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

Towards a single EU telecoms market

In a speech delivered at Mobile World Congress 2013, Neelie Kroes, European Commissioner for Digital Agenda, called for the creation of a single telecoms market in the EU. Kroes iterated that it would be of great benefit to the European telecoms industry as well as consumers. There are numerous aspects to this, but mobile telecoms and notably spectrum allocation is most notably one of the focal points.

In recent times, common EU policy has led to the harmonisation of mobile spectrum and technology in the form of GSM at 900MHz and 1800MHz. One could argue that it is this which kicked off the global boom in mobile communications as a result of delivering low equipment prices (terminals and network) as well as international roaming. The benefits to both the European industry and users are undeniable. Mobile communications is now a global business and with the inclusion of multiple LTE bands on chipsets, harmonisation is perhaps a little less important from the technology perspective, but it still matters from a business perspective.

Spectrum allocation mechanisms and prices paid by operators are driven by national policy objectives. Some governments (e.g. Finland) rightly think that spectrum should be made available to operators as cheaply as possible since ultimately this generates the greatest benefit to society. Others (e.g. Ireland and Greece) focus on immediate cash generation. Views on competition may also differ. The 800MHz auction rules in France are a good illustration of a government ensuring the survival of the 4th entrant, whereas in the highly competitive UK market, competition does has not been a big issue in the recent spectrum auction.

These policy differences result in very different costs for mobile operators and yet there is an assumption that prices, notably wholesale prices should be standardised across the EU. Clearly there is a contradiction.

Another key point in pushing for an EU wide approach to telecoms regulation is that cross-border mergers should be made easier in the EU. The fragmentation of telecoms services provision within the EU is a barrier to the single market. An innocent bystander might ask a whole series of questions which demonstrate that the current EU mobile and fixed regulatory environment is unsatisfactory, for example:

—Why is it that a call on a mobile network within a country tends to be included in the bundle whereas a call to a neighbouring country is usually priced at a premium?

—Austria has a smaller population than Bavaria, so why does T-Mobile run Austria as a separate business from its German operation?

—Why are mobile numbers portable within a country but not within the EU?

The current structure of the EU telecoms industry and markets are an artefact of national telecoms regulation. Faced with competition from global OTT players who are not bound by national regulatory regimes, it is the European telecoms companies who suffer. Both industry and end-users would greatly benefit from a truly EU wide approach to telecoms policy and regulation.

Written by Stefan Zehle, CEO, Coleago Consulting

The APT Bandwagon Reaches Cruising Speed

On the 7th of February Brazil made the decision to make available 698MHz-806MHz for mobile broadband services. The frequencies are those of the Asia Pacific Telecommunity (APT) band plan. ANATEL, Brazil’s regulator, now has the authority go ahead with clearing and the allocating this 700MHz spectrum to mobile operators for mobile broadband use. This should help Brazil to achieve the goals of the country’s national broadband plan (Plano Nacional de Banda Larga).

Of course the process will take time because the process of moving terrestrial TV from analogue to digital will be lengthy. In some parts of Brazil the spectrum could be cleared as early as 2016. Given the size of the country, a regional approach to opening the band to mobile broadband may be possible, although this potentially creates an interference problem.

Brazil’s decision means that the APT eco-system is gaining the scale which confirms it as a mainstream solution for LTE deployment. This means the 700MHz APT band plan may appear in chipsets and more devices earlier rather than later.

Many Asian countries have committed to the APT plan. However, the clearing of the band appears to be slow and countries such as India have only just launched 3G and therefore Region 2 may not be the main driver in developing the device eco-system. The confirmation of the adoption of the APT band plan in Latin America indicates that it will become well-established in Region 2. In addition some African countries have also looked at the APT band plan and the Russian 700MHz allocation is reasonably close to the APT band plan. Therefore we may see the APT band plan being adopted in also in Region 1.

