How to consolidate Europe’s telecoms industry

Europe’s highly fragmented telecommunications market is undergoing massive consolidation through mergers and acquisitions, at a time when media lines are blurring

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Europe's telecoms network will become increasingly unified in the near future, with many different ideas floated about over how to simplify this market

For years now, Europe’s telecoms industry has been a mess. A fragmented market with many different players operating within the confines of their national borders, unwilling to collaborate or cooperate with rivals. However, it seems that change is afoot.

Over the next year, Europe’s media landscape is set to undergo a dramatic change, thanks in large part to industry consolidation that some feel is long overdue. While this consolidation has occurred naturally, regulators have also sought to encourage a more unified approach to telecommunications across Europe, in the hope that this will spur innovation and help the region catch up with the US and markets in Asia.

Allowing operators to offer their services across state boundaries would increase choice for consumers and end the roaming charges that have given the industry such a bad name

The large number of operators is one problem, but there has also been a distinct lack of coordination in terms of regulation across the many EU member states. Calls for a change in approach have been growing for a number of years. In a report released in 2013, the European Telecommunications Network Operators’ Association described how there was a serious need for a unified approach to Europe’s telecoms market. “While Europe was once a leader in the technologies that comprise the backbone of the digital economy, many markets in Asia and North America now enjoy fibre access penetration that is up to 20 times higher and penetration of LTE that is as much as 35 times greater than Europe’s”, the report states.

The consequences of this stagnation in the European market have contributed to the region’s lacklustre economic growth, it adds. “As a result, European consumers and businesses experience slower connections, leading to less value and slower economic growth. Fast connectivity to the internet is the foundation of a modern digital economy and a key enabler of innovation. Without it, Europe will fall behind on the world stage.”

Growing trend
The first sign of a concerted effort by Europe’s regulators to simplify the market came last year, when the European Commission unveiled a report that called for a Digital Single Market. While the scope of the initiative extended to all digital communications, the Commission’s report also called for a unifying of regulations across EU member states and a reduction of roaming charges between states. The key proposal, however, is allowing operators to grow beyond traditional state borders.

Allowing operators to offer their services across state boundaries would increase choice for consumers and end the roaming charges that have given the industry such a bad name. Some in the industry also feel that the simplification of regulations would help international companies. Rob Bratby, Managing Partner of Olswang Singapore, claims: “The change from individual country authorisations to a Europe-wide one will significantly ease the compliance burden on international operators. This is a welcome development.” He adds: “Less European regulation will encourage companies operating in Asia to think about investment into that region.”

One major change to come out of the European Commission’s discussions is a new approach to roaming rules. The bane of many a frequent European traveller’s trip, charges for using data across EU countries have been excessively large for years. However, since last July, operators have not been able to charge customers for incoming calls while abroad within the EU, while data roaming charges have also dramatically fallen.

Olswang’s Head of Telecoms for Spain, Blancha Escribano, welcomed the move: “The changes introduced into the roaming regulations bring new mechanisms for operators to offer domestic tariffs to users when they are traveling across the EU. This is a positive development for end users, but is expected to increase the usage of telecoms services (especially data) and to boost the provision of new telecoms services related to the internet of things in the EU. Roaming charges are one of the entry barriers that operators find when providing machine to machine communications, which are international by nature.”

Action taken
Fast forward a year, and the European Commission has come forward with further proposals into how it can best implement this unified market. Unveiling the Digital Single Market strategy, the Commission was keen to stress how important a coordinated strategy was towards getting the best out of Europe’s digital economy. Andrus Ansip, Vice President for the Digital Single Market, said: “Let us do away with all those fences and walls that block us online. People must be able to freely go across borders online just as they do offline. Innovative businesses must be helped to grow across the EU, not remain locked into their home market. This will be an uphill struggle all the way, but we need an ambitious start. Europe should benefit fully from the digital age: better services and new jobs.”

The key goal of this strategy was to foster innovation and growth. Ansip believes that a digital single market could benefit the EU to the tune of €260bn a year, while also creating hundreds of thousands of new jobs. Günther Oettinger, Commissioner for the Digital Economy and Society, added: “Europe cannot be at the forefront of the digital revolution with a patchwork of 28 different rules for telecommunications services, copyright, IT security and data protection. We need a European market, which allows new business models to flourish, start-ups to grow and the industry to take advantage of the internet of things. And people have to invest too, in their IT skills, be it in their job or their leisure time.”

