SPECIAL REPORTF-M Convergence in Europe:Strategies for SuccessPublished by BUSINESS MONITOR INTERNATIONAL LTD 2008 Business Monitor International.All rights reserved.All information,analysis,forecasts and data provided by Business Monitor International Ltd is for theexclusive use of subscribing persons or organisations(including those using the service on a trial basis).All such content is copyrighted in the name of Business Monitor International,and as such no part ofthis content may be reproduced,repackaged,copied or redistributed without the express consent ofBusiness Monitor International Ltd.All content,including forecasts,analysis and opinion,has been based on information and sourcesbelieved to be accurate and reliable at the time of publishing.Business Monitor International Ltd makesno representation of warranty of any kind as to the accuracy or completeness of any informationprovided,and accepts no liability whatsoever for any loss or damage resulting from opinion,errors,inaccuracies or omissions affecting any part of the content.F-M CONVERGENCE IN EUROPE:STRATEGIES FOR SUCCESSBusiness Monitor International Ltd SPECIAL REPORTContentsThe Status and Future of Fixed Mobile Convergence in Europe.5Introduction.5Mixed experiences.5The Enterprise Factor.6Conclusion.7FMC/FMS USERS EUROPE(MILLIONS).6FMC/FMS SERVICE REVENUES($BNS).7MC/FMS EQUIPMENT MARKET($BNS).7Fixed-Line Industry Forecasts.8United Kingdom.8TABLE:UK TELECOMS SECTOR FIXED-LINE HISTORICAL DATA&FORECASTS.8Germany.8TABLE:GERMANY TELECOMS SECTOR-FIXED LINES-HISTORICAL DATA&FORECASTS.8France.9TABLE:FRANCE TELECOMS SECTORFIXED-LINEHISTORICAL DATA&FORECASTS.9Italy.9TABLE:ITALY TELECOMS SECTOR FIXED-LINE HISTORICAL DATA&FORECASTS.9Spain.10TABLE:SPAIN TELECOMS SECTOR-FIXED-LINE-HISTORICAL DATA&FORECASTS.10Mobile Industry Forecast.11United Kingdom.11TABLE:UK TELECOMS SECTOR MOBILES HISTORICAL DATA&FORECASTS.11Germany.12TABLE:GERMANY TELECOMS SECTORMOBILEHISTORICAL DATA&FORECASTS.12France.13TABLE:FRANCE TELECOMS SECTORMOBILESHISTORICAL DATA&FORECASTS.13Italy.14TABLE:ITALY TELECOMS SECTOR MOBILES HISTORICAL DATA&FORECASTS.14Spain.15TABLE:SPAIN TELECOMS SECTORMOBILEHISTORICAL DATA&FORECASTS.15Company Profiles.16BT.16France Telecom.19Deutsche Telekom.22Telecom Italia.25Business Monitor International Ltd F-M CONVERGENCE IN EUROPE:STRATEGIES FOR SUCCESSBusiness Monitor International Ltd SPECIAL REPORTThe Status and Future of Fixed Mobile Convergence in EuropeIntroductionFixed Mobile Convergence (FMC)started out as a strategy for fixed network operators to reclaim some ofthe revenue their mobile rivals were taking from them.Now it is being turned on its head to push even morebut despite closing in on three years of active marketingthe number of customers have stubbornly remained inthe mid tens of thousands range.Compared to 24 mil-lion households and 33 million fixed line telephones inthe UK,that does not amount to much.revenue the mobile operators way.A number of reasons account for the disappointing fig-Over a third of all calls on mobiles are estimated to takeplace within ten feet of a fixed phone,either at home orat work.And with the number of mobile phones in usein Europe lying at close to double those of fixed and insome places treble or more,it is easy to see why fixedoperators should be concerned.FMC is all about being able to use the same servicesover different devices,whether mobile or fixed phonesor increasingly other types of devices such as comput-ers or televisions.The three key components are devicemobility,services mobility and number portability.AnFMC user should be able to make or receive a call onto device he or she chooses wherever he or she wantsand gain access to any service he or she wants such asvoicemail,directory of contacts or least cost routing.The sector divides into consumer and business segmentson the one hand and strategies/product offerings thatbenefit fixed operators and others that benefit mobileoperators on the other.ures.The limited range of compatible handsets on offerhas not helped nor has the mixed marketing messagewhich may leave prospective customers wondering whatthey are buying a cordless or a mobile phone.In Germany Deutsche Telekoms experience has beeneven worse.So bad,in fact,that it cancelled its first tryat FMC,its T-One service,in March 2007 after onlyeight months during which it had attracted the attentionof just 10,000 subscribers.Things in Germany were nothelped by the fact that the mobile operators launchedtheir counter-attack even before Telekom had begunits offensive.Anticipating that the mobile phone would becomepeoples primary communications device,Germanysmobile operators have always offered good value homezone deals designed to promote use of mobiles in thehome.Even Deutsche Telekoms own mobile arm,T-Mobile,was offering more attractive rates.DeutscheTelekom simply found it too difficult to make a profitfrom a consumer FMC service.We estimate that there will be the equivalent of over 100million European