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European operators weakened by the fragmentation of their markets


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European telecommunications operators are having problems for an effective deployment of fixed and mobile broadband networks in their respective territories in relation to their North American and Asian counterparts, both due to the fragmentation of the European market and what they consider to be excessive community regulation . This hinders their investment capacity and has caused their income statement to fall, as indicated in a recent report by ETNO, the association of the main European operators.

The recent annual results released by Telefónica, Vodafone and Orange, both at the Spanish and corporate level, show a significant drop in their billing and profits or, in the case of Orange, a flat record of the same, despite the notable increase of the activity of their fixed and mobile networks as a result of the pandemic, which have shown, despite this, to have good resilience. One of the causes of the deterioration in the income statement of the large European operators is the strong competition in their respective markets, which causes the price of the telecommunications services offered to fall.

Deusche Telekom (DT), the incumbent German operator, is the only one to deviate from this trend since in 2020 it has managed, for the first time, to exceed 100,000 million euros and increase profits by 7.5%. But it is mainly due to the good results of its US subsidiary, New T-Mobile, thanks to the merger with T-Mobile US and Sprint approved by the FCC, the regulatory body, last April.

The revision of the Community Broadband Cost Reduction Directive (BCRD) should encourage and facilitate the deployment of future telecommunications networks in Europe and broaden its focus

The price of DT’s shares has nevertheless fallen 5% in the last five years and dividends were cut from 70 cents in 2018 to 60 cents the following year, which have now remained at this level further low. The high investments made in recent years and the purchase of Sprint have triggered DT’s net debt by 120,000 million euros, which exceeds its market capitalization by some 50,000 million euros. This year, DT plans to invest 18,400 million euros, about 1,400 million more than last year, which will strain the results of 2021 and shareholders will continue to doubt that investing in European telecommunications operators is a good alternative.

In the case of Telefónica and Vodafone, the fall in the value of their shares and the results of last year are much worse than those of DT, because they do not have the cushion of the US subsidiary and are mainly focused on Europe and, in the case of Telefónica, in Latin America, which is also not very profitable and has led to recent divestments. In the last five years, the value of Telefónica shares has fallen by 63% and that of Vodafone by 43%, which means that Telefónica’s debt, for example, exceeds its capitalization by some 15,000 million euros market. In 2007, the market value of its shares peaked at around € 310 billion, which has now dropped to around € 21 billion due to the difficult market situation.

To reduce debt and be more competitive, Telefónica has just sold part of its Telxius subsidiary, which brings together its telecommunications towers, to the American ATC, as Vodafone also plans to do with its Vantage tower subsidiary. Orange and DT are studying divestments of their towers, although not as drastic as those of Telefónica and Vodafone and they do not want to sell them to Cellnex, which in recent weeks has made sounded tower purchase operations in Europe, and the market does not give for so much. At the moment, the most preferred option is to share networks, including towers, between the different European incumbent operators.

In the presentation of the 2020 annual results on February 25, José María Álvarez-Pallete, president of Telefónica, took his chest out and said that the company had made the grade in 2020, an exceptional year and in which they had been put testing. “We have been by the side of society, where we had to be”, and “we have fulfilled and we continue to make progress”, “as a result of the guidelines that we set for ourselves in the 2019 strategic plan that left us well prepared for the unexpected.” “We had to act, we did and the results now tell us that we were right,” assured the president of Telefónica in the presentation of the 2020 results at the shareholders’ meeting.

On February 1, in a debate organized in Brussels by the Center for Regulation in Europe (CERRE), Álvarez-Pallete called for “advancing in the deregulation of the telecommunications sector and establishing new standards for the digital world.” “Europe has to review its traditional regulation to face the revolution that 5G supposes,” he added, and defended the need to have the support of community regulators.

Review of the directive for the reduction of broadband costs

Last December, the process of revision of the Community directive for the reduction of broadband cost began, the Broadband Cost Reduction Directive (BCRD), which should encourage and facilitate the deployment of future telecommunications networks in Europe and expand their approach, such as placing greater emphasis on reducing the cost of mobile networks.

Last Tuesday, the deadline for submitting amendments to the BCRD review ended. The GSMA, the association that brings together the world’s leading operators, has published a report in which it highlights its main concerns and makes several recommendations to make the revision of the directive more effective and achieve a more effective deployment of pan-European networks.

The GSMA assumes that having broad and high-quality connectivity will contribute significantly to responding to the Covid-19 crisis, because it will ensure the stability of telecommunications networks and create the basis for future economic growth. Investments in expanding broad connectivity will contribute to maintaining employment in the short term, when aggregate demand is low, says the GSMA document, and in the medium and long term, telecommunications infrastructure will be a great instrument for Europe. become more competitive and enable the deployment of new digital services such as industrial applications 4.0, smart cities and connected cars, which in turn will benefit from lower broadband deployment costs.

European operators see average revenues from fixed and mobile services decline over the years, making it difficult to invest in infrastructure and making it less attractive, with the consequent decline in market capitalization value

Specifically, the GSMA strongly recommends that several changes be made to the revision of the directive, including improving and expanding access to any physical infrastructure owned by a private or public entity, ensuring effective application of transparency measures, prescribing more effective permitting procedures to overcome granularity and inefficiency at local and municipal level, introduce an ambitious pro-investment approach, apart from aligning with the European Electronic Communications Code (EECC) and harmonizing and strengthening measures current to ensure a more efficient and economical deployment of networks.

Finally, and equally important, the GSMA requests that, in accordance with the cooperation initiatives of the EECC, shared mobile networks, co-investment in common projects and with well-defined objectives, such as Edge and Cloud, be supported. Most of these initiatives, recalls the GSMA, are already in line with the “green” objectives, because they allow cost sharing and are favorable to the preservation of the environment.

