European telecoms operators in strong position to ride out recession according to Arthur D. Little – Exane BNP Paribas joint study
France

With the rise of mobile telephony, telecom operators' fixed line revenues seemed doomed to ongoing decline. However, the eighth edition of the annual Exane BNP Paribas-Arthur D. Little joint report on the European telecoms market published today - entitled 'Reviving the Fixed Line' - predicts that the fixed market will stop losing ground thanks to the growing popularity of 'triple-play' services, which offer home users phone, broadband access and TV delivered over the internet. It also identifies that triple-play will help operators to resist competition from pay-TV providers (cable and satellite) and combat the substitution of fixed lines by mobile broadband. The study, conducted in 17 European countries with more than 80 telecoms stakeholders, shows that developing and offering services around the 'TV of the future' - which includes features such as in-built 'catch-up'/PVR (personal video recorder) and EPG (electronic program guide) facilities, plus integrated online interactivity - is the best weapon available for incumbents to defend their fixed line business. Market consolidation around triple-play services will also further enhance operators' profitability. In addition, telecom operators are in a strong position to take advantage of their existing technical and commercial assets if they choose the right partners, engage in a balanced content strategy, and align with internet consumption patterns. "Telecom operators can lead the development of the television of the future," states Jean-Luc Cyrot, co-writer of the report, Arthur D. Little Paris. "But they can't solely rely on their historical assets; a strategy of innovative targeted content and services and carefully-built partnerships will be key to entering this new era of their development." The triple-play success story
In Europe, in spite of the strong growth of fixed broadband, operators' fixed line revenues have declined by 2 to 3% on average per year due to a decrease in the number of fixed line users (-5.7% per year since 2005).  Two main factors have led to this decrease:

  • The substitution of fixed telephony for mobile telephony in, on average, 20% of European households
  • The incumbent's market share having been reduced by cable operators and competitors that rely on unbundling.
However, the report shows that triple-play has altered this trend. Users are increasingly willing to keep their fixed line phone in order to also enjoy the benefits of broadband and IPTV.  For instance, incumbents in countries such as Portugal, Sweden and Austria have reduced fixed line losses in this way. Triple-play has also led to a consolidation of the market - for example, in France, the acquisition of Cegetel, AOL and Club Internet by Neuf Telecom (now SFR), Tele2 by SFR and Alice by Iliad resulted in a recovery of the average revenue per user (ARPU), a stabilization of operators' market share, and an improvement of their profitability. "Fixed line loss rate should slow down over the next few years, leading to more optimistic valuations of the sector. For instance, an incumbent that halves its rate of line losses can increase its valuation by 27%," highlights Antoine Pradayrol, Financial Analyst in charge of the telecom operators team at Exane BNP Paribas. First choice for content: Pay TV and ‘light premium’
By 2015, the report predicts that European incumbents' revenue derived from Pay-TV, video on demand and advertising could reach around €4Bn, which represents 7% of their current revenues (€2.7 per month per fixed line). This increases operators' fixed line revenue by an additional 1% on average per year over the 2008-2015 period, which partly offsets the current 2-3% yearly drawback. Pay-TV accounts for two thirds of this growth opportunity, as incumbents can seize between 10-30% of Pay-TV subscribers depending on the country. However, the rapidly growing but crowded VoD (video on demand) and advertising markets represent a smaller share of this opportunity. However, investing in exclusive high premium content (i.e. an exhaustive offer of latest movies and exclusive rights for most premium sports) would be, according to the report, a very risky strategy, as the customer base alone cannot amortize this extremely costly content. The authors of the report also state that a strategy combining high premium content and broadband access is jeopardized by new regulations forbidding content exclusivity, for example in the UK and the Netherlands. Rather, they believe that the winning solution is a "light premium" strategy that packages valuable content and develops interactive services around it. This approach, which requires only 15-25% of the average investment in content of a premium TV operator, is both differentiating and ARPU generating. How can telecom operators win?
Challenged in traditional areas of strength (quality of service, infrastructure, good quality content) by companies from the internet and systems worlds, "Telecom operators have to create partnerships to develop innovative services around content, mirroring what is being done in the USA by cable operators such as Comcast and Pay-TV providers such as DishTV," notes Franck Herbaux, Media Director, Arthur D. Little Paris. By partnering with various players from the telecom-media-technology ecosystem, operators can bring together all the assets necessary to lead the development of the TV of the future - for instance, offering user-friendly, innovative and attractive services such as 'catch-up TV' and interactive electronic program guides; enhancing the ease of use of the video service catalogue; and by deploying platforms and dedicated sales teams to develop targeted and local advertising. These partnerships can take place with internet players, software editors or hardware manufacturers (eg. TV or gaming console), and benefit from these experts' competencies in R&D and user friendliness. Such a proactive approach will also allow operators to deflect the threat of access commoditization. Thanks to recurring revenues and leeway in terms of cost and investment management, telecom operators will be less affected by the economic downturn than other sectors, and so present unquestionable advantages for these 'expert partners': they provide network access, control of triple-play equipment in the home, and above all, a privileged relationship with the user through customer service and billing arrangements. "Paradoxically, the current financial crisis gives operators the time to organize and fine-tune their offering, as it will slow down the development plans of both internet leaders and system providers," believes Didier Lévy, Telecom Director, Arthur D. Little Paris. Local disparities
The 2009 Arthur D. Little - Exane BNP Paribas report notes that European households' triple-play expenditure only costs an average of €50 per month compared to €70 per month in the USA. As such, incumbents in countries such as Portugal and the Netherlands should observe a growth in their fixed line revenues. "However, the situation is more complex in countries such as the UK and Germany, as telecom operators are threatened in these territories by cable as well as satellite operators such as BSkyB," concludes Antoine Pradayrol. Documents for Download The 2009 Arthur D. Little – Exane BNP Paribas report (.PDF, 542 kB)

