No winners in Europe’s fragmenting telecoms market; The vision of a single telecoms market is far from reality

March 25, 2014 6:36 pm

No winners in Europe’s fragmenting telecoms market

By Sarah Gordon, Europe business editor

The vision of a single telecoms market is far from reality

The battle of the French billionaires is hotting up. Martin Bouygues, head of the number three mobile operator in France, has mounted a €15.5bn bid for number two SFR, owned by Vivendi, in which Vincent Bolloré is the largest shareholder. Another billionaire, Patrick Drahi, is determined to win SFR for his Numericable cable group, and has put forward a €14.5bn offer of his own. Xavier Niel, France’s sixth-richest individual, owns the fourth biggest mobile operator, Free, whose entry into the market in 2012 ushered in one of Europe’s most brutal price wars.

Messrs Bolloré and Bouygues have history. Mr Bolloré has been in bad odour with Mr Bouygues ever since the former mounted a corporate raid on the Bouygues conglomerate in 1997s. Meanwhile, Mr Bouygues has accused the colourful Mr Niel of being a gravedigger. Name-calling aside, the tussle over the French telecoms market has a serious rationale. A Bouygues tie-up with SFR would reduce the number of mobile operators from four to three, benefiting Bouygues, but also helping Orange, the market leader, and Free. A combination of Numericable and SFR would create a stronger fixed-line/mobile competitor to Orange.

Each of the actors in the drama hopes that, by absorbing SFR, they will be able to raise prices and thus profit margins. They argue that this would also benefit consumers even if prices rise, as the winners would then make much-needed investments in customer service and infrastructure. But the French government may yet intervene. It opposed any consolidation in the market until this year, when it reluctantly gave the go-ahead as long as prices did not increase and jobs would not be lost – thus removing the incentive for any deal.

France is not the only country where telecoms operators are engaged in a scramble for market share at the expense of profitability. In 2012, Hong Kong’s Hutchison Whampoa bought France Telecom’s Orange Austria, reducing the number of mobile operators in Austria to three, and Bouygues must hope the battle in France will have the same result – prices started to rise, prompting sighs of relief in Europe’s telecom industry. Last month Andreas Bierwirth, head of T-Mobile Austria, described the modest price rises since the deal as the end of “more or less a joint suicide pact”.

As well as France, other large markets with four players include Spain, Italy, the UK and Poland, and more domestic consolidation in these countries seems likely – BT is the only fixed-line incumbent in Europe, for example, without a mobile operation. The region’s regulators seem resigned to allowing just three operators in one country, although key tests will come in the next few months when the EU Competition Commission rules on Hutchison’s 3 Ireland purchase of O2 Ireland, and Telefónica’s bid for KPN’s E-Plus mobile subsidiary in Germany.

But, although these deals are expected to pass, albeit with some remedies required, the regulator is unlikely to countenance further reduction of domestic players from three to two. Duopolies rarely deliver the best outcome for customers, but this leaves the operators with few strategic alternatives. The industry seems to have realised there are few benefits to be gained from cross-border deals. As Moody’s points out in a recent report, geographically diversified operators are no more profitable than single market ones. The reasons are not hard to find; each country has its own regulator, spectrum is sold country by country under different auction rules, and the lack of a single language means it is difficult to make savings on marketing or customer service. Political interference, as in France, may also hamper commercial decisions. Many of Europe’s telecoms companies are partly state-owned and governments are often unwilling to lose control.

The EU has long cherished a vision of a single European telecoms market, with a small group of large pan-regional operators competing with smaller local companies, delivering competitive prices for consumers allied to fat enough margins for investment. Sadly for both customers and investors, rarely has this vision seemed further from the reality. The European Parliament votes next month on proposals to reform the sector, but these will focus on ending international roaming charges and making spectrum allocation more uniform, rather than grappling with the bigger structural obstacles to regional consolidation. Like Europe’s energy market, the region’s telecoms market is in fact fragmenting rather than consolidating, and whatever the outcome of the hostilities in France, there will be no winners in this battle.