European operators at a difficult crossroads

European telecommunications operators are facing a difficult crossroads, because the numbers with the current 4G networks have not just come out and with the 5G networks less, as they require a strong investment with a very slow recovery. In the case of Spain, the situation is much more complicated by the strong competition between the four main operators, which is pushing down the prices of convergent rates. The MWC, which starts this Monday, may be an opportunity to glimpse the future that holds for 5G networks in Europe and their operators in the next two years.

 

The situation of telecommunications operators, especially those in Europe, given the arrival of 5G networks is very delicate, because they carry a heavy debt, profits in many cases go down and, as one of its consequences, the price of their shares are on the ground, as the profitability of the large European operators is low. In the second half of the last decade, most of the operators dedicated themselves to lightening the workforce, taking advantage of the fact that technology allowed greater automation of the services provided and the heavy investments made in the first half of the last decade in 4G networks and, by Telefónica, a large fiber optic deployment.

 

In some cases there has been an improvement in profitability, boosted by the transfer of assets and the outsourcing of some services to large technology companies, such as cloud services. The arrival of 5G requires a large investment that, at the moment, its profitability is not clear, at least in southern Europe, as has been highlighted in some recent studies by ETNO and the GSMA, the association of operators European and world, respectively.

The main telecommunications operators cut 230,000 jobs between 2015 and 2020, 12% of the total workforce, and last year alone 55,000 jobs were cut to achieve greater profitability and finance the necessary investments

The fragmentation of the telecommunications markets, both for fixed and mobile telephony in Europe, is one of the most cited causes, together with what European operators consider as excessive regulation. In any case, the horizon for European operators in the short term is not very buoyant. For consumers, on the other hand, it allows them to have good fixed telephony, Internet and 4G mobile services at very attractive prices, especially in cities.

 

This means that the majority of European consumers have no special interest in switching to 5G, at least for now. It is likely that, from the middle of next year, 5G will be more attractive in Europe with 5G SA networks, but it will also require a large investment from operators, without necessarily having very high added revenues.

12% cut in the workforce between 2015 and 2020

The main telecommunications operators around the world have cut 230,000 jobs between 2015 and 2020, 12% of the workforce, according to Light Reading.Of the 20 large operators that the specialized telecommunications site tracks, only the Canadian Telus and the British Vodafone increased the number of employees last year. The net reduction in workforce last year among the top twenty operators was about 55,000 people, the worst since 2016 for telecommunications employment, notes Light Reading.

 

The job cuts were due to asset sales, mergers and the search for higher profitability. During the first half of the decade, the deployment of 4G increased workforce as well as revenues and expenses. In the second half, on the other hand, 4G networks were already installed in most developed countries, competition increased both in fixed and mobile telephony services and this produced a reduction in margins that, in the end, led to cuts of designated template.

 

The greater automation of the networks also had its effect in the less employment required by the operators, together with the increasing outsourcing of many tasks to large technology, such as cloud services or the use of external data centers. The two graphs below from Light Reading show the overall downward evolution of the number of employees of the main operators and the turnover per employee during the second half of the last decade.

 

It is worth highlighting the reduction, by more than 24,000 people, of Telefónica, 18% of the total workforce in 2015, as well as 14% of Vodafone, 9% of Orange and 21% of Telecom Italia, all of them with very numerous templates in the middle of the last decade. Deutsche Telekom’s payroll was down 7% in 2019 compared to four years earlier, but the rise of T-Mobile US, together with the subsequent merger with Sprint in the US market in April 2020, made the total workforce of the operator Germany will remain the same between 2015 and 2020. The fall has been proportionally sharper in other operators in northern Europe, such as Telenor, Telia or KPN. In the United States, the cut by AT&T and Verizon has also been very important.

