EU Telecom landscapeEvolution, Current State and Future trends

By Rajal SoodMarch 21

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20 years of Telecom (R)evolution in EuropeTelecom Access

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20 years of Telecom (R)evolution in EuropeTelecom Access

# of fixed lines decreasing# of broadband connections increasing# of mobile phones increasing rapidly (remember this)

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20 years of Telecom (R)evolution in EuropeRevenue Breakdown

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20 years of Telecom (R)evolution in EuropeRevenue Breakdown

# Revenue follows the same pattern for broadband and fixed lines# But mobile phones revenue is almost flat whereas the number of units increased rapidly (Do you see the contradiction?)

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20 years of Telecom (R)evolution in Europe

In order to understand this contradiction, lets breakdown the revenues in terms of voice and data. So, we will have 4 categories –

# Fixed voice (your landline phone), # mobile voice, # mobile internet (you use your mobile phone connection to access internet NOT WiFi) # and fixed internet (that is your broadband connection)

For simplicity, lets take data from last 2 years.

Solving the puzzle.

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Zoom in to the current situation

Growth rate in % (2012)

Growth rate in % (2011)

Fixed Voice -7 -7,2

Fixed Internet access and services

+2 +2,4

Mobile Voice -2,7 -4,4

Mobile data services +6,3 +6,3

Total telecom (carrier) services

-1,1 -2,2

Current State - Revenues of the EU telecoms sector

Source: EC services based on EITO 2012Total growth rate takes into account business data services also

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Zoom in to the current situation

Growth rate in % (2012)

Growth rate in % (2011)

Fixed Voice -7 -7,2

Fixed Internet access and services

+2 +2,4

Mobile Voice -2,7 -4,4

Mobile data services +6,3 +6,3

Total telecom (carrier) services

-1,1 -2,2

Current State - Revenues of the EU telecoms sector

Source: EC services based on EITO 2012Total growth rate takes into account business data services also

# Revenue from mobile internet/data services is up# But revenue from mobile voice is down

So, the mobile revenue loss from voice must be roughly equal to the Revenue gain from data/internet revenue. This explains the previous contradiction

# But, the data poses another question. The net growth rate is negative. So what could be the reasons for negative growth rate of EU telecom sector since the recession 2008-09?

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Reason # 1 for Negative Growth – Low 4G network coverage in EU

Why Negative Growth rate?

Fact 1: Although 4G connections represent only 0.9% of mobile connections they account for 14% of mobile data traffic. This means people tend to use more data services, when they have 4G.

Conclusion - Since achieving full coverage of 4G networks offering higher speed access may still take some years, rapid adoption of 4G services at higher prices is not expected. Why is this so? Well, the spectrum over which 4G has to be provided is government resource. Unfortunately, EU administration has been lagging nehind in opening this resource for commercial purposes.

Fact 2: The Accenture Mobile Web Watch survey indicated that 63 percent of the consumers using slower connections (3G broadband or lower) for their mobile Internet connection are willing to pay more for faster connectivity. While 28 percent will pay up to 10 percent more, 35 percent will pay an increase of more than 10 percent.

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Reason # 2 – New Market Forces – Competition from non Telco players

Why Negative Growth rate?

Fact 1:The new OTT uses telecom infrastructure to provide their widely used services,

thereby increasing the value of being connected and driving demand by consumers for further and better connectivity

Conclusion - Substitution of voice/SMS by IP-based voice/messaging services has prompted many operators to develop new, more aggressive pricing structures.

Fact 2: The traditional voice service (+ SMS), which still contributes a quarter of overall telecommunications revenues, is fading away very quickly, replaced by voice applications provided by the above services. Remember that in 2012, 59% of the telecom revenue came from voice services.

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Reasons # Others for Negative Growth

Why Negative Growth rate?

Conclusion: 1. Limited prospects of Organic Growth 2. Macro-economic impact of financial and economic situation continues3. Regulatory policies have impact on telecom growth

Fact 1: Most of the EU market is saturated. There are approximately 1.31 mobile phones per person in EU.

Fact 2: There were reductions in mobile termination rates in 2012 (in nine EU countries average MTR were slashed by more than 50%), mobile number portability has been imposed in many countries and, in some countries, there is competitive pressure of MVNOs. Not to forget the slash in roaming rates that happened across the Europe

Fact 3: Since, the recession of 2008-09, the telecom growth has never been positive. This is loosely linked to low GDP growth recovery.

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Is there a solution?

Overall EU telecom sector is doing bad, but there are few bright spots. We must look at those bright spots, understand what they have been doing and emulate them to succeed.

Looking at those bright spots, these are the future trends that may become substantive in coming years.

