Iliad’s bid for the US market; lessons from France

Over the past 18 months, Iliad has grown from a small fixed broadband provider, to become one of the key players in French mobile telecommunications

At the beginning of 2013, Iliad’s consumer brand Free could only boast 4m fixed broadband customers, most of whom were drawn to Free as a result of their unique Freebox product. A smart piece of Customer Premise Equipment (CPE), the Freebox aggregates different services such as Wi-Fi access, Community Wi-Fi, IP telephony, IP TV and more traditional broadband services.  

From inception, Iliad’s Free has always used disruptive, in-house technologies to underpin their business strategy, without having to rely on third parties. It therefore didn’t come as a surprise when they decided to launch their mobile services in the competitive French market, drastically disrupting the well-established mobile landscape with very cheap and simple subscription tariffs. These aggressive tariffs fostered a complete rejigging of the French mobile market, with the merger of SFR and Numericable on one side, and Bouygues Telecom in a dire situation today on the other.

The Community Wi-Fi network was undeniably one of the best assets Iliad leveraged to offer cheap data services in France, with subscribers seamlessly roaming on and off Free’s Wi-Fi network. This allowed Iliad to cut the cost of the origination and termination of calls, SMS and data traffic, as it mostly uses its MVNO network provided by Orange.

Cheap tariffs and disruptive in-house technology are part of Iliad’s DNA, and undoubtedly Xavier Niel’s group sees an opportunity in the US, where the ARPU has gone up by 17% over the past 4 years, in comparison with a drop of 6% in Europe during the same period.  US tariffs are on average 40% higher than those in Europe, meaning that should Iliad make a second bid that T-Mobile would deem adequate, it would be well positioned to capitalise on these generous tariffs to carve out its own market share.

Although T-Mobile has decided to turn down Iliad’s offer, currently Xavier Niel’s bid is the only one on the table.  T-Mobile’s CFO Braxton Carter has recently commented, however, that the first offer is never the best, indicating that he feels there might be scope for further negotiation with Iliad.

More interestingly, Braxton Carter has mentioned T-Mobile is now ready to carry voice over Wi-Fi traffic, mentioning fixed operator partners such as  Comcast in last week’s discussion of Iliad’s bid. Iliad may therefore decide to push a hybrid solution of Wi-Fi and LTE network to lure T-Mobile, thereby achieving low tariffs and undercutting its competitors.

Should Iliad succeed in entering the US market, it may be bad news for Verizon and AT&T, especially if Xavier Niel succeeds in also striking a deal for offering fixed services which again stitch mobile and fixed together.

 By Philippe Berard, Consultant at Coleago Consulting

Telefonica O2 and e-Plus merger: MVNO access strengthens competition and wholesale and retail levels

Last week’s approval by the European Commission of the acquisition of e-Plus by Telefonica Deutschland (O2) became possible through concessions at wholesale level. Telefonica committed “to enter into capacity based wholesale agreements with one or several (up to three) Upfront Mobile Bitstream Access MVNOs (“Upfront MBA MVNOs”) in Germany prior to the closing of the merger.” This broadly follows the capacity based MVNO deal offered by Hutchison in Ireland to gain approval for its takeover of O2 Ireland.

Germany already has a vibrant MVNO market, not least as a result of the e-Plus multi-brand wholesale strategy. In regards to the wholesale markets, the Commission is satisfied that these MVNOs will not be harmed by reduced competition at network level. The existence of competitive MVNOs also acts as an insurance against unwarranted retail price hikes and hence alleviates the Commission’s concerns in the retail market.

The merger will take costs out of the mobile industry in Germany so shareholders will benefit. Telefonica Deutschland further committed to “make the following offers: (a) a spectrum offer consisting of the lease of 2×10 MHz in the 2.1 GHz band and of 2×10 MHz in the 2.6 GHz band; (b) a national roaming offer; (c) a divestiture of sites offer; (d) a passive radio network sharing offer; and (e) a sale of shops offer.” An Upfront MBA MVNOs might buy some spectrum. However, the Mobile Bitstream Access effectively provides access to capacity. There is little point in owning spectrum; indeed such a limited spectrum holding would make little sense without immediately entering into a spectrum sharing agreement with Telefónica Deutschland. There is little differences between this and the MBA MVNO arrangement.

