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Introducing Analysys Mason. Expertise and Experience in Applying Economic Analysis. Our economists and analysts have worked with public regulatory bodies and private companies worldwide We have worked on cutting edge issues, including:

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Expertise and experience in applying economic analysis

Introducing Analysys Mason

Expertise and Experience in Applying Economic Analysis


Our economists and analysts have worked with public regulatory bodies and private companies worldwide

We have worked on cutting edge issues, including:

economic benefits of advanced network solutions (e.g. WiMAX, SLU)

understanding the market dynamics for future spectrum usage

We have applied our knowledge and expertise to help clients solve “real world” problems relating to:

market definition

market review

existence of market power

competitive pricing

merger support

deregulation

As a company, we have both expertise and experience in applying economic analysis to a wide variety of issues for clients

Expertise

Experience


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

Operators

Litigation

Pricing

Merger support

Regulatory

Mobile

Broadband & Media

Competitive analysis

Economic benefits

Regulators

Costing

Market reviews

Valuation

Spectrum management

Other bodies

Policy work


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

Economic analysis projects


35% analysis are presented in the following case studies

12

MCI business revenues

30%

10

25%

8

MCI as % of total

20%

USD (billions)

6

15%

Industry business revenues

4

10%

2

5%

0%

0

2000

2001

2003

2002

Case studies: Merger support

Case Study 1: Measuring the impact of the Verizon / MCI merger on the competition in the Internet backbone market

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.

Approach

  • We gathered data to show the impact of the merger on the market share of the combined company:

    • this data included proprietary data from the two companies that we requested and analysed

  • We also assessed the competitive trends impacting the Internet backbone sector, including:

    • falling prices for Internet access

    • increases in backbone capacity resulting from fibre builds and new technology

    • increases in peer-to-peer traffic between end-users

    • increased use of technology such as Internet caches.

MCI business IP revenues against industry wholesale IP revenues (2000–03)

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 analysis are presented in the following case studies

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

Approach

  • We firstly provided an overview of the options that alternative providers have available to them, in terms of:

    • geographies covered – urban vs. suburban vs. rural

    • co-location options – build second cabinet vs. co-locate with KPN

    • backhaul options – build own backhaul vs. lease backhaul

  • We developed a model of the incremental costs and revenues faced by an alternative provider using SLU/WBA, rather than continuing to use an existing LLU solution. This was done for a range of scenarios

  • The study concluded that the use of SLU by an alternative provider is not economically viable as an alternative to continuing to use LLU, except under very optimistic conditions (55% market share of all broadband lines and an ARPU increase of EUR10 per month)

Incremental cost of deployment options for an alternative operator

1400

Core network

1200

MDF-MCL Link

1000

Co-location

800

NPV (EUR millions)

MDF equipment

600

SDF-MDF Link

SDF equipment

400

Line rental

200

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 (http://www.opta.nl/asp/en/newsandpublications/research/)

  • 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 study 3 investigating what factors explain broadband retail price differences in europe

Case studies: Competitive analysis analysis are presented in the following case studies

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 government

Approach

  • Framework of two ‘lots’ of work:

  • Lot 1: a comparative study of retail prices in the residential markets

  • Lot 2: an analytic study to consider a wide variety of potential factors that could explain the differences found between the offers in the countries in Lot 1 and identify those having a material impact e.g. differences in

    • factors influencing the costs of supply (e.g. PC penetration, levels of demand)

    • Extent to which retail prices are related to csots and the drivers of these effects (e.g. level of competition, broadband churn)

    • Factors affecting retail prices in general (e.g. incumbent cost of capital, VAT).

35%

30%

Austria

Belgium

25%

France

20%

LLU as a percentage of DSL

Germany

15%

Netherlands

10%

Sweden

5%

UK

0%

Jun-05

Jun-06

Jun-04

Sep-06

Mar-04

Mar-05

Mar-06

Dec-05

Dec-03

Sep-04

Dec-04

Sep-05

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 considered

  • 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 (http://www.mi-is.be/themes/participation/digitale%20kloof/index_fr.htm)


Case studies: Market analysis analysis are presented in the following case studies

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

Approach

  • Addressing these key areas called upon a wide set of skills and experience, and required precise, professional and clearly expressed analysis

  • In order to achieve the objectives of the study, we conducted a small scale survey of companies active in the market and consumer organisations, forecast the development of the electronic communications services sector, and reviewed a number of issues of current and future interest.

  • We made a number of recommendations ranging between detailed points regarding consistency between Directives, important procedural issues (for example, timetabling for market reviews), and some more significant policy issues (for example, regarding whether structural separation should be in the list of applicable remedies).

Information-gathering activities

Key areas

Conclusions

Stakeholder survey

Identify obstacles to internal market

Review data held by the Commission

Possible amendments to the Framework

Harmonisation methods for ex-ante regulation

Forecast sector developments

Consumer protection

Review of key issues in 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

*http://ec.europa.eu/information_society/policy/ecomm/doc/info_centre/studies_ext_consult/next_steps/regul_of_ecomm_july2006_final.pdf


Case study 5 development of retail and interconnection charging models for an africa regulator

Case studies: Pricing and costing analysis are presented in the following case studies

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

Approach

  • An approach with two workstreams was adopted. Firstly, determine the economic / policy goals and then revise regulations and licences to empower the regulator to achieve those goals.