subscriptions to FMC and equivalentservices by the end of 2012 yielding a combined annualequipment and services market of$85 billion.The only questions are which technologies will beemployed and who stands to benefit and who stands tolose.The following sections address these issues.Mixed experiencesEuropes FMC pioneers are the major fixed carriers buttheir experiences have not been universally good.In the UK BT launched its Fusion service in June 2005Business Monitor International LtdOf Europes major fixed carriers only France Telecomseems to have found what most observers would considera degree of FMC success.With around half a millionusers to its Orange branded Unik service it was helpedby an existing installed base of Digital Subscriber Line(DSL)broadband Internet subscribers to whom it vigor-ously encouraged the upgrade of their modem/routersto Liveboxes capable of also supporting WiFi and voiceover IP(VoIP).There are a number of reasons for France Telecomsrelative success,by far the most important one beingthat it is not just a fixed or cable or a mobile operator F-M CONVERGENCE IN EUROPE:STRATEGIES FOR SUCCESSbut all three things and the countrys major Internetaccess provider to boot.This,we believe,has to be theway forward for any fixed network operator wishing toexploit FMC opportunities.France Telecom is now seeking to repeat its successwith Unik overseas,in particular in Poland,Spain andthe UK.It does not have the market dominance or thequad play advantage in these countries,however,andwe expect success there to be more limited.In eastern Europe FMC has still to make an impact.Aswell as France Telecoms offering in Poland the countryhas recently seen the launch of another service fromMobilna Telefonia Internetowa(MTI).It is targetingbusiness users rather than consumers and plans to offerit service across central and eastern Europe during thecourse of 2008.We expect demand for classic FMC to remain low ineastern Europe for some years,at least as far as consumersare concerned.The momentum of the mobile phone issimply too great.We do,however,see a healthy futurefor business FMC services across the region,such asthose offered by MTI.The Enterprise FactorWe believe that fixed carriers will face a struggle withtheir consumer FMC strategies.There is one area ofFMC,however,where fixed carriers may have success:in the enterprise.Todays FMC technologies tend to fall into one of twocamps:Session Initiation Protocol(SIP)and UnlicensedMobile Access(UMA).But a third is now emergingwhich will displace both,IP Multimedia SubsystemVoice Call Continuity(IMS VCC).FMC/FMS USERS EUROPE(MILLIONS)When IP(Internet Protocol)is in place on both mobileand fixed networks Voice over IP(VoIP)will becomethe standard means of voice communication and FMCwill be de facto.Services such as Skype and Vonageare already IP based.In the large enterprise space thischange has already happened.And it is about to happenfor small and medium sized businesses too.And thisrepresents a great opportunity for a number of differenttypes of potential players in the FMC space,includingfixed network operators.With smaller companies the target groups are fastgrowth entrepreneurial businesses who require the latesttechnologies to achieve a competitive advantage andwho move frequently as they grow.Their requirementis for the full spectrum of telecommunications servicesstarting with high speed data,mobile.Email,fax toemail,conferencing,managed firewalls,voicemail,web hosting,secure back up,file sharing,Blackberry(and equivalent)access,virtual private networking andlocal,long distance and international voice.Not all kinds of enterprises will be interested.Hairdress-ers and family owned shops are unlikely to need FMC.Some bigger organizations such as banks or military maynot want to have mobile phones used on their premisesfor security reasons.But for businesses with mobile,flexible and communications hungry workforces weexpect FMC to be important.We estimate that there are some 80 million workers inEurope in this target market for FMC and that by 2012just under half of these will be using FMC services yield-ing annual equipment expenditure of close to$6 billionand annual service revenues of over$30 billion.But there is no guarantee of success for fixed operators.20082009201020112012Business FMCBusiness FMSConsumer FMCConsumer FMSTotal FMC10.30.846.12.50.61.5812.651.52.51625104.543250.52013.5764104.5Source:BMI researchBusiness Monitor International Ltd SPECIAL REPORTHere too,however,fixed network operators will face stiffcompetition from mobile network operators and compa-nies allied with them who are pursuing their own enterpriseorientated Fixed Mobile Substitution(FMS)strategies.Essentially FMS is about making mobiles have more ofthe attributes of fixed phones with the ultimate goal ofkeeping more of the traffic on the mobile network or atleast getting a share of any fixed network revenues.There are three main approaches:Carrier based mobile network gets