Operators Move into Content: Part I

This eighth edition of the annual Exane BNP Paribas-Arthur D. Little joint report on telecom operators focuses on the move by operators into content.

In preparing the report, Arthur D. Little conducted 95 interviews with 83 companies in the telecoms-media-technology (TMT) arena across 17 countries. It drew three principal conclusions. Here we look at the first, how and why triple play works in Europe, with the other two to follow on Monday and Tuesday next week.
Triple play slows line losses and pushes in-country consolidation, which means it can greatly improve the revenue outlook and value of fixed networks.

European fixed line revenues have been under pressure for years and incumbents' revenues have declined by an average of 2-3% a year: growth in ARPU stemming from broadband adoption has been more than offset by the high rate of line losses (5.7% a year since 2005) as a result of fixed-mobile substitution (circa 20% of households are mobile-only) and broadband competition.

There is no reason for these trends to abate by themselves. They are driven by the fact that mobile broadband competes with fixed broadband and put pressure on fixed ARPU.

Also, there are now fewer broadband competitors than in the past (primarily incumbents, large unbundlers and cable operators, plus BSkyB in the UK), but those that remain can bundle broadband and telephone with pay-TV. Consequently they pose a more serious and longer lasting competitive threat.

Most European telecom operators have launched triple play services, with two main positive consequences. Firstly it gives customers a good reason to keep their fixed line connection. The launch of triple play has enabled incumbents to slow or even stop line losses, notably in Portugal, Sweden and Austria.

Secondly, it forces local consolidation of fixed broadband markets. The French example shows that this is followed by stabilised market share and a turnaround in ARPU.

Such improvements can slow the decline (and even enable a return to growth) in fixed line revenues. This creates huge value for the remaining operators, in particular incumbents, as valuations are very sensitive to key assumptions such as long-term penetration, broadband market share and ARPU:

"¢ halving the rate of line losses from 5% to 2.5% (over 2008-2015) can increase an incumbent operator's valuation by 27%;

"¢ a discounted cash flow approach points to valuations at 3x current year EBITDA (assuming the market share falls to 25% and ARPU to €30), and to 6x EBITDA assuming a market share of 50% and ARPU of €55.

These are all credible assumptions, close to current levels in selected countries.

Also see today's analystwire piece on AT&T bundles $50 netbook, fixed/mobile broadband