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Sky’s quad play dreams spell more grief for Italian operators

As if Italian operators don’t have enough to deal with – given the entrant of disruptor Iliad and the high price of the recent spectrum auction – they are now facing new competition from Sky Italia.

The pay-TV provider is taking a shot at a quad play offering by launching mobile services via an MVNO agreement, to complement its plans in the fixed broadband sector. That could make it a significant player in the market, particularly challenging fixed-line providers.

The existing operators were put on notice when Sky Italia was added to regulator Agcom’s public register of communications operators, which means it has official status as a telecoms operator.

Earlier this year, Sky confirmed plans to launch fixed broadband services in summer 2019, having signed a deal with wholesale company Open Fiber. Now, reports indicate that it will also launch Sky Mobile, using TIM’s and Vodafone’s networks, in the spring.

Of course, a new MVNO is not as immediate a threat to the incumbents as a new network owner like Iliad, which is seeking to repeat the success of its French mobile unit, Free Mobile, having acquired spectrum that was divested by 3 Italia and Wind as a condition of their merger to form Wind Tre. In Italy, MVNO customers account for just 9.7% of the total SIM base of around 83m, excluding M2M, according to Agcom.

In the fixed broadband market, four providers – TIM, Fastweb, Wind Tre and Vodafone – share almost 90% of the retail market.

But the challenge from Sky will rest on two key advantages over other new entrants, even Iliad – it is launching mobile and fixed services at the same time, and preparing a quad play strategy as it has in other markets like the UK; and it has the weight of its satellite TV presence behind it, giving it an established brand and customer base in Italy. Sky Italia is the pay-TV market leader with a retail base of 4.8m.

In the UK, Sky has converted about half its TV base to its broadband service (without significant integration, as yet, with its MVNO). If it did the same in Italy, it would seize almost 25% of the retail broadband space.

That seems unlikely, at least in the next few years, but given the pressures already mounting on the fixed/mobile players, TIM, Wind Tre, TIM and Vodafone will not be sleeping easily when Sky goes live.

They were already forced to make pre-emptive moves in advance of Iliad’s mobile launch, with both Vodafone and TIM introducing low cost offerings. But if the MNOs thought Iliad would be less disruptive in their market than it was in its native France, their worst fears were soon realized. Iliad launched its first offering in Italy in June, following a spectrum deal last year, and announced a low cost tariff which undercut the other operators’ deals, threatening to spark price wars and cost cutting, just as the company’s Free Mobile unit did in France in 2012.

Iliad offers consumers a mobile deal costing €5.99 per month with 30GB of data and unlimited SMS messages. “Unless the competition matches these tariffs in the near term, we see this plan as a credible way of gaining considerable market traction,” analysts at Raymond James wrote in a client note, predicting that Iliad would attract one million users by the end of its 2018 financial year.

Its entry is more worrying to TIM and Vodafone than the creation of a stronger player in the shape of Wind Tre. That merger was a defensive move, part of a wave of consolidation to help established European players gain the scale to survive with their traditional model. The disruption, however, sets in when new entrants attack those business models and make them even less tenable.

In France, Iliad/Free used its cable and WiFi connections to support low cost WiFi-first mobile services and multiplays, undercutting established players dramatically and sparking a wave of consolidation and cost-cutting programs. The same could happen in Italy. However, the Italian market is very different to the French one which Free entered in 2012 – that was ripe for disruption, with only three MNOs, and inflated prices compared to those in more aggressively competitive markets like the UK. In Italy, prive wars will confine Iliad to the low end of the market since, for the user base as a whole, fees already found their acceptable level during the cuts of the past few years. And Iliad does not have the fixed-line and WiFi assets in Italy which were the engine of its strategy in France.

And a recent research note from RBC, the Royal Bank of Canada, gives one ray of hope to beleaguered Italian telcos, suggesting they did not, after all, overpay for their 3.5 GHz spectrum in the recent auction.

“Italy’s auction caught investors’ attention with a high price for Mid Band 5G,” the report says. “While operators have been quick to decry this as ‘artificial scarcity’, subsequent results appear to validate the Italian result. Sweden’s Low Band was a 22% premium to Italy; while the Australian regional 10-year Mid Band was a 32% premium to Italy’s 19-year Mid Band.”

The sale, which spanned several spectrum bands, raised €6.5bn in total, three times more than had been anticipated.

In the mid-band spectrum – the focus of most early 5G deployments – 200 MHz of 3.7 GHz spectrum sold for €0.36 per MHz/pop. But in Australia, 10-year licences in 3.5 GHz sold for US$0.54 per MHz/pop), equivalent to a 32% premium to the Italian 19-year licences.

In Sweden, 40 MHz of low band (700 MHz) spectrum sold for €0.68 per MHz/Pop, 22% higher than in Italy in the same band (low band spectrum generally attracts higher prices because of its scarcity and its good propagation qualities).

The shock in Italy, then, came because that auction took place at the start of what can now be seen as a steady upward trend in spectrum prices, especially for 5G-oriented bands like Europe’s 3.5 GHz and 700 GHz. However, prices in Italy were also inflated by the entry of a fourth MNO, leading to more competitive bidding than in countries where operators have been falling in number, like Germany.

Prices are climbing, so operators in some countries will be pleased their regulators moved early. South Korea’s 3.5 GHz auction totalled $3.3bn for an average of $0.19 per MHz/pop, while in the UK, 2.3 GHz sold for £0.08 per MHz/pop and 3.4 GHz for £0.12 per MHz/pop.

Germany is about to begin its mid-band auctions, with the government targeting revenues of between €4bn and €5bn, as is France. In the latter, regulator Arcep is promising to ensure lower prices in return for roll-out commitments. The UK will have a second mid-band auction, and one in 700 MHz, next year.

RBC believes that, of the European multinationals, Vodafone has the highest level of exposure to high spectrum costs, because of its presence in Italy, Germany and the UK, though the analysts estimate that Orange will have to pay about €2.1bn in France, while Telefonica will have to find more than €4.5bn for the delayed Spanish auction and for spectrum in South America.

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