Europe has ‘lost its edge in mobile’ and is lagging well behind the US, according to a new study by the GSM Association. Recession, fragmented markets and price wars have all helped rob Europeans of the traditional pleasure of sneering at US mobile services, and despite the continuing global influence of majors like Ericsson and Vodafone, the region has ceded its mobile leadership crown. But while the EU’s digital commissioner Neelie Kroes announces proposals to retip the balance, the terms of engagement already sound outdated. The real opportunities in the mobile world now lie in emerging markets, and in technologies and spectrum which may not be in the control of current regulators and operators.
That is not to dismiss the importance of the established mobile markets, both in their size and their ability to drive innovation for all, and the US/Europe comparison made in the new GSMA study will have lessons for other regions too.
In technology terms, the US is suffering too ‘ with the loss of homegrown giants like Lucent, the declining role of Motorola, and even Apple under pressure. The infrastructure space is a battle between Europe and China, while in smartphones, it is Korea/China versus Apple, with the chance of some comeback for Nokia.
But the GSMA’s study is focused on consumer and operator spending on mobile networks and services, and here the US has stormed away from its traditional role as sluggish follower behind Europe, Japan and Korea. Investment in broadband wireless has been hefty, led by Verizon’s impressive LTE roll-out, and the market potential is clear in the battles by Dish and others to grab a share of this space. Mobile broadband is the last best hope to reverse the progress towards an AT&T/Verizon duopoly, giving non-telcos a chance to build innovative quad play offerings. The rush to shift that competitive landscape has accelerated investment in networks, and those are driving new levels of consumer usage and spending ‘ helped by far higher charges than European cellcos can imagine amid their intensifying price wars.
“Europe was the early leader in mobile, with a wide range of companies pioneering the innovation that now benefits more than 3.2bn men and women around the world,” said Anne Bouverot, director general of the GSMA. “However, this report confirms the very sobering reality that Europe has lost its edge in mobile and is significantly underperforming other advanced economies, including the United States.’
So can Europe regain its old pre-eminence? In supplier terms, it is by no means down and out, but it faces major challenges in the key areas analyzed by the GSMA ‘ operator investment, consumer behavior, and regulatory policy.
On average, US consumers spend more per month than their EU counterparts; they use five times more voice minutes and almost twice as much mobile data; data speeds are, on average, 75% faster than those in Europe and by 2017 will be more than double. These shifts have been driven by the accelerated investment US carriers have made in LTE and HSPA+ – by the end of this year, the GSMA believes, almost one-fifth of US connections will be on LTE, compared to fewer than 2% in the EU, thanks to a 70% increase in mobile capex between 2007 and 2013, a stark contrast with a capex decline in the EU.
By focusing on the two major western economies, the report loses some important points – the expansion of European carriers in emerging markets, or the threat to the entire western region from China’s massive investment in mobile R&D, manufacturing and broadband services. But even in this limited analysis, there are clearly big decisions to be made by European movers and shakers.
The regulatory climate is the biggest and most uncertain. Digital society commissioner Neelie Kroes is an aggressive proponent of more harmonized regulation processes, to speed up spectrum allocations and support activities like roaming and cross-border interference management. She also believes a more unified European market would boost competitiveness, scale and global influence for vendors, operators and research institutions, attracting inward investment and skills. However, her efforts are being made at a time when the eurozone is in economic crisis and the very future of the Union and its currency are in the balance. Kroes’ bid for greater centralization goes against the current tide of support for a more distributed community.
Most analysts agree that the fragmented market structure in the EU, partly the result of regulatory policies which have been nervous of reducing local autonomy, has harmed the region, preventing cellcos from benefiting from economies of scale and slowing the pace of investment. The GSMA believes that regulatory reforms must address this, and also shift the balance of effort away from direct management of pricing and towards ‘investment and innovation’. Of course, this reflects the body’s operator membership, which has resisted EU changes such as compulsory cuts in roaming fees and supported voluntary change and free market approaches. But the Association makes some recommendations which chime in with the ideas of Kroes and others. In particular, it calls for urgent change in policy on spectrum allocation, M&A processes and the single market.
