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Rapid expansion of mobile networks fuelled hopes of empires but now the industry is consolidating

Just nine years ago Telia was on top of the world. The Swedish company had launched 3G services on Mount Everest by installing a base station at an altitude of 5,200m, laying claim to be the world’s highest telecoms network. 

As it turned out, that moment — part engineering feat and part corporate bravado — proved to be the apex of a two-decade race by the European telecoms industry to plant a flag in every corner of the planet. The land-grab was fierce, with incumbent operators battling a new breed of aggressive mobile-only players led by Vodafone that were willing to spend record sums to push into new markets. 

Yet the industry’s dream has long soured, unable to build truly global brands like the leading tech groups and media providers that piggybacked on the industry’s infrastructure. The sector’s biggest names, which had built subscriber bases equivalent to the populations of large countries — by 2014, Vodafone had 434m customers — have started to retreat from their far-flung empires. Seen initially as engines for growth, much of the telecoms colonialism yielded little return on investment and, for the likes of Telia, hefty fines related to corruption.

Telefónica is the latest European giant to beat a retreat from its empire building days after putting its entire non-Brazilian Latin American business — stretching from Mexico to Patagonia — under review. The Spanish group spent more than $110bn building its central and South American operations, which had grown to account for more than half of the company’s overall revenue by 2012. 

José María Álvarez-Pallete, chairman and chief executive of Telefónica, says the move was driven by technological disruption of the traditional telecoms model. “Our sources of revenue are exhausted,” he says. “Technology is changing everything . . . we have to build our own road forward.”

Telecoms has been one of the worst performing sectors for investors over the past five years as global bets have failed to pay off. That has left companies with huge debts even as they are under intense pressure to invest in new 5G and full-fibre networks both in their home markets and across their still-sprawling networks. 

Dominance of the communications market instead passed to a different breed of companies — led by Google, Apple and Facebook — that have used the pipes and masts installed by telecoms companies around the world to capture the lion’s share of digital profits.

Chris Gent, the former Vodafone chief executive who ran the company during its globetrotting heyday, says the telecoms industry had the opportunity to conquer the world. But while hardware players including Nokia and Huawei created international companies, it was the platform companies such as Facebook and Google and not the telecoms companies that developed software and apps with global appeal for consumers.

“The customer felt connected to the iPhone but not to a particular network,” he says. “The networks didn’t differentiate themselves.”

Telia’s international expansion imploded in 2017 when it agreed to pay a near $1bn fine to settle corruption charges over payments in Uzbekistan. The huge penalty triggered the unwinding of its empire. 

“You are standing in front of a button to sign it off. Your hair is lifting on your arms and you think what is happening — this is a lot of money,” says Christian Luiga, acting chief executive of Telia on paying the fine. “Personally I think [expansion] was the wrong strategy.” 

Until the 1990s telecoms had traditionally been dominated by state-owned operators. However, privatisation, combined with the boom in mobile phone technology in the latter part of the decade, created the conditions for global expansion. 

Vodafone became the figurehead of this telecoms imperialism when the UK-based mobile company quadrupled in size in the space of 18 months by spending almost $200bn on the acquisitions of AirTouch in the US and Mannesmann in Germany. It also won licences to build new networks in dozens of markets across Europe, Africa and Australasia.

Sir Chris says the global expansion was driven by GSM, the European mobile technology standard. Launched in the early 1990s, it underpinned 2G networks and opened up the possibility of capitalising on the market for wireless voice and data services in countries that were yet to build mobile networks. 

“This was not about planting flags. Each business was attractive,” he says of the rapid expansion into markets as diverse as Fiji, Japan, Kenya and the US.

Vodafone was not alone in dreaming of digital empires. Deutsche Telekom spread to the US when it paid $35bn for Voicestream, now T-Mobile USA. Orange, then called France Telecom, pushed into francophone Africa and eastern Europe. While Finland’s Sonera helped establish Turkcell. CK Hutchison, the Asian conglomerate, spent billions across Europe to capture 3G data revenue with newly installed mobile networks. 

Scandinavian and Russian operators drove farther east into Eurasia and south Asia, and when Norway’s Telenor won a battle to build a network in Myanmar in 2013 it marked the end of the phase of greenfield expansion. With only a handful of countries, such as Ethiopia and Iran, still untrammelled by foreign telecoms companies, the globalisation of the industry looked to be complete.

For Enrique Lloves, Telefónica’s head of strategy, the benefit of building a global network at that time was obvious: companies could export expertise built in Europe to high-growth markets such as Brazil. Moreover, he says telecoms needed that global scale to work with other large industries such as financial services and media.

