European Telecoms: Peace with OTT, War on the Regulators

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So, what broad, strategic themes are emerging this year? We've been mulling over the news, discussions with clients and within our team, and our experience at the GSMA's Mobile World Congress (MWC) 2013 in particular.

[NB. Our coverage of this year's MWC has been extensive - see our MWC news summary, this update on free, this article on the future of voice, and Smartphones: when will Huawei be No.1?.]

In this article we briefly examine developments on two perenially important themes: regulation and competition. [You can also join us at the EMEA Executive Brainstorm, 5-6 June in London to explore strategies relating to these issues.]

Hating The Regulators

One important function of the keynotes at MWC is to act as a lobbying megaphone for major operators and the GSMA. The common theme in all the megaphoning was that the regulatory environment, especially in Europe, lacked "industrial focus" and was putting too much emphasis on consumers as against infrastructure development and, to be blunt, the industry's desire to make a reasonable return on capital.

Plus, as we pointed out in European Mobile: The Future's not Bright, it's Brutal and this update on Voda and Telefonica, the commercial and economic enviroment is quite rapidly deteriorating for many European telcos. So the telcos' exclamations of pain carry a lot more conviction and validity these days.

The main case study of this is, of course, Free Mobile (see Free Mobile: A Prototype for Disruption? and this update on the latest numbers). ARCEP and the French government spent a lot of time giving the operators precisely what they wanted, an orderly, not-too-competitive market. It also gave French users prices around €10 a month higher than in the UK or Germany for services that weren't obviously better.

The Free Mobile experience has shaken everyone up. A major message was "Please don't do it to us". A further message was generally complaining about roaming and termination rates. That's not news, although it will always be important. But on the other hand, the operators were keen on something called "internationalisation"....

Give Us Competition But Not Yet

What does that mean? Well, in part it's consolidation. The UK has gone from five operators down to four, with a considerable degree of infrastructure sharing via MBNL (the infrastructure company that links the EverythingEverywhere partners with 3UK) and Cornerstone, the Vodafone-O2 UK partnership. A similar story can be found across Europe. But according to one of the panellists, the UK is "operator hell" - what must they make of Uganda?

Obviously the so-called EU5 operators would very much like to take their markets down to 3 operators or even fewer, as in Switzerland, but the French experience suggests that regulators are going to be chary of this. And the general scepticism that must be applied to mergers and acquisitions is required here. Although MNOs are cheap at the moment, compared to historical levels, big mergers across a wide range of industries tend not to deliver the economic benefits they promise.

But there is another kind of consolidation. This could be described as internal consolidation. Operators could consolidate internally and be more "international" by centralising more of their functions and by hollowing out their national operating companies.

The structure of multinational operators is determined by regulation, specifically the fact that licences are national and require a substantial OpCo organisation in each country. Although many operators have set up centralised IT functions and service centres, and regionalised some of their management, their OpCos are usually quite substantial, especially when the group has grown by acquisition. The cost of this comes both in maintaining the organisations and in the variety of IT systems that result. Vodafone is an example of an operator that has made progress in horizontalising its structures and consolidating its IT into a small number of strategic data centres. They have also worked hard in providing central shared services for back-office functions, such as procurement and finance.

This is likely to hit first in Europe, and we did hear the phrase "single European networks" used at MWC. It's also a possibility in Africa, where a lot of operators already regionalise their smaller OpCos.

Something new, though, was the sight of vendors arguing for infrastructure sharing and internal consolidation. Gabrielle Gauthey, Alcatel-Lucent's VP of government affairs, gave a presentation in the network track arguing for "moving away from facilities competition" and much more passive infrastructure sharing. Vendors are normally more than keen on facilities competition because it helps them shift more units. She also argued for carrier-neutral investment, perhaps including public investment, in the 700MHz band when it becomes available in Europe, although the European Union's recent budget decision to zero out funding for broadband networks makes this sound less likely.

Declaring Peace with the OTTers

In a sense, all the bluster targeted at the regulators can be seen as a smokescreen protecting a strategic retreat. A major theme we've picked up is that the operators appear to be preparing to bury the hatchet with the so-called OTT players. This is of a piece with the increasing acceptance that the core business going forward is being a profitable data-centric ISP, the Happy Pipe option, plus whatever Telco 2.0 services seem advisable. (See A Practical Guide to Implementing Telco 2.0 and Dealing with the 'Disruptors': Google, Apple, Facebook, Microsoft/Skype and Amazon for our analysis on the best steps to take in new services and with respect to the 'OTT' ecoystem, respectively)

Réne Obermann's keynote was a case in point; having joined in with the regulator-bashing session to begin with, he then moved on to presenting a strategy heavily influenced by "own-brand OTT" and partnerships with more OTT brands. With the voice & messaging wars over, in a sense, everything is now an OTT service. Obviously, this will only accelerate the move towards zero-rated voice.

But Something Needs Doing...

Perhaps the most shocking statistic of the show was that 8% of global LTE investment and 5% of FTTH investment is in Europe. 70% of world LTE investment is going into the United States. Part of this is the dreadful macroeconomy, of course, but then again our view is that improving the climate for investment in broadband would provide much-needed help in fixing the EU economies.