Passive infrastructure sharing had been a feature of the German market for some time. Perhaps Vodafone Germany and T-Mobile will also look to increase the sharing of network resources, active and passive with each other and also with the merged Telefonica Deutschland and e-plus. Are we seeing the first steps of an evolution towards a national neutral host network with regulated wholesale prices?

With return of capital employed in the European mobile industry below that of some regulated utilities such as water and gas, investors may be better off by effectively pulling capital out of the mobile industry by means of outright consolidation or through sharing networks including spectrum, i.e. a “merger lite” strategy, becoming regulated utilities.

Noteworthy is that e-Plus was one of the four operators bidding for the 2x30MHz of digital dividend 800MHz spectrum in Germany which did not obtain any block. The outcome of the spectrum auction is likely to have been a factor in KPN’s decision to put e-Plus up for sale. In the next German spectrum auction only three operators will compete for spectrum, probably resulting in auction prices close to reserve prices. This is another reason for investors to be cheerful about the trend towards consolidation in the European mobile industry.

By Stefan Zehle, CEO, Coleago Consulting

Hutch – O2 Ireland acquisition approval: Hutch plays it well, the “Connected Continent” loses out

The conditions attached by the Competition Commission to the clearance of the acquisition of Telefónica Ireland by Hutchison 3G shows that the Commission is still desperate to maintain network based competition. H3G offered a package facilitating the market entry of two mobile virtual network operators (MVNOs), with an option for one MVNO to morph into a mobile network operator by subsequently purchasing spectrum from the merged entity. “H3G committed to sell up to 30% of the merged company’s network capacity to two MVNOs in Ireland at fixed payments. The capacity is measured in terms of bandwidth and the MVNO entrants will obtain a dedicated “pipe” from the merged entity’s network for voice and data traffic.”

H3G probably has the first MVNO customer lined up, or else the acquisition cannot go ahead. The likely candidate is UPC. UPC is one of the few telecoms providers in Ireland with a large enough customer base to be comfortable to take on the fixed cost associated with becoming an MVNO under these terms. With that, UPC would become a quad play company. This means that at retail level competition will remain vigorous while costs are taken out of the mobile industry. So far, so good.

However, it is highly unlikely that the MVNO would want to become an MNO with all the cost implications as well as the daunting prospect of participating in future spectrum auctions to stay competitive. Therefore, just like in Austria, Hutch played it well by making a spectrum divestment offer that is unlikely to be taken up. The Commission does not get it: In mature markets new network based market entry does not make sense. Consolidation is the name of the game for the European mobile industry.

MNOs are dominated by fixed costs. Because around 75% of their costs are fixed, profitability comes through scale. In contrast MVNOs are dominated by variable costs with the proportions of fixed to variable costs roughly reversed compared to an MNO. This means an MVNO is not operationally geared, has a lower risk of not achieving break even, and can operate profitably at a lower scale. Hence an MVNO can play in niche markets. The fixed cost deal offered by Hutch Ireland is clever from Hutch’s perspective because it offsets Hutch’s fixed costs with a fixed revenue stream, and is probably betting on a limited impact because only one player in Ireland is likely to have the ability to commit to a five year fixed cost deal.

The Commission missed an opportunity. In addition to the fixed cost MVNO condition, it could have requested a similar variable wholesale price undertaking as in the approval of Hutch’s acquisition of Orange Austria. A low wholesale price (€0.002 per Mbyte for data) not only serves as an insurance against unwarranted retail price rises, but creates the opportunity for players who are not MVNOs in the traditional sense. Innovative business models would use mobile access as part of a service, such as smart metering, automotive services, home security, M-Health, etc. and might even include handset manufacturers such as Apple or Samsung as well as OTT players. If innovators could find the same wholesale price and access conditions across the EU, we would be well on the way to overcoming the disadvantages associated with the fragmentation of the EU mobile industry and truly leverage the value of LTE mobile broadband.

