EU 'Connected Continent' Plans Please Few
The European Commission has published a lengthy set of proposals aimed at accelerating telecoms reform in the 28 member states of the European Union. Encompassing far ranging reforms addressing key issues such as net neutrality, spectrum allocation, consumer rights and wholesale network access, among other things, the proposals are aimed at making Europe's digital economy, leaner, more productive and consumer-friendly. BMI broadly welcomes reforms that seek to harmonise regulatory tools and place the consumer at the forefront of technological change. However, we also acknowle dge that - as do many players and industry associations - the proposals will have a significant impact on sectoral profits and investments . The reforms would leave the sector greatly changed and a swathe of casualties in their wake.
As expected, the proposals focus heavily on reducing roaming and interconnection fees, moves that would encourage more consumers and businesses to adopt mobile and fixed broadband services. It is proposed that incoming call rates incurred when travelling within the EU be abolished from July 2014. Operators would either have to offer 'roam like at home' rates offering consistently priced voice, messaging and data services, or have their customers pay for a separate roaming provider without needing to acquire a new SIM card. Intra-EU mobile calls would be capped at EUR0.19 per minute; fixed-line operators would not be allowed to set higher rates for intra-EU calls than for domestic long-distance calls.
Allowing consumers to take out 12-month contracts is also envisaged, as is the banning of contracts tying customers to contracts of more than 24 months' duration. Increased freedom to switch networks or service providers would make consumers more inclined to adopt mobile and fixed broadband services as well as multi-play packages, it is argued. Mobile broadband penetration is below the European average of 54.5% (proportion of active mobile users) in 18 states, although that average appears inflated by excess usage in more advanced markets such as Finland, Sweden and Denmark (see chart).
|Mobile Broadband Penetration, EU28 (January 2013)|
|Mobile Broadband As % Of Active Mobile Subscribers|
Although BMI concurs with the commission's view that lower roaming and interconnection costs and lower pricing for basic and value-added services arising from an intensification of competition will stimulate demand for advanced services, we believe that the proposed changes will undermine operators' appetites to invest in such services and the infrastructure that supports them. Over the last five years, mobile and fixed-line operators across Europe have seen traditional service revenues fall faster than they have been able to grow income from 'new wave' services such as IPTV and mobile internet . High charges certainly have acted as a deterrent as the Commission argues but, with consumer and business spending on services currently held back by Europe's ongoing sovereign debt crisis and the lingering after-effects of the global recession, operators are understandably reluctant to jeopardise core revenue streams by engaging in organic price competition or having tariff caps imposed on them at the regulatory level.
Operators are also faced with the high cost of building next-generation access networks to meet rising traffic volumes and acquiring the requisite radio spectrum and licences that allow them to future-proof their businesses. In most cases, long-term investment plans are geared around projected revenue-generation rates and, although imposing fixed standard rates and caps gives players the ability to plan for worst-case scenarios, they will still face a revenue shortfall in the near and medium terms.
In order to remain both competitive and profitable, many operators could be forced to focus investments where returns on investments seem most achievable. This would run counter to the Commission's aims of delivering super-fast broadband to as many citizens and businesses as possible . BMI expects incumbent telephone companies, for example, to turn to technologies such as vectoring to increase the commercial lives of ageing copper plant, rather than investing in the fibre or wireless technologies that would achieve the Commission's objectives.
In order to safeguard their long-term futures, operators of all kinds are expected to amalgamate as they pursue the scale and resources need to meet consumers' growing appetites for 'everything, everywhere' service packages. Failure to do so would force consumers to turn to other operators or - as seems increasingly likely - turn to multiple service providers for their various needs and utilise network operators as mere 'dumb pipes'. To an extent, this is already happening as IP-based voice and messaging services supplant mobile operators' own offerings and as network-agnostic video-led services such as Netflix bypass operators' billing systems.
Telecom Italia is considering spinning off its fixed-line network to help it meet these challenges head-on. The UK's BT has introduced a new sports-centric TV channel in order to steal subscribers from rival broadband operators BSkyB and Virgin Media . Pan-European pay-TV operator UPC has acquired Virgin Media and is swallowing up stakes large and small in operators across the region. Vodafone is poised to acquire Germany's Kabel Deutschland but, at the same time, is said to be an acquisition target itself. AT&T of the US is reportedly considering investing in Europe, possibly as a response to América Móvil 's investments in KPN and Telekom Austria .
These deals are primarily being driven by operators' responses to the service and investment environments. BMI foresees a significant uptick in consolidation if the proposed new rules are adopted. This would make the survivors hardier, but it would also increase their dominance, their debt piles and their capacity to innovate. Despite promises to improve and standardise the process of opening up incumbents' infrastructure, smaller, independent infrastructure-based operators would still be the main casualties of these reforms, BMI believes.