The real economics of Internet in Sweden

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The real economics of Internet in Sweden

• Birger SteenScandinavia Online AB
• 23 October 2001

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Scandinavia Online at a glance

• Origins in the first ISP in the Norway, Oslonett
  (1991)
  
• The leading portal in the Nordic countries and
  one of the regions top-3 media companies based
  on reach with more than 8 million unique
  users in September 2001
• Product formula Media-enriched start page,
  market leading search engine and directories,
  one-stop-shop for Web services, wireless/wireline
  integration through user data warehousing
• IPO in 2Q2000, current largest owners Schibsted
  (34), Telia (24), and Telenor (16)
  
• Fully funded until profitability
• Current share price SEK 5.60 vs. IPO price of SEK
  115 and cash per share of SEK 10.40 (2Q01)
  

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Internet content providers kick-started the
Nordic IP wonder
Internet users, thousand, Nordic countries
Spray.se
Passagen.se
SOL.dk
Torget.se
Kvasir.no
AlltomStockholm
Aftonbladet.se
Lunarworks
Everyday Village
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making the Nordic population is the worlds most
connected
Mobile phone penetration
Finland
Norway
Austria
Denmark
Sweden
Italy
Portugal
Switzerl.
Netherl.
UK
Spain
Belgium
Germany
France
USA
Internet penetration
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In the process, they incurred heavy losses
EBITDA losses in content sector in Sweden, 2000
ESTIMATE

• SOL 140 MSEK
• Spray 200 MSEK
• MSN 50 MSEK
• Telia 100 MSEK
• Tele2 20 MSEK
• Bonniers 50 MSEK
• Schibsted 40 MSEK
• Others 500 MSEK?

The Internet content and service sector in Sweden
lost more than 1 billion SEK in 2000.
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Therefore, you cannot make money on the Net

• People are used to getting everything for free
  on the Net. You only want to pay for something
  you can hold in your own hands - Media
  analyst
• The days of the Its on me-Web are
  over - Journalist
  
• Content providers must take responsibility for
  their own business model - CEO, incumbent
  telco

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However, content and service production is only
half the product
Content/ serviceprovider
The Internet
User
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and the other part is its delivery Dial-up
Internet access
Local telephone company
Content/ serviceprovider
ISP
The Internet
User
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The user sees an integrated service
Hello, is this Scandinavia Online? My modem is
not working
Local telephone company
Content/ serviceprovider
ISP
The Internet
User
Content, IP dial-tone/modem pool operations and
twisted-pair based Internet access are 100
integrated, complementary services they cannot
be separated by the consumer
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Local-loop telephony economics 101

• Europe
• Telcos are end-to-end IP service providers,
  providing local-loop connectivity, ISP modem
  pools and backbone IP transport
  
• Local calls are (still mostly) metered you pay
  per minute connected
  
• Therefore, every minute spent on the Web gives
  more revenue, mostly to incumbent telcos
  
• For the average consumer, local call charges on
  Internet access are many times greater than
  access charges

• North America
• ISPs, local-loop telcos and backbone providers
  are separate companies
  
• Local calls are free you pay for having a phone
  line only
  
• Therefore, every minute spent on the Web gives
  more costs to the local telco
  
• For the average consumer, local call charges are
  not a factor in their Internet costs
  

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Who paid what in Sweden 2000?
Local telephone company (telco)
Content/ serviceprovider
ISP
The Internet
User
From users From ISP From telco Net non-ad reven
ue
0 0 0 0
2,736
436 - 2-300 7-800
2,300 - 2-300 2,000
Of 2.7 billion SEK paid by the users for Internet
access, 2,3 billion SEK was paid to see more
content (time based phone charges). For this,
the content providers got 0 SEK from telcos, the
ISPs got 2300 MSEK.
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The Internet industry made money in Sweden 2000

• Internet access revenues
• Internet access cost (est.)
• EBITDA losses in content sector
• SOL 140 MSEK- Spray 200 MSEK- MSN 50 MSEK-
  Telia 100 MSEK- Tele2 20 MSEK- Bonniers 50
  MSEK- Schibsted 40 MSEK- Others 500 MSEK
  