By adopting a country by country approach to set conditions to clear consolidation among mobile network operators, the Competition Commission might address country specific competition concerns but does nothing to advance the “Connected Continent” agenda. Next up is the proposed acquisition of E-Plus by O2 Germany. Let’s hope for a better set of conditions which signals a harmonised, fast track merger approvals mechanism with the aim of advancing mobile industry consolidation in the EU for the benefit of consumers and investors.

 

By Stefan Zehle, CEO, Coleago Consulting

Elimination of EU roaming charges implies a move towards regulated wholesale rates

On the 3^rd of April 2014 the European Parliament voted (with some amendments) to adopt the Commission’s proposal to end roaming charges in the EU by the end of 2015. This was part of a wider vote in support of the Commission’s proposed regulation for a “Connected Continent”, the term used for the telecoms single market. The regulation must be approved by parliament and the European Council. With this, the Commission also moved a step closer to regulated wholesale prices and hence the structural separation of mobile networks into NetCos and RetailCos.

In essence the Commission wants EU consumers be able to use their mobile phone within all EU countries in the same manner as they would at home. “…Further reforms in the field of roaming should give users the confidence to stay connected when they travel in the Union without being subject to additional charges over and above the tariffs which they pay in the Member State where their contract was concluded.”

However, the problem with this is that most consumers chose domestic tariff plans with bundled minutes and data plans, so that within the bundle the incremental cost of usage for consumers is nil. Selling bundles also makes sense from a mobile operator’s perspective because most costs are fixed. In contrast, in a roaming situation an operator’s costs (the wholesale rate an operator has to pay to the visited network) are proportional to usage – i.e. variable. The Commission and the Parliament appear to be aware of this problem, and the adopted text states that operators “may, notwithstanding the abolition of retail roaming charges by 15 December 2015, apply a “fair use clause” to the consumption of regulated retail roaming services provided at the applicable domestic price level, by reference to fair use criteria. These criteria should be applied in such a way that consumers are in a position to confidently replicate the typical domestic consumption pattern associated with their respective domestic retail packages while periodically travelling within the Union.”

Much will depend on how the “fair use clause” is written. If we take at face value the text “consumers are in a position to confidently replicate the typical domestic consumption pattern associated with their respective domestic retail packages while periodically travelling within the Union”, this may mean that customers on large minute and data bundles can use these freely at any time across the EU. Alternatively the EU would have to define what “periodically travelling within the Union” means. Does it mean 30 days a year, or 180 days, or how much? Assuming the Commission does not want to place limits on how much Connected Continent consumers are allowed per year, there will be no time limits. Taken to an extreme, a mobile user could shop around for the cheapest SIM-only deal in Europe regardless of his or her country of residence. A prime example is EU parliamentarians who shuttle between their home country, Strasbourg, Luxembourg and Brussels.

The fair use provision is designed to address the problem that it is ultimately impossible to regulate retail prices without regulating wholesale prices. The Commission appears to be aware of the difficulty in defining “fair usage” and the implication for operators’ margins. The adopted text states: “In addition, the Commission should by 30 June 2015, in advance of that final abolition of retail surcharges, report on any necessary changes to the wholesale rates or wholesale market mechanisms, taking into account also mobile termination rates (MTR) applicable to roaming throughout the Union.” This is the real bombshell because it heralds EU regulation of wholesale prices.  In the same way as the EU has driven the regulation towards lower MTRs this may happen to wholesale prices.  The target might be a Reference Wholesale Access Offer, for example with the €0.002 per Mbyte of data rate imposed on Hutchison 3 Austria to allow their acquisition of Orange Austria to go ahead.

In regulating mobile tariffs, the EU is focusing only on roaming charges, whereas international call pricing is also highly unbalanced. In most cases international calls are not included in a mobile minute bundle and charged at a premium. This leads to oddities. For example, for a UK mobile subscriber with a bundled minute plan the incremental cost of a call to a UK mobile numbers is nil. Hence for a call to a UK number that is roaming in Poland, the marginal cost to the caller is nil and, according to the EU roaming charges cap, the called party pays no more than €0.07 per minute to receive the call. The marginal revenue to the UK operator is €0.07 per minute. However, if a UK mobile user calls a Polish mobile number the price paid is substantially higher. For example, Vodafone’s standard to Europe call price is £1 a minute (€1.20). In other words, Vodafone’s incremental revenue is 17 times higher, although costs are the same.

