Euro meltdown hits operators' wallets

European operators are struggling on two fronts: escalating economic challenges within the Euro-Zone countries, and intense competition in a region where the market is saturated.

The latest quarterly results announced by France Telecom and Telefónica provide insight into the impact these two factors are causing at a group level. Revenues are down, cost reductions are a priority--and for Telefónica, dividends have been slashed and now suspended.

But there are anomalies within this gloomy picture. In Spain, Telefónica's revenue plunged by over 12 per cent in the last quarter and Vodafone dropped 17 per cent. This could all be blamed on the dire economic situation within the country, but doesn't explain why Orange Spain managed to lift its revenues by 2.4 per cent in the same period.

The answer appears to be that France Telecom has got better management running its Spanish operations than the others.

However, Ovum analyst Emeka Obiodu believes that European operators will need to prepare for harder times given that their financial performance historically lags the economic woes of a particular country. And the Euro-Zone mayhem will probably get worse before it gets any better.

"As such, the challenge for telcos is to extract additional value from their businesses despite the difficult circumstance. This is not going to be easy," admits Obiodu.

While accepting that growth will continue in broadband, the Ovum analyst said  that initiatives to create fresh revenue streams from M2M, health services, etc. provide promise, but their impact will be minimal in the short-term.

Meanwhile, France Telecom Orange believes that it has turned the corner, having lost 155,000 customers in its second-quarter, compared with 615,000 in the first quarter.

However, competition from Free Mobile appears to have hurt Orange driving down its average revenue per user by 6 per cent over the past 12 months. This damage is likely to be balanced by the roaming agreement France Telecom Orange has with Free Mobile--something SFR and Bouygues Telecom do not benefit from.

These two operators, along with Iliad's Free Mobile, will announce their results next month when a more a complete picture will appear for the French mobile sector.

As a preview of how they may fare, Exane BNP Paribas analysts believe that SFR will report a 12 per cent ARPU decline, while Bouygues Telecom's will slide by 14 per cent.

Yet the talk of overcoming the "wave" of customer desertions to Free Mobile could be a little over-confident. The billionaire owner of Iliad, Xavier Niel, is not one to simply accept the success his firm has achieved in the few months it has been operating--his rivals should fear what he might do next.--Paul