enterprise cus-tomer to dump its fixed network office phone systemand outsource its communications to the carrier hasproved spectacularly unpopular as years of being over-charged and receiving sub-standard service have taught enterprises not to trust carriers.Enterprise-based enterprise buys WiFi and SIP enabledhandsets to make use of VoIP/WiFi connections to theenterprise network when on-site and the mobile networkwhen out and about awkward and not really integrated(ie customers do not gain access to enterprise functionssuch as directory when outside of the office),also requiresphones that can run third party software and not maycan-but perhaps most importantly this approach is notliked by carriers(and therefore not pushed by them)because they cut the carrier out of the loop.Hybrid only just becoming available(first productsemerged 2007).A box in enterprise network ensuresFMC/FMS SERVICE REVENUES($BNS)enterprises policies are applied to the mobile handsetsand a box in the mobile network operators networkensures that the appropriate tariffs are applied for dif-ferent uses.Trials of hybrid enterprise FMC solutionsjust started two in the USA with three in Asia and onein Europe expected this year.A new emerging technology could provide mobile op-erators with even more ammunition in their battle withtheir fixed counterpartsPicocells and femtocells are tiny indoor cellular basestations that are being touted by many as the convergencesolution of the not-too-distant future.If deployed cor-rectly they will not only serve their primary function ofimproving indoor cellular coverage but tie enterprisesinto the mobile network operator and place mobiletechnology and the mobile network operator at the heartof the corporate network.And mobile operators are very motivated to make surethey achieve this.Despite all their advances,only afifth of Europes voice minutes are carried over mobilenetworks.They still have a lot to gain.ConclusionThe bad news is that when it comes to the home,thebattle is already lost for pure play fixed telephony carri-ers.The good news for pure play fixed carriers when itcomes to FMC is that they hardly exist anymore.Thosethat do would be well advised to diversify.20082009201020112012BusinessConsumerTotal1.32.884.183.15.78.806.511.117.614.521.636.133.542.676.1Source:BMI researchMC/FMS EQUIPMENT MARKET($BNS)20082009201020112012BusinessConsumerTotal0.270.250.520.540.471.011.020.91.922.41.754.155.73.59.2Source:BMI researchBusiness Monitor International Ltd F-M CONVERGENCE IN EUROPE:STRATEGIES FOR SUCCESSThe bulk of Europes carriers,east and west,are in facttriple play providing Internet and entertainment servicesas well as fixed or mobile telephony.And some areeven quad play providing fixed,mobile,Internet andIt has made it clear that it intends to adopt IMS VCCtechnology at some unspecified time in the future whichwill again render all shipped equipment useless.A trialis planned for this year.entertainment services.Telecom Italias FMC experience illustrates the complex-In the enterprise space,however,we see another picture.Even less adventurous fixed network operators still standan excellent chance with business customers if they canconvince enterprises of their technology managementand integration skills.The bottom line when it comes to FMC is that becauseof the disappearance of traditional telecommunicationsnetworks where everything is neatly compartmental-ized according to function voice or data,mobile orfixed,etc convergence is happening faster than manywould have predicted.The trouble is that it is not the“right type”of convergence,at least from the networkity of FMC when it comes to competition regulation.Telecom Italia was only allowed to launch the originalFMC service on the understanding that it would notrecruit more than 30,000 subscribers and pending fur-ther investigation.After months of investigation,Italian telecommuni-cations regulator Agcom decided that Telecom Italiawould have to provide a wholesale version of Unicato allow rivals the chance to provide a similar service.Rather than go along with this Telecom Italia decidedto withdraw the UMA based service and introduce aSIP based one instead.operators point of view.The SIP service will work on more handsets than theEverything is being reduced to bits.As a result it is aconvergence of services rather than networks and froma pure information conduit perspective,network opera-tors only stand to lose.On the other hand customers,whether consumer or enterprise,stand to benefit.Andso do the nimble technology suppliers who gain theirconfidence.And perhaps a few courageous operatorswho can adapt and are willing to change their businessmodels completely.We believe that the operators that now look like takingthe best advantage of convergence technologies are the mobile operators,especially those like France Telecom,who have both types of network at their disposal.Prima-rily fixed operators are out of this game if for no otherreason than people