Analysys Mason: Can Western European operator revenue ever grow again?

Rupert Wood

Retail spend on telecommunicationss services (including consumer and business) per head of population in Western Europe was, at  $65 per month, 33 per cent lower than in the United States in 2011. This was is in spite of the fact that GDP per head of population in Western Europe was just 11 per cent lower than in the United States in the same year. Moreover, retail telecoms service spending is increasing in the United States, but continues to fall in Western Europe (see Figure 1), despite the fact that both regions are struggling to realise much macroeconomic growth. Arguably, this is great for European consumers and businesses, but not for operators.

Figure 1: Retail spend per capita per month by service type, USA and Western Europe, 2010 and 2011 [Source: Analysys Mason, 2012]








In our recently published report, The Western European telecoms market: trends and forecasts 2012–2017, we forecast that the trend will continue in Western Europe and that retail revenue will decline by 1.4 per cent CAGR between 2011 and 2017 (see Figure 2).

Figure 2: Fixed and mobile service revenue, Western Europe, 2009–2017 [Source: Analysys Mason, 2012]








What makes Western Europe such a difficult environment for operators, and what would have to happen for this to change?

The problems for Western Europe lie in the confluence of several factors: an economic downturn; the structural challenges of a mature telecoms market; and the inexorable shift towards IP data. These are common to developed economies, but specific regulatory and demand-side factors make Western Europe a less benign environment for operators than the U.S. market.

  • Macroeconomic woes. The economic outlook is at best uncertain in Western Europe, and a "lost decade" seems increasingly likely. Parts of telecoms, particularly fixed, are utilities in nature and tend to grow and contract less dramatically than the economy, but the most promising area of growth is essentially discretionary spend, particularly of course mobile data.

Would a stronger-than-expected economic performance change this? Possibly, but looking at actuals, even where economic performance has been relatively strong, as in Sweden, reduced spend on fixed has completely wiped out the additional spending on mobile (particularly 4G). By contrast, fixed-line retail revenue is stable in the U.S. market.

  • Operators' waning influence over the retail edge. Western European operators' dreams of controlling new digital value chains through highly centralised and intelligent service-centred networks seem more elusive than ever. Operators will lose actual and potential service revenue to over-the-top voice, messaging, app and content plays that will piggy-back on operator connectivity. Some European operators that have kept basic voice and messaging services high-price and low-volume are particularly vulnerable to dramatic falls in revenue. Moreover, consumer service spend can be replaced in part by spend on devices many of which currently create little or no additional value for operators (for example, SIM-free tablets). So it could be that consumer spend grows, while operator retail revenue falls.

What might alter this? Rapid and proactive rebalancing of mobile handset subscription tariffs would help. Forward-thinking operators need to maximise revenue from connectivity (and consequently reduce their reliance on voice and messaging services) and exploit this to maintain control of the device distribution value chain.

  • Unit costs fall faster than volumes rise. This is self-evidently true for voice, but it is probably true for mobile data too. This combination of factors reduces the cost of transport. In Western Europe--a region with particularly strong pro-competition regulation--lower costs result in lower revenue.

What might alter this? Not much will alter falling costs because at least one player in any market will want to take advantage of a lower-cost technology. And we certainly do not expect new cartels to arise any time soon. Voice volumes will not grow, so the burden is on data, particularly mobile data. Cellular data traffic growth is generally pretty weak compared with other regions, and results in lower transport costs.

  • Telecoms-internal value-destruction: Growth in mobile data spend is severely weakened by the offloading of wireless data onto Wi-Fi, mainly at home, where Europeans spend a lot of time relative to people in other developed economies. Our primary research surveys consistently show that Europeans make more use of Wi-Fi on smartphones than Americans. Fixed broadband thereby cannibalises (potential) mobile revenue.

What might alter this? European mobile operators will have to get a lot smarter with pricing and bundling if they are going to succeed in persuading end users of the value of their product over essentially free Wi-Fi. Operators in the United States are much better at this, or, to put it another way, European consumers are cannier. Bundling fatter data subscriptions will probably mean that something else will have to give: either the handset subsidy will be squeezed, or operators will have to accept lower premiums for handset data compared with general mobile broadband. Multi-device bundles will be an important factor in any resurgence in growth in Europe. On the other hand, radical changes in lifestyle seem unlikely.

  • Race to the bottom in fixed broadband. Fixed-line spend, at $54 per month per head of population, is far higher in the United States than in Western Europe ($32). AT&T and Verizon have rolled out next-generation access quite swiftly, but they operate in a much less heavily (ex-ante) regulated environment than their European equivalents. European regulation appears to remain preoccupied, some two decades after liberalisation, with driving down prices and with encouraging market entry. This creates short-term benefits for consumers and the broader economy, but arguably at the expense of the growth of the industry itself.

What might alter this? We expect some "natural" consolidation in fixed, but not for simple duopolies to emerge as in the United States, at least not during the period of the forecasts (2012–2017). This would require a major change of direction in European policy. However, part of the reason why fixed spend is so much higher in the United States than in Europe is pay TV. AT&T and Verizon have the scale and ambition to be able to compete in pay TV, whereas in Europe incumbents do not always have these qualities. Moreover pay TV and video just matters less in Europe.

Rupert Wood is a principal analyst at Analysys Mason. Rupert's primary areas of specialisation include next-generation networks, long-term industry strategy and forecasting the dynamics of convergence and substitution across fixed and mobile platforms. Rupert has a PhD from the University of Cambridge, where he was a Lecturer before joining Analysys Mason.