The increasing harmonization of telecoms regulation and policy making across the European Union has had a deep, if only gradually evident, impact on the region’s competitive landscape, especially as more countries have joined (though the UK has left).
EU-level decisions concerning mergers and acquisitions, roaming fees, security issues, spectrum bands and rules, and even Open RAN ecosystems, have helped investment flow into telecoms networks, and achieved a more consistent (though hardly perfect) regulatory framework that encourages roaming and economies of scale.
On the downside, however, operators complain of reduced freedom of commercial action, over-regulation compared to hyperscalers, and slow decision making. And despite the improved unity that has slowly developed over the past two decades, the large multinational European operators have failed to achieve truly integrated regional structures and processes.
In theory, an EU-wide framework combined with cross-border thinking by the operators’ management teams should almost achieve the advantages that the US telcos have – the huge economies of scale and global influence that come from addressing one giant market, however varied it may be internally, in a reasonably consistent manner. But Vodafone, Deutsche Telekom, Telefónica, Orange and others still suffer from fragmentation, from tension between central corporate and local operating company managements, from failed attempts at greater centralization.
The arguments for and against central control ebb and flow in terms of appeal to operators. Vodafone, and to some extent Telefónica, are on a centralizing mission at the moment, but in the past have sometimes pulled back from that in order to encourage greater local autonomy and agility. Ideally, operators would combine the economies of scale of central procurement and planning with local self-determination for marketing and services delivery, but none has really struck the perfect balance so far. The recent quarterly results and capital markets days held by the giant operators indicate a pro-centralization sentiment, to reduce the cost of the major migrations that await in the 2020s – to 5G, cloud-native networks and potentially the build-out of advanced telco clouds.
These migrations have brought a key strategic decision to the forefront of operators’ minds in Europe – whether to remain heavy investors in owning network, and even cloud, infrastructure, or whether to become more asset-light and rely on partnerships with wholesalers, neutral hosts and hyperscalers. The big European players are mainly opting to carve out their tower operations, in order to unlock value in a market that is valuing infrastructure stocks well above telecoms service providers. But the move also gives them more predictable costs and the ability to focus on their key areas of differentiation, whether those rely on control of the active networks and the cloud, or not.
Generally, we can expect to see the European incumbents remain heavy investors in their own active networks, though with greater appetite for RAN sharing, especially when it comes to small cells. Their ability not just to act in a uniform way across all their operations, but to work collectively with one another, will be another important decider of how their 5G-era economics play out. Currently the big four, plus Telecom Italia, are cooperating closely to encourage an Open RAN ecosystem in Europe, with the hope of influencing global standards, driving down 5G costs and building a broader supply chain that has considerable European participation. It remains to be seen how far these big, and very different, companies continue to cooperate effectively – past history does not present high hopes, but so far, the Open RAN group has been impressive in the speed of producing concrete deliverables such as a set of technical requirements.
Common purpose between the multinational operators is also seen in their joint ventures, alliances and mergers. Consolidation has been going on in Europe for years, where regulators have allowed it, and there are also partnerships such as Orange’s with Deutsche Telekom to share various types of infrastructure; or Vodafone’s with Telefónica O2 UK for RAN sharing. The latter may change over time as a result of the latest European merger, between O2 UK and Liberty Global’s Virgin Media cableco (often tipped as a merger prospect for Vodafone, which has joint ventures with Liberty elsewhere). The newly approved UK marriage will create a significant challenge to incumbent BT, and add to the web of alliances that Liberty is building around its European cable assets.
Perhaps more interesting, though, is Liberty Global’s new partnership with neutral host infrastructure provider Digital Colony, to build edge cloud data centers that will be offered to telcos on a wholesale basis. This highlights how the important partnerships and investments in telecoms are not only being made by conventional operators, as well as the rising importance of neutral hosts for telco cloud as well as for towers and fiber – especially as operators start to assess their requirements for edge infrastructure to support distributed, virtualized networks and enhanced 5G services.
The relative success of Telefónica’s Tech infrastructure division in its most recent financial period, compared to its Digital unit, further reinforces the view that infrastructure is king in terms of operator performance and valuation at the moment, and those with significant scale and assets should relinquish them only reluctantly, or only for a high price that can be ploughed into strategic initiatives such as accelerated 5G migration.
Indeed, tower carve-outs aside, the European operators seem inclined to appreciate their physical assets while seeking to gain further scale, even beyond Europe (as reports that Deutsche Telekom wants to take full control of T-Mobile USA again reflect). This is a time of chasing massive scale, inter-operator partnerships and tangible assets and acquisitions, and that is likely to lead to a defocusing, for now at least, on the dreams of offloading networks and seeking differentiation as a digital service provider.