• -------------------------------------
• Industry profit

ILLUSTRATIVE
SEK 2,700 million SEK 1,000 million
SEK 1,100 MSEK
--------------------------------
SEK 600 million
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The structure of the Swedish internet industry
, market share
Local telephone company (telco)
Content/ serviceprovider
ISP
The Internet
Users
MS 5Lycos E 4 SOL 3Schibst. 4Telia 2Tel
e2 2Top-10 23Top-50 48(minutes)
Telia 31Tele2 24Telenor 11Lycos E
8Rest 23(homes)
Telia 86Tele2 7Telenor 4Rest
3(homes)
4.2 million (individuals)
The real reason why content isnt paid The
Internet value chain is bottlenecked in the
local loop by the incumbent.
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The evidence

• But what do I do if my operator does not carry
  the content I like? - Comment from
  content producer seminar participant

What do I do if my grocery store doesnt carry
Coke? What do I do if my bank doesnt provide o
nline banking?
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Revenues from Internet access in Sweden
MSEK, CY2000
Total 2,740
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The problem is

• not that people are using the Internet too
  little, but
  
• not that people do not want to pay for Internet
  content, but
  
• not that the Internet consumer service industry
  is unprofitable, but
  
• not that a mechanism is hard to find, but

• that it costs to much to provide them with the
  current content volume with advertising as only
  revenue source
  
• that they are used to paying the wrong guy
• that there is no mechanism for allocating (at
  least some of) the economic profit to where a
  large share of the real value is created
  
• that the incumbent will not agree to implement
  it
  

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What is responsibility for ones own business
model?

• Content, IP dial-tone/modem pool operations and
  local-loop based IP access are 100 integrated,
  complementary services
  
• For telephony, the same applies to call
  origination and call termination you cannot
  make a telephone call without a receiver
  
• In order to secure a functioning, de-monopolized
  market for telephony, an interconnect fee has
  been mandated by the regulator in most markets.
  This is a tariff to be paid to the telco
  terminating a call from the telco originating a
  call. A similar concept secure revenues for TV
  channels from cable operators
• SMS, particularly in Norway and Finland, has
  become a vibrant content platform, thanks to a
  revenue share scheme open to all content
  producers
• Therefore To take responsibility for their own
  business model content providers must ensure
  that they get compensated for the economic value
  they create

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The (only) four ways forward

• Comments
• Only well financed players and side businesses
  will remain, but network usage and telco
  revenues will fall
  
• Seemingly great for telcos, not so great for
  consumers Will 2-3 AOLs own the market?
  
• Not likely to happen short term
• The only solution securing (i) efficient
  allocation of resources, (ii) continued
  de-monopolization of the telecom industry and
  (iii) media diversity

• Development
• Content offering radically diminished
• Content being vertically integrated into telcos
• Content attracting more advertiser and direct
  user revenue fast
  
• Content receiving fair share of economic value
  created through interconnect fees on content

Internet usage growth
Low
High
These potential developments are not mutually
exclusive. A reduction in openly available
content could easily happen at the same time as
telcos are producing more content in-house.
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The future of Swedish internet?
MSEK
Local telephone company (telco)
Content/ serviceprovider
ISP
The Internet
User
From users From ISP From telco Net revenue
0 - 500 300 500 700 - 800 1,000 1,800
2,500- 3,000
500 300-500 2-300 7-800
2,000 - 1,000 1,000
A functioning interconnect fee regime for content
secures potentially profitable operations in all
part of the value chain at todays activity
levels.
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SOL Matchmaking A User Paid Success
The message (or cheaper just an alert) is
forwarded to the user via a SMS
User enters correct verification code on the web
and the Alert service is activated
The user is billed NOK 5 (or NOK 3 if he has
chosen alert only)
A user wishes to activate Paid alerts for
Nettvenn msgbox
A verification code is sent to the user via
SMS(free of charge)
User is prompted to log in and enter mobile phone
number (if not already known)
Another Nettvenn finds our first user
interesting and decides to send a message
SOL Dating Service
Internet
Operators
GSM