The Commission also proposed that for European fixed calls “operators will have to charge no more than a domestic long-distance call for all fixed line calls to other EU member states. Any extra costs have to be objectively justified.”  Will the same principle be applied to mobile operators? If yes, the scenario where a consumer buys a SIM in one country and uses it in another becomes practical. In this scenario, where within the EU distance and geography no longer matter for mobile retail prices, the retail activity of a mobile operator might evolve into what is in effect a pan-European MVNO with an “always best connected” value proposition, regardless of the access network used. Under these circumstances, who will then want to bid for spectrum and invest in networks?

Either way, we are moving to a situation where the EU mobile industry is subject to extensive price regulation. And yet, the EU Directorate General for Competition is totally focussed on preserving competition at network level and in-country consolidation of mobile operators is hard to achieve. This makes little sense. Now that the cost of calling has come down, perhaps Neelie Kroes can afford to make a call to Joaquín Almunia (Vice President of the European Commission responsible for Competition Policy) and attempt to sync policies.

Written by Stefan Zehle, CEO, Coleago Consulting

How the Telefonica Deutschland / E-Plus merger could play out

This week it was reported that the European Commission and the German telecom regulator (Bundesnetzagentur) are applying pressure to Telefonica regarding their planned takeover of KPN’s subsidiary E-Plus in Germany.

We think on balance the deal will get approved but both parties will need to make significant concessions to get it done. This will be especially the case with regard to spectrum holdings and as we saw in Austria commitments to support virtual operators and branded resellers (i.e. wholesale access). There is always a chance that the concessions are so onerous that they may effectively destroy the deal.

The combined entity will have approximately a 39% mobile customer and 32% mobile service revenue market share in Germany, so the European competition authorities (and the German telecom regulator) will no doubt review it very carefully. Revenue market share figures would of course look much lower if the fixed and mobile markets were combined and no doubt KPN/E-Plus and Telefonica Deutschland will be arguing for this. They have a point, given the recent €7.7bn deal by Vodafone to acquire Kabel Deutschland and the fact that Deutsche Telekom sells fixed and mobile services effectively under one brand.

Regarding spectrum, the combined entity will on the face of it have a whopping 64% of the 1800MHz and 54% of the paired 2100 MHz bands, so it is likely that regulators will require a sale or handback of some of the holdings in these core bands.  In the less scarce 2600MHz band, it holds 42% of the spectrum. A similar situation was seen in the UK with regard to 1800MHz spectrum when EE was created from the merger of Orange and T-Mobile. It is possible that the other German operators will lobby to have “excess” spectrum handed back rather than sold so that the merged entity does not benefit. Some of the excess spectrum is due to for renewal in 2016 and the merger will reduce competition for these frequencies.

By contrast, in the very scarce and more valuable sub 1 GHz bands, it holds 33% of the 800MHz and 29% of the 900MHz spectrum, so there should be less of an issue here.

Clearly the deal is going to require significant concessions.  It makes sense for the competition authorities to scrutinise these deals to ensure that monopolies are not arising and customers have enough market choice.  Yet at the same time, telecom operators need to generate acceptable returns in a fiercely competitive and mature market. A difficult balancing act for the competition authorities.

By Scott McKenzie, Director, Coleago Consulting and former supervisory board member of E-Plus

Consolidation in the European mobile industry is inevitable, but what path will it take?

It has been pointed out many times that the EU with around 100 mobile operators, serving a roughly similar size population as the USA, is hugely fragmented compared to the mobile industry in the USA. The historic reason is easy to understand, but the fight put up by Directorate-General for Competition of the European Commission to halt in-country consolidation is harder to understand.

In the model used to analyse the impact of mergers on retail prices, the Competition Directorate, assumes that retail prices will always go up as a result of a merger between two MNOs in the same country. It does not assume that the efficiencies brought about by a merger would, at least in part, be passed on to consumers in form of lower prices or better service in terms of coverage or access speeds.

