Telecoms eye end to long cold spell for European deals
Two mergers – one approved, one still in the works – do not make a summer in Europe’s telecommunications industry. The month of July is nevertheless sending hopeful signals that the sector’s long cold spell will give way to warmer weather. At last, Europe is finding a formula to reconcile the twin objectives of consolidation and consumer protection.
Compared with their US and Chinese rivals, Europe’s large telecoms companies are compelled by fragmented market conditions to operate with one hand tied behind their back. But a serious attempt to set straight Europe’s cockeyed telecoms industry is in motion. Arguably, it is already irreversible, though not yet far-reaching enough.
It may gain momentum after Jean-Claude Juncker takes over this year as European Commission president. During his campaign for this job, the former Luxembourg premier identified fixing the telecoms industry as a priority and indicated that EU regulators should look more benevolently on merger proposals.
The two deals that justify a prudent optimism are the €8.6bn purchase by Spain’s Telefónica of E-Plus, the German mobile business of KPN of the Netherlands; and the decision of Sweden’s Tele2 to sell its Norwegian mobile unit to TeliaSonera, also of Sweden, for SKr5.1bn. Telefónica’s deal received approval last week from commission regulators. The Scandinavian deal, announced on Monday, will come under scrutiny from Norwegian regulators, but the companies hope to close it by the first quarter of 2015.
The merger in Germany has exciting implications. Telefónica Deutschland and E-Plus, once united, will compete for customers against Deutsche Telekom’s T-Mobile unit and Vodafone. EU regulators have broken new ground by declaring, in effect, that three network carriers constitute sufficient competition in a big European state, not just a country the size of Austria or Ireland.
After Germany, France and Italy may be next. How long before France’s four operators – Bouygues Telecom, Iliad, Orange and SFR – overcome their differences and, in one combination or another, come down to three? This is the openly expressed wish of Arnaud Montebourg, France’s economy minister, who frets that the four-way price war that has raged since 2011 is bad for jobs and industrial development.
One EU condition for the German merger was Telefónica’s disposal of up to 30 per cent of the new company’s network capacity. The beneficiary will be Drillisch, a midsized mobile virtual network operator, or MVNO. Similarly, the Scandinavian deal will probably go ahead only if TeliaSonera and Tele2 sell some network assets. One obvious purchaser is an upstart local carrier owned by Access Industries, the conglomerate of Len Blavatnik, a Ukrainian-born billionaire.
At last, Europe is finding a formula to reconcile the twin objectives of consolidation and consumer protection
The regulatory principle guiding both deals is that they permit consolidation but, at the same time, uphold fair competition. It is a sensible approach. In telecoms, this is the closest Europe has come to demonstrating that antitrust rules, intelligently applied, can benefit consumers without obstructing the essential restructuring of the sector.
It would be too sanguine to suggest that the worst is over for European telecoms companies. As Tim Höttges, Deutsche Telekom’s chief executive, observed in May during his debut speech to shareholders, internet data traffic keeps on expanding in Asia, Europe and the US – but Europe is the only continent where the combined revenues of telecoms companies keep on shrinking.
Europe, like China and the US, is an enormous, sophisticated market. But China and the US have one national regulator and one authority that allocates spectrum. Each has applied its competition rules in such a way that each has emerged with a handful of very big, profitable telecoms firms. This allows the companies to pour investment into the latest technologies.
By contrast, Europe is filled with more than 100 fixed and mobile operators, most not very big and some not especially profitable. At times, governments treat the sector as little more than a cash silo whose function is to lighten their fiscal burdens in spectrum auctions. Funds for investment in new technology are accordingly less abundant.
Besides, regulatory standards vary so much from one EU nation to the next that groups such as Telefónica and Vodafone do not compete against each other on a European level at all. In telecoms the 28-nation EU’s “single market” exists mostly on paper. It is to be hoped that politicians and regulators will redouble their efforts to turn it into a reality.