Four into three won't go: the new industrial policy for TMC (TMC Conference 2016)

There has never been a question that technology has brought innovation and choice to consumers worldwide but not everyone would agree that part of that success has been driven by certain regulatory policies. The role of the regulator has always been controversial in the world of telecommunications.

Never more so than today, when the pace of development of new technologies and the cost of implementing them continues to grow rapidly.

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Speakers

María Luz Medrano, Group Vice General Counsel and Chief Legal Officer, Telefónica

Jacek Niewegłowski, Chief Strategy Officer, Play

Karim Taga, Managing Partner, Global Practice Leader, TIME, Arthur D. Little

Irek Piecuch, Partner, CMS

There has never been a question that technology has brought innovation and choice to consumers worldwide but not everyone would agree that part of that success has been driven by certain regulatory policies. The role of the regulator has always been controversial in the world of telecommunications. Never more so than today, when the pace of development of new technologies and the cost of implementing them continues to grow rapidly.

Europe is already looking at the introduction of 5G technology, which the European Commission estimates could cost €700 billion over the next few years. However, such large-scale investment requirements fall within a telecom industry that is already under heavy pressure with static margins and dramatic cost-cutting programmes under way. Telecoms operators are having to navigate turbulent waters and a period of significant consolidation in the sector is anticipated in a move which is already causing concern to European regulators.

Karim Taga, managing partner of Arthur D Little in Austria, says Europe’s telecoms industry has to undergo a major transformation where operators converge and begin to rebalance their pricing models to better reflect consumer demands for voice and data services. He expects that pricing within the sector could follow the yield management model set by the airline industry where the cost of a service changes according to the level of demand and the time of day it is used: 'We need intelligent pricing for a sustainable model so operators can still invest in new technology.'

Average profit margins for most telecommunication firms in Europe have fallen in recent years raising concerns about how these companies can remain competitive, pay dividends to their shareholders and still re-invest in their businesses. Consolidation is often seen as the answer but regulators in Europe are worried about the risk to consumer choice and pricing competitiveness when consolidation reduces the number of operators, from four to three for example.

Maria Luz Medrano, chief legal officer at Telefonica, says: 'Changes in technology are happening quicker and as a result of that risky and quick investment decisions should be taken every day. In this context, synergies are becoming more important and investors that are considering this market are focused on the return on capital investment.'

She adds that the potential scale of consolidation in Europe could be immense as there are 450 million people served by more than 100 telecoms operators. This compares to the US where four large companies – A&T, Verizon, T-Mobile and Sprint – provide services to 300 million citizens. 'By 2025, according to European Commission plans regarding the Gigabit Society, we are expected to have one gigabyte per second capabilities and this means that European companies have to have the opportunities to strengthen themselves to address these goals.'

Despite the potentially huge funding gap, Jacek Nieweglowski, chief strategy officer of Play, the second-largest mobile operator in the Polish market, says there is no need to be overly gloomy. 'We are not facing the end of the world – it is just the market is not growing as much as it used to,' he explains. 'The development of 5G may be a challenge but it will also bring relief as it will drive yet another incremental improvement in efficiency. This is why we are upgrading our networks – not because Brussels tells us to – but because it allows us to keep the production costs down.'

In the UK, regulators recently blocked a proposed merger between Telefonica’s O2 UK with Hutchison Holding’s Three network while in Austria a 'four into three' consolidation was only allowed after the regulator secured concessions to allow mobile virtual network operators to share networks with incumbent operators.

No one believes there is a 'magic number' for determining the right number of operators but Mr Nieweglowski says there is a need for greater flexibility: 'When an industry is going through change some operators will cope better than others and consolidation is a way of allowing companies to exit without making heavy losses. Any healthy industry has to allow people to exit the market.'