In spectrum, it points out that the state-by-state approach to switching digital dividend spectrum in 800MHz from TV to LTE has resulted in slow progress, missed deadlines and an uncoordinated approach ‘ and to meet its spectrum shortfall, the EU needs to streamline its processes for future allocations like 700MHz.
For M&A, the hurdles to carriers acquiring one another mean that the anticipated market consolidation has not happened as decisively as expected. Many experts believe three is the maximum viable number of cellcos even in large European economies, but most have more than that. While the impact of disruptive new entrants like Free Mobile in France has delivered short term consumer benefits in the shape of lower prices and more competition, there is the downside that established players have less to invest in improving networks and developing new services. The GSMS says the EC ‘should reduce impediments to the efficient consolidation of mobile markets by streamlining merger reviews and taking a more cautious approach to the imposition of remedies. Discrimination in favor of new entrants should be discontinued and market forces should be allowed to determine the optimum number of players.’
The Association may be taking an unfashionable economic view in its support for free market economics, but it does believe in enlarged regulation, even if this would have less power to intervene in commercial factors like pricing. As demanded in recent years by several of its largest European members, such as Deutsche Telekom and Vodafone, it believes there should be a harmonized, but ‘light touch’, pan-European regulator. This would coordinate activities which, the GSMA thinks, would be most effectively addressed at regional level, such as consumer protection and spectrum. There should also be new rules to ease and harmonize planning laws and ease network sharing, to accelerate roll-out and encourage infrastructure investments.
Finally, the GSMA calls on the Commission to create a ‘bold plan’ to attract investment and innovation, recreating Europe’s old role as a center of mobile R&D and growth. It would like to see a ‘series of pan-European, visionary, mobile-enabled public/private partnership initiatives aimed at stimulating growth, building social inclusion and promoting investment in new technology and services,’ said its document.
Despite the obvious self-interest of an organization driven by large cellcos, there are many ideas here which chime in with the thinking of Kroes and her supporters, even though she is generally seen as the scourge of large operators, particularly with her slashing of roaming fees. She has been working towards a ‘super-regulator’ ‘ though one with more market shaping power than the GSMA would like, in probability. This month, she unveiled plans for a ‘radical legislative compromise’ to bring greater scale and harmony across the EU telecoms industry, and she has put in place proposals to ease spectrum allocation and boost R&D. However, some of her ideas are not carrier-friendly ‘ for the next round of European Parliament lawmaking, she aims to eliminate roaming premiums altogether, and enshrine net neutrality, by next spring – putting a large stake in the ground about greater regional harmonization to come. In a speech this week she said: ‘I want us to show citizens that the EU is relevant to their lives. That we made the digital rules catch up with their legitimate expectations … I want you to be able to say we took real action on cybercrime and other threats.’
‘There is no other sector of our incomplete European single market where the barriers are so unneeded, and yet so high,’ she added.
This is part of a process by the Commission to develop a blueprint before October, which should present ‘concrete measures to establish the single market in information and communications technology as early as possible’, with a list that already includes many of the areas addressed by the GSMA. As well as spectrum and consolidation policies, other important issues to consider include pricing regulation, but the EC has been keen to stress the aim is ‘convergence not central planning’, to reassure Eurosceptics.
And looking further ahead, Kroes has made many statements about leading the way to next generation technologies with EU research activities. One is the UK’s ‘5G’ R&D center, set up at the University of Surrey south of London last year (though there is irony in the fact that its main vendor backers are Huawei and Samsung from Asia). The main focuses of the Surrey research program will be increased spectral efficiency, cell capacity (up to 10Gbps speeds) and energy efficiency.
