FROM THE ECONOMIST INTELLIGENCE UNIT
When a market reaches saturation, it’s no surprise that competitors look for new products and services to boost growth. With mobile phone penetration levels fast approaching 100% across Europe, operators are scrambling to convert their customers to new internet-enabled 3G phones, which can handle music, TV and video downloads as well as a host of other services. As a result, the recent move by TeliaSonera, Sweden’s leading telecoms operator, to invest in €1bn (US$1.26bn) in the Spanish 3G market appears to make sense.
Unfortunately, TeliaSonera may have made its move a bit late in the day. While growth of 3G phones and services is expected to grow in double digits for the next two or three years, three other players, including incumbent Telefonica, UK-based Vodafone’s Spanish subsidiary, and local operator Amena, have already launched 3G services in Spain. The entry of a fourth player into the Spanish market can only mean one thing – thinner margins for everyone and the potential for outright failure by the weakest of the four.
According to the Economist Intelligence Unit, mobile penetration in Spain jumped from 91.6% to 97.8% between 2004 and 2005 and will stage another 1% growth this year. The EIU expects sales to be flat for the three years from 2007-2010. As for 3G, after a slow start, the other players in the Spanish market are starting to see some results. Of Telefonica’s 20.3m subscribers in Spain, about 360,000 or just under 2% are 3G customers. Vodafone Spain’s 3G customer base accounts for 6.6% of its 13.5m Spanish subscribers while Amena, which is part of France Telecom, has 123,000 3G customers, just over 1% of total customer base.
Even so, TeliaSonera executives insist that the market had room for another player, and point out that the Swedish company has experience in operating 3G networks in Sweden and the Baltic states. The company will carry out its plans by paying €71m to Spanish construction group ACS, raising its ownership in Xfera Mobiles, which owns a 3G network licence in Spain, from 16.5% to 80%. It intends to spend a further €1bn on network infrastructure, service platforms, spectrum fees and startup costs over the next five years. The company predicts the operation will be cashflow positive at the end of that period.
Margin mayhem
The company will face an uphill battle to achieve that goal. In addition to the three established players, TeliaSonera will also be competing against local independent Mobile Virtual Network Operators (MVNOs) which do not own their own spectrum and usually do not have their own network infrastructure. MVNO's set up arrangements with traditional mobile operators to buy minutes of use (MOU) for sale to their own customers, normally using a familiar brand name, such as Virgin in the UK and US.
The coming fight in Spain, however, will not present a new challenge to the Swedish operator. With the arrival of the Saunalahti Group in Finland, TeliaSonera’s operating margins plunged from 40% to 20% over the last two years. The company’s bet on Spain is clearly a bid to leverage its expertise across a wider turf and thus reap the kind of growth that, in turn, will give the muscle and market share to allow it to build up margins. The group has pointed to today’s more attractive price for 3G handsets, the better battery life offered by the more sophisticated phones and TeliaSonera’s own experience in operating 3G networks as strong reasons for its success. However, its competition, with the exception of MVNOs, all benefit from the same advantages. As a result, the move looks like a risky one, aimed at grabbing growth in a crowded, mature market.
