One Again This Year, the DigiWorld Summit (IDATE's International Conference) Has Earned Its Reputation as a Cornerstone Event in Europe for Taking Stock of the Changes at Work in the Broadband, Mobile and Media Industries

MONTPELLIER, France -- DigiWorld Summit 2006: Key data

Over the 3 days of the conference:

* Record attendance with more than 1300 attendees (increase of 10% compared to 2005)

* More than 200 speakers (a large amount of International Keynote)

* Net increase of journalists on site

* 80 exhibitors : IT companies, innovating SME (in partnership with OPPTECH-LR)

Find on our dedicated web site www.digiworldsummit.com:

* Speakers Proceedings (workshops and plenary sessions)

* Videos from Keynote speaker during plenary sessions

After Japan in 2005, IDATE has chosen China as guest country for the year. Top level industry representatives took part in the Conference's debates. An official representation from China Embassy in France and delegates from chinese companies also attended the DigiWorld Summit 2006 during the three days of the conference.

On the Agenda DigiWorld Summit 2007 13 - 14 - 15 November 2007 Le Corum, Montpellier (France)

DigiWorld Summit 2006: the year of strategic uncertainty

Convergence is back. But, as IDATE's President, Francis Lorentz pointed out in his opening remarks, 'it is no longer question of wondering whether the dividing lines between internet, telecom and media companies will shift,' but rather of, 'which business models are likely to enable the ICT industry to sustain a lasting momentum of growth and innovation, and how the different players, including public powers, will be involved in this shift.'

This past 14 to 16 November, in Montpellier, France, IDATE's 28th annual International Conference (rebaptised the DigiWorld Summit) endeavoured to answer these very questions, through specialty seminars on opening day, and during the two following days of plenary sessions.

The markets will first feel the impact of the growing weight of emerging economies.

The Chinese are comingC* China was selected as the Guest Country for the 2006 Summit, which gave those in attendance the chance to hear from China's Vice-Minister of Communications, and to meet with operators such as China Unicom, along with representatives from leading portals like Sina.com, and from more internationally-known companies, including equipment manufacturers Huawei and ZTE. As expected, no real announcement was made about the terms of 3G licence awards, the ensuing reshaping of the four top telcos that dominate the domestic market, or the scheme for opening the Chinese market up to foreign investment. What we were given, however, was a series of impressive figures on this booming market of more than a billion consumers, marking a far cry from the strategic uncertainties of players in the Western world.

Telecom revenues in China quadrupled in ten years, reaching 1,222 billion Yuan (122 billion euros) for more than 800 million subscribers1, with the number of internet users expected to overstep the 120 million mark in 2005 and climb to more than 200 million next year2. 'Asia-Pacific accounts for 27% of the world telecom services market ($1,246 bn in 2006)' indicates IDATE CEO, Yves Gassot, 'or equal to Western Europe and the United States combined' - a gap that will just keep on widening, as Asia-Pacific reported an overall annual growth rate of 5.4% between 2002 and 2006, compared to 4.3% in Western Europe and 2% in the US. Like many emerging countries, and like most of Asia's markets, China is mobile-centric above all. China Unicom Vice-President, Li Gang, underscored the importance of 3G, at a time when operational GSM and CDMA platforms are already generating 20% of data service ARPU. This is also the area of excellence of hundreds of service companies specialised in gaming, sports news, etc., which share telcos' revenues. On the internet side of things, Sina.com founder, Wang Yan, shared his optimistic views of 'an advertising market enjoying 50% annual growth,' indicating that, unlike the situation in most European countries, it is Sina and its local competitors that dominate China's portal, search and IM markets, and not Yahoo!, Google or MSNC*

In addition to the talks from our Chinese guests, notable contributions to the topic came from Motorola's Bruno Demassieux and Ericsson's Hans Vestberg, both of whom focused on the huge market that emerging economies and underdeveloped regions represent, and the impact they are going to have on the industry as a whole, requiring considerable efforts be made in devising innovative and low-cost network solutions and devices - changes that will surely have a ricochet effect on Western markets.

Sluggish mobile growth in Europe...

While it is true that there are markets in Europe where growth rivals, and in some cases exceeds China's - including Turkey, the Ukraine and Romania, all of which are reporting over 25% annual increases, followed closely by Russia and Latvia - growth in Europe's top five markets is expected to be below 3% in 2006.

The landline base is shrinking (3.8 million lines cancelled in Western Europe in 2005), and even price cuts have not turned back the tide, suffering from the ever-growing popularity of mobiles and broadband. Mobile services - which have now achieved an average 100% penetration rate in Europe, and generate over 50% of the sector's revenues - may have to content themselves with average annual growth rates of only 3% to 4%, so not enough to compensate for the ongoing decline of fixed telephony revenues.