Meanwhile, European operators’ investments in current generation systems may be lagging those of their US peers, but progress is starting to accelerate. LTE auctions have been completed in the five largest economies and 4G networks are starting to appear. In the UK, EE has extended its 4G offering to 74 towns and cities, and about half the population, while its competitors, Telefonica O2, Vodafone and 3UK will launch over the coming months. The German roll-out is well underway, though with a slightly different pattern because of the rural coverage requirements included with the 800MHz licences. The first Italian and French LTE services appeared last fall, and Spain gains 4G in selected cities this week (see separate item). However, with the exception of Germany, most countries are focused on creating urban hotzones, and continuing to rely on HSPA+ expansion to meet wide area data needs for years to come. This makes sense in a region which invested heavily and early in 3G, and generally achieved more efficient and universal networks than the US ‘ hence there is still plentiful unused capacity available in most locations, and operators can stagger their 4G spend. In other words, the contrast with Verizon in terms of LTE pace and capex is not necessarily a sign of European operators’ inferiority, but of their very different capacity positions.
However, there is no denying that Verizon Wireless has set the global pace in early LTE roll-out, forcing AT&T to accelerate its own efforts and sparking the battle to create a viable third player in mobile broadband. There have been many variations on that theme, most involving Sprint, which although it is the clear third cellco ‘ even after T-Mobile USA’s merger with MetroPCS ‘ has been an unsatisfactory counterweight to the big two, especially since its alliance with the major cablecos broke apart and they aligned their interests with Verizon. Once, before LTE was commercial, Sprint aimed to become a major balance to Verizon/AT&T by combining an early 4G roll-out ‘ in WiMAX, via the Clearwire joint venture ‘ with positioning itself as the main mobile platform for the cable industry (and possibly merging with T-Mobile into the bargain). That plan was destroyed by the failure of WiMAX to become a mainstream mobile technology once LTE rolled out, leaving Clearwire in a backwater and with a massive bill to migrate to LTE. That helped push the cablecos ‘ increasingly powerful in the move to quad play with their video and Wi-Fi assets ‘ towards Verizon. An alliance with LightSquared also went sour for Sprint when the latter filed for bankruptcy protection. However, despite the defection of its partners and many of its customers, the fiasco of the Nextel/iDen mismanagement, and the power of the big two, Sprint still has several charms with which to lure a new set of partners ‘ notably its ambitious Network Vision infrastructure, capable of hosting allies’ networks in multiple bands and technologies; and its spectrum assets, particularly those contained in its 50.1% stake in Clearwire.
Those factors, as we know, have attracted two new would-be partners, Softbank of Japan and Dish, the US satellite-TV operator. Softbank wants new growth outside its saturated home market and would bring Sprint welcome funding, especially to accelerate its LTE and Clearwire roll-outs, and a wealth of mobile market expertise. Dish needs to create a mobile business in order to offer a quad play to compete with the telcos and cablecos. Its proposal would be financially less table, with a high level of debt, but it would enable Sprint to fill the biggest gap in its ability to challenge Verizon and AT&T ‘ a video/content offering.
It remains far from clear which deal (either of which would also include Clearwire) will prevail (see inset), though either, if well executed, could boost Sprint’s viability in the 4G and quad play segments, and improve competition in the US. And Dish is certainly determined to play a key role in the mobile and broadband evolution, even though it has acknowledged that its existing spectrum ‘ in the AWS-4 former mobile satellite bands, now cleared for LTE-only ‘ will be insufficient on its own as the basis of a viable business. While it manoeuvres to gain control of Sprint and Clearwire, it is also engaging in more short term enhancements to its satellite-TV model. It has announced a partnership with rural mobile provider NTelos to develop broadband wireless services, mainly for fixed access in underserved areas within NTelos’s territories in Virginia, West Virginia and parts of Maryland, North Carolina, Pennsylvania, Ohio and Kentucky. This is small fry in terms of Dish’s broader ambitions, but will give its chairman Charlie Ergen a chance to test new technologies and business cases. ‘We believe we can create a service that simultaneously addresses the mobile and in-home requirements of rural residents, with the potential to serve as a model for how we can utilize spectrum more effectively while creating differentiated consumer offerings,’ Ergen said. NTelos said in March that it would launch LTE services in select markets this year, using kit from Alcatel-Lucent. Fixed LTE is not just being adopted by rural specialists either ‘ it is being used as a DSL alternative or replacement by Verizon and AT&T, and the latter has a roadmap to phase out its DSL lines and offer broadband only on fiber or 4G.
