The ripple of network consolidation going on across Europe has set a new standard for each of the 28 EU member countries to follow – three cellular operators are good enough for “competition” right now, and in fixed lines one dominant cable provider and one incumbent telco is also fine in broadband, as long as it allows either unbundled broadband or some form of fiber unbundling such as VULA ((Virtual Unbundled Local Access), to allow data wholesalers. It is a less widespread idea that cable too must allow unbundling of some sort, but this is established in Belgium and catching on in the Netherlands and is likely to become part of the mix eventually.
The idea is emerging that everywhere in Europe there should be quad play bundles emerging, and it doesn’t much matter what they are made up from – in other words, who owns the underlying infrastructure is not at issue, as long as there are enough controls on pricing, either from the market or from a regulator, to ensure that anyone can launch such a bundle more or less profitably and if necessary, entirely over the top.
It is through this lens of understanding that we see this week’s activity in the quad play market in Western Europe – Altice is both bidding €3.9 billion to buy the 20% of SFR which Vivendi continues to own, and at the same time is associated with talking to Bouygues about merging its cellular operation into the SFR-Numericable axis in return for shares, to create a strong challenge to Orange in France, and put some distance between Free, as the third largest cellular player and 2nd largest ISP, and themselves.
At the time that SFR was up for grabs it was established that there are no internal political objections to France falling back to 3 separate MNOs from 4, and now it also appears clear from the sales of E-Plus in Germany, to Telefonica, that the European Commission has no objections to a reduction to 3 MNOs in every territory and a suggestion that they would actually prefer to see the end of local upstarts and the emergence of large multinational European behemoths, which cut up Europe between them.
This new EU love of “large” businesses is something really difficult for the innovation community to take in. We think of this as the several hundred players in chips, software, cloud services, content and enabling technologies which buzz around the networks business. The ability to sell technology to “entrenched” monolith type players, such as Deutsche Telekom, is usually only present among large companies that already have many incumbents among their customers. Companies like Alcatel can wait almost forever to see an ISP upgrade its broadband, whereas companies like Sckipio could die from the wait and have to pick their targets carefully and borrow cash or sell more stock in order to reserve their seat at the tier one table.
On the one hand the EU seems to want to spawn major swashbuckling cash cows among their networks operators, who can afford to take a risk on new ventures, and who will be able to withstand assault from determined predators from the US, Latin America (America Moviles) and China, when network owners decide to break out of their own economies. On the other hand, the EU wants to preserve a modicum of competition to protect consumers on pricing, and at the same time, allow this to act as a spur to take on new services, which means working alongside smaller, innovative start-ups. It’s a tough balancing act. Any American operating in this environment feels it is too heavily regulated, whereas any European sees the US regulator administrations as largely “toothless,” emasculated by US courts and litigious operators, and a market with insufficient competition.
Right now the Europeans are winning this battle in that their networks are healthier and more able to withstand innovative pricing models and accommodate new shifts such as OTT video delivery than their US counterparts. But in chasing a dream of larger and larger, and more robust network operators, the European Commission is now in danger of becoming more like the US. One determined push in the US, for instance if Free’s parent Iliad had managed to buy T-Mobile US, would push the entire shooting match over and decimate profits.
Already AT&T and Verizon have shown they are inept at defending their broadband and voice borders and have lost “every new broadband line since 2007” in that both of these incumbents have the same number of broadband lines today as they had in 2007, while Comcast, Charter, Time Warner Cable, have accumulated more than double their 2007 totals in both broadband and voice and are now attacking the enterprise.
AT&T and Verizon seem powerless to look beyond cellular, the only arena where cable has not yet followed them, but clearly it is eyeing this space with slavering jowls, as the profits are clearly delicious.
The other two deals that are in prospect is the purchase of EE by British Telecom and the reduction of the UK market from four MNOs to three, with the merger of 3 and O2. Both of these deals have been triggered by the shift to quad play economics. Without the prospect of WiFi offload eating into cellular profits and the addition of TV services across all networks, with both of those capabilities reliant on having fixed lines in the ground, none of this would have happened.
