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5 May 2022

Multi-play reform at Telefónica, urges TV competition rethink

Telefónica appears to be regarding the proposed merger of Orange Spain with the country’s fourth MNO, Grupo MÁSMÓVIL, with mixed feelings. On one hand, if regulators approve the deal, it will provide a strengthened competitor for the Spanish incumbent. But on the other, it may release Telefónica from some of the obligations that come from being the dominant player.

Even without restructuring of the market in Spain, Telefónica faces plenty of challenges in its home country. It has been focusing its consumer market efforts heavily on convergence, with various fixed/mobile and multiplay services, but growth in these areas has come to a half in recent quarters, and the number of converged customers the incumbent has in Spain fell from 4.82 million to 4.65 million during 2021, while converged ARPU has also fallen from €91.4 at the start of 2021 to €89.2 a year later.

This is driving Telefónica Spain both to become more ambitious in its multiplay strategy and to double down on its efforts to win more enterprise business, via its newly established Industry Verticals business unit. It has also given its growing Wholesale business unit greater autonomy and its own leaderships team.

This is part of a recently announced management restructure in Spain, which comes only a year after the last such shake-up of management, and is targeted with addressing new growth opportunities more aggressively, especially by becoming a critical link between industry verticals and end users, according to the description of the changes.

As part of its reinvention of its converged and consumer offerings in Spain, Telefónica plans to replace its decade-old Fusión brand and focus on expanding new services developed with partners such as Microsoft, Prosegur and Teladoc.

Spanish business newspaper Expansión reported that the company will launch an all‑in‑one portfolio of services that will move from a triple-play or quad-play approach to a “myriad‑play strategy”, which will aim to capture a larger share of a household’s budget by offering many added value services.

Telefónica already offers Microsoft’s Xbox consoles and passes as part of Fusión and the two companies announced an expanded strategic alliance for digital services in February, with a focus on gaming.

The company will hope that the new structure and services will make it better placed to compete against a potentially stronger Orange challenge, if the merger is allowed to take place. The official Telefónica line is to welcome consolidation – COO Angel Vilá recently said that consolidation in the “fragmented market” would rationalize retail and wholesale telecoms markets, allowing operators to make higher investments in network technologies in the hope of better revenues and improved returns on invested capital.

Speaking at the Group’s annual general meeting, Vilá said the Másmóvil merger with Orange Spain would be “very positive for the sustainability of this sector,” although he does not expect it to gain regulatory approval before 2023.

He suggested that the combined enterprise value of the deal, at €19.6 billionn, provided a “better implicit value” that does not reflect the current market. Orange and Másmóvil plan to create a 50:50 joint venture in Spain. Orange Spain is valued at €8.1 billion and Másmóvil at €11.5 billion, following its 2020 acquisition by Lorca JVCO (backed by private equity firms Cinven, KKR and Providence Equity Partners).

Orange estimates that the combined entity will have revenue of more than €7.5 billion, which would put it ahead of Vodafone Spain, whose revenues in full year 2021 were €4.2 billion. Meanwhile, Telefónica España’s were €12.4 billion in the same period.

A recent Reuters report estimated that the merged entity would control about 40% of the contract mobile market and 43% of the fixed broadband sector by user numbers, although Telefónica would still lead the landline telephone market.

Such statistics will give the incumbent hope of being released from some of the restrictions that come with being a dominant player. Vilá said it would no longer make sense to consider Telefónica in that light.

He also echoed comments by Telefónica Group chairman José María Álvarez‑Pallete, who said recently that telco regulations are failing to address the impact of competitive digital platforms adequately. Vilá gave the example of pay TV services in Spain, in which Telefónica is considered the dominant operator because it accounts for 50% of the 6 million registered pay TV subscribers.

But he said that a further 8 million pay for TV services from streaming or OTT platforms.

“The total market is more than 15 million subscribers – in this market, we are not the dominant operator,” he said. “Now is the time that the authorities need to reconsider their competition policy, especially in terms of the joint venture being negotiated by Orange and Másmóvil.”

The Spanish competition regulator, Comisión Nacional de los Mercados y la Competencia, has pledged to review current regulations governing Telefónica Spain if the proposed merger takes place.

Of course, there are significant implications for Vodafone Spain, which had hoped to make its own deal with Másmóvil. Spain and Italy are the worst performing European subsidiaries in the Vodafone group and last year, the company said it would reduce its workforce in Spain by 12% to try to improve profitability.

Recent reports indicate Vodafone is looking to sell all or part of its fixed network operations in Spain, which could result in it expanding its existing wholesale agreement with Telefónica for fiber.