However, not everybody was enthusiastic about the goals of the European Commission. Writing for Euractiv, Dutch MEP Marietje Schaake said that the latest proposals for Europe’s Digital Single Market were inadequate, and that a much more ambitious telecoms single market was needed first, where all the different national laws that govern domestic markets were unified. “The digital economy also depends on the availability of reliable, high-speed and affordable fixed and mobile broadband networks throughout Europe. There are no good reasons to still have national telecoms laws in this field, yet the prioritisation of spectrum allocation as a key pillar of the telecoms single market was removed from the European Council’s agenda altogether.”

With the telecoms industry rapidly changing and new technologies disrupting the traditional market, a clear strategy needed to be in place from regulators to allow European firms to lead the way. This will involve implementing the 5G spectrum across the EU, rather than in individual states, and far quicker than it took both the 3G and 4G spectrums to be released.

Another issue facing the industry is new, borderless technologies like Skype and WhatsApp, which have eaten into traditional telecoms firms’ business. The European Commission is looking at ways in which it can regulate these services and level the playing field. Schaake adds that, without a more coordinated approach to the telecoms market, Europe’s digital economy will fall behind those of its global rivals. “How will Europe successfully deploy 5G without enhanced coordination of spectrum assignments between member states? Let us not forget that these networks do not only have an economic value; they are increasingly important for public access to information, freedom of expression, media pluralism and cultural and linguistic diversity.”

Bearing the fruits
There have long been complaints within the telecoms industry and from consumers that the highly fragmented market has held back innovation. A large number of companies currently make up the European telecoms industry, all competing for customers and spectrum. Indeed, just last year there were over 100 fixed and mobile operators across Europe. By contrast, the US market has only four major operators controlling 90 percent of the market, while China has three. Over the last year, a number of leading UK telecoms firms have joined forces. As part of Hong Kong-based firm Hutchison Whampoa’s acquisition of O2 for £10.25bn, the leading UK firm will merge with budget provider Three to create the largest telecoms business in Britain. With a combined customer base of 31 million people, the deal will surpass EE’s lead by three million. Elsewhere, BT re-entered the mobile telecoms market with its acquisition of EE for £12.5bn earlier this year. This came 14 years after retreating from the market by spinning off Cellnet into O2, which subsequently was sold to Spain’s Telefónica in 2005 for £18bn. EE itself was only formed in 2010 as a result of the merger between the UK arms of Orange and T-Mobile.

Elsewhere in Europe, there has been a similar move towards consolidation. Hutchison Whampoa is said to be trying to acquire Italian operator Wind, while it is also looking at a number of Scandinavian operators. Another major merger last year saw French operator Numericable merge with media giant Vivendi’s telecom business SFR, in a deal worth more than €11bn, forming Numericable-SFR. The newly combined firm then acquired Virgin Mobile France for €325m last November, and is actively pursuing a deal to acquire smaller competitor Bouygues Telecom too.

What’s more, it’s not just telecoms firms that are consolidating. In April, rumours emerged that Vivendi was considering an offer for Sky TV. Later denied by the media giant, it underlines the swirling rumours around greater consolidation of Europe’s media firms. Sky has recently announced its own plans to launch a mobile network in the next year, to compete with the likes of O2 and EE in the UK. With the company already offering cable television, broadband and landline services, Sky is pursuing the final piece in the ‘quad play’ strategy that many media companies dream of.

With many offering mobile phone networks and broadband, as well as television services and content, there has been a concerted effort by media giants to tie customers into a full range of services. BT, traditionally a landline and broadband company, entered the lucrative cable television market a few years ago, and with its purchase of EE it will itself have a quad play strategy.

While all this consolidation should mean a better service for consumers and a more consistent experience across the EU, it remains to be seen whether regulators will worry about there being too few players in the market. However, the European Commission has been calling for a more unified market for a while now, so it must follow through with its plans by allowing these mergers to take place.