Trends in European Telecoms Consolidation

Klaus von den Hoff, Global Head Telecoms & Media Practice, gives his view of Europe's Telecoms trends from Arthur D. Little's latest report: "In the eye of the telecom-media storm"

Q: What were the report's main conclusions?
A: Produced in partnership with BNP Paribas, this 7th report since 2001 is based on interviews with over 70 executives in the telecoms & media sector across Europe. This study presents a definitive view of the European market from the shareholder and investor perspective.

There are two main conclusions:

1) The first can be found in the burgeoning pressure for return on Triple Play and fibre. This means that fixed line operators, in particular, are having massively to invest in Triple Play, fibre and mobile broadband. This crippling investment is taking its toll and we expect to see multiple consolidations in 2008, primarily driven by fixed line providers.

The number of fixed and mobile access player in most of the European markets will likely fall from an average of seven today to an average of four. In Germany a case in point is Versatel AG, Freenet and UI which are currently in talks to enter into a joint venture which may also takes Telefonica on board.

2) The second key conclusion lies with the internet players, manufacturers and content providers; all of which are also trying to retain and grow their slice of the pie. Until now access was the key revenue generator, now the ground has shifted to content and related new revenue channels. Traditional handset manufacturers like Nokia are moving into the sector with their Ovi offer and there's a raft of new offerings from Sony, Microsoft and Cisco. There is now a clear shift in the value chain; breaking up the traditional separation between access and device.

Q: How do you break down trends in consolidation?
A: Local consolidation, where smaller companies are bought by larger fixed players and mobile operators, is already in evidence. In Germany for example, Vodafone will soon integrate its fixed line arm - Arcor, so the number of fixed line operators will fall in the coming months.

The second trend in consolidation lies in the global economy. It is quite clear that larger multicountry operators have much more power than small players in negotiating with internet giants and device manufacturers who are both trying to extend their influence in the value chain. This global consolidation is likely to happen over the next 18-24 months while local consolidation is a more immediate but still ongoing process.

Q: Does the industry accept this is going to happen? Is it business as usual or is there some resistance?
A: It is definitely not business as usual. Some enterprises, particularly the smaller concerns, are entering new service markets requiring major investments to support Triple Play. These investments are likely to be too high for a single player. Some have already started the process in terms of partnerships, but these collaborations can not necessarily support this level of investment. The funding sufficient for fibre or VDSL investment in multiple cities and networks to provide direct access direct for customers is just too high.

Q: Once the investment has been made, will consolidation continue, taper off or even reverse?
A: There is an accepted logic that every market can afford to lose two or three key players. If this reduces down as far as four, it presents potential market instability. We do not expect that the trend will continue beyond that. Could it go back to five, six or seven? Not on the access side, but would likely work well on the service side. We would strongly expect that eventually, there will only be a few access players remaining but a plethora of service players.

The service battle will be highly competitive. Operators, manufacturers and internet providers - representing the reaches of the value chain, will all be fighting for revenue streams on services.

Q: What will be the determining factor for winners and users?
A: The primary battle will be for content followed by customer access. Ideally, providers will be looking to offer services which customers buy into and can then be retained through contracts. Currently customer control is defined by who owns the access. There is no question that access is an important means of control but as new internet content providers come on stream, they will develop effective customer retention mechanisms.

Q: What will be the regulatory authorities' take on this?
A: There will certainly be some debate, but pervasive action is unlikely until a monopoly position is established. For example although Telefonica and Freenet will consolidate their DSL business in Germany, there will still be significant numbers of other DSL players. This would create less of a competitive landscape but still leave three major players in the business with Deutsche Telekom and Vodafone and other small concerns still remaining. We do not expect the regulators to interfere because it would not sufficiently change the competitive landscape.

Q: Will the Credit Crunch change things?
A: The current financial climate has yet to impact the DSL market in Europe. Little or no concern was expressed by study participants.

Q: Would you envisage any non-European participation in this process?
A: We believe the market shifts to remain a pan- European consolidation. About ten years ago Europe had investors from the US 'baby bells' such as Bell South, Pacific Bell investing in newly opened European markets. We don't envisage this occuring again in Europe. It is something that is being driven by larger groups which are already established in Europe in order to expand their footprint, strengths and position in certain pan European markets. For a US firm to make any kind of investment in Europe would be quite tough in what is effectively a very mature market now.

The European market from a global investor perspective is not as attractive anymore, because of the need to realise greater synergies, which are much more viable on 'home-grown' basis. Big spenders like Telefonica or Vodafone are the ones who will drive this growth. Investments by Vodafone in Spain and elsewhere are now spreading to other European operators. We predict that mobile operators will make investments into DSL providers because no mobile operator so far has successfully developed its DSL business stand alone - nowhere in the world.

Q: What's Arthur D. Little's role in this process?
A: Arthur D. Little is actively supporting the development of the European Telecoms and media markets. The core of our business is in working with clients to develop and execute innovative and sometime disruptive strategies in this highly dynamic markets, including due diligences, merger and integration programmes. We help them to develop their growth plans and, critically, with the execution of that strategy. We work closely with some of the world's leading operators and media companies and this report presents a valuable platform for discussion among stakeholders in this industry.

Our incisive reports generate questions and discussion on harnessing or combating market trends to help businesses to meet upcoming strategic challenges. We help organisations to stay ahead of market forces and improve profitability through informed strategic and technological decisions.

For more information:
Email: taga.karim@adlittle.com
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