Network sharing is encouraged under EU rules as long as it is limited to the Node B and RNC and excludes spectrum and the core. A great deal of cost sits in the RAN, and hence RAN sharing could be termed “merger lite”. With LTE, it is efficient to deploy the technology in as wide a band as possible. Hence significant additional savings could be brought about if spectrum is shared.  This reduces competition at network level, but also delivers consumer benefits in form of higher access speeds.

The transactions now awaiting approval by the Competition Directorate are the O2 and Eplus tie-up in Germany, Hutchison’s takeover of O2 in Ireland and, if the acquisition of SFR by Altice fails, then also the Bouygues – SFR take-over in France.  The conditions the European Commission attached to the Hutchison 3 take-over of Orange Austria may serve as an indicator as to the conditions that might be imposed to allow these deals to go ahead. Among other conditions, Hutchison Austria had to publish a wholesale access price reference offer for MVNOs. By regulating wholesale prices, the Commission in effect bought insurance against sharp increases in retail prices because it would allow MVNOs to undercut these.

The conditions imposed on Hutchison Austria may be a first step towards the structural separation of the mobile industry into Netcos and Retailcos. In a world where mobile network operators share much of their network and perhaps spectrum, these mobile operators start to look more like MVNOs on a shared network. Structural separation may not be a “horror scenario” for mobile operators if returns on invested capital can increase as a result.

Looking at what business mobile operators are actually in, it seems that they are to a large extent hire purchase phone vendors. Comparing SIM only postpaid tariffs with postpaid plans that include a “free” smartphone, it appears that the price for SIM only deals is 50% below plans with a bundled handset. Therefore roughly 50% of a mobile network operator’s business is not about running a network but about selling phones on credit. Other than marketing and selling phones and SIMs, customer care and billing are a big cost bucket attributable to the retail activity of an MNO.

Retail activities are scalable, i.e. can be done profitably at different volumes. In contrast the Netco activity is not scalable because costs are fixed. Netco returns are a function of network utilisation. By structurally separating retail and wholesale activities in exchange for being allowed to merge networks including spectrum, MNOs might see lower costs and as a result higher returns, all the while prices at retail level may not move or even decline.

Barriers to entry and exit in the Mobile Netco activity are extremely high. We are now in the maturity stage of the industry life cycle, and it is normal for consolidation to take place. Furthermore, regulators have hastened the need for consolidation because they took billions of Euros out of the industry through spectrum auctions. This had the effect of dramatically reducing returns to investors. And yet, the Directorate responsible for telecoms, DG Connect, ceaselessly points out the benefit to European industry of increased investment in mobile broadband networks. How can the policy objectives of DG Connect and DG Competition be delivered simultaneously?

From the industry perspective, if structural separation allows returns to increase despite increased competition at retail level, then structural separation might be the way forward. Competition might drive down margins in the retail activity, but this is not problematic because in contrast to the Netco activity reducing capital or even exiting the retail activity is possible.

The proposed consolidation in Germany is most interesting in this regard. Eplus pioneered a multi-brand wholesale and MVNO strategy precisely because E-Plus was sub-scale. As can be seen by leafing through some older KPN investor presentations (KPN E-Plus Seminar, Delivering profitable growth, Sep 2006), this resulted in lower subscriber acquisition costs and higher EBITDA. The strategy brought about a flourishing MVNO and reseller activity, thus increasing consumer choice. This means within Eplus the set-up exists to take the concept forward to full structural separation.

From the mobile industry perspective a further benefit of consolidation at network level would be that governments can no longer pit competing operators against each other in spectrum auctions, such as the forthcoming second digital dividend. High spectrum reserve prices would finally be seen for what they are: a tax on the mobile industry that ultimately has to be paid for by the consumer. Furthermore it may be better to be in a regulated industry with reasonable returns rather than in an industry with wafer thin returns, high investment needs and continued technology risk.

Written by Stefan Zehle, CEO Coleago Consulting

Coleago join a managed services panel session

Chris Buist, Director, Coleago Consulting takes part in a managed services panel session at European Communications’ quarterly seminar.