like their mobile phones,and whatthey can do for them,more than their fixed.Case study 1Telecom Italias UnicaTelecom Italia launched its Unica FMC service in Sep-tember 2006 based on UMA technology.It changed overto SIP technology rendering all previous customerequipment useless in October of 2007.UMA service.But the drawback is that there is nohandover between cellular and WiFi networks if a callinitiated on WiFi wanders beyond the reach of the WiFinetwork it just drops.With UMA it would seamlesslytransfer to the cellular network.For Telecom Italia the main thing appears to be that itcan offer a quad-play proposition to its customers en-tertainment,Internet access,mobile and fixed telephony in as user friendly a format as possible.The regulatorrecognizes,however,how this could put Telecom Italiain an unfair competitively dominant position.OtherEuropean regulators may well take a similar position.Case study 2Cicero NetworksDublin-based Cicero Networks was founded in 2002.It is still a privately held company.It is also a pioneerof SIP based FMC technology and behind many of thecommercial FMC offerings of this technology availableacross Europe today.Leveraging unlicensed wireless networks and harnessingthe power of VoIP,Cicero enables the delivery a newBusiness Monitor International Ltd SPECIAL REPORTrange of value added wireless voice services many ofwhich are key to FMC.Developed specifically for op-erators and service providers fixed network operators,mobile network operators,broadband service provid-ers,hotspot operators and wireless Internet serviceproviders.These services can be offered to subscribers in manylocations including:Public wireless hotspotsThe enterpriseThe homeBusiness Monitor International LtdUsing a single mobile device,Cicero users can makelow-cost calls from public hotspots in cafes,airportlounges,etc,connect to the company telephone networkfrom a public hotspot,connect wirelessly to the officephone system when at work,connect to your officephone network when visiting other company locationsand make voice calls over the broadband connectionin the home.FMC services based on Ciceros technology includethose of Hello in Norway,MessageNet in Italy andMTI in Poland.10F-M CONVERGENCE IN EUROPE:STRATEGIES FOR SUCCESSFixed-Line Industry ForecastsUnited KingdomBased on an assessment of data provided by Ofcom andthe UK fixed line service providers,BMI estimates thatthere were 33.273mn fixed lines in service in the UK atthe end of 2007;this equates to a fixed line penetrationrate of 54.5%.Although the fixed-line market continuesto decline,the rate of decline appears to have been moregradual that we previously expected,at just 1.4%in 2006.We believe that the UK fixed line telephony market willcontinue to decline at gradual pace over the next fiveyears.By the end of our forecast period in 2012,weare forecasting a total market of just under 31.166mnlines,giving the UK a penetration rate of 49.6%.Fac-tors accounting for fixed-line decline in the UK includeincreased competition in the broadband market,which isdriving take-up of VoIP services.Meanwhile,althoughBTs share of call volume is expected to decline furtherin the face of increased competition from alternativeoperators,there are signs that the incumbent is startingto minimise churn and even attract customers back to itsnetwork;this trend suggests that overall market declinewill be more evenly shared by the sectors differentservice providers.GermanyDuring 2006,the number of fixed-line connections inGermany fell by 1.7%to reach 38.244mn.However,inthe case of the incumbent Deutsche Telekom,the totalnumber of fixed lines(PSTN and ISDN)fell by 5.8%.In contrast,the number of fixed-line voice subscriptionsbeing provided by alternative operators increased bynearly 50%during 2006,with cable-based connectionsaccounting for the greatest growth.These broad trendscontinued in 2007,with Deutsche Telekom continuingto report a quarterly drop in PSTN and ISDN lines,andalternative operators generally reporting incrementalincrease in fixed-lines.BMI estimates that,as a resultof this trend,there were some 37.9mn fixed-lines in themarket at the end of 2007,giving Germany a fixed-linepenetration rate of 45.8%We expect the trend whereby traditional fixed voiceservices are replaced by voice over internet protocol(VoIP)and mobile alternatives to continue for theduration of our forecast.We predict that the fixed-linemarket will contract by approximately 1%for each ofour forecast years,resulting in 35.870mn traditionalfixed lines in service by the end of 2012;by this time,Germanys fixed-line penetration rate will have fallento 43.1%.TABLE:UK TELECOMS SECTOR FIXED-LINE HISTORICAL DATA&FORECASTS200520062007e2008f2009f2010f2011f2012fNo.of main telephone lines in service(000)No.of main telephone lines/100 inhabitants34,06856.533,60355.433,27354.532,90753.632,51252.732,08951.731,64050.731,16649.6e/f=BMI estimate/forecast.Source:Ofcom,BMI.TABLE:GERMANY TELECOMS SECTOR-FIXED LINE。