For 5G to succeed European operators need a new deal on regulation and consolidation

Telecoms.com periodically invites third parties to share their views on the industry’s most pressing issues. In this piece Bengt Nordstrom of Northsteam explains how regulation, M&A and consolidation in the European telecoms market have divided opinion over the industry’s future direction.

Europe’s large operators have long argued that anti-M&A measures by regulators undermine their future investments by preventing market consolidation. They contend that fewer national operators can devote more resources to better networks and services for their customers, including 5G.

But regulators disagree. They maintain that four-player national markets promote competition and therefore guarantee low prices and high service quality for consumers.

Can new players survive?

Regulators also encourage new players to enter and disrupt the market. That’s why regulators in Germany and Belgium over the summer opened the door for new players to enter their respective mobile markets. Both markets have already consolidated to three operators, but regulators are still prepared to offer spectrum to new players.

However, the overwhelming cost of building an entire nationwide network from scratch along with gaining access to suitable mast sites is the reason why we shouldn’t expect new players to enter the fray in Germany and Belgium.

No new customers in Europe

The reality in Europe is that there are no new customers to win. Operators currently engage in tit-for-tat price wars to steal subscribers from each other, either by lowering prices or through exclusive deals on new devices.

Questions remain over how profitable any new entrant can be in Europe’s largely saturated markets. Any new entrant that attempts to enter a mature European market is likely to be sold – probably at a loss – to a bigger incumbent operator a few years down the road.

Iliad launches in Italy

A case in point is Iliad in Italy. In May, the French operator group launched in Italy to compete against incumbents Telecom Italia, Vodafone and Wind Tre (who itself merged with Three Italia in July 2016). With its aggressively priced service plans, Iliad added one million users in its first 50 days in Italy: in the same quarter that Iliad launched, Vodafone recorded a 6.7 per cent drop in its Italian revenues.

It was Iliad who kicked off the current spate of operator price wars in Europe when, in 2012, it took the French retail market by storm with its cut-price voice and data services. However, since 2017, its share price on the Paris Exchange has dropped by fifty percent.

Analysts and investors are concerned by Iliad’s missed forecasts, plus its gamble on expanding into the Italian market. They’re also wary of the impact on Iliad’s subscriber numbers of France’s other operators investing in and upgrading their own networks for better service performance.

Iliad’s early success in Italy sounds impressive. But attracting one million customers from its competitors is not as much of an achievement when we consider that those customers are probably low ARPU subscribers who typically spend the least amount of money with their operator. These subscribers aren’t likely to be missed by their previous operator.

Iliad’s long-term prospects

The key question that Iliad – and any new entrant into a mature, saturated European market – must answer is whether its business is viable in the medium and long term. Does Iliad have deep enough pockets to keep fighting the price war it’s started in Italy?

Iliad depends on its Italian rivals for their networks and their coverage. None of them will offer it wholesale conditions that jeopardize their own businesses. And building an entire network of its own from scratch would be prohibitively expensive for Iliad.

What’s most likely is that Iliad – rather than become a long-term fourth operator in Italy – will instead sell its assets as part of some future consolidation of the Italian market.

Europe must catch up in 5G

Rock-bottom consumer prices versus continually rising data usage define how much capital operators can invest in upgrading and improving their networks – including 5G.

Europe currently trails both the Far East and North America in the move to 5G. Incumbent operators and investors alike have long demanded a more stable regulatory environment to deliver the sorts of returns needed to support future network rollouts, whether full-fibre or 5G.

If the current regulatory policy doesn’t change, the most likely outcome for Europe is continuing low prices for customers – but also very few 5G services by 2021.

Can France provide the answer?

Perhaps it’s appropriate that the next twist in this story might well come from France, where the current round of operator price wars began with Iliad in 2012. In May, Sebastien Soriano, Chairman of French regulator ARCEP, indicated in an interview that he would be open to allowing consolidation among the mobile players.

The reason? France’s operators have addressed the country’s coverage problems and infrastructure needs with two years of investment, including €9.6 billion in 2017.

Other national regulators, along with the EU, should be watching intently to see if policy changes by France that reduce the number of nationwide players to three will have a positive effect and trigger a fresh round of investment in 5G and fibre.

A new regulatory approach for 5G

In these changing circumstances, regulators should reevaluate their relationship with operators plus their own regulatory position. They can continue to protect consumers by closely monitoring both prices and service quality. At the same time, regulators must also remove their opposition to consolidation.

Instead, they should work more directly and closely with operators, to guarantee service quality targets for network performance issues like coverage, latency and speed. In this way, regulators can ensure fairness for customers, create new growth opportunities for operators, and help Europe catch up and compete in the race to 5G.

Bengt Nordstrom is CEO of strategic mobile telecoms consultancy Northstream, which he co-founded in 1998. A former CTO and Executive Director of Hong Kong mobile operator SmarTone, Bengt has also held senior management positions at Ericsson, Comviq and consultants Netcom. In addition, Bengt was a member of the Executive Committee of the GSM Association and chaired the GSMA’s Asia Pacific Interest Group.