Carrier network investment amid Eurozone crisis

As reports emerge that the Eurozone economy shrank 0.2% between April and June, carriers are no exception in facing similar hardships to other sectors in the region.

Some European Tier 1 carriers have reported falling or underwhelming revenues and net profits in their second-quarter results, continuing a trend seen in recent years.

The European Telecommunications Network Operators’ Association (ETNO), which has many incumbents as members, earlier estimated that revenues in the region’s telecoms sector tumbled 2% in 2011. This was mainly attributed to an 8% slump in fixed-line revenues and followed a 1.4% fall in 2010.

Given the ongoing financial climate, there is a growing sense of uncertainty over how European carriers can continue investing to support the booming demand for capacity.

ETNO believes carriers could struggle to make enough investment to meet the EU Digital Agenda’s targets by 2020. The body suggests that regulatory clarity and the facilitation of new business models will be key to supporting rising data volumes.

Luigi Gambardella, chairman of the executive board at ETNO, says that the decrease in revenues happening in the European telecoms sector must be taken into account by policy makers and regulators: “more pricing freedom [and] predictability on wholesale regulation are very important elements for market players to invest in networks and services.”

Gambardella suggests that incentives should be provided for carriers to invest in mobile and fixed networks to meet demand for capacity. “More regulatory certainty is a fundamental element to give market players the right incentive to plan future investment,” he adds.

ETNO has embraced policy indications made by the European Commission in July, which have provided more certainty on future access policies related to the stability of prices for local loop unbundling and more flexibility on the pricing of access to fibre. ETNO has also proposed a framework for commercial agreements on IP interconnection, helping to monetise traffic from over-the-top players.

In spite of financial pressures, carriers appear committed to investing in access networks and IP backbones in order to ensure there is enough capacity in the immediate future. Changes to network strategy, business models and technological advances are all playing a role in helping to offset the decline in revenues.

Franz Bader, head of international sales at Telekom Austria Group Wholesale, admits that the company faces the same situation as other carriers in terms of declining revenues. He says the company, however, is convinced that data demand will support its network investment.

Telekom Austria has already made several signicant investments to its network this year. In June, the company announced the launch of three independent fibre routes linking Frankfurt and Turkey, with two travelling through Romania and one through Serbia.

The latter was added to offer a safe alternative route because of outages in Romania. “This was quite a significant investment and clearly indicates that we follow our forward-looking strategy,” says Bader. Telekom Austria has also launched a PoP in Skopje, Macedonia.

Bader highlights the increasing importance of partnerships as a cheaper way to roll out networks. In terms of international wholesale, he says, Telekom Austria remains strong in the transport environment and is seeking partners that have strengths in other areas such as IP. “Partnerships will expand, as everyone has limits on future bandwidth and everyone is looking at their cash flow,” says Bader.

Stefan Amon, head of wholesale at Telekom Austria Group, believes the company’s strength is its position in eastern Europe, where many other carriers lack a presence and the company can act as a preferred partner. “We are not the cheapest, but we offer best quality and service at a time when cloud services are more important and companies are highly dependent on data,” says Amon.

Mark Lewis, VP of architecture and development at European network operator Interoute, emphasises that carriers have become far more comfortable with sharing and outsourcing networks and says that more than half of Interoute’s wholesale revenues now emerge from these types of deal.

Lewis provides several examples, including a deal with Telefónica International Wholesale Services (TIWS) last year which saw Interoute act as its core fibre-optic network provider. Interoute provides TIWS with a 100Gb capacity network connecting major European cities, while TIWS has become Interoute’s provider for transatlantic, US and Latin American routes.

Carriers are also learning to share networks in new ways. A landmark networking sharing agreement between Telefónica and Vodafone in the UK this June, for example, saw the two plan to pool their basic network infrastructure.

As a result, the two companies predict they could offer nationwide 4G up to two years before the anticipated regulatory requirement of 98% population coverage by 2017.

Analyst firm Ovum also estimates that the Vodafone and Telefónica deal could generate combined savings of more than £1 billion across 2G, 3G and 4G networks by 2015 and will save at least 25% of their network costs.

Ovum predicts that at least 50% of global LTE roll-outs in the next five years will use shared networks and that most countries will end up with no more than two networks. “Since 2009 we have warned that the financial realities facing mobile telcos mean they have no choice but to share their networks,” says an Ovum analyst.