Yet the past decade in the industry has been a story of retreat. Telia has sold off everything — making a loss on its Everest adventure when it left Nepal in 2016 — except its Moldovan network, and reinvested the proceeds in Norway and Sweden. Others have searched for ways to improve returns. Telenor this year tried to forge a merger of its Asian business with Malaysia’s Axiata, a deal that failed but pre-empted Telefónica’s decision to look for partners and buyers for its Latin American operations.

BT’s experience has been rockier than most. It spent billions on 3G licences across Europe but the dream was crushed under the weight of the debt it took on and it was forced to split off its mobile arm Cellnet, now O2, in 2001. It tried to maintain its strategy by targeting the multinational business market. But the Global Services brand became its Achilles heel, triggering huge write-offs. An accounting scandal in Italy uncovered in 2016 acted as a catalyst for the sale of its international networks. 

The unwinding of Vodafone has been a slower burn, dating back to the 2006 sale of its Japanese network to SoftBank, then a little-known internet company. A year later it entered India. Growth proved spectacular as it swiftly built a base of 200m users. 

Yet the foray turned into a nightmare for Vodafone after rival Reliance Jio overwhelmed the market with free services. It merged with rival Idea Cellular in 2018. In October Vodafone — which has spent $20bn on establishing itself in the country — threatened to pull the plug on its Indian business after it was hit with a $4bn retrospective tax bill. 

In contrast, Orange’s Africa and Middle East markets have provided some respite for its mature operations in France and Spain. Yet the French company’s plan to have a global network of 300m subscribers — unveiled a decade ago — now appears to be the dream of a bygone age and the company is rumoured to be considering a move to separate its non-European assets.

Many blame the sale of European 3G licences around the turn of the century, for what Sir Chris describes as “colossal amounts”, leaving companies short of the cash to buy and build globally. 

“[3G] sucked the lifeblood out of the industry,” he says. However he also argues that telecoms companies failed to take advantage of their global reach by abolishing roaming rates instead of waiting for them to be outlawed by the EU, or developing apps that worked across numerous markets. 

Ronan Dunne, chief executive of US telecoms company Verizon’s consumer group who used to run O2 in the UK, now questions the strategic logic of planting “flags in maps” across the world, as consumer behaviour is so wildly different across markets. 

Regulation has also played a big role, he says, in challenging the execution of a global telecoms model. With different governments taking different views on how to oversee the industry, running a global network has become complex. The use of equipment from China’s Huawei has effectively been outlawed on national security grounds in the US and Australia, and remains uncertain in Europe, but is allowed in most of Africa or Asia. Presence in these territories will help Huawei match Ericsson in the global provision of 5G services.

Yet, say critics, those rules have not been applied to “over-the-top” players — so called because they do not own the infrastructure through which their content is distributed. 

“While the model of a global telecoms company has not been successfully cracked,” says Chris Watson, global head of telecoms at law firm CMS. “OTTs like Netflix, Amazon Prime Video and Sky Go have mushroomed globally. Higher revenue streams and better control of data have helped to propel OTTs forward, but it is their difference in regulation compared with telecoms that has caused the disparity of outcomes.”

For many, the future for global telecoms companies lies in network infrastructure — the pipes and cables running underground. Essential to the way data is transmitted around the world, it provides international links to telecoms companies, banks, broadcasters and technology companies.

Once a boom industry, the infrastructure industry imploded when supply vastly outstripped demand. The handful of companies that stuck it out now underpin global data transmission. 

One of those residual players is, ironically, Telia. The Swedish company has sold off its international operations but it still owns a 65,000km-long fibre network covering 115 countries that is used by 900 other telecoms operators to transmit data globally.

Johan Ottosson, head of its carrier business, says backbone networks “glue the internet together”. In this scenario, the telecoms company is the “dumb pipe” used by other businesses that reap most of the value. The industry has long railed against any connotations that might pigeonhole it as a utility. But a greater focus on the software that runs on the industry’s infrastructure could finally deliver on the promise of a truly international network.

Philip Jansen joined BT as chief executive last year, having spent stints at global payments company Worldpay and international catering company Sodexo. He argues that the telecoms industry needs to strike a balance between the enormous scale and low-margin operators in food services, and the asset-light but service-oriented model of technology businesses.

Mr Jansen, like many of his predecessors in telecoms, believes there is good business to be made from a global model. Yet the newcomer admits that the high hopes of the international telecoms empire that were envisaged two decades ago are long gone. “Frankly, it is never going to be stellar,” he says.

Bonds are designed to bolster balance sheets in event of future financial crisis

European lenders are on track to issue a record €100bn of new “bail-in” debt in 2019 to meet tougher post-crisis rules designed to protect taxpayers from footing the bill for future bank failures. 

Banks in Europe had already issued €94bn of “senior non-preferred” debt by early December, according to figures prepared for the Financial Times by S&P Global Ratings, and are expected to pass the €100bn mark by the end of the year. 

