Infonetics: Good luck to you and AT&T, Randy!

Stéphane Téral,
Infonetics Research

"Good luck, Randy!"

That's exactly what four of Europe's Big 5 operators (e.g., Vodafone, Deutsche Telekom, Telefónica, and Telecom Italia) told me when I asked the question: What do you think of AT&T CEO Randall Stephenson's statement that he sees room to move the European market in the direction of the U.S. by investing in networks, shifting pricing strategies to encourage mobile data use and collecting more revenue as use increases?

When he said this in the Wall Street Journal back in September, he piqued their curiosity, but then a few weeks later, speaking at the ETNO (European Telecommunications Network Operators) conference in Brussels this week, he got their attention. He said he sees a "huge opportunity for somebody" to invest in mobile broadband in Europe, a market that could be "incredibly exciting." Every major European mobile operator wonders what he means by incredibly exciting! And I also wonder how this market could be exciting when heavy competition, declining revenue and heavy regulatory environment are the main characteristics.

On heavy competition, all over Europe, each country has at least four mobile operators that compete fiercely in their saturated market, marked with consumers' diminishing willingness to pay for mobile communications services.

Take the case of France, which decided a few years back to introduce a shiny new fourth operator named Free Mobile, the mobile arm of billionaire entrepreneur Xavier Niel's fixed broadband venture Iliad. On Jan.10, 2012, Free Mobile launched its unlimited plan at €19.99 ($27) per month, excluding the cost of a smartphone. This has to be compared with a typical unlimited plan of €30 to €45 per month plus €200 for the smartphone. After six months, the jolt could be felt across Orange, Bouygues Telecom, and SFR, which had to quickly adjust to this new reality by lowering their offers as well as their cost structure. By the end of 2012, most operators stopped subsidizing high-end smartphones. In other words, an iPhone 5 now costs €700. At this price tag, I'm not surprised that I hardly found anyone with an iPhone 5 during my recent visit to France! And little changes when you cross the border to Belgium, the Netherlands, and Germany.

The case of France, which by no means is unique in Europe, leads us to the ongoing trend of declining revenue. There are three major reasons for this.

First, discretionary income in Europe is lower than in the United States, which has one of the highest average revenues per user (ARPUs) in the world, along with Canada, Japan, and South Korea. In general, Europeans want to pay less and less year after year for mobile communications services. And with the exception of Germany, most countries are plagued with high unemployment, even more so in Southern Europe, which used to have the highest saturation levels before the sovereign debt crisis of 2010-11. In Italy for instance, seeing people carrying a BlackBerry, an iPhone, and a Prada phone was very common until things got bad and forced them to drop one phone, if not two.

Second, a rigid regulatory environment and the decision to cut roaming charges across countries to establish a more homogeneous and seamless pan-European mobile market will put a big dent in operators' revenues.

Finally, voice is still paying the bill. Although mobile data ARPU is increasing every month, it is still not fast enough to offset the decline of voice revenue, despite stable and heavy usage in various countries. Moreover, voice quality is well above average on networks such as Orange's via their High Definition (HD) voice offering over 3G. By contrast, it's worth mentioning that in South Korea, SK Telecom has been successfully ramping up its Voice over LTE subscribers to 4.5 million as of the end of May by marketing it as HD voice! This is something AT&T plans to start doing as well by year-end.

What a contrast with the U.S. market! And I'm not even tackling spectrum issues and governments' stakes in major operators here. That's why instead of merging with UK-based Vodafone, Verizon Communications decided against it and bought its Verizon Wireless stake for $130 billion to take full control of the carrier. The company strongly believes in the strength of the U.S. market.

Anyway, everyone I talked to welcomes Randy's initiatives and is intrigued as to what the outcome will be. Au revoir and auf Wiedersehen as they say in France and Germany--until we meet again.

Stéphane Téral is Principal Analyst for Mobile Infrastructure and Carrier Economics at Infonetics Research. He is a trusted advisor at some of the world's largest telecom providers and manufacturers and authors mobile and capex research year-round.

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