Designing these rules at the level of the European Union is a high priority, but the GSMA recalls that it is also to monitor and ensure that they are applied effectively at the national level. If due compliance is not ensured, the association raises, the revision of the directive will have the same problems as the incomplete application of previous procedures. For this reason, the GSMA recommends that Member States be encouraged to strengthen legal instruments so that the review is effective and achieves its objectives. In this way, in addition, it will contribute to the achievement of the gigabit society objectives in 2025.

Incentivize real investment in European 5G networks

In presenting the 2020 results, the president of Telefónica was in favor of any operation that leads to a consolidation of the Spanish telecommunications market, as had Jean-François Fallacher, recently appointed CEO of Orange Spain. In Spain, Álvarez-Pallete said, “there are too many operators” and recalled that the average income per client in the European Union is half that in the United States.

At the end of last January, ETNO, the association that groups together the main European telecommunications operators, published the State of Digital Communications report, prepared by the American consultancy Analysis Mason, in which it highlights that European telecommunications operators are behind their North American and Asian counterparts in several key parameters, which are essential to achieve leadership. A GSMA report released the following day, titled Sovereignty, Resilience and Trust, pointed in the same direction.

The ETNO report specifies that the total investment of the European telecommunications sector was 51.7 billion euros in 2019, compared to 48.6 billion a year earlier. 70% of these investments are made by companies associated with ETNO, with an added value in relation to GDP of 141,500 million euros in 2019 compared to 136,900 million in 2018. However, the report points out, “there are signs that the capacity investment of the European telecommunications sector is under tension ”. The capital intensity of companies associated with ETNO is 18.7% while those of South Korea, Japan and the United States are below 16%. This means, the report clarifies, that European telecommunications operators allocate a relatively higher level of their turnover to investments. The most worrying thing is that the per capita investment of European operators was 94.8 euros in 2019, compared to 229.8 euros for the Japanese or 214 euros for the United States.

The trend that seems to prevail in the European Union is to create a more flexible framework that favors investment and the sharing of telecommunications infrastructures, without excessively damaging free competition

The average income from European consumers received by operators in Europe is 34.7 euros, compared with 76.1 euros for those in the United States or 52.5 euros for those in Japan. Average billing per mobile user in Europe is also lower, 14.9 euros, compared to 36.9 euros in the United States or 28.1 euros in Japan, the ETNO report says.

The lower demand in Europe for mobile phone services than in other regions, together with the lower average billing per user, logically affects the profitability of the services provided by the operators in Europe. The differences between different regions, the report argues, are clear, even when adjusted in relation to GDP, and highlight the difficulties of European operators to remain competitive which, being such an essential service for the European Union as it is telecommunications, it is also weighing on the European economy.

Mobile Average Billing Per User (ARPU) in Europe, the United States, Japan and South Korea in 2019, in euros. Source: 2020 Analysis Mason data in ETNO report.

Average spending per gigabyte of mobile data and average monthly consumption of gigabytes of mobile data per capita in different regions in 2019. Source: 2020 Analysis Mason data in the ETNO report.

Evolution of average per capita spending on consumer telecommunications services in Europe, Japan, South Korea and the United States in 2006, 2013 and 2020. Source: 2020 Analysis Mason data in the ETNO report.

To further complicate things for European telecommunications operators, the average per capita expenditure of European users on consumer telecommunications services has not stopped falling in the last fifteen years, while in other regions it has tended to rise, as seen in the graphic above. This situation, in short, is the ruin for European operators and, incidentally, puts Europe in a situation of tremendous fragility.

An added problem, as mentioned at the beginning, is that global financial investors do not see the European Union’s telecommunications infrastructures, both fixed and mobile, at all attractive and prefer to speculate with shares of companies that provide services without having their own infrastructure and even without licenses to operate, such as virtual mobile operators, and they subcontract the service they provide to operators that do have infrastructure.

Operators have often complained that the different European countries have approved auction conditions for mobile telephony licenses that prioritized collection, but now it does not seem to be the main cause of the problem, because criteria are set in the auction conditions very strict temporary coverage and service provided. In the latest auction in the United States, Verizon has paid about $ 50 billion for a relatively insignificant chunk of the so-called C-band, which will also hopefully not be available until the end of the year. This sum paid by Verizon for the license is higher than that invested by all Chinese mobile operators in 2020 to install nearly 200 million 5G connections across the country.

The problem in Europe, therefore, seems to be one of the free competition model of mobile telecommunications. Now the idea is being considered to limit the number of mobile and fixed operators in each country and to encourage the use of shared infrastructures by those who really have them. Among the dominant operators, it also seems to have come to the conclusion that it is suicidal to lower prices a lot to try to have a greater market share in each of the countries in which it operates.

This philosophy of action that now wants to impose itself will clash head on with reality if a clear framework of action is not established beforehand between the regulatory bodies of the different countries. Ultimately, it is about adjusting the “remedies”, the legal mechanisms used to regulate free competition in the telecommunications sector, in such a way that whoever really invests in infrastructure in a country clearly benefits and harms, or purely financial or speculative investments are discouraged.

In this way, incidentally, operators would be prevented from being tempted to steal customers from another or, to use a softer English term, to do “churning”, in exchange for what the Spanish proverb knows as “bread for today and hunger for tomorrow ”. The improvement of the BCRD directive, like so many other directives approved by the European Commission and seconded by Parliament, is well under way. Provided that they are accompanied by the appropriate “remedies” and applied for the benefit of European consumers, their companies and operators so that they can continue to invest in tangible infrastructure.