Senior non-preferred (SNP) bonds are debt instruments designed to prop up banks in a future financial crisis. They can be converted to equity or “bailed in” if a bank’s losses wipe out its capital buffers.

In theory, ample bail-in debt will require bondholders, rather than taxpayers, to recapitalise banks that regulators and governments deem too big to fail, if or when the next crisis hits. 

The world’s largest banks, which pose the greatest systemic risk, must raise bail-in debt equivalent to 18 per cent of their risk-weighted assets by 2022, under rules from the Financial Stability Board, the international body that monitors the global banking system.

In the EU, policymakers have gone further by stipulating that most banks, including small and medium-sized lenders, must meet a bail in-debt hurdle known as the “minimum requirement for own funds and eligible liabilities”, or MREL.

Although banks can meet the requirements using more established types of debt, policymakers in Europe have in recent years legislated to introduce SNP bonds. 

Issuance of SNP bonds in Europe has increased markedly since their introduction, from €68bn in 2016 to €85bn in 2018 and more than €100bn expected this year, according to the S&P Global Ratings figures. French banks were the biggest issuers in 2019, followed by Italy, Germany and Spain. 

Alexandre Birry, an analyst at S&P Global Ratings, said: “This year promises to be a record year in terms of issuance of new senior non-preferred instruments in Europe.”

Mr Birry forecast that 2020 would be another record year, as additional European countries pass legislation to introduce SNP bonds, allowing more banks to come to market, “although at some point we will see a plateauing”. 

Some investors had worried about banks’ debt servicing costs rising as they issued the new bonds, which are riskier than senior debt and so therefore pay higher rates of interest. In November 2018, UniCredit, Italy’s largest bank, offered a hefty 7.83 per cent coupon on an SNP bond. 

However, the extension of negative interest rates in the eurozone, which have hurt banks in most other respects, have made it relatively easy for lenders to sell SNP bonds to investors on the hunt for assets that offer higher interest yields.

Banks crucial to short-term lending market find fresh ways to trade it

Goldman Sachs and JPMorgan have found ways to keep trading in the $1.2tn US repo market while limiting regulatory burdens, potentially easing a cash crunch at the turn of the year.

Both banks are key players in the repo market, exchanging cash for high-quality collateral like US government debt — a vital financing tool that hit trouble amid a squeeze on funding a couple of months ago, which sent borrowing rates sharply higher.

Some analysts are braced for further turmoil in coming days, as lenders have tended to rein in repo activities around year-ends. That is when global regulators take snapshots of banks’ balance sheets to assess whether they have enough capital to keep trading through a big hit to the financial system.

However, in recent months Goldman has begun to mimic repo trading using derivatives known as total return swaps that carry lower capital requirements than regular repo trades, according to people familiar with the bank’s shift.

JPMorgan, meanwhile, has been encouraging its clients to use so-called “sponsored repo” deals, where a clearing house sits in between trades and allows dealers to net transactions off against each other, according to people with direct knowledge of the bank’s strategy.

Analysts said that the efforts of both banks, while designed to minimise their own capital requirements, should have the effect of alleviating cash pressures in the market. Both banks have “taken steps to be ahead of the game at year-end,” said Jeff Drobny, chief executive officer of Garda Capital Partners, a hedge fund manager. “It’s sensible.”

The New York Federal Reserve has been injecting money into the repo market for about three months, in an attempt to prevent interest rates moving outside the central bank’s target range. This month the Fed announced plans to inject almost half a trillion dollars into the market over the end of the year to keep markets ticking over.

Goldman and JPMorgan declined to comment. Each bank trades almost $200bn in the repo market each day, according to data from the Federal Reserve. 

Both banks were on course to cross into a higher bracket, giving them a higher capital surcharge, when scores were last published at the end of the third quarter. The banks — which are both “globally systemically important banks” or GSIBs, in the eyes of the Basel Committee on Banking Supervision — have until the end of the year to reduce capital-intensive trading activity if they are to avoid such a penalty.

Goldman’s new strategy centres on reducing secured financing like repo for non-US clients, such as hedge funds domiciled abroad, said the people. Such operations attract heavy capital charges under Basel’s capital rules.

Total return swaps offer a way for hedge funds to replicate highly leveraged Treasury investments away from the repo market. The returns tied to a Treasury are created synthetically without owning the security, allowing funds to increase potential profits without borrowing more cash via repos.

JPMorgan’s shift achieves a similar goal. Typically, the bank would source cash through the repo market from investors such as money market funds, and then lend this out to other clients such as hedge funds.

Through sponsored repo, the bank’s capital costs are reduced because the bank faces the Fixed Income Clearing Corporation on both sides. Another benefit is that the FICC is classed as a domestic counterparty under the GSIB rules, so trades with non-US investors can receive more favourable capital treatment.