Exhibit 1: 700MHz Allocation in Russia & APT Band Plan

700MHz Plans	Mobile Transmit	Centre Gap	Mobile Receive
700MHz in Russia	720 MHz to 750 MHz = 30 MHz	750 MHz to 761 MHz	761 MHz to 791 MHz = 30 MHz
APT Band Plan	703 MHz to 748 MHz = 45 MHz	748 MHz to 758 MHz	758 MHz to 803 MHz = 45 MHz

Written by Stefan Zehle, CEO, Coleago Consulting

Making sense of recent European spectrum auctions

Regulators across Europe are busy this year auctioning spectrum in the 2.6GHz spectrum frequency range as well as other frequencies including the 800MHz Digital Dividend. 800MHz spectrum is clearly of great value to operators as the equivalent US auction demonstrated. The low frequency allows the radio signal to propagate further which means that fewer base stations and hence capital expenditure is required to provide coverage compared to higher frequencies such as 2.6GHz. This makes the spectrum ideal for supporting mobile broadband services at manageable levels of cost. The lower frequency range also provides better in-building penetration and as mobile broadband usage seems to be predominantly in-doors, this further increases its attractiveness. The first significant auction of spectrum in the 800MHz band is currently taking place in Germany and bidding levels have already reached 0.67 $/MHz/Pop. At this level the price paid is greater than the prices paid in the heady days of the Dot Com book for 3G spectrum in Denmark and Austria but it is still considerably lower than the US 700MHz auction average of 1.18 $/MHz/Pop. If German prices reached this level it would also put them on a par with the auctions of 3G spectrum in the Netherlands and Italy at the start of the new millennium. Prices would then have to increase by more than three fold to reach the German 3G auction price levels. Prices may well continue to move higher but with few other benchmarks available it is too early to draw any significant conclusions regarding this spectrum band but at present the bidding levels look reasonable.

In contrast to 800MHz there has been much greater activity in relation to 2.6GHz spectrum. Norway, Finland and Sweden auctioned their spectrum in 2007, 2008 and 2009 respectively. This year the Netherlands and Denmark have already concluded their 2.6GHz auctions, the auction in Germany is on-going and at least a further six 2.6GHz auctions are expected at some point during 2010 (France, Spain, Poland, Portugal, Switzerland and Belgium are all expected to hold auctions this year). Mobile operators will be busy preparing their 2.6GHz business cases in preparation for the auctions and in doing so they will be attempting to make sense of the results of the spectrum auctions that have already taken place. This is no easy task when the highest price paid so far in Europe (Sweden, May 2008) is almost 135 times greater than the lowest (the Netherlands, April 2010). Analysis is further complicated by the fact that in most auctions the paired spectrum (FDD) has commanded a premium to un-paired (TDD) spectrum which in some cases attracted no bids at all (Netherlands). However, in the case of Finland the result was reversed with the TDD spectrum priced at a premium to FDD.

Attempting to make sense of these results requires the consideration of a great many factors. The timing of the auctions is important as some occurred before the start of the on-going financial crisis. The licence conditions attached to the spectrum, such as coverage requirement, should also be considered. These vary from regulator to regulator and the more onerous the coverage requirements, for example, the less valuable the spectrum. However, in the end, the final price paid in an efficient auction will determined by relative levels of spectrum supply and demand. The regulators have taken different approaches when it comes to supply and have auctioned blocks ranging from 2x5MHz to 2x20MHz and everything in between. Caps on total spectrum holdings have also been imposed in some cases. The fewer unique blocks that are offered the greater is the potential for demand to outstrip supply. On the demand side the most significant factor is the number of incumbent operators and in Europe this varies from 2 in Norway to 4 in markets like Denmark and Sweden. There has also been demand from new entrants usually arising from the existing cable operators such was the case in the Netherlands. In addition to the number of potential bidders demand will also be influenced by operators’ expectations of future mobile data traffic. Mobile data traffic is growing exponentially and no one has a clear view of where demand levels will be in 15 or 20 years time which is the typical term for the new spectrum licences. Not only must operators contend with uncertainty over traffic levels there also remains uncertainty over what levels of data throughput can actually be achieved when technologies such as LTE and MIMO are implemented in this frequency range and have matured. On the issue of TDD versus FDD it would seem that there is a reasonably clear trend that the FDD spectrum is more valuable than the TDD spectrum however this is not always the case and the relative valuations can vary significantly.

Despite a reasonable number of 2.6GHz auctions having taken place it is almost impossible to draw any firm conclusions especially as the design of each auction is also subtly different which can have a major impact on participant’s bidding strategies and ultimately the price paid. As a result, for any operator facing a 2.6GHz auction little conclusive insight can be drawn from the results of the 2.6GHz spectrum auctions to date. Therefore in order to prepare for an auction a country, operator and auction specific business case will be required to value the spectrum and to allow the operator to bid with confidence.