Part I. Trends, Developments and State-of-Play
4 Mapping and analysis of the value chain
4.1 Mapping of the value chain
Traditionally postal services dealt with the collection and delivery of post items. Nowadays this signifies only a portion of the value chain. This is shown in figure 4.1, which represents the traditional value chain and the extended value chain as we nowadays observe it. The last years postal companies with a universal service obligation became increasingly active in non-core business activities as a result of changes in consumer demand and a search for higher value activities due to liberalisation (see Chapter 7) and technological developments (see Chapter 5). They compete with independent, generally smaller, firms in these adjacent markets. Two main trends can be observed: one of further diversification and one of increased focus on core competences/activities.
Figure 4.1 The postal service value chain
Suppliers Suppliers
Services
Collection Outward Sorting
Transport Inward sorting
Delivery
Data services
Mail and Document services
Transport and delivery
Fulfillment Production
Traditional value chain
Extended value chain
Customers (31% business, 69% households) Customers (87.5% business, 12.5% households)
Source: SEOR (2008) figures for customer data from WIK (2006).
Postal companies have made innovative use of services they already provided to supply other services downstream and upstream of the value chain. Data services include extended use of the postal code databases for marketing purposes. Production means printing services and content creation. Mail and document services include logistic services and facilitating services, such as document handling and mailroom management. Fulfilment means online consumer services, such as e-logistics, online payment services and handing of returned items.
In similar fashion, the large express carriers (the “global integrators”) have extended operations into warehousing, packaging and other logistics services and many traditional postal operators have already become large express carriers and “global integrators”. These services are often referred to as 3rd or 4th party logistics. These express companies primarily focus on delivery of parcels sent by business.
Another difference with the traditional value chain is the inputs used by the postal companies.
Traditionally inputs in the postal sector contained mostly equipment, vehicles, products and materials. With the increased diversification postal companies rely now more on other services providers for their inputs, such as logistic services and even express services. In parallel, postal operators increasingly outsource activities that were previously carried out by own staff. Examples include road transport and operation of retail outlets (see section 6.3).
Diversification resulted in tighter relations with other sectors. Postal service companies provide services that are outsourced by other companies, such as contract and document management. Companies are increasingly diversifying in different services. The income share from parcels and other logistic services increased from 9% in 2001 to 12.5% in 2006 (UPU, 2008). For other logistics services this increase is even larger as the number of parcels distributed by USPs decreased. Currently, the share of logistic services in the total revenue of USPs is rather high for some countries. Examples are Estonia (15%), Finland (34%), Germany (15%), Netherlands (31%), Sweden (28%) and United Kingdom (10%) (Van der
Lijn et al., 2005). Indeed, the percentage income from letters declined from 2001 to 2005 for the EU-15 (UPU, 2008).
The majority of post offices used to incorporate banking services, either through a post office joint venture between the postal company and a bank (e.g. Belgium, Ireland and Netherlands) or through subsidiaries (e.g. Austria, Germany, Sweden and the United Kingdom). In Denmark some banks are allowed to use the network of post offices for banking services.
Today most postal companies still provide financial services. Postal companies in Austria, Belgium and the Netherlands, however, have discontinued their financial services and devoted themselves to their core business. Norway Post previously had its own bank, Postbanken. This is sold and Norway Post provides financial services through a cooperation agreement with the new owner of Postbanken. In the new Member States most USPs provide financial services, except for Latvia. In Estonia and Czech Republic the USPs only provide money orders.
Except for Luxembourg, most countries have separated their telecoms and postal activities.
Telecoms
Broadly speaking, telecommunications services encompass transmitting information, in the form of speech, images, text and data streams. The most widespread telecommunications services are voice telephony (supplemented by text messaging, especially in the mobile telecommunications sector), Internet and TV broadcasting. The information to be transmitted is typically described as ‘content’. Content can be produced by specialized companies (TV, partly the Internet, telephone information services) or provided by individual consumers (voice telephony, text messaging, partly the Internet).
To provide telecommunications services, infrastructure is needed in the form of telecommunications networks. Three different types are available: wired (fixed telephony, cable TV, optic fibre), wireless (mobile telephony, terrestrial TV broadcasting) or satellite.
Voice telephony typically makes use of fixed and mobile dedicated telephony networks and TV cable networks. The Internet is usually provided on fixed networks (telephony and TV cable) and to a lesser extent but increasingly so on mobile telephony networks. TV is mainly broadcasted using the cable, terrestrial and satellite networks. All telecommunications services make use of technical equipment produced outside the telecommunications sector and are influenced by regulation at the EU and national level. In summary the telecoms value chain can be represented as shown in Figure 4.2.
