Too Much Fragmentation is Decelerating European 5G Deployments

The world’s largest exhibition for the mobile industry, Mobile World Congress (MWC), took place in Barcelona in the last week of February with more than 109,000 attendees. The main event was launched 32 years ago as GSM World Congress, and, as the most significant annual gathering of the telecommunication industry today, the extent of the exhibitors present always provides a good snapshot of the telecommunication industry Twenty years ago, European mobile service providers (MSPs), infrastructure vendors, and device manufacturers (such as Alcatel, Ericsson, Nokia, and Siemens) clearly dominated MWC, and Europe was at the forefront of 2G capable devices and network deployments.More recently, however, European dominance of the equipment vendor market has ceased, as Chinese vendors have risen and Europe-based MSPs have performed poorly in the last decade compared to their counterparts in other parts of the world. This trend doesn’t seem likely to change soon: ABI Research expects the lowest mobile service revenue growth between 2019 and 2023 to be in Eastern Europe (1.2%) and Western Europe (1.8%), while North American (5.2%), African (4.6%), and/or Middle Eastern (4.8%) rivals are expected to do significantly better.

During the examination of European telco slowdown, distinguishing between in equipment or device manufacturers and mobile service providers is essential. While network equipment and devices manufacturing are mostly open, global industries, providing mobile services is a strictly regulated, country-level competition.

Despite its recent efforts—such as abolishing roaming charges and the harmonization of European technical standards—the European Union is still one of the most fragmented areas, with 28 different markets and more than 80 separate mobile networks. As mobile operators buy their network equipment and handset devices, their cost function differentiates them from each other. Several MSPs tried to overcome this status. For example, NTT Docomo launched its own phone and Verizon created its own pre-standard 5G technical forum (V5GTF), while European operators simply outsourced many of their functions and focused on costs. As a forward-looking move, two major European MSPs, Orange and DT, opened up BuyIn, a joint venture for harmonized client devices and network equipment procurement. Despite a few of these examples, there is still a lot of work to do; there are four (maybe nearly three) mobile networks in the United States, which has a population of 330 million people, and three mobile networks in China, which has 1.39 billion inhabitants.

Besides the aforementioned higher fixed costs, European MSPs are also struggling with revenue realization. The European Union and the European Commissioner for Competition did a great job keeping average consumer prices low and ensuring low costs for connectivity--ABI Research expects that monthly average revenue per user (ARPU) will be US$21.19 in Western Europe and US$5.8 in Eastern Europe during 2019. This is way less than what customers pay in North America or Asian or Pacific mature markets parallel with the decent European service quality.

The 5G era will require an unforeseen level of investments from MSPs. Spectrum auctions and network deployments will financially challenge operators, especially until the key revenue pools of 5G crystallize. To help build Europe to not fall behind with 5G network developments, ABI Research recommends 4 key action points:  

First of all, European decision-makers must also consider long-term impacts of long-drawn 5G deployments and let MSPs devolve some of their costs to end customers. Consumer protection is crucial; however, regulators need to ensure that investment level is adequate and find the right balance. Average consumer prices in Europe are significantly lower compared to other mature markets and revenue barely covers the cost of capital. This encourage MSPs to hold back CAPEX investment in the crucial early 5G times. Cheaper spectrum auctions or decreasing additional telecommunication related taxes would help MSPs increase their 5G related CAPEX.

Secondly, to overcome the European scale disadvantage, regulators should encourage MSP consolidation and M&A activity. Currently, there are more than 50 country-level operators in the European Union with fewer than five million subscribers. However, thanks to the different regulatory standards and country-level administration, they are unable to exploit synergies during their operations or procurement. Despite cultural and language diversity in Europe, letting MSPs work on a regional level would help them leverage economy of scale. For example, Germany-Austria-Switzerland, France-Belgium, the British Isles, or the Benelux countries could form a larger market, affording MSPs a better negotiating position with vendors, or simply share their fixed costs more. This less favorable industry structure and smaller market sizes raise concerns about the return on investment (ROI) of 5G deployments.        
           
Thirdly, 5G requires a much more densified network in dense urban areas. Strict and diverse radio emissions, building constraints, lingering administration, and cell site approvals will slow down deployments in cities. The European Conference of Postal and Telecommunications Administrations (CEPT) recently mandated very strict 5G transmission laws due to satellite interference. Thus, Europeanmetropolitan areas could be challenged to deploy suitable, high band networks on time. Furthermore, deploying 3-4 dense high throughput network parallel into a European historic city center is not just inefficient but also can be disturbing. In contrast to China, or the US, there is no robustious tower company in Europe which would be able to execute similar large-scale deployments. This implies a significant European market potential and a win-win opportunity for both MSPs and European cities. Furthermore, governmental support of network sharing or supporting neutral network hosts would overcome this issue too. However, authorities should act quickly because MSPs are planning to start deploying 5G in major cities.
 
Finally, the real value-pools of 5G technology are still unclear--the “iPhone” moment hasn’t arrived yet. Furthermore, 5G will overcome 4G’s customer focus and disrupt many areas such as manufacturing, transportation, logistics, and/or retail. European institutions should support the 5G ecosystem extensively and encourage cross-industry 5G labs, test labs, and startup incubators and promote European cross-industry forums where equipment vendors and MSPs can cooperate with other entrepreneurs to help them grow. This could help the European telecommunication ecosystem avoid becoming a dumb utility pipeline, capture real value from 5G, and maybe also ensure increasing European significance at MWC 2029.