Unlocking the Potential of the Telecommunications Sector to ...

Unlocking the Potential of the Telecommunications Sector to ...

Unlocking the Potential of the Telecommunications Sector to Support Networked Readiness Harvard University March 14, 2002 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organisation without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion. Agenda Impact of telecommunications sector reform Importance of reform going forward Priorities for reform 2 Spread of sector reform Fixed voice telephony, status end of year 2000 No reform Privatization only Liberalization Real GDP per capita $000 No. of countries Share of countries having undergone sector reform, % 100% Upper high income countries 20 21 Lower high

income countries 10 - 20 15 Emerging countries 3 - 10 28 Developing countries 3 85 100 47 43 33 33 25 41 20 32 26 3 Value impact Incumbent market capitalization, $ billions

829 85 Emerging and developing countries High-income countries CAGR 3% 993 60 -24% CAGR 18% 534 78 744 933 +105% 456 At flotation Flotation +3 years January 18, 2002 4 Teledensity growth Change in teledensity between 1996 and 2000

No reform Privatization only Liberalization +54 +48 +53 +21 +20 +26 +13 +3 Upper high income Lower high income Emerging countries +5 +5 Developing countries 5 Internet penetration % change in Internet users per 100 inhabitants from 1996-2000 No reform Privatization only Liberalization +31 +25 +15

+11 +4 Upper high income Lower high income +6 +8 Emerging countries +1 +1 +1 Developing countries 6 Options to reach Internet penetration Status end of year 2000 Internet penetration (%) 6 60 60 User Intensity (Internet users per 100 lines) 50 5 50 75 40

40 4 30 30 3 50 CHL 37.5 20 20 2 25 ESP 10 10 1 0 17.5 10 20 30 40 50 60 70 80

90 100 110 120 130 140 150 160 170 10 5 2.5 0.5 Teledensity (Lines per 100 inhabitants) 7 Multiple tradeoffs Industry Industry growth growth Customers Business Residential Investors Operators Society Incumbent(s)

New entrant(s) Government Employees, unions Equipment providers Domestic Foreign 8 Priorities among multiple objectives Similar emphasis Developing countries Emerging countries Developed countries Country Benefits to Efficient customers industry Germany France U.K. (1) U.K. (2) Sweden U.S. Australia New Zealand Japan South Korea Argentina (1) Argentina (2) Brazil Chile (1)

Chile (2) Mexico (1) Mexico (2) Czech Republic Hungary Poland Russia Malaysia South Africa China India Indonesia Philippines Proceeds for government Universal service Attract investments Networked readiness EXAMPLES

Broadly favored market efficiency and competition Compromised between efficiency, privatization proceeds and teledensity

Promoted teledensity and additional investments 9 Measurable dimensions Teledensity Universal access Price levels

Benefits to consumers Incumbent performance Proceeds to government * Source: Footnote Source 10 Universal Service Cumulative growth of fixed-line Teledensity 3 years post-reform Emerging countries Teledensity at time of reform Hungary Brazil Poland Czech Republic Malaysia Chile (2) Mexico (2) Chile (1) South Africa Mexico (1) Argentina (1) Argentina (2) Increase in lines per 100 12 10 15 19 8 11 9

9 8 8 8 3 4 3 5 10 6 10 20 3 2 2 1 1 2 1 1 1 1 3 1 1 1 1 Change Percent 69 71 53 43 39 35 29 61 12 30

12 6 Priority on Universal Service No priority on Universal Service Developing countries China India Indonesia Philippines Senegal 73 90 97 62 150 All with priority on Universal Service 11 Benefits to customers Long distance cumulative price change Incumbent tariffs 3 years post-reform, % Countries that did not emphasize benefits to customers Countries that emphasized benefits to customers South Korea Germany France

Chile (2) Sweden New Zealand Australia (2) Australia (1) U.S. U.K. (2) -65 Mexico (2) -60 -45 -43 -34 -32 U.K. (1) -21 Argentina (2) -21 Japan -20 Poland -20 -17 -28 Indonesia -16 0 -13 0

Brazil 11 12 Proceeds to Government Change in performance and relative value of incumbent % median values At flotation Flotation + 3 years EBITDA 41 P/E premium over main stock market index 51 EBIT 46 Countries with priority on proceeds to Government 21 30 32 53 Countries with no priority on proceeds to Government 43

26 28 27 17 13 Overview of regulatory levers Industry Structure Pricing Interconnection Regulatory Levers Customer Access Universal Service Performance Levels 14 Detail of fixed and mobile regulatory levers Example of fixed and mobile regulatory levers Industry Structure Pricing Regulatory Levers Interconnection Customer Access

Universal Service Performance Levels Source: McKinsey Number of competitors Ownership and control rules, including restrictions on foreign investment Networks and services open to competition Licensing procedures and conditions Price caps / tariff rebalancing Access deficit compensation Pricing constraints on local calls Constraints on roaming charges Rights and obligations to interconnect Structure and level of charges Collocation and infrastructure sharing Conditions for unbundling network elements Interconnection for ISPs Obligations and rights for virtual network mobile operators (MVNOs) Numbering plan Number portability Length and ease of carrier pre-fixes Subscription mechanism for carrier pre-selection Universal access and service obligation definitions Universal service funding mechanism Penetration targets Network rollout and coverage targets Service quality targets 15 Continued importance of reform Access Internet and usage intensity Quality Teledensity low in Increase usage of

Steps to ensure 5.7 billion inhabitants $150-200 billion to most developing world (>800 million households stilll without a phone line) existing infrastructure already enabled for Internet are not using the Internet $150200 billion in value broadband reaches 187 million connections by 2005 support rollout of 3G mobile technology Value has been unlocked 16 Teledensity Million access lines/population Access lines Population 1,064

High-income countries Emerging countries Developing countries 948 220 614 438 4,534 17 Potential to increase usage intensity Highest in group Median Lowest in group Internet user intensity Developed 41+ Access availability Price Lower income developed Emerging 31+ 38+ Competition Enabled line

Choice of service Developing 63+ Interconnection 18 Broadband penetration Broadband access lines, million % of global access lines 2001 2005 2001 fixed lines 2001 2005 Infrastructure challenge 19 Broadband quality upgrades by country, 2000 EXAMPLES Internet penetration Users per 100 inhabitants Broadband penetration Percent of all households South Korea Singapore

U.S. Netherlands Japan 20 3G challenges No deployment, available only in Japan US$130 bn paid in license auctions in Europe alone Unclear initial consumer value Additional US$150200bn to deploy networks in Europe alone 21 What can be done? Promote access Developing countries Encourage and attract investment Explore mobile options Recognize mobile options Slow gradual process Encourage Internet and usage intensity Fund quality improvements All countries Stimulate demand

Encourage Mostly developed, but competition and choice Fine tune and revise Iterating process significant variation by country Require significant upgrades Explore funding options Experiment multiple approaches New approaches needed 22 Unlocking the Potential of the Telecommunications Sector to Support Networked Readiness Harvard University March 14, 2002 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organisation without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

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