And now MVNOs are putting even more pressure on prices, at a time when 3G network deployments did not translate into the hoped-for increase in average revenues per user: quite the contrary, ARPU has been on a downwards slide since 2004. Totalling 27.40 euros a month in Western Europe in 2006, they are at their lowest level since 2001.

It is nevertheless true that we are undoubtedly far from having exhausted the mobile market's value. It is likely that broadband, combined with customised flat rates, will pave the way for new rich media applications in the coming years, comparable to what is currently happening on the fixed web.

Questions over the expected convergence of the fixed and mobile value chains are further bogged down by technological uncertainties, starting - if we are to believe what emerged in the debates in Montpellier - with those associated with WiMAX.

Over the course of 2006, leading equipment suppliers - Alcatel, Siemens, Motorola, SamsungC* - lined up behind Intel, to prepare themselves for the expected offensive brought by the mobile version of WiMAX (802.16e). The WiMAX Forum's membership shot up from 46 in the first half of the year, to the current 414 members and, more significant still, frequencies around 2.5 GHz became available in the United States and in Asia. Pioneer rollouts will undoubtedly take place once the remaining uncertainties, notably the availability of "ultramobile" handsets, are lifted. Technical and economic potential appear considerable: 'We can finally speak of real personal broadband for the consumer,' says Keimpe Algra of WorldMAX, 'in a situation where volumes that well exceed those of UMTS will enable much more affordable prices.' But the GSM/UMTS world clearly does not have the same view of things, and is already predicting $40 3G handsets coming out of the factory within five years.

It is against this backdrop that 3G operators are picking up the pace of their HSDPA deployments, and equipment-makers paving the way for the transition to all IP (3G LTE) in an EoIP ("everything over IP") universe, to echo the words of Cisco's Robert Pepper. Operators will have to compete not only with a technology equipped with options that will no doubt be carried over to 4G (such as OFDM), but will also have to defend their European licences for which they paid dearly. 'With the exception of the UK, opening up the 2.5 GHz band - which, up until now, had been considered the 3G extension band - to systems other than 3G is by no means a foregone conclusion,' says IDATE's Pierre-Michel Attali. 'There is undeniably a question of equity involved,' indicates ARCEP board member, Gabrielle Gauthey, referring to the price that mobile operators paid to acquire licences. Among other things, the French regulator will await the results of its consultation for the fourth 3G licence award before addressing the issue.

and the success of fixed broadband C*

If mobile appears to no longer be the driving force that will guarantee the sector growth well above the GDP, the broadband segment, sustained chiefly by DSL, does appear to still boast considerable potential. Totalling 66 million in 2005, the subscriber base in Europe corresponds to only 8.7% of the population. Broadband density is naturally highest in the EU-15 but, at 14.6%, clearly has a sizeable margin to expand. Furthermore, one thing we have seen is that, especially in Europe, the speeds offered to subscribers go up when triple play bundles are introduced. This healthy market momentum is nonetheless also an expression of very lively competition enabled by unbundling, and which is weighing on providers' margins - a situation that triggered the growing number of consolidations in recent months, resulting in only four or five major players in each market. More fundamentally, listening to broadband providers' views on the matter reveals two, to a degree intertwined, questions: to what extent does the bid to maintain the broadband momentum go hand in hand with the gradual abandonment of copper phone lines in favour of fibre? Can the coexistence of telcos and ISPs and their access-centric business model, on the one side, and of the top internet companies and content providers, on the other, be considered a stable one?

C*give meaning to the many questions surrounding FTTx network rolloutsC*

According to IDATE's Roland Montagne, who chaired the workshop on optical fibre, 'FTTx technologies will undergo a phase of gradual but increasing investment around the globe.' New fibre subscribers have outnumbered new ADSL subscribers since mid-2005 in Japan. NTT's Hiromichi Shinohara reports that, 'In June 2006, there were 6.3 million FTTH subscribers in Japan, compared to 14.5 million for ADSL, with the FTTH market growing at such a pace that it is expected to overtake DSL in number of lines by 2007.' Meanwhile in the US, in a bid to better compete with cable, Verizon and AT&T are now investing in FTTx, while only a handful of isolated rollouts have taken place in the Old Continent, chiefly in Northern Europe and often on the initiative of local authorities.