Meanwhile, as Dish and Sprint dance around one another, Verizon is not standing still. Having rolled out its LTE network in the coverage-friendly 700MHz band, it is now expanding capacity in selected areas by moving into its AWS spectrum ‘ a strategy which will be emulated by AT&T, probably late this year.
The AWS switch-on will not start until later in the summer, but Verizon plans to upgrade 5,000 LTE cell sites in major cities to support the additional frequency by the end of the year, and the shift will eventually double its capacity (or treble, where it has 40MHz to add) and boost its data rates. For now, it is seeding the base by introducing devices which support AWS, though they will need a software update to activate the connection. It is selling seven such products, including the Samsung Galaxy S4, Tab 10.1 and Note 10.1, the Nokia Lumia 928, and USB gadgets. It will issue the software patch when the network goes live. Verizon acquired additional AWS spectrum from a group of cable companies and from Leap Wireless last year, significantly boosting its spectrum position.
Despite all this activity, the GSMA report remains old-fashioned in its focus on a mobile race between Europe and the US. Much of the growth and future innovation in the market will come from emerging economies, and this is where Google is increasingly focusing its attention. The search giant has been a disruptive force in US telecoms, not just in its over-the-top role but because it has taken many steps to try to shift the balance of control away from traditional operators. Its investments in Clearwire/WiMAX and Wi-Fi metrozones ‘ and even its fiber roll-outs – are not financial successes, but helped establish new ways of thinking about mobile services, with the focus on unlicensed spectrum and open access platforms. It pushed the FCC into taking more liberated positions in the 700MHz auction and the white spaces spectrum, with its lobbying and its backing of key players. And it has launched Google fiber services in Kansas, and plans to
expand it in Missouri, Texas, Utah and elsewhere, supplementing it with Wi-Fi.
But Google knows its real chance for power is in markets with less established rules and incumbents, where the mobile network will be the main source of broadband and where the cellular and internet models are already converged. The internet giant is considering a range of technologies and spectrum it could finance in order to accelerate roll-out of wireless broadband in emerging markets (to reach one billion people, according to its sound-bite to The Wall Street Journal). As in the US, this is not because Google really wants to be an operator, but because it wants to stimulate the mobile web activity that drives its businesses in search, advertising, Android and cloud services.
Google is already an investor in O3b Networks, which plans to deploy a network of MEO (medium earth orbit) satellites to deliver low latency services to rural areas. Now it is reported to be in talks with various regulators in Africa and south east Asia about gaining spectrum and licences to augment satellite with higher speed, lower cost rural options such as white spaces networks or high altitude balloons. The latter is an often derided idea which has surfaced multiple times, and never found a commercial model, but Google’s considerable financial and lobbying clout could change that.
The news highlights the wide range of technologies and spectrum bands which will be needed to meet broadband capacity and coverage needs in the coming years ‘ many of them, to Google’s delight, not under carrier control. This is what the established mobile industry needs to take on board quickly. Traditional considerations driving the wireless industry ‘ western market focus, conventional licensed bands, 3GPP standards ‘ will be a diminishing part of the picture. The GSMA report, Apple’s long delay in taking any notice of emerging market content or prices ‘ these are just examples of a continuing tendency for the mobile industry to stay in its comfort zone. But while it does, emerging markets will start to be the key drivers, opening the way to solutions that are beyond the reach of the cellcos and their regulators.