Western Europe’s operators are on a regulatory seesaw. Will the European Union members’ regulators become more open to consolidation, as the MNOs face saturated markets and falling ARPUs? Or will they insist on additional players as they allocate 5G spectrum?
The EU, and many member state authorities, have been hostile to any mergers that reduce the number of MNOs in a single country (usually from four to three). Some have been allowed, with significant concessions required (usually mandatory access to networks for a new MVNO, with the idea that a strong MVNO should, in effect, be an additional choice for consumers). This happened in Germany, Ireland and Italy, but similar deals were blocked in the UK and Denmark.
Now, the UK government hinted this week that it might be more willing to consider consolidation in the future. This may be related to Brexit, or to the fact that BT – which was allowed to acquire the country’s largest MNO, EE, because this did not reduce MNO numbers – is becoming a very dominant player. With real competition shifting to quad play services, where BT is undoubtedly in the strongest position, the regulators may listen again to the arguments, rehearsed during their failed merger pitch by Telefonica O2 and Hutchison Three, that a combined company would be a better counterweight to BT than two struggling players.
When the negotiations were still ongoing, one suggestion to allay fears of reduced competition was that the combined O2/Three should divest some spectrum and infrastructure to a new player. Interest was shown by BT’s triple play rivals, Virgin Media and Sky, but also by Iliad, the French company which owns Free in France. Free, as we know, unleashed chaos on the French market when it launched its disruptively low cost mobile offering in 2012, undercutting the three incumbents and sparking consolidation in France.
That set off warning bells in the UK, but while BT and Vodafone may have been saved from an Iliad onslaught, Italy’s operators have not. The perhaps unlooked-for impact of the policy of insisting that four-to-three mergers must enable a new entrant is clear in Italy. In allowing Hutchison and Wind to merger their respective mobile units, the EU ruled that they must divest assets to a newcomer, and Iliad snapped at the chance.
However, it looked a more challenging prospect than France, where Iliad had an existing customer base, and an extensive cable network to leverage for backhaul and to support low cost wireless infrastructure from cellular homespots to WiFi offload. In Italy, it had no such cost or brand recognition advantages, yet it is already claiming one million subscribers, just 50 days after launch, giving it 1.2% market share alongside Telecom Italia, Vodafone Italia and Wind Tre.
This is not quite as rapid as its initial French growth – when it acquired 32,000 customers a day for the first three months – but it comes against a backdrop of the established MNOs launching attractive cut-price tariffs, often through inhouse MVNOs, to pre-empt the new arrival. There is far less room to undercut than there was in complacent France in 2012, but Iliad is investing heavily in infrastructure (it has one of the highest capex levels in the European telecoms market) and is targeting budget sensitive consumers at the expense of Wind Tre, in particular.
In a research note, Moody’s predicts mobile service revenues at the three incumbent MNOs will shrink by 4% to 6% a year over the next two years. Iliad’s introductory offer is €5.99 ($6.95) a month, but Wind Tre’s monthly ARPU is only €10.80 ($12.50), giving it little room to respond. TIM and Vodafone are slightly better positioned, with ARPU of €11.90 ($13.80) and €14.80 ($17.20) respectively.
“Wind Tre and virtual operators competing in lower cost segments will be hit the hardest by the tougher competition,” said Laura Perez, a senior credit officer at Moody’s. “Larger operators Telecom Italia and Vodafone are somewhat more insulated given their position in higher end segments of the market and better quality networks.”
Perez is forecasting an 8% to 9% annual decline in Wind Tre’s mobile service revenues, to around €3.5bn ($4.1bn) next year, and an fall in EBITDA of 5% to 6%. For TIM and Vodafone, the revenue decline is forecast to be between 4% and 5% next year, and as they have more space to cut costs, their EBTIDA could still grow by 1% and 3% respectively.
Iliad says it will extend its €5.99 ($6.95) offer to its next 200,000 customers, and presumably after that, prices will rise and growth slow. But it will not just be competing on price but on a generous allowance for that price. Its €5.99 offer provides 30GB of data per month and unlimited calls and texts. The new low cost brands from Vodafone and Wind Tre come with 20GB per month for between €10 and €17, which makes Iliad’s offer 40% of the price of its closest rival on a per-GB basis.
Moody’s believes Iliad will finish 2020 with market share of between 5% 7%, which will be important to compensate for decline at home, where it reported its first-ever decline in fixed broadband customers in the first quarter of this year.
In the light of the dramatic impact of new entrants on France and Italy, Europe’s MNOs are nervous about any moves to introduce new entrants at the 5G stage. Belgium’s operators reacted angrily to the government’s decision to open up the forthcoming 5G auction to a fourth player. Lead MNO Proximus argued that this would hit the existing MNOs’ profits and ability to invest in high quality networks, which in turn would lead to poorer services for customers and fewer jobs.
Belgium’s deputy prime minister and minister of telecoms, Alexander De Croo, said last month that he wanted to introduce a fourth player to rival Proximus, Orange and Telenet. But Proximus said: “We regret this decision as it will allow a new operator to enter the Belgian market on disruptive terms. This will indeed reduce prices for the consumer in the short term, but will also immediately affect the quality of the network and the profitability of the sector. This will inevitably put pressure on network investments and employment in the Belgian telecommunications sector.”
Belgium’s auction will take place next spring, and will cover the 700 MHz, 1400 MHz and 3.6 GHz bands. The country will also re-auction the 900 MHz, 1800 MHz and 2.6 GHz bands, whose licences are due to expire in March 2021.
In a market of just 11m people, it is easy to see why a fourth MNO would make it tough for any operator to compete. And just introducing additional MNOs to offer the same, ARPU-strapped consumer services will not improve choice, it will just trigger a race to the bottom. A far more creative way to use 5G auctions to shake up the competitive landscape is to encourage new entrants focused on enterprise and IoT services which traditional MNOs have largely avoided, and for which they find it hard to make a business case. Specialist providers, or better still, IoT-focused neutral hosts, would leverage the more plentiful spectrum available in bands like 3.6 GHz to accelerate availability of new services for underserved business users – rather than just provoking ever more intense price wars in the consumer space.