“We believe sponsored repo cannibalises less efficient forms of repo, ultimately freeing up capital and creating more capacity for banks to provide liquidity to the fixed-income markets,” JPMorgan analysts wrote in a research report earlier this year.

Agents say prices of exclusive properties in UK capital may have bottomed out in last quarter

The beleaguered estate agents of Mayfair can raise a small festive cheer: house prices in London’s most exclusive districts have stopped falling for the first quarter in more than four years.

Prices in prime central London were flat in the final quarter of 2019, according to researchers at the listed property agents Savills, while prices of high-end homes across the broader area known as prime London — which includes districts further from the centre, such as Chiswick — rose slightly, by 0.1 per cent.

That helped annual price drops to slow: prime London prices fell 0.5 per cent year-on-year, down from a 3.2 per cent decline a year earlier.

Lucian Cook, head of residential research at Savills, said: “This is a stronger year-end for prime London than we had been anticipating, given the levels of political and economic uncertainty, and reflects a narrowing of buyer and seller expectations.”

Mr Cook said the apparent levelling off of prices could be a “turning point” for the falling market in what is still Europe’s most expensive city for housing. But he cautioned that Brexit concerns would continue to cast their shadow over the market despite Boris Johnson’s general election victory this month.

“2020 will not be without its challenges as the Brexit deal is negotiated, so we are not forecasting a significant bounce in values until 2021,” Mr Cook said.

The UK is currently due to leave the EU at the end of next month and to continue its current trading arrangements with the bloc until the end of 2020.

If it does not agree a trade deal by then, there is a risk of a cliff-edge “no-deal” scenario that could seriously damage the UK economy.

The Bank of England has tested the resilience of the financial system to disruptions including UK house prices falling 33 per cent in a “worst-case disorderly Brexit” scenario.

However, both buying and selling agents in wealthy areas of London reported a bounce in transactions after the Conservatives’ election victory, which removed the possibility of a Jeremy Corbyn-led Labour government. Mr Corbyn’s leftwing agenda had sparked concerns among the wealthy, who had expected tax rises.

The number of homes worth more than £5m changing hands was up by a third in December from the same month a year earlier, Savills said.

This follows four years of sluggish transactions and often steep price falls: in prime central London, which includes exclusive districts such as Chelsea and Kensington, prices have now dropped 20.5 per cent since their 2014 peak. In outer areas, the prices of high-end homes have fallen 8.4 per cent.

Prices for the most expensive homes in London have often foreshadowed the broader market. “In central London the highly discretionary super prime market has historically been the first to fall and the first to rise again,” Mr Cook added.

Urgent action is needed to tackle the junk accumulating in orbit

Sometime in 2025, a European spacecraft will extend four robotic arms around a 100kg piece of metal junk in orbit at an altitude of 800km. Then, embraced in a hug of death, the craft and its target — a redundant rocket stage — will hurtle back towards Earth, burning up harmlessly in the upper atmosphere.

The €100m ClearSpace mission will be the first large-scale demonstration by a space agency of technology to tackle the menace of orbital debris. It is an overdue move against a growing threat to the satellites on which modern life depends — communications and broadcasting, navigational signals, weather and environmental monitoring. According to the European Space Agency, Earth is surrounded by more than 3,000 abandoned satellites, 34,000 other objects larger than 10cm and millions of small fragments travelling fast enough to damage spacecraft. At least one active telecoms satellite has already been destroyed in a collision and experts fear a series of catastrophic failures as thousands more satellites are launched in the 2020s.

This accumulation of rubbish extends into orbit the “tragedy of the commons” that has led to so much pollution on Earth. Anyone can benefit from exploiting space but no one has an incentive to keep it clean. Solutions will depend on developing international rules to force satellite operators to remove redundant spacecraft from dangerous zombie orbits, while coming up with new technology to remove the junk already up there.

The 1967 Outer Space Treaty, the foundation of international space law, was drawn up when few anticipated how many satellites would be launched in decades to come. It is vague about responsibility for junk almost to the point of uselessness. There is little chance of amending the treaty in the near future but various voluntary codes have been drawn up for satellite operators, such as the 2007 UN Space Debris Mitigation guidelines, which need strengthening and enforcing through national governments and industry bodies.

Top priority is for every satellite to include a built-in de-orbiting mechanism that propels it to burn up safely at the end of its life. Otherwise the operator must contract with someone else to bring down its satellite. A few private companies are developing their own technologies to serve the junk removal market that they expect to emerge later in the 2020s. Although robotic grabbing like ESA’s ClearSpace seems the most popular clearance technology, others including harpooning the junk and catching it with a net are in contention too. However it is done, large-scale investment in space junk removal and prevention by both private and public sectors will be essential if we are to prevent catastrophic collisions in space in the decades to come.