Telecom companies have been the underdog, but this is changing

Until recently regulation has been seriously impairing the profitability of telecom companies.

Measures have been taken to regulate wholesale broadband access and roaming tariffs. Competition regulators have incentivised strong competition, while spectrum auctions have often been expensive, allowing for new operators to enter the market.

Product differentiation is difficult because of net neutrality regulations. As a consequence, telecom companies have been at the wrong spot in the value chain, while companies that sell telecom equipment, media content or cloud have performed exceptionally well.

This challenge for the industry has been loudly voiced by the European Telecommunications Network Operators’ Association, although it seems that the European Commission is still focused on lowering consumer prices.

A particularly exciting development is the novel way customers can connect to the internet in remote areas

Today, a number of investment opportunities arise for the industry and this will likely bring at least revenue stabilisation.

5G and fibre broadband are here to stay and we expect that 2022 will be the year when its uses will become more widespread.

5G handset availability is driving consumer demand for 5G networks, while network coverage also improves. For example, in Germany, half of the country was covered by 5G in December, while the roll-out continues.

In France, 5G was available in 239 municipalities in March 2021 and almost 900 at the end of December, which indicates a strong improvement.

However, this requires strong investments with operators needing to acquire spectrum, establish mobile towers, and purchase equipment.

The critical factor to achieve future revenue growth, however, will be in setting an optimal pricing policy for 5G services. Are users going to pay for new services like innovative gaming, virtual reality, augmented reality, and for solutions centred around industrial automation?

The build-out of fibre networks is progressing according to plan, also with the help of EU funds.

Money from Next Generation EU, the European recovery fund, will be used to accelerate the digital transition. At the end of 2021 approximately half of all European households had access to full fibre, with the fibre roll-out to reach approximately 60 per cent of European households by 2022.

Exciting development

A particularly exciting development is the novel way customers can connect to the internet in remote areas. Operators could connect homes using fast mobile networks, dubbed fixed-wireless access (FWA), as well as satellite connectivity.

Furthermore, satellite solutions are becoming very interesting to connect remote areas.

The war in the Ukraine shows the power of satellite technology with the government asking Elon Musk to divert more Starlink satellites to the area.

Besides investments in new technology, restructuring programmes continue to modernise the back-office of the operators and to phase out legacy technologies. Once implemented, this could be a tailwind for profitability.

Note that we expect that European-based telecom operators will be rather insulated from the conflict in the Ukraine, unless there will be a global recession.

Major operators have no sales in the region, the exception being VEON, which is largely exposed because it is active in Russia and Ukraine.

Russia is a relatively small market for smartphones compared to the USA, EU and Asia combined. Therefore, the direct impact of halting smartphone sales to the region is not that material for global handset vendors.

Given the need for higher returns, ownership of some telecom operators will likely change, especially among the smaller operators.

Cybersecurity risk provides a business opportunity for telecom operators

In markets where price competition is very strong, there is an increasing likelihood of leveraged buyouts, where private equity will try to carve out the network.

Such a stand-alone network could provide wholesale access to all telecom companies on equal terms and could therefore profit from a lighter regulatory regime. As a result, pressure on revenues will abate.

We are also going to witness the change of ownership of mobile tower operators as incumbents can obtain very good sale proceeds for their towers. In ING’s recent 2022 Telecoms Outlook, we predicted consolidation among the smaller telecom operators as well as an increase in scale for tower operators in Europe.

Security risk

But better connectivity has the disadvantage that criminals can also profit from it.

In 2022, the risk of disruption to digital services remains high and could become higher. Cybersecurity risks are on the rise, without the war in Ukraine.

State-sponsored hackers could engage at some point in cyber warfare, something the US government is warning about.

Nevertheless, this also provides a business opportunity for telecom operators. As an example, Orange, KPN, BT and Telefonica offer cybersecurity services, which could prove an important client retention tool.

It is clear from all of this activity that the telecoms industry is moving into an exciting period with years of investment in technologies such as 5G, fibre, and cybersecurity, bringing a number of opportunities to both users, operators, and investors alike.

Jan Frederik Slijkerman is TMT sector strategist at ING Bank