Evolution of the workforce of the main operators between 2015 and 2020

	2015	2016	2017	2018	2019	2020
América Móvil	195.475	194.193	191.851	189.448	191.523	186.851
AT&T	281.450	268.540	280.000	268.220	247.800	230.760
BCE	49.968	48.090	51.679	52.790	52.100	50.704
BT	102.500	106.416	105.787	106.742	105.344	99.741
CenturyLink	43.000	40.000	51.000	45.000	42.500	39.000
Deutsche Telekom	225.243	218.341	217.349	215.675	210.533	226.291
—T-Mobile US	50.000	50.000	51.000	52.000	53.000	75.000
KPN	14.078	13.530	13.275	12.431	11.248	10.102
Level 3	12.500	12.600	0	0	0	0
Millicom	15.956	17.985	19.127	21.403	22.375	21.419
Orange	156.191	155.202	151.556	150.711	146.768	142.150
Proximus	14.090	13.633	13.391	13.385	12.931	11.423
Rogers Communications	26.200	25.200	24.500	26.100	25.300	23.500
Sprint	30.000	28.000	30.000	28.500	27.000	0
Swisscom	21.637	21.127	20.506	19.845	19.317	19.062
Telecom Italia	65.867	61.229	59.429	57.901	55.198	52.347
Telefónica	137.506	127.323	122.718	121.853	117.347	113.182
Telenor	38.000	37.000	30.800	20.832	20.044	18.000
Telia	26.895	26.017	25.021	20.836	21.232	20.741
Telus	47.700	51.300	53.600	58.000	65.600	78.100
Veon	52.321	41.994	39.938	46.132	46.492	43.639
Verizon	177.700	160.900	155.400	144.500	135.000	132.200
Vodafone	111.684	111.556	106.135	98.996	95.219	96.506
Source: Light Reading, based on company data and SEC files. June 2, 2021

This severe cut in the workforce has caused the turnover per employee to increase in some cases while in others it has continued to decline, due in large part to the heavy debt carried over from the previous period, with the high investment in fiber and 4G networks , as is the case with Telefónica. In 2019 there was a slight rebound in turnover per employee of Telefónica, but in 2020 it fell again, indicates the table compiled by Light Reading (These indicators analyze a part of the situation, like any other economic analysis; it can occur, for example, that the turnover per employee is very high because a lot is subcontracted or vice versa, that there are many employees but hardly any subcontractors. The trend, it seems, is to subcontract more and have less direct staff).

Evolution of the billing of the main operators per employee, in dollars

	2015	2016	2017	2018	2019	2020
América Móvil	228.813	251.379	266.500	274.267	263.232	272.369
AT&T	521.585	609.965	573.214	636.791	731.207	744.323
BCE	356.463	373.829	363.899	368.293	378.338	373.886
BT	262.388	320.572	317.125	311.092	307.776	302.728
CenturyLink	416.279	437.500	347.059	501.778	504.894	531.077
Deutsche Telekom	375.343	409.030	421.015	428.815	467.142	545.285
—T-Mobile US	649.340	749.800	796.157	832.885	849.019	911.960
KPN	607.478	614.023	598.208	554.204	595.873	637.953
Level 3	536.000	642.857	ND	ND	ND	ND
Millicom	392.580	224.798	205.782	184.367	193.788	194.734
Orange	314.444	321.958	331.316	335.451	351.597	363.295
Proximus	520.252	528.730	529.162	525.839	537.215	585.996
Rogers Communications	423.713	450.390	485.880	479.170	493.569	490.586
Sprint	1.072.667	1.190.964	1.080.200	1.178.947	ND	ND
Swisscom	602.378	611.646	635.602	657.558	660.480	648.686
Telecom Italia	365.403	379.114	407.043	399.639	397.894	368.872
Telefónica	487.780	498.965	517.689	488.207	503.903	464.977
Telenor	405.445	426.797	486.787	611.065	681.513	819.886
Telia	389.055	391.076	385.446	484.729	489.385	519.770
Telus	217.100	206.710	205.568	205.228	185.114	164.025
Veon	183.483	211.935	237.869	196.957	190.635	182.864
Verizon	740.574	783.095	811.030	905.882	976.800	970.439
Vodafone	544.768	521.300	536.415	538.889	577.047	554.603
Source: Light Reading, based on company data and SEC files. June 2, 2021.

The recent divestments of Telefónica, especially the sale of antennas for rental purposes, have lightened the debt and the group’s workforce and will foreseeably increase the turnover per employee. However, the sharp drop in convergent rates in Spain, due to competition with the other three large operators and virtual operators, means that the outlook is not at all rosy for any of them. Especially if very attractive 5G services are not able to be launched and that allow to bill more for them.