Look at the bright spots

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Bright Spots – European Telecom Trends

Domestic revenue growth for some European carriers was negative in 2012 and some operators were able to experience some growth in overall revenue thanks only to international operations.

Trend # 1 – Expansion in product portfolio and new geographies

Portugal Telecom, Telenor and Telefonica already source more than half of their revenues from non-EU countries and Vodafone, DT, Telecom Italia, Tele2 and BT also obtain between 30 and 40% of their revenues from non EU markets

Telefonica is a poster boy of diversified portfolio. It has spun out Telefonica Digital, with a separate profit-and-loss account.

Focus areas include financial services, advertising, content distribution, security, the cloud, M2M services and the generation of revenue from past acquisitions,such as Tuenti, a Spanish-language social network.

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Bright Spots – European Telecom Trends

An especially provocative finding of The Accenture Mobile Web Watch survey is that 31 percent of consumers in mature markets, and 17 percent in emerging ones, say they have no service provider preference; instead, their choice would be based on what company offers the most value.

Trend # 2 – Increase ARPU with constant base – innovative pricing to continue

Some EU operators added quadruple play products to their portfolio with the aim to provide customers all telecom needed package in a row and reduce churn ratio. By contrast, broadband standalone services are fading away, representing around 34 percent of all offerings in 2013, down from 64 percent six years ago.

Better understanding of the changing consumer behavior and strengthening customer care services, customer profiling and customization of products using big data will gain more momentum.

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Bright Spots – European Telecom Trends

In 2012, France Telecom, gave revenue forecasts for new enterprise products, but not for consumer products. This indicated significantly more confidence about the enterprise segment.

When looked at mention of products in top level strategic communications, there are fewer consumer products than the enterprise products. This also indicates a shift in the strategy vis-à-vis enterprise and consumer products.

Trend # 3 – Focus on Enterprise rather than consumer products

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Bright Spots – European Telecom Trends

Communications service providers have a number of attributes that give them a potential marketplace advantage: an extensive customer base, distribution muscle and knowledge of customer preferences through CRM and billing systems.

They may look to leverage their customer relationship to diversify into different areas.

Going beyond the telecom market, Magyar Telekom can be mentioned as an operator that has widely diversified its portfolio selling electricity and gas to its fixed line subscribers; by end-3Q12, 45% of its triple-play users had also bought its energy offerings.

Trend # 4 – Leverage and provide 2-sided market place.

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Bright Spots – European Telecom Trends

The sharp drop in European operators’ income and their shrinking margins will result in a period of both direct mergers and large-scale infrastructure-sharing deals, first at the national level and subsequently to revived cross-border strategies.

In the first half of 2013, M&A deals worth around €60 billion were announced in Europe's telecoms market, almost double the volume in the same period last year, and we will see further growth in 2014

The decrease in European group’s share prices is opening the doors to foreign investment which could inevitably reshape the sector.

Trend # 5 – Consolidation of the Sector

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So, in summary

Reasons for negative growth of EU telecom sector

Low 4G network coverage in EU

New Market Actors

Limited prospects of Organic Growth

Weak financial and economic situation continues

Regulatory policies

How to Counter them…Trends

Expansion in product portfolio and new geographies

Increase ARPU with constant base – innovative pricing to continue

Focus on Enterprise rather than consumer products

Leverage and provide 2-sided market place

Consolidation of the Sector

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www.infosyslodestone.com

© 2013 Infosys Lodestone. All rights reserved. Copyright in the whole and any part of this document belongs to Infosys Lodestone. This work may not be used, sold, transferred, adapted, abridged, copied or reproduced in whole or in part, in any manner or form, or in any media, without the prior written consent of Infosys Lodestone.

Thanks

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References and Acknowledgement

# Reference

1 http://www.accenture.com/us-en/outlook/Pages/outlook-online-2013-mobile-web-trends-opportunities-for-communications-service-providers.aspx

2 http://ec.europa.eu/digital-agenda/sites/digital-agenda/files/DAE%20SCOREBOARD%202013%20-%201-THE%20eCOMM%20SECTOR.pdf

3 http://blogs.forrester.com/thomas_husson/13-01-25-telecom_trends_life_for_european_carriers_will_not_get_any_easier_in_2013

4 http://www.tellabs.com/blog/index.cfm/2012/1/26/How-European-operators-are-getting-smarter

5 http://blog.idate.fr/futuretelecom2025/

6 http://www.developingtelecoms.com/business/opinion/5036-amdocs-michal-harris-2014-trends.html

7 https://www.gartner.com/doc/2345815/market-trends-strategies-europes-top

8 https://www.etno.eu/datas/publications/economic-reports/etno-economic-report-2012.pdf