On the marketing side, there may be a race to be crowned Europe’s ‘first 5G operator’, but in reality, deploying 5G at scale – and supporting a host of demanding new services from virtual reality to the Internet of Things – will put significant stress on the finances of some of the region’s already debt-laden and profit-squeezed MNOs. Italy’s TIM, Vodafone and Telefonica are all considering divestments, partly to pay the 5G bills.
Since unlicensed and shared spectrum options for 5G New Radio – which would help improve the cost base – will not be commercial until at least 2021; and since the first applications for 5G are mainly in traditional consumer mobile broadband; there is a real case, for some MNOs at least, to stick with enhanced LTE for some years until they can deploy 5G more flexibly and cost-effectively, and optimized to support a wider variety of revenue streams.
But the MNOs will feel obliged, by their marketing departments, shareholders and governments, to bid for 5G spectrum, and to build networks at an early stage. Even if these are initially just showcases networks in a few cities, or targeted at specific use cases like fixed wireless, they will still require investment, and of course, spectrum.
In Italy, Telecom Italia says the costs of the upcoming auction may force it to sell subsidiaries, and it is already divesting a majority stake in Persidera, an Italian broadcaster.
During the earnings call for its second quarter, the operator said it had started assessing strategic options for its subsidiaries after examining the likely financial impact of the auction, which is scheduled for September.
One of the assets it might look to sell is its mobile operator in Brazil, which has nearly 57m customers. Other candidates could be Sparkle, the submarine division, which CEO Amos Genish has said is “not core”; and towers unit INWIT.
It might also offload all its fixed line assets (a move being considered, reportedly, by Telefonica in Spain too). In March, Telecom Italia approved plans to spin off its Italian fixed network and run it as a wholly owned but legally separate entity. That could now be a first step towards merging those assets with government-owned broadband infrastructure to create a national, high speed wholesale network rather like Australia’s NBN.
That would support the view that, eventually, broadband will become a utility business, in which fixed line networks at least (and perhaps, eventually, mobile) should be run as national grids to support a wide variety of service providers.
If this happened in Italy, however, it would not be a strategic vision of the future but borne of short term financial considerations, both for the telco and the government.
Activist investor Elliott took control of the Telecom Italia board from Vivendi in May, and has stepped up the call to sell assets.
The urgency has increased amid fears of high charges for the new spectrum licences. Italy’s telecoms regulator has indicated that it expects to raise at least €2.5bn ($2.9bn) from the sale of 5G licences. But Telecom Italia is not in a strong position to bid high. Its net debt was €26bn ($30.4bn), or about three times its EBITDA, in 2017, making it one of Europe’s most debt-laden service providers on that basis.
Now it has come under new competitive pressure in the mobile market from a combined Wind and Hutchison Three (Wind Tre, which should be a stronger rival than the two separate, small MNOs) and from disruptive new entrant Iliad (see separate item), which has snapped up one million customers in less than two months. Telecom Italia’s mobile business has so far been more robust than its others but that could now change.
The telco recently announced plans to cut some 4,500 jobs, nearly 8% of total headcount, and it said on the earnings call that cost controls had led to an 18.5% year-on-year reduction in capital expenditure, to €1.68bn ($1.96bn), in the first six months of 2017.
Vodafone is also looking to slash costs. Incoming CEO Nick Read said he would target higher cost reductions this year than last, to hit profitability targets despite increased competitive pressure in markets like Italy, Spain and India, and the need to invest in 5G.
Vodafone Group reported a 4.9% year-on-year fall in revenues, to €10.9bn ($12.8bn), in its first fiscal quarter (April to June). Vodafone said this figure partly related to new accounting rules and would have been just 1.1% under normal reporting, but Vodafone is still falling behind on its target of 3% growth in EBITDA at the half-year point.
Read, who takes over from departing CEO Vittorio Colao in September, said in an interview: “I think you’ll see that net operating costs, which were down €100m [$117m] in the last fiscal year – we’ll deliver a higher number this year. We see greater opportunity in Europe and in group activity where we are making faster progress.” Read added that Vodafone had an opportunity to cut costs more rapidly than European incumbents that may face regulatory constraints.
Vodafone reported a 4.2% increase in adjusted EBITDA last year, to about €14.7bn ($17.2bn), despite a 2.2% fall in revenues, to around €46.6bn ($54.6bn).
A shift to online sales, the use of data analytics and investments in artificial intelligence to support customer relationship management are among the tactics to reduce cost, and Read says they are already delivering results. “We are simplifying and rationalizing areas all the time, whether IT or network or procurement,” he told analysts.
Vodafone cut about 2,300 jobs last year, excluding the divestment of its Dutch business into a joint venture with Liberty Global. It finished March with a total of 106,135 employees.
Read commented on the new challenger in Italy, saying: “Iliad had a decent commercial entry and we’re not surprised by the numbers. When you analyze the type of customer we are losing, ARPUs are lower than average and usage is lower than average. There is a question about the sustainability of the [Iliad] offering.”
Vodafone is also under intense pressure in Spain, where service revenues fell 2.2% on a purely organic basis, to €1.11bn ($1.3bn). Colao said the market represented an unusual case of four operators all providing bundles of fixed and mobile services.
There was also bad news in the UK, where service revenues dropped 4.9% organically, to €1.46bn ($1.71bn), because of handset financing charges. In Germany, where Vodafone is hoping to buy Liberty Global’s Unitymedia business later this year, service revenues were up 2.4%, to €2.55bn ($2.98bn), with good progress in the broadband market. The Unitymedia deal has yet to be signed off by European competition authorities and is being opposed by quad play incumbent Deutsche Telekom.
In India, Vodafone is also seeking consolidation to improve its scale and profits, with its bid for Idea Cellular, partly to counter an Iliad-like disruptive new entrant, Reliance Jio, whose price wars have affected Vodafone India’s results – service revenues were down 22.3%, to just €955m ($1.12bn).
Read said he would also focus on driving churn to even lower levels (it is falling everywhere but India and Spain) and prioritize expansion into the bundled quad play market.
“Both the board and the management team are highly frustrated by our recent share price development, which does not reflect the fact that the majority of our business is performing well,” he said. “We are directing this frustration into an even stronger focus on execution.”