Europe’s telecoms reshuffle in full swingCarriers jostle to keep control of the customer as technologies converge

Daniel Bailey, Global Head of TMT, Global Banking & Markets, HSBC

Fierce competition and rapid, technology-driven change in consumers’ habits suggest there will be no let-up in the frenetic pace of deal-making in the TMT sector.

Regulatory approval permitting, there is every prospect of further consolidation among mobile network operators coupled with convergence between telephone companies – fixed-line as well as mobile – and pay TV providers. Add to the mix a proliferation of new digital content offerings from ‘over-the-top’ players, which piggyback on carriers’ existing networks, and the picture is one of a sector in the throes of turbulent change.

At stake is a battle for ultimate control of the consumer, who demands instant access to the Internet, TV, video and social media through his or her smartphone, tablet and myriad other devices. Telephone operators used to enjoy monopoly access to the end-subscriber. No longer. To keep customers loyal and avoid being reduced to mere providers of infrastructure, many telcos are scrambling to supply content and to bundle fixed and mobile calls

with broadband and pay TV – the so-called quad-play. Convergence also makes sense technically because smartphones receive data over mobile networks and, via wireless technology, through wireline broadband. Hence the flurry of recent deals across Europe over the past couple of years. If anything, the pace is picking up. In the UK, fixed-line operator BT is buying EE, which has about 24 million mobile customers.i Separately, the Hong Kong owners of Three UK plan to turn it into the UK’s mobile market leader, with a share of about 41%, by acquiring rival O2.ii In France, Altice, a European cable and mobile group that has spent more than 28 billion euros on acquisitions since early 2014,iii has increased its majority stake in Numericable-SFA, the country’s second-largest telecoms business. And the head of Orange, France’s biggest mobile provider by subscribers,iv has said an alliance with Telecom Italia would be an attractive European consolidation opportunity – a tantalising pointer to the big cross-border link-ups that many in the industry see as the logical end-game for EU TMT firmsv.

Global Banking and Markets

Regulatory uncertaintyDeal-makers driving the tie-ups have been pushing on an increasingly open regulatory door. For a long time, the European Commission generally frowned upon mergers between large telecoms companies in the EU, arguing they would hurt customers and deter investment. Attitudes in Brussels then changed as policymakers grew alarmed that Europe was falling behind the US and leading Asian nations in its telecoms infrastructure, threatening jobs and growth.vi As a result, mergers in Austria, Germany and Ireland that reduced the number of operators from four to three were approved. The guiding principle was that telcos would be allowed to charge more in return for offering more. The EU competition portfolio is now in the hands of Margrethe Vestager, a former deputy prime minister and economy minister in Denmark, who has several pending deals in her in-tray. How she balances consumer interestsvii with the imperative to incentivise investment will be closely watched: with Europe’s economic recovery still in its infancy, creating the conditions for a flourishing digital single market is a political priority in Berlin as well as Brussels.

The widespread assumption is that a market with fewer operators must lead to higher tariffs. But research commissioned by the GSMA industry group finds no evidence that prices are higher in markets with three players rather than four.viii Even if the starting price for a subscription initially rises, the mobile industry would argue that a narrow focus on the short-term price impact of a tie-up is misplaced because it ignores the benefits that flow from increased investment. Customers get a lot more calls, texts and data downloads for their money so unit prices are lower. These ‘dynamic efficiencies’ spurred by consolidation are critical as ever more data is downloaded: a smartphone generates 37 times the data volume of a regular phone, and a tablet almost 100 times more.ix Seen in that light, mergers create the big customer bases needed to defray heavy spending on new technologies in a sector with short investment cycles.

Data deluge What is clear is that the need for ever-swifter broadband will only grow. Cisco estimates that global mobile data traffic grew 69 percent in 2014 and will increase nearly tenfold between 2014 and 2019; it also projects that mobile video will increase 13-fold over the same period and will account for 72 percent of total mobile data traffic by 2019.x By then, the gigabyte equivalent of all movies ever made will cross the Internet every three minutes. In a market where content is king, the rapid expansion of digital entertainment providers such as Netflix, Apple and Amazon could loosen the lucrative link between telecoms operators and their end-users. Other over-the-top players threaten further disruption to an industry that has already lost a chunk of its traditional business to free voice-calling and messaging services. And then there is the stunning growth of the Internet of Things. By 2019, Cisco reckons 97% of mobile data traffic will originate from smart devices.xi The connected car could soon be another data-delivery battleground.

It is against this background of dizzying change that telecoms operators are weighing up where they want to position themselves and how to differentiate their services so they stand out from the crowd. The need to buy in content – either through acquisitions or paying for the rights to, say, high-profile sporting events – in order to make the most of their distribution networks strongly points to more tie-ups. But the regulatory environment may turn less hospitable and some deals that work today thanks to cheap finance will be rendered uneconomic when interest rates eventually rise. Devising the right strategy to survive and thrive will get harder, not easier. But doing nothing is perhaps the riskiest strategy of all.

ii http://www.theguardian.com/business/2014/dec/15/bt-talks-mobile-phone-eeiii http://www.theguardian.com/business/2015/jan/23/mobile-network-three-to-buy-o2iv http://www.ft.com/cms/s/0/b008e41e-bb57-11e4-a31f-00144feab7de.html#axzz3XoY5MZMdv http://www.ft.com/cms/s/0/bf1fcdde-cc9e-11e4-b5a5-00144feab7de.html#axzz3XoY5MZMdvi http://www.ft.com/cms/s/0/dba39576-c046-11e4-a71e-00144feab7de.html#axzz3V9KCf4DQvii http://ec.europa.eu/digital-agenda/sites/digital-agenda/files/DAE%20SCOREBOARD%202013%20-%201-THE%20eCOMM%20SECTOR.pdfviii http://www.ft.com/cms/s/0/39b90222-c425-11e4-a949-00144feab7de.html?siteedition=uk#axzz3V9KCf4DQix http://www.gsma.com/newsroom/press-release/gsma-report-highlights-benefits-of-mobile-mergers/x http://conversableeconomist.blogspot.fr/2015/03/data-movement-mushrooms.htmlxi http://www.cisco.com/c/en/us/solutions/collateral/service-provider/visual-networking-index-vni/white_paper_c11-520862.pdfxii http://www.cisco.com/c/en/us/solutions/collateral/service-provider/visual-networking-index-vni/white_paper_c11-520862.pdf