Wired for growth
Stuart Mitchell argues Europe’s long-struggling telecoms are finally receiving a shot in the arm – from politicians.
It’s been 15 years of struggle for former state telecoms operators like BT and France Télécom (now Orange). The 3G auctions of 2000 employed sealed bids and offered fewer licences than the number of operators bidding, yet telecoms companies desperately needed faster 3G technology in order to compete in new heavy-data areas – perhaps even in order to survive. Bids therefore came in far above rational levels. In the UK and Germany, for example, the auctions raised an astounding £23 billion and £30 billion respectively. In the UK this was equivalent to 2.5% of GDP – enough to build 400 new hospitals. The industry’s resulting debt burden was colossal.
At the same time, European regulators, working hard to spur competition within the newly privatized industry, were tightening regimes everywhere. Redburn Partners argues the major telecoms companies have faced €25 billion of regulatory headwinds since 2004, from the reduction of termination rates and roaming charges, to the enforced opening up of their own copper-line networks to new entrants at below cost prices. Some 45% of European broadband services are today supplied by companies that didn’t even exist ten years ago. Add in the proliferation of new internet technologies (Voice over Internet Protocol, wireless mobile etc.), and the result has been an industry too financially weak, and too strategically insecure, to invest confidently in the latest technologies, such as high-speed broadband or 4G mobile telephony.
The effect has clearly been highly beneficial for the consumer in the short term, ensuring choice and quality at low prices. Today’s consumers rarely pay for calls or texts, while the high prices of old for long-distance and international calls have all but disappeared. But their gain has been the industry’s loss.
Help from above
Politicians are at last taking note, as Angela Merkel and others warn that Europe is falling behind the rest of the developed world in the provision of world-class telephony – even, in some cases, behind parts of the developing world. The attitude of the regulator also seems to be changing. Since taking over the presidency of the European Commission last November, Jean-Claude Juncker has promised “ambitious legislative steps towards a connected digital single market” in the near term.
Possible new legislation could include higher prices for unbundled access to the copper-wire network, and light-touch regulation of high-speed broadband networks. As the EU eases up on regulation, investment should increase and industry-wide deflation begin to decline.
The first tangible sign of this regulatory easing came when the Commission allowed the number of operators to fall from four to three in a number of countries, including Germany and Austria. The fourth operator in these markets had tended to pursue aggressive pricing strategies to survive, and the evidence from Austria shows deflation easing since industry consolidation. The Italian and French mobile markets are expected to follow suit in the next few months.
The new business-friendly approach is not without its detractors. Europe’s newly appointed Commissioner for Competition, Margrethe Vestager, has warned that telecoms mergers must not endanger “affordable prices”. She also questions the assumed link between consolidation and increased investment spending within the sector, commenting recently that “it is still competition that will lead to investment and not the other way round”. Yet it seems momentum is against her.
Indeed, price pressure has already begun to ease across Europe, and not just thanks to regulatory easing. The bundling of different technologies is reducing customer churn, which in turn eases pricing pressure. Recent fourth-quarter results confirmed this gradual easing. Vodafone, for example, experienced a progressive easing in deflationary pressures throughout last year. European revenues declined by 3% in the fourth quarter of 2014, a subdued drop compared to the 8% dip suffered in the first quarter.
Political pressure looks set to encourage a continued loosening of telecom regulation, a shift which politicians hope will increase investment within the industry. Whilst telecom share prices have risen a good bit over the past year, prices still reflect no more than a marginally better outlook for the industry. We think that a return to growth is likely to see telecoms share prices move sharply higher.
Stuart Mitchell of S. W. Mitchell Capital is the manager of the St. James’s Place Continental European fund and co-manager of the St. James’s Place Greater European Progressive fund. The opinions expressed are those of Stuart Mitchell and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.
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