Success for the DigiWorld Summit 2006; 28th IDATE International Conference 14, 15 & 16 November 2006 - Le Corum, 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 coming... 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
subscribers(1), with the number of internet users expected to overstep
the 120 million mark in 2005 and climb to more than 200 million next
year(2). '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 MSN...

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, Samsung... - 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 ...

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?

...give meaning to the many questions surrounding FTTx network
rollouts...

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.

... and the relationship with internet heavyweights...

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.

...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-Francois
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-Francois 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