Europe should welcome in the 'Patchwork Network'

Arthur D. Little and Exane BNP Paribas have been busy piecing together the capital expenditure picture for European telcos. The investment, they say, is going in but the outcome is far from certain. In fact the researchers envisage an ongoing juggling of network ownership and network types as telcos try to buy, sell and share their way into competitive shape. The outcome will see the 'Patchwork Network'.

The researchers conducted 118 company meetings across 24 countries.  Despite talk of reduced investment in Europe and general pouting about roaming and termination revenue reductions, the consultants reckon capex is rising to “new peaks” in both mobile and fixed. The new investment is to take advantage of technical advancement and comes from cable and fixed ‘leaders’, says the report.  That means investment in potentially gigabit DOCSIS 3.1 cable Internet access on the fixed side and LTE investments (particularly by cash-rich Vodafone) on the mobile side.

However, there’s a problem, particularly in mobile. Nobody has yet done a good job of turning network quality improvements from investment (where it occurs) into a strong competitive advantage leading to market share gains or market pricing power. Users seem to be more impressed by ‘good enough’ quality at low prices, at least so far. However the researchers don’t expect that mobile operators will give up. More likely they will redouble their efforts, keep investing and refine their marketing.

Meanwhile, the researchers think the challenger mobile networks might find the going tough too and expect consolidation and network sharing initiatives from them to keep them in the game.

In conclusion, says the report, “we see higher capex ultimately paying off in fixed-line, but it will cost incumbents more than currently expected; in mobile, we believe that higher CapEx will lead to a regrouping of networks but not necessarily to a decline in competition.”

So it’s still a picture of revenue decline for European telcos, but not the bloodbath of 2013 when revenues declined by 5 per cent overall and by 9 per cent in mobile. Instead the two research outfits chart an almost enjoyable (in comparison) 1.6 per cent annual decline in revenues from the end of 2014 through to the end of 2016.

The challenger networks will also suffer, since they don’t have the financial resources to reinvest and are experiencing weak returns. This could trigger consolidation (as is currently playing out in France) but the outcome could actually stimulate more competition (rather than the hoped-for less) should we see new market structures emerge with cable operators buying wireless (cellular and WiFi).

Challengers will also look hard at network sharing to get costs down and to push network quality up, believe the researchers, who also applied a positive spin on the concept of ‘Patchwork Network’ - interesting in the wake of Neelie Kroes’ identification of network fragmentation as being a major boat anchor on the European market.

To be fair she may have been thinking about an alleged over-supply of separate telecom operators, rather than an over-enthusiastic supply of heterogeneous access network types which, according to Arthur Little and Paribas, will actually comprise the networks of the future. All using IP of course, thus allowing the network’s layers below to be selected against geography, demography and even application.

“The networks of the future will be “virtualised”, “IP-ised”, “layered” – with benefits in terms of costs and simplicity but also in ease of interface with other networks and players in the ecosystem. This is key because it will enable:

‘Patchwork networks’. That is, the emergence of operators built on a number of different types of networks, owned by themselves or by others, combining different technologies (fixed-line, mobile, cable, WiFi, etc.) and different generations (3G, 4G, etc.) over different geographies (national, regional, local).