Orange does not visualise one overriding strategy for its particular network across Europe, but expects an expansion of activities like network sharing and outsourcing in the coming years. Yves Bellego, director of technical and network strategy at Orange, says active radio access network (RAN) sharing like the operator carries out in Spain and Poland can enable savings of up to 40%.

Bellego says Orange sees outsourcing as a “long-term solution” and refers to deals already in place with its network operations and IT in Belgium, Spain and Switzerland. He says that the company hopes to benefit from the economies of scale offered from the outsourcer’s other activities.

In the short term, however, he says Orange remains committed to its network investment plan. Part of which is an ambitious €2 billion FTTH project in France to guarantee coverage for 10 million homes by 2015 and 15 million by 2020. Bellego admits this presents a challenge. Like other European incumbents, Orange faces pressure from the EC to roll out FTTX in line with its Digital Agenda.

As well as being costly, this can at times present quite a radical overhaul of networks. It is precisely why the ETNO has been keen to clarify regulatory issues surrounding the roll-out of fixed-line services. Bellego says, however, that Orange’s plans are quite aggressive on the technical side and roll-out is helped by regulation that envisages denser deployment in more populated areas. He adds that there is some room to increase the capex-to-revenues ratio and still benefit.

Similarly, Telekom Austria’s Bader says the company is planning to build a dense fibre network in certain high-demand areas in Austria and can already reach 2.2 million people with speeds of up to 100Mbps. In rural areas, where the return on investment is lower, he says it is harder to justify investment in fibre and DSL is instead used. “It is a difficulty for sure, as there is no other telecoms network and we need to roll it out ourselves,” says Bader.

Interoute’s Lewis believes that the way the European telecoms market is evolving means there are few problems in terms of finding capacity investment for the future and that this will naturally sort itself out.

“Networks are cheap enough now that it is easier to build a far more dense mesh network,” he says, referring to the falling price of 10 gigabit Ethernet. The arrival of 100G on the market has also helped fulfil future demand for capacity. Likewise, DWDM, which was a 10G technology in the past, now supports 10 times the capacity for even less money.

Lewis says that carriers have also been helped by the fact that there is more locally generated traffic, which is being driven by Europe’s booming data centre market. He also cites the rising adoption and number of delivery points for Wifi, such as those of BT in the UK as helping to mitigate rising demands for data. “This is essentially sensible data offloading and optimisation of data,” says Lewis. “Domestic Wifi is almost a roaming technology.”

Lewis continues that “the increase in edge consumption, through smartphones, along with greater utilisation from broadband means the wholesale/international carriers are spending more, not less, on building out”. ETNO’s figures actually estimate that investment in the telecoms sector rose by 5% in 2011 compared with the previous year.

Separately, Paris Burstyn, a senior analyst in wholesale telecoms at Ovum, says there is little indication that European providers are scaling back investments in their interfaces for wholesale customers. Burstyn says his sense is that “wholesale carriers are experiencing steady demand from their customers and are continuing to build strategic relationships with them to create mutual improvements in efficiency, productivity and profits.”

He adds that wholesale carriers recognise that partnering closely with their customers is key to their future success: “They must prioritise investments in infrastructure necessary to support and solidify their relationships with customers. Incremental wholesale sales contribute to the cost justification of investments in network expansion and new services.”

Although investment in networks appears safe for now, market consolidation could also help meet demand for network capacity.

Some industry observers see limited opportunity for in-market expansion, but more strategic moves like that of Vodafone for Cable&Wireless Worldwide (CWW) could be on the cards.

Vodafone says of the deal that “as the demand for mobile data continues to grow strongly, the CWW fibre network can provide fast backhaul at considerably lower cost compared to prevailing market rates for leased capacity”. The company adds that CWW’s international network and high traffic volumes give it favourable peering status for IP transit with other operators.

Carriers may also seek to offload assets to focus on their core businesses. Telefónica’s recent results have been hit by its exposure to the Spanish market and the company faces huge pressure to reduce debts. The operator reached an agreement to sell half its stake in China Unicom back to the company and reports have said it is considering listing O2 Germany and some Latin American assets.

Benoit Maynard, an analyst at investment bank Natixis, argues that this will not necessarily lead to Telefónica conceding its global status if it sells only parts of its assets and sheds non-core activities.

Telekom Austria Group follows it own strategy of in-market consolidation and opportunistic acquisition, such as its merger of mobile subsidiary Vipnet with cable operator B.net in Croatia. And Amon believes that both small and large European acquisitions will take place to help fulfil future demand for capacity and economies of scale.