Orange Spain, for example, has announced an ERE to 485 people, although recently it relaxed the dismissal conditions a bit. The turnover per employee at the level of the entire French group, the former monopoly France Télécom, is one of the lowest, as is that of Telecom Italia. The turnover per employee of Telefónica and Vodafone is a little higher, but nothing to do with that of Swisscom or the US operators Verizon and AT&T. The big problem for European operators is, as has been said, that the price of their shares does not stop falling.

Lack of investment in 3.5 GHz

An added problem is that European 5G networks do not contribute much more than 4G because, according to Ericsson, the necessary investments have not been made in medium-band radio stations. In a statement made to Light Reading by Christian Leon, Ericsson responsible for networks and managed services for Europe and Latin America, the low investment of European operators in 5G radio stations that operate at the medium frequency of the spectrum, 3.5 GHz, It is the main reason that 5G networks in Europe have poor coverage and operate at speeds comparable to 4G.

The Ericsson executive’s argument is that European operators have promoted 5G with the support of technologies such as DSS, which share part of the unused 4G networks, or at frequencies below 3.5 GHz, such as 2.1 GHz, 700 or 800 MHz, which clearly give lower performance in terms of speed (although much higher in indoor and outdoor coverage than 3.5 GHz).

It so happens that DSS (Dynamic Sharing Spectrum) technology was developed by Ericsson and licensed to other equipment manufacturers. DSS, it was said two years ago, was a very useful resource to take advantage of the unused 4G part to offer 5G networks. And it is true, as the 700 or 800 MHz band is very useful for 5G, if you have the spectrum granted. But it is still a 5G network at low speed, comparable in some cases to 4G although it allows much higher applications.

South Korea or China achieve download speeds with 5G at 3.5 GHz much higher than those of the European Union, a direct consequence of having a much higher density of base stations and having invested accordingly

Ericsson’s statements must therefore be taken with some caution. It is evident that to have a 5G network in optimal conditions of coverage and speed it has to operate at 3.5 GHz, but also a greater base station infrastructure than with 4G and that the network is 5G SA, and not 5G NSA as before. in the vast majority of European countries; In other words, the entire 5G network, from the antenna to the core, is exclusively 5G.

Very low 5G coverage in Europe

Regardless of the reasons for the strategy used by European operators in terms of 5G, what Ericsson estimates is that the coverage of 3.5 GHz 5G networks, both in the European Union and in Great Britain, is less than 10 % of the population, when in South Korea it reaches 90% or in China close to 60%, as seen in the graph below. In Switzerland, coverage with 5G at 3.5 GHz is 46% of the population, Ericsson calculates. In the United States, a little higher, although the company alerts that only T-Mobile US provides service with a band around 3.5 GHz (the other two operators still cannot make the auctioned license work).

PERCENTAGE OF POPULATION COVERED WITH 5G MEDIUM-BAND NETWORKS

Source: Ericsson (april 2021)

The corollary of all this, Ericsson points out, is that the average speed of 5G networks in the countries of the European Union (including Switzerland) is very low, between 120 and 200 megabits per second of download, while in the Emirates The United Arab Emirates exceeds 500 megabits per second and in South Korea a similar figure of average decline is achieved, for a much larger population. In China, the speed is hovering around 350 megabits per second, twice that of Switzerland and three times that of Germany, according to the table below from Ericsson published by Light Reading.

AVERAGE 5G SPEED PERFORMANCE IN DIFFERENT COUNTRIES

Fuente: Ericsson, en base a datos de Ookla de 1 febrero a 15 mayo 2021.

This higher 5G speed in Asia and the Middle East is a consequence, Leon acknowledges, of the much higher density of 5G base stations at 3.5 GHz. In South Korea it is estimated that there are 57 sites for every 10,000 people and in China 14, while the equivalent figure for Germany is 8.7 and France around seven, calculates the consulting firm Deloitte. China now has around 1.9 million 4G stations, of which 776,000 have been upgraded to 5G. South Korea has 290,000 4G sites, with 166,250 upgraded to 5G.

It is clear that in order to have a good 5G medium-band network, it is essential to have the proper license to use the spectrum, but accompanied by a dense network of base stations, which means a colossal investment. In low demand areas or rural centers, tricks such as DSS or the 800 MHz frequency can be used, but at the cost of sacrificing speed. In telecommunications, as in many other aspects, it is about having a good physical infrastructure, adjusted to real needs, with few possible shortcuts.