Figure 4.2 General description of the value chain in telecoms
Services supply:
incumbents and entrant (fixed and
mobile)
Equipment Suppliers
Network Fixed (1) Mobile (several) Satellite (several)
Content providers Competition Authorities (EU, NRAs)
Content (fixed/mobile voice/text/video)
Consumer (voice, video, text, TV, data)
Sales and marketing incumbents and entrant (fixed and
mobile)
Until the 1990s, the structure of telecommunications sector in most European countries was characterized by a limited number of services, public ownership and vertical integration. The only widely provided services were fixed telephony and TV broadcasting. Fixed telephony network was typically in the hands of a state-owned monopolist, who was also the sole provider of telecommunications services on this network. TV broadcasting was also largely dominated by the state-owned entities, either public cable companies or terrestrial broadcasting stations, with a limited role for satellite TV.
In the last 20 years, the telecommunications sector has undergone drastic transformations as a result of institutional and technological changes. The telecoms sector first saw equipment manufacturing (new hardware (e.g. wireless, satellites) but especially the ‘middleware’ of enabling devices) transformed by new entrants and subsequently found its networks and international cables opened up to outside services providers transformed by new entrants.
Some, e.g. EIU (2008), claim that the influence of customers on new ideas and changes – which is already sizeable nowadays – could prove an equally transformational force in the near future (i.e. user-led innovation).
An important change that enables the was the vertical separation of network ownership and service provision, leading to more competition in services. The state-owned tele-communications companies were privatised and the telecoms market liberalized. Since the large costs of connecting each household and business premise to a fixed network made the emergence of infrastructure competition at the local level doubtful, at least in the short run, competition in services was stimulated by separating network ownership from service provision. Incumbents were obliged to open up their network and rent the local loop (i.e. the last piece of the network connecting a particular premise to the long-distance network) to alternative service providers at a regulated price (Laffont and Tirole, 2001). This has led to entry of operators without their own network or operators who own a long-distance network but lack direct access to consumers’ premises (e.g. Versatel in Benelux and Germany). The direct network access remained in the hands of the incumbent. Although the access obligation is now imposed in the whole EU, the state of its implementation and effectiveness differs per country. Additionally, the incumbents were assigned a universal service obligation, i.e. the obligation to serve all customers (also those located in remote areas) at reasonable prices.
A major development was the introduction of mobile telephony at the beginning of the 1990s.
This market has grown explosively to achieve 119% penetration in 2008 (European Commission, 2009). The first mobile operators were often the old fixed telephony incumbents, but they were soon challenged by new entrants who also obtained government licenses for the use of mobile frequencies and in many cases quickly gained substantial market shares. Although the costs of setting up a mobile network are substantial, they are still considerably lower than the costs of a fixed network. As a result several mobile networks are active nowadays in most countries, and there exists vigorous network competition. No access obligation or universal access obligation is imposed in the mobile segment of the market.
There is an interconnection obligation, however, meaning that mobile operators have to interconnect their customers to customers of competing providers. This obligation paved the way for mobile virtual network operators, who do not own their own infrastructure but buy capacity from other mobile operators. The introduction of mobile telephony has led to the creation of new telecommunications services such as text messaging (SMS) and image messaging (MMS) and to the development of diversified tariff plans aimed at different user profiles.
Table 4.1 Internet and broadband subscribers by country, 2006
Internet Broadband
Subscribers Users Subscribers
Level* Share Level* Share Level* Share
EU 104386 22 240596 51 81976 17
EU-15 92890 25 199637 54 73157 20
NMS 11496 11 40959 39 8819 8
Austria 2380 29 4210 51 1452 18
Belgium 2557 25 5490 53 2355 23
Denmark 1900 35 3171 58 1735 32
Finland 1400 27 2925 56 1428 27
France 15252 25 30100 50 12711 21
Germany 20000 24 38600 47 15000 18
Greece 952 9 2048 18 488 4
Ireland 1045 25 1441 34 602 14
Italy 17700 31 30764 53 8639 15
Luxembourg 130 28 339 72 99 21
Netherlands n.a. n.a. 14000 86 5192 32
Portugal 1582 15 3190 30 1425 14
Spain 7187 17 18578 43 6690 15
Sweden 3471 38 6981 77 2346 26
United Kingdom 17334 29 37800 63 12995 22
Bulgaria 467 6 1662 22 385 5
Cyprus 106 13 356 42 63 7
Czech Republic 1408 14 3541 35 1113 11
Estonia 259 20 730 55 247 19
Hungary 1292 13 3500 35 1199 12
Latvia 116 5 1071 47 120 5
Lithuania 418 12 1083 32 369 11
Malta 95 24 127 32 52 13
Poland 3244 8 14084 37 2911 8
Romania 3294 15 11300 52 1769 8
Slovakia 395 7 2255 42 317 6
Slovenia 402 20 1250 64 274 14
Source: ITU. * times 1,000.
