European telcos’ new deal hopes face reality check

Singular market. European telecom operators are calling for a “new deal”. Executives gared at ir annual shindig in Barcelona this week to ple for regulators and governments to show a little understanding for an industry plagued by low growth, high costs and demands for major capital expenditures amid permanent technological change. Policymakers are unlikely to grant ir wishes any time soon. In meantime telcos will have to convince investors that price of future growth is more investment today.

bosses of Deutsche Telekom, France’s Orange, Britain’s Vodafone and Spain’s Telefónica, who shared stage in a rare joint panel at Mobile World Congress, agreed that Europe is nowhere close to becoming a single telecom market. Timous Höttges, CEO of German group, even declared that he was no longer interested in becoming a major player in a market contested by more than 40 operators, 60% of which do not make an equate return on capital. “You cannot ride on a de horse,” he said.

At least Höttges has a choice of horses. Deutsche Telekom last year earned about two-thirds of its global revenue and operating profit in United States courtesy of its 50%-plus stake in local operator T-Mobile US. But even in Germany it demonstrated that not all telcos are equally disvantaged. Deutsche Telekom’s revenue in country grew by nearly 3% last year, while rival Vodafone’s local unit only managed a 1% increase.

One of industry’s long-standing beefs is that European Commission is overly focused on interests of consumers. This has me competition watchdogs in Brussels reluctant to allow number of operators in a given country to shrink from four to three. Commission’s recent decision to approve union of Orange’s Spanish arm with local rival MásMóvil suggests industry’s complaints have been heard. Now operators would like more visibility on regulator’s doctrine.

y are unlikely to get it. Margre Vestager, Commission’s competition czar, and Thierry Breton, former Orange CEO who now oversees EU’s internal market, may not keep ir jobs following European Parliament elections in June. And industry’s plea to overhaul way governments sell spectrum to highest bidder is too nakedly self-interested to attract official support.

At least Commission, in a white paper on continent’s digital infrastructure needs, has suggested ways to improve regulation and harmonise treatment of telecom spectrum. It estimates ditional investment required to meet EU’s connectivity needs at 200 billion euros – or about 1.2% of bloc’s GDP this year.

But EU member states appear far from convinced by dream of a continent-wide telecom market. If anything, governments are showing signs of designating communications as a “strategic” industry – like defence or energy – that requires closer scrutiny for national security purposes.

It’s refore up to CEOs like Telefónica boss José María Álvarez-Pallete to persue investors that only technological innovation will help sector emerge from years of slow revenue growth. For all gloom, many shareholders have fared reasonably well in recent years. Deutsche Telekom, Telefónica and Orange and have delivered total returns to ir respective shareholders of 63%, 45%% and 37% in past three years, according to LSEG data. By contrast, investors in Vodafone and Telecom Italia have suffered negative returns of 31% and 23%, respectively.

re was no shortage of new technologies to talk about in Barcelona. Deutsche Telekom’s Höttges proclaimed near end of mobile app within 10 years, when simple voice-activated interfaces powered by artificial intelligence will tend to consumers’ needs. Meanwhile an alliance including Japan’s SoftBank Corp, chip giant Nvidia, Britain’s Arm and equipment maker Ericsson will explore ways to use AI to optimise rio access networks, which link mobile devices to core networks. That could be a source of both savings and extra revenue.

Operators will also have to spend more to upgre security of ir systems still vulnerable to hacking attacks or even physical damage. Commission’s white paper underlined need to improve security of critical submarine cables.

Telecom CEOs may refore feel y are caught in a bind. While some investors want m to cut capital spending and return cash to shareholders, same investors may criticise m in five or 10 years’ time for not having invested enough. Some may seek to raise cash by offloing towers that house mobile transmitters, as Vodafone and ors have done. But as Orange CEO Christel Heydemann quipped, this amounts to “selling infrastructure in order to be able to invest in infrastructure.”

One potential source of financing much discussed in Barcelona a year ago appears to have been kicked into long grass. This is so-called “fair share” that European telcos say video streaming giants like Netflix, Google’s YouTube or Amazon.com should pay to use ir networks. idea is hotly debated in principle, hard to implement and it lacks support from policymakers.

European telcos cannot hope to match U.S. tech giants for financial clout. combined market capitalisation of companies managed by four CEOs who shared a stage in Barcelona is 179 billion euros ($194 billion). That’s smaller than Netflix, and barely a tenth of Amazon and Google owner Alphabet.