The cellcos imagine trying to fight off customer churn in a market where the tempting offers of “free TV” or better still, “free TV with the top sport content” sold with every broadband line, followed by cheap cellular for your entire family, and shudder. They know their margins, they know each other’s margins, they can see that the years of massive profits for not delivering very much, are over and the only answer is quad play and scale.
This also means that anyone can own anyone. For instance Sky (and Liberty Global) can own a shareholding in a cellular player or simply carry around an irresistible amount of MVNO heft, and enter quad plays in all of its countries. Sky can probably get itself into Spain on the back of an MVNO plus the purchase of the bewildered Prisa DTH service, cast adrift from its deal with Telefonica and looking for a rapid way out of this Quad play war. The rest of Prisa makes content and it just wants to retire back into the safety of that business.
Similarly BT can buy EE – achieved by stranding EE from fixed line economies unless it yielded to a sensible purchase offer – in fact O2 and EE were so keen to avoid a Quad play price war in the UK that they were queuing to sell the business to BT. Vodafone in the same breath has now made a statement about what it feels are appropriate controls to apply to BT in the event of the EE deal being allowed.
Vodafone has already said, and this week repeated, its plans to launch TV services in the UK and broadband lines, and says it will invest £1 billion in such a network this year. It has begun its moves by dusting off the UK Cable & Wireless network assets it acquired in 2013, but in the end it has to use BT’s Openreach network wholesale as well, as Sky, TalkTalk, EE and O2 already do.
Vodafone has made public statement calling for regulator Ofcom to get the merged BT and EE to give up spectrum but also to improve access and pricing of access to BT’s broadband network. Given that Ofcom has spent the last decade separating BT’s wholesale operations from retail and driving down the price of broadband, we would suggest that it is already doing all that it can in that department. Vodafone is already positioning itself as a RAN (Radio Access Network) sharing partner for 3 – it already shares radio access to towers and such with O2, and wants to extend this, stranding EE, which is already a shared network between T-Mobile and Orange, as a single network with no further sharing. Effectively Vodafone is asking for the economies of scale that come with rolling 3 networks (Vodafone, O2 and 3) into a single infrastructure, supporting what will be 2 brands, while EE is the combination of two networks already. In infrastructure terms the UK will be two competing islands if Vodafone gets its way, which we think it will.
So the rules are fairly clear from all these transactions – cellular can own broadcasters and broadcasters can own cellular and pay TV can own broadband and cellular etc… And largely the only thing that is important, right the way across Europe is that at least 3 quad plays are stimulated in every country and OTT independents are not crushed in the process.
We have a database at Faultline of all the operators across Europe – and we can tell you there are plenty of deals that these new guidelines trigger. But the one everyone wants to know about is whether Vodafone can buy Liberty Global?
And we cannot see much in the way of this. The German Cartel office thinks that Deutsche Telekom needs to be protected, and that all the German cable lines cannot be merged into a single provider. This is completely out of kilter which was has happened in the Netherlands, where not only has there been a repeat of what has happened in the UK, France and to some extent Spain, where all (or most) of the cable operators have been rolled into a single provider, who can really make a fight of it against the incumbent telco.
But elsewhere around Europe, the only difficulty is in the Netherlands, funnily enough, where Vodafone would inherit the merger of UPC and Ziggo, and provide overwhelming dominance against KPN the incumbent. Unravelling Ziggo might be best thing it could do there, or simply relinquishing Vodafone fiber assets there.
But first and foremost everyone is going to have to accept Net Neutrality as a fact in Europe – OTT services, especially video, are sacrosanct in this evolution to quad play, and all the evidence we are seeing week to week, as consolidation unravels, is that as long as there are multiple, balanced quad plays plus Netflix and other OTT services such as HBO Go, sweeping across Europe from the US, then all is considered well in the networking world.