international analysis and commentary

Europe’s telecoms: global challenges and the elusive single market

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The telecom market in Europe is about to face a defining moment. More than 20 years after the first liberalization of the sector in Europe, due to regulatory input from the EU institutions, the final step towards the realization of a truly single telecommunications market is about to take place.

Beginning in 1992, the national telecommunications markets of the single EU Member States, step by step, moved towards complete liberalization, sparking a price war among operators that eventually brought lower prices to European consumers.  

The sector’s total revenue in Europe in 2012 was €272.3 billion, but it is in decline and has been for the past four years. The shrinking of turnover is not only caused by the economic recession in Europe – which is still ongoing and affects consumer demand – but it is also due to a radical change in the market. Another cause is the decline in the use of landlines and a decrease in the growth of mobile services (which however hold thanks to the explosion of mobile data traffic). In order to survive, telecom companies need to provide more than traditional services (voice and mobile calls); they need to become service providers able to compete with cable companies when it comes to providing contents to customers and innovative services to enterprises such as cloud storage and computing.

One of the consequences of the financial difficulties faced by the European telecoms is the shrinking investment in IT infrastructures – which has decreased by 2% annually in Europe over the past five years. Meanwhile, the rest of the world saw a 2% annual increase. As a consequence, in the past decade Europe went from being the leader to being the laggard of telecom technologies. The penetration of the latest fiber and wireless technology, which allows access to new kinds of services, is between 20 and 35 times lower in Europe compared to North America and Asia. Therefore, European customers and enterprises currently are experiencing access to services of lower quality than their American or Asian peers.

In order to avoid a degeneration of the problem (which could affect the European economy in the long-term), Neelie Kroes, the European Commissioner in charge of the digital agenda and telecommunications, has launched a legislative proposal that will push for the consolidation of the market – an attempt at completing the realization of a single European telecommunications market. With this target in its sights, the European Commission will push for consolidation and restructuration, reducing the number of operators (currently more than 100). Furthermore, the legislative package is also going to sustain a horizontal integration of the single national markets bringing about various advantages such as making it easier to obtain authorizations, deleting roaming charges and reducing restrictions on wholesale access products, but, at the same time, keeping net neutrality safe.

The European Commission is not the only force pushing for a consolidation of the market. The telecom companies are also for it as they favor merging and acquisition operations and thus a decrease in the number of operators in the market. The most relevant consolidation took place recently when Telecom Italia became the first major European operator to fall. It was taken over by the Spanish telecom giant Telefónica. The former monopolist in the Italian market had been drowning in debt since its privatization in the late nineties. Over the last 15 years, many have had control over the company by means of financial holdings and financial “Chinese boxes”, but none of them have been able to come up with the necessary financial resources to pay the accumulated debt or to lay out a clear strategy to develop the company. Telefónica struck a deal with Telco, the holding company owning 22% of Telecom Italia’s shares, to increase its participation in the Italian company and take control of it. The acquisition of Telecom by Telefónica is mainly about surviving, and not expanding its business.

Telefónica, like Telecom Italia, is burdened by constant debt (about €50 billion) but survives thanks to the substantial cash flow provided by the companies it controls in South America. As a matter of fact, the acquisition of Telecom Italia by Telefónica is not connected to the Italian market; rather Telefónica aims to acquire Telecom Italia’s activities in Argentina and Brazil. These markets are the only ones, for both companies, that could provide enough cash flow to survive the lack of profitability of their home markets and the huge debt accumulated over the last decade.

The consolidation is not a closed survival battle among European operators, rather several international telecom companies are ready to enter into the European telecommunications market and most of them do have at their disposal the financial resources to invest in the infrastructures. These include the Latin American company America Móvil, which is controlled by Carlos Slim, and has been one of the most active. America Móvil is planning to increase its shares in  KPN, the Dutch telecom company, in which it already owns a large amount of shares. Furthermore, Slim also acquired an important stock of shares in Telekom Austria, with the possibility to increase its participation. The final stage of the acquisition of KPN by Slim is at the moment on hold, but the company has a lot of cash to invest and has reached its limit in America with 260 million of subscribers, therefore after the KPN deal, others European operators could be on Slim’s shopping list.

America Móvil isn’t alone; Vodafone is also looking to expand its role thanks to the $130 billion gained on the sale of its US activities to Verizon. In the meantime, Orascom and Three, both already present in the European market, are also looking to expand their positions, as is the American communication company AT&T.

Furthermore, the European telecom carriers are also facing the competition of the cable companies, which distribute telecommunication services (broadband) to customers alongside traditional television contents. The merging of these markets is particularly evident in Germany, where Vodafone recently bought Kabel Deutchland, the main German cable provider. The merging of cable markets makes the traditional telecom companies even weaker due to the presence of new competitors in an already overcrowded market and the necessity to cut their prices to face new competitors. On the other hand, it may provide a new market to exploit where the provision of content could provide a new line of revenue to those that are cash-strapped.

The consolidation and restructuring of the European telecommunication market will go hand in hand with the formation of a single market. Only a market composed of a small number of operators will be able to have the necessary resources to invest in modernizing the telecommunications infrastructure in Europe – even though it is likely that some of them will not be European. Telecoms are the backbone of the ICT sector and control of it is vital in a contemporary society in which everything goes through the net. Therefore, if the consolidation and creation of a truly pan-European single market does not take place, there is little chance that European operators will be able to compete with the rest of the world, making Europe a market of conquest, and definitely left behind Asia and the Americas in the ICT sectors.