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European Telecommunications Market Assessment 2002
Key Note Publications Ltd, Oct 2002
The European telecommunication services market was valued at e282.4bn in 2001, and we expect this to increase to e289.3bn in 2002. The rate of market growth has slowed significantly in recent years, reflecting slower regional economic growth and the continued downward pressure on prices in an intensely competitive environment.
The market is divided between three main sectors: fixed line, cellular or mobile, and switched data and leased line. In the past five years, mobile revenue has been the most dynamic, along with areas related to data - for example, Internet traffic, virtual private networks (VPNs) - rather than voice transfer.
The European telecommunications market is currently facing a number of serious challenges. While broad social trends, such as the rise of the so-called information society, are making telecommunications increasingly important, the industry is caught in a serious financial crisis. Major telecommunications groups, such as BT Group PLC (BT), Koninklijke KPN NV (KPN), Deutsch Telecom AG and France Télécom SA, have accumulated huge debts, and are having to take drastic action, such as asset disposal and financial restructuring, in order to cope.
The WorldCom affair in 2002 compounded the problems faced by European players by undermining investor confidence in all telecoms companies and calling into question the accounting policies of leading groups. At the same time, the telecommunications market is seeing competition intensify - a factor encouraged by new pan-European, competition-promoting legislation - which is in turn, placing downwards pressure on end-user prices. The consequence is the undermining of profit levels, and weaker cash flow from core telecommunications services.
The financial problems afflicting the industry stem from decisions taken in the late 1990s, when leading players - especially those in the mobile sector - made over-optimistic assumptions about the potential growth of the industry. Based on these false assumptions, companies used debt to finance acquisitions and buy licences that would enable them to provide third generation (3G) mobile telephone services, both of which in hindsight had highly inflated valuations. As a result, they are now saddled with large debts, while the mobile assets they acquired with the borrowed funds have since depreciated significantly.
Today, cellular operators are extremely circumspect when planning the launch of 3G services. Despite the huge investment ploughed into the acquisition of the 3G licences - a total of over e100bn, excluding the cost of building the actual networks - there remains considerable uncertainty as to whether there will be a substantial return on that money. In addition, there are a number of issues to be resolved before services can be successfully launched, such as how 3G services will be charged for, the schedule for making 3G handsets available in sufficient numbers and the cost of such handsets.
In the coming 5 years, we expect cellular and data services - especially Internet Protocol (IP) networks - to continue growing much more strongly than the rest of the telecommunications market. Overall, telecommunications revenue is expected to show improved rates of growth compared with 2001 and 2002, reflecting improved, stable economic conditions in Europe.
In the future, integrated services will be a central feature of the market and new infrastructure (i.e. the communications skin) and new technologies will effectively integrate fixed-line with cellular technologies, computing technologies with telecommunications and telecommunications with the media industry. In this situation, mergers and strategic partnerships between telecommunications, computing and media players can be expected.
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