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European operators at a difficult crossroads

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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.