Regulatory Tide Turns for European Operators

Vodafone claims success in its “social contract”

Telecommunications has been one of Europe’s poorest performing sectors in recent years. Despite surging demand for connectivity, stock prices have gone into reverse, dragged by expensive deployment costs for fibre and 5G networks in ultracompetitive markets.

As long as I can remember, European operators have complained that the telecom industry is too heavily regulated and that fragmented markets stifle their ability to achieve economies of scale in the same way carriers do in other regions, like North America.

The merit of their grumbles is a separate debate. But when Covid-19 struck just over a year ago and starkly demonstrated the value of good connectivity to almost every part of society, I argued it might finally trigger some of the changes the industry has long been calling for (see The Long-Term Impact of Covid-19 on Telecom Operators). It felt like the perfect time to re-engage with authorities and better collaborate on policy to spur higher-quality digital infrastructure. It was a topic I also addressed during our Predictions event in October 2020.

So, I was interested to hear Vodafone CEO Nick Read highlight the company’s good progress with its “social contract” strategy during a call to comment on results for its full fiscal year.

Introduced in 2019, the strategy aims to build stronger relationships with governments and regulators to better encourage investment and ultimately improve industry returns. Focus areas include spectrum allocation, network sharing and diversity of infrastructure supply.

Mr Read highlighted positive discussions with the president of Spain and his senior ministers about the role telecom can play in improving a country’s overall competitiveness and prosperity. This has encouraged Spain to propose reform, evidenced by a planned extension on spectrum licences from 20 years to 40 years and tax relief on network deployments.

Spain is one of Europe’s most competitive markets and poor financial performance among network operators has repeatedly fuelled rumours of mergers and acquisitions. Mr Read batted off speculation that Vodafone may look to merge with fourth player MasMovil, but such a move remains a viable option and would be a fascinating test of regulators’ resolve at a time when the case to consolidate has perhaps never been stronger.

The CEO also highlighted recent 5G auctions. In the UK, he argued that Ofcom’s original plan to bundle 700 MHz and 3.6 GHz to 3.8 GHz frequencies would have bumped up prices. Instead, constructive conversations led to the bands being split out, and the removal of coverage obligations cleared the way for the UK’s pioneering shared rural network. As Vodafone already held a strong position in sub-1 GHz spectrum, it didn’t need to bid for the 700 MHz band and this helped the market avoid overheating, Mr Read argued.

The UK sale raised about £1.4 billion, slightly topping the £1.1 billion reserve price, but a fraction of the £22.5 billion splurge on 3G licences at the turn of the century (see Ofcom Wraps Principal Stage of Latest Spectrum Auction).

Mr Read added that auctions in Greece, Hungary and the Netherlands have also seen a good outcome for the sector and that the only market he’s unhappy with is Portugal, where a controversial and drawn-out sale has delayed network deployment.

Vodafone is also one of Europe’s leading champions of Open RAN. This new technology could foster new entrants to the infrastructure market, to help address an alarming lack of supplier diversity, exacerbated by recent bans on Huawei kit in some countries.

Open RAN has suddenly attracted political debate as governments seek to remedy their restrictions amid a growing battle for technology leadership. For example, one of the main aims of the UK’s Telecoms Diversification Taskforce is to encourage new suppliers, to reduce its reliance on traditional providers Nokia and Ericsson.

Earlier in 2021, five of Europe’s leading operators, including Vodafone, signed a memorandum of understanding committing to pick up the pace with Open RAN technology and calling for state support to harness its development.

Significantly, a main aim of the agreement is to lobby governments to part-fund early Open RAN deployments, research and development efforts and start-ups. Although pitched as an opportunity to strengthen Europe’s technology credentials, it could face stiff competition from industries like airlines, hospitality and tourism, which have been decimated by the pandemic and are arguably far more in need of state support.

If the operators succeed in their objective, it could signal that the regulatory tide in Europe may be finally turning.