M&A could help telcos close European network gap

Europe’s top technology regulator Neelie Kroes supports consolidation as one way to create a handful of strong cross-border telecom leaders, which can invest more in mobile and broadband networks to close the gap with the United States and Asia.



Europe’s top technology regulator Neelie Kroes supports consolidation as one way to create a handful of strong cross-border telecom leaders, which can invest more in mobile and broadband networks to close the gap with the United States and Asia.


Speaking on Monday at the Reuters Technology and Media Summit, Kroes also said a long-awaited proposal on how member states should encourage investment in ultra-high speed fiber broadband networks will be released in the coming weeks. Such fiber deployments have been slow in Europe as telecom operators have been weakened by anemic consumer demand, sinking revenue and tougher competition from new players such as Apple Inc (Cupertino, Calif., USA).


“Europe needs to get back to the driver’s seat of the digital society, like we were a decade ago with third-generation mobile technology,” said Kroes in an interview. “Having a few pan-European operators that are strong in the cross-border market would not necessarily be bad for competition.”  Kroes added that protecting consumers was about more than just ensuring a given number of operators in each country.


“It can make sense … and be good for investment and innovation.”


Kroes is a former liberal Dutch politician who was Europe’s top anti-trust official from 2004 to 2009. She now serves as Europe’s commissioner for the “Digital Agenda”. Her comments come as Europe’s telecom sector has entered a period of turbulence, in which shares of leaders such as Telefonica SA (Madrid) and Deutsche Telekom AG (Bonn, Germany) have hit lows not seen in a decade.


Europe’s telecom sector is chasing ways to meet the rising cost of keeping pace with technological advances and customer demands, with tie-ups and co-operation deals the order of the day. The arrival in Europe of emerging markets billionaire Carlos Slim, who has scooped up a stake in Telekom Austria AG and mounted a raid on Dutch telco KPN, is also ramping up the pressure for consolidation.


Buildouts of fourth-generation mobile networks have begun in some countries such as France and Germany, prompting operators to seek network-sharing deals to share the investment burden.


But Europe remains far behind Japan, Korea and the United States, where such technology is already commonplace. The European Union had just a quarter of Japan’s 20 million fiber customers at the end of 2011, despite its much larger population.


Yet Kroes maintained the European Union was still on track to meet its target of connecting 50% of households to high-speed broadband by 2020, one of a series of ambitious goals for the technology sector.


Telecom operators grumble that Brussels’ heavy-handed approach to regulating everything from international roaming to mergers has sapped their ability to invest. The fiber proposal has been brewing as the latest battleground since last autumn, and Kroes says the EU will make its position “crystal clear” in coming weeks.


Kroes floated a proposal in an October speech to a telecom industry conference, that countries ratchet down the price that such ex-monopolies such as France Telecom SA (Paris) or Deutsche Telekom rent out their old copper networks to rivals to spur investment in faster fiber networks.


That sparked the instant ire of chief executives in the audience, including Telecom Italia SpA CEO Franco Bernabe, who called the idea “simply crazy,” arguing it would only make it tougher for them to invest in fiber. Such fiber buildouts won’t be profitable for decades, sector executives say, while companies have to justify their performance to investors quarter by quarter.


Kroes hinted that the commission’s proposal on fiber would be flexible enough to take into account differences between various countries. The commission will not release a fully-fledged recommendation in the coming weeks, but will set out principles on what companies and investors can expect on fiber.


“We don’t aim to deliver higher or lower copper prices, nor to mandate the switch-off of any technologies,” Kroes said. “We want to give economically sound principles to countries’ regulators to help them set regulated copper prices, and we are identifying the most appropriate costing methodologies.”


Alternative telecom companies that compete with the ex-monopolies, such as upstarts like France’s Iliad SA and Italy’s Fastweb SpA, support Kroes’ idea of lowering copper fees since it would reduce their costs and spur investment. They also argue the incumbents built copper networks when they were state-owned so shouldn’t make excess profit from them today.


Analysts say funding for fiber is in suspense as investors remain wary and telecom operators wait to see how the Commission will regulate prices.


“You cannot ask pension funds to put money into something that has an eight-year payback with no guarantee that the rules won’t change in a way that destroys any return,” Robin Bienenstock, a European telecoms analyst, said.


Kroes promised clarity would come soon, but signaled she did not believe that telecom operators could not afford to invest.


“It is not a matter of lack of cashflow, there is money available in the sector,” she argued. “I have the feeling that some of the players have been a bit spoiled – to speak in a direct Dutch way – and they would prefer to continue in old way. But that will not give Europe’s economy a boost.”


(Additional reporting by Gwenaelle Barzic, Kate Holton and Georgina Prodhan; Editing by David Holmes)