Brussels on attack over pay-TV rights

Territorial restrictions placed on TV anywhere apps adds another dimension to the UK pub test case with regards to the single EU market for digital services

The week-end edition of the Financial Times (23 Nov 2013), lead with “Brussels on attack over pay-TV rights”, reporting on the anti-trust probe by European commission over pay –TV rights. This was prompted by the case of the British publican fined for showing football to UK customers using a satellite card from Greece.

The UK pub test case is only the tip of the iceberg in the challenge rights holders and the digital media industry face.  TV anywhere apps such as “Virgin TV Anywhere” or “Sky Go” give consumers the ability to watch the subscribed channels away from home over the internet. However, a British pay-TV subscriber on holiday in Spain wanting to watch a Premier League football match on his iPad would find the viewing blocked because access is only allowed from within the UK.  In the physical world this is akin to a British holidaymaker being blocked from reading a book on the beach in Spain, with the excuse that the book was bought London.

I am sure that pay-TV operators would like to grant their customers access from anywhere within the EU because this would add value to their service. The problem lies with the country based approach to TV rights. The 2011 judgement with regards to the Premier League may not have considered the issue because at that time TV-anywhere apps did not yet exist. The EU is keen to promote the “connected continent” and should take vigorous steps to ensure that consumers are free consume digital media anywhere within the EU, regardless from which EU country the service is played out.

Written by Stefan Zehle, CEO, Coleago Consulting

Bidders in spectrum auction attach a high value to 1800MHz spectrum

The multi-band combinatorial spectrum auction (CCA) in Austria ended on the 21^st of October, with bidders paying €2,014 million for 2x30MHz of 800MHz, 2x35MHz of 900MHz and 2x75MHz of 1800MHz spectrum. The 800MHz spectrum was new spectrum whereas the two other bands were renewals. The only bidders were the three incumbent operators Austria Telekom, T-Mobile, Hutchison.

The overall price paid for sub-1GHz spectrum and the 1800MHz spectrum amounted to €0.85/MHz/pop. This is only slightly less than the implied price for the sub-1GHz spectrum of €0.96/MHz/pop.

The price for sub-1 GHz spectrum is roughly in line with prices paid for 800MHz spectrum in recent European auctions.  The price paid for 800MHz spectrum in Germany was €0.73/MHz/pop (May 2010) and the average in Europe during 2010 to 2013 was €0.52/MHz/pop. So the price paid in Austria for 800MHz spectrum is relatively high. Benchmark prices paid to renew 900MHz spectrum are in the €0.19-0.53 range whereas the implied price paid in Austria amounts to €0.96/MHz/pop.

Exhibit 1: Austrian Spectrum Auction Results

 

However, since the overall price per MHz per pop paid is only slightly lower than the implied price for sub-1GHz spectrum, this means that operators valued the 1800Mhz spectrum very highly at €0.76/MHz pop.  This is significantly above prices paid for 1800MHz spectrum in recent auctions, and certainly massively more than prices paid for 2.6GHz spectrum. Benchmark prices paid to renew 1800MHz spectrum are in the €0.10 – 0.21 range.  In this context the comments by Telekom Austria’s CEO Hannes Ametsreiter, referring to a “bitter pill to swallow,” are quite appropriate.

The auction outcome highlights that in the context of the rapid growth of data traffic, spectrum is becoming an ever more valuable resource. The re-farming of 1800MHz from GSM to LTE requires more spectrum in the short term because spectrum resources cannot be used efficiently. In that sense governments can hold a gun to operators’ heads and demand almost any price.

1800MHz spectrum is the spectrum of choice for LTE in Europe. Most operators have built a grid based on 1800MHz and hence the 1800MHz band provides both an LTE capacity and an LTE coverage layer. In contrast 2.6GHz is “only” a capacity band. I placed quotation marks around the word “only” because LTE capacity is of course very important in urban areas and here cell sizes are quite small. Nevertheless, the in-building propagation characteristics of 1800MHz spectrum are significantly better than for 2.6GHz spectrum and in-building capacity matters for mobile broadband.

