calculated by taking the weighted average of all possible outcomes

Game resolution by backward induction 1/2

Stage 2 Fixed choice

x1

x3

B A U m A f A  U m A  x1

U mB f A  U mB  x2 U mB f B  U m A  x4

y A

B

U mA  EU A  U mB  EU B  y 9

B

A

U m A f B  U m A  x3 Stage 1 Mobile choice

x4

x2

Game Resolution by backward induction 2/2  A  ( p f   A  c f ) y x1 A

A

A

 B  ( p f  c f ) y (1  x3 ) B

B

 ( p f A  c f A )(1  y ) x2

 ( p f B   B  c f B )(1  y )(1  x4 )

 ( pm A  cm A ) y

 ( pmB  cmB )(1  y )

x1

A

x3

B

y

A

x2

x4

B

Stage 0: profit maximization equilibrium prices

10

B

Results in duopoly with two integrated operators Expression at equilibrium Demand for “mobile only” vfB=vfA=vf; vmB=vmA=vm ; B= A = linear approximation on A & vmA

Profits vfB=vfA=vf; vmB=vmA=vm ; B= A=0

Profitability related to introduction of discount to bundling vmB=vmA=0; B= A=  linear approximation on  & (vfA-vfB)

11

Dmobileonly  (1 

vf t

)(

vm   ) t 2t

2 t (v f  vm ) A   2 4t

2

t v  A   fB 2 4t v f (v f  v f B ) v f A  v f B  B A   2t 6t

Intuition Dmo is increasing with technical progress in mobile network vmA and decreasing with A. “mobile only” is reduced thanks to discount A. Technical progress in mobile network negatively impacts the profits.

The bundling is profitable for the operator that enjoys the higher valuation of his fixed network vfA>vfB, and no impact for whole market.

Nash Equilibrium in case of introduction of discount to bundling Pay-off table (profits of firm A) No discount for joint purchase

discount for joint purchase

Firm A

B=0

B>0

No discount for joint purchase A=0

0,0

--,++

++,--

0,0

Firm B

discount for joint purchase

A>0

12

Individually, the firm A always has interest to introduce a discount to bundle to obtain higher profit and whatever the strategy of firm B

Nash Equilibrium in case of introduction of discount to bundling Pay-off table (profits of firm A) Firm B

Firm A No discount for joint purchase A=0 discount for joint purchase A>0

13

No discount for joint purchase B=0

discount for joint purchase

0,0

--,++

++,--

0,0

B>0

Individually, the firm B always has interest to introduce a discount to bundle to obtain higher profit and whatever the strategy of firm A

Nash Equilibrium in case of introduction of discount to bundling Pay-off table (profits of both firms) FirmB

FirmA No discount for joint purchase A=0

discount for joint purchase A>0

14

for joint purchase

discount for joint purchase

B=0

B>0

0,0

--,++

++,--

0,0

No discount

In case of two symmetric actors, Nash equilibrium is (0,0) , corresponding to the situation where both firms introduce a discount to their bundled products.

Case: two asymmetric operators: vfA>vfB Pay-off table (profits of both firms) FirmB

FirmA

No discount for joint purchase B=0

No discount for joint purchase A=0 discount for joint purchase A>0

15

discount for joint purchase

B>0

0,0

--,++

++,--

+,-

Nash equilibrium is (+,-) , corresponding to the situation where both firms introduce a discount to their bundled products.

Nash Equilibrium in case of introduction of MtoF offloading:

c  (1  ' m

Pay-off table (profits of each firm) FirmB

no offload

offload

0,0

--,++

++,--

0,0

FirmA no offload

offload

16

gf gm

)cm

In case of two symmetric operators, Each firm has individually interest to introduce offloading. Nash equilibrium corresponds to the situation both firms introduce MtoF offloading

Case: two asymmetric operators: gfA>gfB (more shared WiFi connections for firm A) cmA<cmB Pay-off table (profits of each firm) FirmB

no offload

offload

FirmA no offload

offload

17

0,0

--,++

++,--

+,-

In case of two asymmetric operators, Nash equilibrium corresponds to the situation both firms introduce MtoF offloading

Investment incentives in mobile network Investment in mobile network improves valuation of data volume

vm  vm + Δvm growth of FMS 

Increase of « mobile only » consumers IM DMO  DMO 



After investment, the profits of integrated operator A (or B) is reduced

 

18

vm  DMO t

IM A

  * A

(v f  vm ) 2t

Situation of prisoners’ dilemma.

vmA   *A

Impacts on welfare, profit and consumersâ&#x20AC;&#x2122; surplus

Welfare

Profit

Consumersâ&#x20AC;&#x2122; surplus

Fixed-Mobile bundling

+

0

+

Mobile to fixed

+

0

+

+

-

+

Offloading Investment in mobile network

if vf<vm+t/2

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Fixed monopoly versus a competitive mobile market Firm A  integrated operator (fixed monopoly), Firm B  mobile operator

mA

Stage 1 Mobile choice Stage 2 Fixed choice

1

0

Consumers of mA above can buy fA or nothing

fA

x

0

vfA=vf; vmB=vmA=vm ;

Demand for fixed monopoly vfA=vf; vmB=vmA=vm ;

Profits for fixed monopoly vfA=vf; vmB=vmA=vm ;

Consumers of mB above can buy fA, or nothing

fA

Mobile only

Price of fixed monopoly

20

mB

y

1

x

0

Mobile only

1

Expression at equilibrium

Intuition

v f  vm

The price for firm A, the market power is reduced by data volume of 3G or LTE (vm)

p  * f

D fixed 

2 v f  vm t

2 t (v f  vm ) A   2 4t

The demand for fixed services is also reduced by data volume of 3G or LTE (vm) The profit of firm A (fixed monopoly) is therefore negatively impacted by vm

Future: Consider LTE as a threat to ADSL and FTTH? Future environment 

LTE is nationwide deployed, its data capacity is similar to that of ADSL network



Only dense areas are covered by FTTH where the backhaul cost for LTE is considerably reduced



FTTH-LTE Bundling is proposed for FTTH covered areas

Questions

21



Is it possible that ADSL is excluded from the market by the LTE?



In FTTH covered areas, is it possible that FTTH exits the market in turn after ADSL?

Offer excluded from the market ~ LTE marginal cost No FTTH coverage area

LTE ADSL

FTTH covered area

LTE ADSL FTTH Bundle

LTE ADSL

LTE ADSL FTTH Bundle

c1

22

LTE 15 ADSL FTTH Bundle

LTE ADSL FTTH Bundle

c2

c3

c4

LTE marginal cost cl

cl < c4 ADSL exits the market (4 offers) in FTTH covered areas cl < c3 Bundle exits the market (4 offers) in FTTH covered areas cl < c2 FTTH exits the market in FTTH covered areas cl < c1 ADSL exits the market for no FTTH coverage areas (2 offers).

Only LTE offer is active on the market

Conclusion

23



With technological progress, mobile broadband access becomes more competitive compared to the fixed market. A partial fixedmobile substitution will be observable worldwide in the future



The discount introduced to bundling mitigates FM substitutability, reduces then the number of “mobile only” consumers



Bundling could be a profitable strategy for an integrated operator, provided that the operator has a better fixed network data rate.



When both firms introduce mobile to fixed offloading the operator has a larger WiFi community earns more profits



Investment in mobile network  prisoners’ dilemma



Social welfare increases with bundling and offloading