The past year has been particularly challenging for Europe’s mobile operators, in light of the economic downturn and the growing impact of regulatory measures. These factors and heightened competition in the industry have caused operators to focus on costs and operational efficiency.
Operators continue to face a challenge to both cut costs and stimulate take-up of mobile broadband and data as 2010 approaches. Those that can strike the right balance could emerge as the most successful players in the coming years.
As operators seek to achieve these goals and at the same time boost their competitive position, moves including market consolidation, network sharing, outsourcing and measures to cut handset subsidies look set to continue next year.
Operators have made a number of major moves in these areas this year, and it will be interesting to see the outcome in 2010 and beyond, because any measures that achieve long-term success are likely to have an effect on the industry’s future trajectory.
Consolidation
One hugely significant move this year was the announcement by Orange and T-Mobile of their planned UK merger, after a slow first half for European M&A activity. The consolidation of two such large players could have a major impact on future developments in the market.
Orange and T-Mobile expect large-scale capex savings in the first five years, because of the integration of their networks and the joint expansion of 3G coverage. They anticipate total capex savings of £620m ($1bn) from 2010 to 2014 and about £100m a year thereafter. They also expect opex savings of more than £445m a year starting in 2014.
If the two operators can carry out an effective merger and cut costs, it could influence the way other European operators act. However, it will be complicated to implement, and full integration could take a couple of years.
Orange and T-Mobile will need to agree on multiple aspects of their businesses, including branding, marketing, retail, distribution, tariffs, handset procurement and system and network integration. It will therefore be interesting to see how effectively they achieve these goals in the coming years.
Orange has separately been involved in recent consolidation in the Swiss mobile market, where it agreed to merge its operations with those of TDC. The two companies also expect significant capex and opex savings from the deal.
Further consolidation is in the cards in Europe next year, and mergers could be seen as a more cost-effective way of achieving this than outright acquisitions.
The economic downturn has also put pressure on the finances of many smaller operators in Western and Eastern Europe, and other third- and fourth-placed players could be ripe for absorption into a larger entity. Industry observers have speculated about a potential acquisition of 3 by Vodafone in the UK.
In Germany, O2 and E-Plus are reportedly discussing a joint bid for 2.6GHz spectrum next year. But the operators could consider a merger in order to compete more effectively with T-Mobile and Vodafone. Neither would it be a surprise if Telefonica decided to acquire KPN or any of the company’s assets.
Network sharing and spectrum
Another significant move this year was the agreement between Telenor and Tele2 in Sweden to build a joint LTE network. The two companies say the 4G network will be Sweden’s most extensive, and they are pooling their 2.6GHz and 900MHz frequencies.
The strategy demonstrates how mobile operators are seeking to save money and extend reach as they roll out new technologies. The development will be watched with interest over the coming years, because Telenor and Tele2 are set to be among the early adopters of LTE, with commercial launch planned in 2010.
TeliaSonera has just launched the world’s first LTE network, and other operators will start following suit next year. The company said it expects about 10 more global operators to introduce LTE in 2010, and industry body the Global Mobile Suppliers Association says that up to 19 could launch.
Operators will seek access to more efficient and cost-effective frequency bands in 2010 and beyond, helping them bolster their mobile broadband networks and at the same time reduce costs.
The situation will improve next year as the 900MHz band is opened up for technologies other than GSM in more European countries, after the ratification of an updated GSM Directive in October. But many EU regulators and operators are still locked in negotiations over the division of 900MHz spectrum, which could delay the process.
Operators will also hope that regulators move closer to awarding spectrum in the 800MHz band set to be freed up by the digital switchover.
In addition, they will continue to seek managed services and outsourcing deals to further reduce costs. Operators can also look for long-term savings from network upgrades and will use these and new technologies to bolster network capacity.
SIM-only and handset subsidies
Among other options for cutting costs, operators can continue to seek strategies to reduce handset subsidies. Some have been pushing SIM-only contract plans, which offer customers more value in exchange for forfeiting a new handset and have proved successful in markets such as the UK.
In Germany, O2 has put its central focus on a new SIM-only price plan, branded O2 O, which it launched in May. The strategy of offering a plan without a handset is geared toward the operator’s aim of reducing device subsidies.
O2 has reported that the price plan has already contributed significantly to the recent rise in its customer numbers. And in 3Q09, the operator reported its highest-ever quarterly revenue, almost €966m ($1.4bn), and a 22 per cent year-on-year rise in operating income.
German operator E-Plus has also previously reported a significant fall in subscriber acquistion costs due to a reduction in handset subsidies.
All in all, there is an array of opportunities for Europe’s mobile operators to both save on costs and bolster their offers and data services next year and beyond. The challenge in the coming years will be choosing the right ones.