The auction outcome, with A1 Telekom (Telekom Austria) acquiring 2/3^rds of the 800MHz band means that the company now holds 53.8% of sub-1 GHz spectrum compared to a subscriber market share of around 39%. As the operator with the weakest cash flow it is likely that Hutchison faced budget constraints. The result is that the market leader managed has managed to acquire a disproportionate share of spectrum.

The design of the Austrian auction and the absence of effective caps on sub 1GHz spectrum holdings suggest that the Austrian government is not particularly concerned about the effects of spectrum concentration on competition. On the other hand, the spectrum divesture conditions imposed on Hutchison (European Commission, DG Competition, CASE M.6497) to clear its acquisition of One Austria, suggests a very different view of spectrum concentration is applied when it comes to approving in-market consolidation.  The only saving grace for Hutchison is that there was no new entrant and so the requirement to divest 2x10MHz the 2.6GHz frequency band lapses; however the MVNO access requirement remains.

While Hutchison managed to increase its sub-1 GHz spectrum holding from 1.6MHz to 2x5MHz, the cost per eNodeB of deploying LTE is 2x5MHz is roughly the same as for Telekom Austria deploying LTE in 2x15MHz in the same band. Furthermore, there are already many smartphones with 800MHz LTE, where Telekom Austria acquired 2x20MHz, but as yet, none with 900MHz LTE.

In the light of this the comments by Trionow, CEO of H3G, describing the auction as a “disaster for the industry” are understandable. Certainly it is a disaster for Hutchison and for a competitive mobile broadband market in Austria.

 

Written by Stefan Zehle, CEO, Coleago Consulting

European commission proposal ignores the fundamentals: We need to create an environment that attracts capital into the EU telecoms sector

The European Commission’s adoption of regulatory proposals for a Connected Continent announced by Neelie Kroes on the 11^th of September 2013 are as polemic as can be expected from a politician. The headline grabbing proposal deflects from the failings of member states to adopt sensible policies with regards to developing the telecoms sector. In its opening paragraph the proposal declares that “The overarching aim is to build a connected, competitive continent and enabling sustainable digital jobs and industries; making life better by ensuring consumers can enjoy the digital devices and services they love; and making it easier for European businesses & entrepreneurs to create the jobs of the future.”

To achieve these objectives substantial investments are required. Only 12 days prior to the Commission’s proposal, on Thursday 05 September 2013, PwC published a detailed analysis which showed that mobile operators cannot make adequate returns on capital employed. For the past three years the return on invested capital (ROIC) made by Europe’s telcos was below the cost of capital of around 8%-9%. In the mobile sector this is in part due to the high spectrum licence fees charged by national governments.

And yet with statements such as “It is also essential that citizens … are protected from unfair charges and practices such as roaming rip-offs and opaque contracts” the Commission conjures up an image of ultra-profitable telecoms operators which fleece consumers.

What the European telecoms sector needs most is a climate with the regulatory certainty which is favourable to investment. Only investment in the sector will achieve the Commission’s aim – which we all agree with – of excellent fixed and mobile internet connectivity and communication without borders within the EU.

Furthermore, the Commission proposal contains contradictions. Vice President Neelie Kroes said “The aim is to gradually make the telecoms sector a “normal” economic sector with limited ‘ex ante’ rules and responsibility shifting to ex-post regulation” and then demands that “Operators will have to charge no more than a domestic long-distance call for all fixed line calls to other EU member states. Any extra costs have to be objectively justified.”  “Normal” economic sectors do not “objectively justify” prices based on cost but charge what the market will bear. The image of the Coca Cola bottle in the proposal is a fine example. The price per litre of Coca Cola varies hugely between a discount supermarket and a beach club on the Cote d’Azur. And yet, nobody suggests regulating prices for Coca Cola.

On the positive side, the proposal highlights member states’ regulatory failings and tardiness in allocating spectrum for LTE.  This, with a call for a European authorisation for telecoms operators – and by implication European telecoms regulation – is a very positive development. This is a prerequisite for the much needed consolidation in the EU telecoms sector which will then give investors a chance to earn adequate returns.

Written by Stefan Zehle, CEO of Coleago Consulting