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2013-07-01 11:21:38
Two deals this week illustrate only some of the problems besetting Europe s
telecoms companies
FOURTEEN years ago Vodafone, a British mobile-phone operator, swooped on
Mannesmann of Germany. One of the grand names of the country s corporate scene,
it eventually succumbed for 112 billion ($183 billion) in shares. Vodafone s
latest German purchase, announced on June 24th, of Kabel Deutschland, the
country s biggest cable-television company, for which it will pay 7.7 billion
($10 billion) in cash, owes more to distress than to daring. Like another,
smaller acquisition on the same day the purchase of the Irish business of Spain
s Telef nica for 780m by Three, owned by Hong Kong s Hutchison Whampoa the
deal reflects the strife that bedevils European telecoms companies.
The Irish transaction may bring a little balm to two familiar sources of pain.
First, it will fractionally ease Telef nica s debt, which the firm hopes to cut
to 47 billion by the end of the year. Second, it will make one of Europe s
mobile-telecoms markets less crowded. Most, however small, have four
contestants. Regulators have sought to keep it that way but if the watchdogs
let the purchase in Ireland through, it will reduce the field of four there by
one. A similar agreement by Three in Austria in February 2012 to buy the local
business of Orange, France Telecom s brand, took almost a year to be approved,
after scrutiny by the European Commission.
The German deal illustrates a newer difficulty: telecoms and cable companies
are invading each other s territory. Whether attacking or defending, companies
are cutting prices and making acquisitions. In France last year Iliad, an
upstart internet-service provider, launched Free, an ultra-cheap mobile-phone
service, setting off a price war. In Britain BT, the old fixed-line incumbent
and a leading broadband supplier, is entering sports television, having bought
the local business of ESPN, an American broadcaster. It is thus both
challenging and defending itself against BSkyB, the country s biggest pay-TV
company, which is trying to lure broadband customers away from BT.
How this turf war is fought varies from one country to another. But Robin
Bienenstock of Sanford C. Bernstein, a research firm, thinks that mobile
specialists such as Vodafone look especially vulnerable. Fixed-line incumbents,
which in most countries offer mobile services as well as broadband, see cable
companies attacking their broadband business. To keep their customers, Ms
Bienenstock explains, they give a bit on wireless which hurts the mobile
operators.
Mobile companies find it hard to fight back, not least because they lack their
own fast broadband networks and so have no choice but to rent from the
incumbents. Though the price is regulated, it can be dear. For example, the
rate recently set for fibre by the Spanish regulator 20 per connection per
month means the economics are impossible for a renter , Ms Bienenstock says.
And to make the squeeze worse, Liberty Global, an American-owned cable company
with operations in several European countries, has said that it is interested
in expanding its mobile services too.
In Germany, its biggest market, Vodafone already had its own broadband network
with about 3m customers, as well as an agreement to serve others using Deutsche
Telekom s wires (which will continue). However, Deutsche Telekom, the biggest
provider of both broadband and mobile services, has been rolling out high-speed
fibre. And both Kabel Deutschland and its rival, the German arm of Liberty
Global, have been adding high-speed broadband, and winning customers. Buying
Kabel Deutschland was the answer for Vodafone, especially since Liberty was
interested in buying it too. (Germany s cartel office has said that a takeover
by Liberty would be more troublesome.)
If only, European telecoms operators sigh, our troubles ended there. Their
services are in demand as never before, as data flood through mobile and
broadband networks. But prices have been driven down not just by recession and
competition but also by regulation. National regulators have made operators cut
the mobile termination rates (MTRs) they charge for connecting calls made to
their phones from other operators , and their broadband access fees. Even
without the cuts in MTRs, says James Barford of Enders Analysis, another
research firm, mobile-service revenues would have fallen by 3.8% in the year to
March. With them, they dropped by 8.6% (see chart).
On top of this, the commission has whittled away at the roaming fees that
Europeans pay to use their mobile phones in other EU countries. The next cut is
due on July 1st, and Neelie Kroes, the commissioner responsible, wants
eventually to abolish them. Intense competition and regulatory pressure mean
that European consumers enjoy much lower prices than Americans do. But
operators complain that the squeeze is leaving them short of money to invest in
new technology.
Having been streets ahead of America in building 3G networks, Europe is far
behind in installing the next generation. Several operators wrote recently to
Jos Manuel Barroso, the commission s president, to plead for a more benign
regulatory regime. Ms Kroes, who says she is as keen on investment in new
technology as she is on cutting prices, wants operators to have a passport to
operate anywhere in the EU presumably to give them pan-European scale but it is
not yet clear how this might work. In any case, operators already rent network
space in countries where they do not have their own.
Transatlantic connection
All of this has operators looking enviously across the Atlantic. America s
telecoms markets are dominated by AT&T and Verizon (on the mobile side, through
Verizon Wireless, of which Vodafone owns 45%); they have plenty of the fixed
broadband market too, though they share it with cable-TV companies. The two
giants have spirited rivals, in the shape of MetroPCS, recently acquired by
Deutsche Telekom s American mobile arm, and Sprint, likely to be bought soon by
Softbank, of Japan, but these are much smaller than the big two. The big two
also have the best spectrum for 4G networks, in which they have invested
heavily and for which they can charge much more.
The Americans, meanwhile, have been looking back at Europe, musing that it
needs their expertise. AT&T is said to have asked the Spanish government how it
would regard an approach for Telef nica. A European executive says that
American companies have also made polite inquiries (but no formal offers)
elsewhere. Other non-Europeans could also be agents of consolidation. Hutchison
Whampoa is keen to buy where it can. Last year Am rica M vil, a Mexican
telecoms company, bought stakes in KPN, a struggling Dutch operator, and
Telekom Austria. But shares in both have since performed horribly. Last month
KPN raised 3 billion in a rights issue, after the Netherlands auction of 4G
spectrum proved unexpectedly expensive. It is still a bit early for anyone to
make a fortune in this business.