Another development was the rise of the Internet (see Table 4.1). In 2006 the EU had 51 Internet users per 100 inhabitants, ranging from 18 in Greece to 86 in the Netherlands. The Internet has vastly increased the possibility for mutual interaction between individuals as well as between businesses and individuals. The rise of the Internet provided a new medium for existing services and led to the emergence of new ones, ranging from e-commerce and Internet advertising to dating services. In recent years, an important development in the Internet is the rise of broadband transmission, with high speed and large data-transmitting capacity increasing the scope of services that can be provided even further. Also interesting is the emergence of Internet telephony (VOIP) and TV via the Internet (IPTV) that in the future may compete with the traditional transmission channels. The average broadband subscriber penetration in the EU reached 17% in 2006 (European Commission, 2008).
One of the most recent developments is technological convergence of telecommunications services and networks. The transmission technologies used for Internet, telephony and TV broadcasting are becoming more and more similar. Different networks are increasingly used
for the provision of the same services. For instance, Internet was initially mainly provided on the fixed telephony networks. In the course of 1990s, TV cable networks have been adjusted to provide Internet and, more recently, digital telephony. On the other hand, the fixed telephony networks have also been upgraded and their capacity increased, and some operators (such as KPN in the Netherlands) are experimenting with IPTV and Internet Telephony. This leads to the former monopolists entering each other markets and the bundling of services resulting in the emergence of multi-play, which is competition in bundles of various telecommunications services. Next to the convergence of different fixed networks, one can also observe fixed-mobile convergence as the increasing capacity of mobile networks makes it more and more possible to use them for services that were until now reserved for fixed networks, such as the transmission of images, fast Internet or TV. Also satellite networks are more and more often used for the provision of telecommunications services other than TV broadcasting. Network convergence thus leads to increasing network competition, which is further intensified by the roll-out of completely new high-capacity networks, such as optic fibre. It leads also to the adjustment of other networks, such as energy transmission networks, for the provision of telecommunications services. Next to traditional telecommunications providers adopting new technologies, Internet companies such as Yahoo, Skype and Google are also entering the market for IP-based telecommunications services (OECD, 2007). With respect to employment, convergence means that the employment structures of different operators are likely to become more similar, while the broadening of scope of services will probably lead to a higher diversification of the workforce within companies.
The prices of telecommunications services are falling due to increasing competition and technological progress. For instance, average prices in the mobile sector fell between 2006 and 2007 by 10-14%. On the other hand, the prices in the fixed sector remain relatively stable (European Commission, 2008). As the prices of telecommunications services fall, telecommunications operators will seek ways to increase their revenues. Two business models seem most likely here (OECD, 2007). Firstly, companies may bundle different telecommunications services into multi-play. Hybrid products are generated in this case, combining features of different telecommunications services or combining services with information content or with other types of services, e.g. financial ones (see chapter 5 for examples). Secondly, companies may focus on the efficient provision of basic data transmission capacity, leaving the provision of additional services to others. The choice of business model obviously will have consequences for the development of the structure in the sector and degree of verical integration.
Networks
The postal and telecoms companies provide a service that is bound by location, but are able to provide services worldwide through the use of the vast international networks. In this regard the Universal Postal Union (UPU) and the International Telecommunication Union play a role in setting rules for international mail and telecoms exchanges and international standardization. Moreover, the mobile operators have contracts with other providers to enable international calls, or have established subsidiaries in local markets. For the postal companies the UPU set up and manages the terminal dues system by which the postal companies are financially compensated for handling volumes of international mail exchanged with companies in other countries. For cross-border mail from one EU country to another, EU legislation prohibits the application of UPU terminal dues since they are not (sufficiently) cost-oriented, and are (discriminatorily) available only to incumbent state monopolies, not to other operators. European postal operators, therefore, have agreed terminal dues under a contract agreed within a separate association (the “REIMS” treaties of the IPC, International Post Corporation), or have agreed bilateral agreements among each other. Although postal
and telecoms companies form an international network and the larger courier companies and mobile operators have a network of branch offices of their own, there are nearly no means of geographic substituting production and therefore no heavy geographical specialization is possible.
4.2 Restructuring