IDATE estimates that there were fewer than 800,000 FTTH/B subscribers in Europe in mid-2006, but the market is beginning to warm up. Growing use of the upstream path, due to blogging and P2P, combined with the prospect of HDTV (requiring at least 6 Mbps in MPEG4 for a simultaneous channel) and the fact that a great many phone lines are too long to make them eligible for triple play bundles, are now giving meaning to what was long viewed as an over-exalted relationship with technology. 'Free's announcement of a four-year one billion-euro investment totally changed the reaction of Erenis partners who were the first to invest in Paris,' happily reports venture capitalist Antoine Garrigues of Iris Capital, who has invested in this new very high-speed operator. France Telecom is confining itself for now to small-scale rollouts as a way of testing all-optical technology, and to assess users' interest. Forced to take risks as its market share began to tumble in recent months, Deutsche Telekom is the European incumbent making by far the most ambitious investment plans (3 billion euros) in FTTN-VDSL networks. Nevertheless, 'we have opted for a gradual rollout, relying on VDSL for the last mile,' explains Deutsche Telekom's Nikolai Beckers. The investment needed for an all optical connection currently exceeds 1,000 euros per subscriber, of which civil engineering accounts for over 70% of the cost. It may nevertheless be preferable to VDSL (Verizon, France Telecom) in cases where the switch is too far from subscribers, and given that speeds are meant to run well above 50 Mbps.

Combined with financial uncertainties are regulatory issues. Managing the coexistence of third parties' ADSL equipment and services and the installation of the incumbent's VDSL gear is not a simple affair. With this in mind, because the copper pair is involved, the European Commission reiterated that a VDSL service had to be made available to the competition. And there will be no more "regulatory holidays" said a Commission representative, speaking of optical fibre networks. But, in this case, it is still up to the national regulator to decide whether the incumbent carrier's investments run counter to competition objectives.

French NRA, ARCEP, remains very aware of the dangers of re-monopolisation, particularly given the difficulties of duplicating infrastructures outside major cities. But its chairman, Paul Champsaur, was careful to point out that competition policies could be sought by taking account of the expected potential of a consolidated cable industry, and by lowering the main entry barrier, namely civil engineering costs, through duct sharing options and, whenever possible, pre-wiring in new builds, and cooperation with property developers and city planners. Champsaur went on to say that this debate also needs to address the ways in which new applications enabled by very high-speed will contribute to earning operators a return on their investments. Here, he views the FCC's rather measured position on Net neutrality to be perfectly suited to European realities. In the same vein, he does not believe that the current pace of fibre network deployment (which he expects to be gradual) requires any substantial alternation be made to the European regulatory framework.

C* and the relationship with internet heavyweightsC*

Do operators have the right to discriminate, favouring access to their own content offerings on their networks? This (very American for the moment) debate nonetheless foreshadows what will gradually take place as the share of revenues generated directly by services and applications gains prominence in telcos' business models. The shift appears inevitable, as the price of access continues to drop and traffic is going flat rate, hence, according to Yves Gassot, telcos' refusal to be dependent only on their network for income. By and large, their strategies are aimed at combining the expected benefits of greater efficiency (lower OPEX and economies of scale through horizontal consolidation), and a growing involvement in the ecosystem offered to consumers and businesses. This is being expressed, most notably, through the creation of a gateway that enables device interconnection (PC, TV, game consoles, phones, etc.) and software downloads adapted to the bundled services on offer. In his talk, Thomson President, Frank Dangeard, took time to focus on these boxes. Beyond the somewhat theoretical comparison of a "dumb pipe" controlled by the portals and a "smart pipe" that would give telcos full control over the services they offer, Yves Gassot identified the other outstanding options that could distinguish leading European operators' strategies in the coming years.

Some companies could opt for investing in their core network, the way that BT is doing - the many implications of which were addressed by Paul Reynolds, CEO of BT Wholesale. This BtoB approach could do away with the widely-stated goal of keeping control of consumers by favouring not only a business clientele, but also the major applications and content providers.

Most telcos do, however, want to maintain control over access, and to monetise it directly with subscribers. What remains, then, is to identify not only the right services but the right partners, keeping in mind that billable income for premium content is hard to come by, and they will need to find a way to rely on other business models. In short, their goal could be to claim a portion of ad revenues which are sustaining the internet giants, or to design transaction tools - in the same vein as eBay (PayPal) and DoCoMo (Felica payment and credit system, using an RFID application on users' mobiles).

But what do the internet titans think of all this? Top level representatives of all of the internet's leading companies - Google, Yahoo, MSN/Microsoft and AOL - were on hand at the IDATE Summit. All have created a worldwide brand associated with a universe of free applications for users, in many cases centred around an area of specialty (search engine for Google, IM for MSN) but cementing user loyalty through the wealth of features on offer, and which can be accessed by a range of devices, so generating increasing revenues from their audience and thanks to the shift of ad monies to the web. Each one of these points appears to run completely counter to telcos' traditional model.

In their bid to keep users on their site for as long as possible, the internet giants have become increasingly interested in communication applications that account for a sizeable portion of the time consumers spend online - hence their increasingly noticeable forays into telephony type services.