Notes for Editors

The Arthur D. Little – Exane BNP Paribas annual report
Every year since 2002, Arthur D. Little and Exane BNP Paribas experts conduct an in-depth examination of the telecoms market, particularly European operators. To conduct these studies, Arthur D. Little international consultants meet the different stakeholders of the sector (operators, hardware manufacturers, media and regulators). The 2009 report is thus the result of 95 interviews in 17 countries. About Arthur D. Little
Founded in 1886, Arthur D. Little was the world’s first professional management consulting firm. Arthur D. Little is a global leader in management consultancy, linking strategy, innovation and technology with deep industry knowledge. These last years, Arthur D. Little developed partnerships with more than 70% of Fortune 100 companies. Its teams conceive and implement sustainable, innovative and operational solutions. Arthur D Little is present in over 20 countries with more than 1000 consultants. With its partners Altran Technologies, the firm has access to a network of over 17.000 professionals. About Exane BNP Paribas
Exane is the number one French broker and among the top European independents. The company specializes in research and broking both in equities under the trade name of Exane BNP Paribas; in equity derivatives and structured products via its subsidiary Exane Derivatives and in the alternative management segment through Exane Asset. Exane’s expertise in research, sales and execution led to frequent coveted financial awards that highlight the skills of its teams. Exane’s 900-strong workforce operates from offices in eight financial capitals Paris, London, Frankfurt, Geneva, Milan, New York, Singapore and Zurich
www.exane.com

Further Information

Mark Mulcahey
UK Managing Director, TIME (Telecoms, Information, Media & Electronics) Practice Leader
T: +44 (0)870 336 6616
M: +44 (0) 7525 680 288
E: mulcahey.mark@adlittle.com Antoine Pradayrol
Telecom Operators Team
Exane BNP Paribas
T: +44 (0) 20 7039 9489
M: +44 (0) 77 9552 8347
E: Antoine.Pradayrol@exane.com