  • This was undertaken by

    • identified limitations in the legislation and powers of the regulator

    • recommended introduction of new interconnection services to ensure operators could only purchase required unbundled elements

    • developed market forecasts and service cost models in collaboration with the main telecoms operators, which provided the basis for identifying operators with dominant market power

    • formulated specific remedies, including price controls and glide paths, and drafted modifications to bring the regulations and licences up to date with best-practice regulatory tools

Monthly cost of ownership for a subscriber with market-average usage on each of an operator’s prepaid tariffs

1400

Move from per-minute to per-second billing

1200

1000

800

Local currency (nominal)

600

Single prepaid tariff replaced by three new tariffs

Two new tariffs replaced old plans in late 2006

400

200

0

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

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 study 6 recommendations for awarding 2 6ghz spectrum the umts expansion band for ofcom

Case studies: Spectrum management analysis are presented in the following case studies

Case study 6: 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

Approach

  • 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 value of the spectrum

  • An economic analysis of potential uses of the spectrum was also undertaken, including the development of a ‘spectrum scarcity’ model 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 spectrum under a number of scenarios

Economic benefit from spectrum scarcity model

BWA

Illustrative

Cellular

High demand assumed for both services

All TDD

125MHz TDD

50MHz TDD

30MHz 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

http://www.ofcom.org.uk/radiocomms/spectrumawards/awardspending/award_2010/


Recent examples of our diverse work in economic analysis
Recent examples of our diverse work in economic analysis analysis are presented in the following case studies


Further examples of our diverse work in economic analysis
Further examples of our diverse work in economic analysis analysis are presented in the following case studies


The modular approach that Analysys Mason has developed for detailed LRIC modelling is founded on our competence with economic principles

Possible relevance of economic theory

Conceptual issue in LRIC modelling

Impact of modelling the costs of actual / hypothetical operators

What size of operator?

Understanding efficiently-incurred costs

How efficient an operator?

Implication of multiple technology generations

Based on what technology?

Understanding economic costs of retail activities

Standalone or vertically integrated network?

Understanding of economic depreciation

What depreciation method?

Impact of increment choice on common costs

What size of increment?

Understanding whether Ramsey pricing is suitable

Which mark-up method?

Appropriateness of externality surcharges

Application of costs to pricing

Implication for the cost evolution trends that can be inferred

For what year or years are results required?


1 detailed LRIC modelling is founded on our competence with economic principles

1

2

2

3

3

4

4

5

5

A

A

A

B

B

B

C

C

C

D

D

D

E

E

E

Model structure (Access core)

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

Planning phase

Algorithms

Inputs

Output

First parent

Second parent

Options

Second dimension

Second dimension

Option 1

Option 2

Option 3

Construction phase

First dimension

Interface

Database

VBA*

Option 4

Option 5

Option 6

Testing phase

Interface

VBA

“Mutation”

Enhancement phase

Interface

VBA + C?

“Crossover”

Illustrative

Child

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
Industry commentary detailed LRIC modelling is founded on our competence with economic principles

The Negroponte Switch: ten years on

In his book Being Digital*, Nicholas Negroponte, the founder of MIT's Media Lab, predicted that the world was moving from one where telephone calls were made over fixed wires and television was delivered wirelessly, to one where just the reverse obtained. Dubbed 'the Negroponte Switch,' this prediction caused quite a stir at the time.

A little over a decade later, it is timely to assess how prophetic Negroponte actually was. It turns out that while he missed the mark in some respects, he was spot on in others.

In the USA, according to the Federal Communications Commission (FCC), 98% of the population lives in a county with access to three or more mobile operators, up from 88% in 2000 (the first year in which such statistics were kept). Mobile penetration stands at nearly 75%, and up to 10% of households have dropped or have never had fixed-line telephone service (Exhibit 1 compares the USA and other countries).

Research we have conducted in the USA suggests that among mobile subscribers (as opposed to the population as a whole) the percentage of those 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 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 the calls they make or receive in their homes, close to two-thirds of respondents say it would. Of course, there are some trends to the contrary as 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 all US households have access to cable television systems, and over 60% of 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. And Negroponte did not foresee that satellite broadcasting would capture a sizable segment of the multi-channel video market – with 23% of television households.

What Negroponte failed to account for altogether in predicting his switch was the importance of data services and especially the various Internet applications. Today, fixed-line operators have a decided edge. Wireless alternatives have been much slower to emerge. But Negroponte was no doubt on to something and it may be best to revisit things in another decade.

50

45

40

35

30

Mobile-only households (%)

25

20

15

10

5

0

UK

Italy

USA

EU25

France

Finland

Portugal

Germany

Exhibit 1: Mobile-only households: EU and the USA (Sources: for EU countries, Eurobarometer Special – eCommunications household survey, 2006; for the USA, CTIA and FCC (adjusted))

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


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