But should this be viewed as a threat? In his talk, IDATE's Vincent Bonneau was careful to put into perspective the overlaps in telcos' and internet companies' strategies - stating that it is, for instance, very unlikely that the internet giants' telephony applications will provide serious competition for the mass of DSL operators' VoIP application users. Even Google, which built a free mesh-Wi-Fi network in San Francisco, based on Earthlink, provided reassurance on this point: 'It is a simple experiment in our core market,' explained Nikesh Arora, VP of Google Europe, 'the goal not being to expand it significantly; international expansion in particular would be inconceivable.'

And, finally, at least for the time being, the priority remains the creation of partnerships, such as the ones that exist between Orange and MSN, or Yahoo and Vodafone. Telcos' fixed-mobile convergence strategies, along with emergence of mobile broadband (with 3.5G and HSDPA) are broadening internet players' universe to mobile phones. Negotiations, from telcos' standpoint, nevertheless appear a delicate matter, and the notion of exclusivity in particular would be detrimental. 'How could an operator explain to subscribers that its partnership strategy means they have to abandon their familiar universe, Google and Yahoo?', asks Symbian CEO, Nigel Clifford. At the same time, even without being exclusive, agreements can include specific developments tailored to an operator's platform and strategy, as pointed out by Orange's Executive Director, Georges Penalver - one case in point being the company's recent agreement to port Microsoft's IM to its mobiles. It nevertheless remains that it would be difficult to combine this growing openness with mobile operators' traditional walled garden approach.

C*and with media content providers.

Another potential area of conflict lies between telcos and content providers. Introducing a roundtable discussion between Marc Tessier, former head of Canal+ then of France Televisions, Jean-FranE*ois Cecillon (EMI), Terry Denzon (Verizon) and Domenico Di Massimo (Telecom Italia), Gilles Fontaine (IDATE) reminded us of the degree to which music and video distribution is becoming increasingly sophisticated (content on-demand, digital households), even though consumers appear to attach more value to access than to the content itself.

For Marc Tessier (NetGem), the greatest tensions are to be found inside the media industry, between programme producers and distributors, with Jean-FranE*ois Cecillon (EMI) adding that online distribution represents an opportunity for record companies to gain direct access to consumers. After having waffled over their strategy, burdened by concerns over the dangers of piracy that broadband opens up, music publishers are now experimenting more and more with different business models, in addition to segmenting their products to match the market's segmentation. Terry Denzon's (Verizon) talk also addressed the confrontation between the telecommunications and content industries, while confirming the distributors' central role in the value chain.

Regulation at the service of competition and a European strategy

This debate was held alongside a high-level seminar focused on the theme: "Reviewing the Review", being held in another room and attended by European Commission representatives, national regulators, academics and operators. One of the seminar's areas of focus was spectrum management issues. Can there be a real European policy on this issue, which is little addressed in the 2002 regulatory framework? And, more fundamentally, how to inject a dose of flexibility (technological neutrality and spectrum resale) to encourage innovation and competition, without abandoning the principles of harmonisation which would help drive the standardisation that the industry so dearly needs?

The special issue of Communications & Strategies provides a detailed examination of the overriding themes of the Review, but it is nonetheless worth noting the remarks of Cercle des economistes Chairman, Jean-Herve Lorenzi, who concluded his talk by calling on those in attendance to be mindful of what is at stake, underscoring the fact that regulatory doctrine cannot be viewed independently of the market's deficiencies, in addition to confirming his strong conviction of the benefits that European consumers can expect from a powerful and innovative ICT and electronic media industry.

About IDATE

Founded in 1977, IDATE is one of Europe's foremost market analysis and consulting firms, whose mission is to provide assistance in strategic decision-making for its clients in the Telecom, Internet and Media industries. IDATE has also been instrumental in providing a forum for debate amongst the markets' key players, notably thanks to the IDATE Foundation, the DigiWorld Summit and the Communications & Strategies Review.

Consulting - IDATE has established its credibility and independence in conducting consultancy and study assignments on behalf of its clients:

* Benchmarking: evaluation, modelling and forecasts, sector-specific analyses, surveys

* International benchmarking: positioning studies, strategic and competition analyses

* Public policies: public policy definition and assessment, project management, regulatory benchmarking

Research - IDATE'S clients benefit from the knowledge and expertise of its teams of specialists, and from its ongoing investment in its Digiworld information and strategic monitoring system - a veritable digital world observatory - along with access to a singular array of market reports, data, analyses and support services:

* Market reports: Atlas, Analysis & Focus Collections

* Quarterly updates: analyses and databases

* Monthly memo service: Executive Notes

* Annual round-up: the DigiWorld Yearbook

* Customised seminars: Strategic Briefing

Please find more information about the program: www.digiworldsummit.com For more information about IDATE's activities: www.idate.org

1 Source: China Unicom

2 Source: Sina.com