At present, Europe is the most penetrated region globally in terms of unique subscribers, with a near-saturation level of 78 per cent. This is nearly 10 percentage points above both North America and the Commonwealth of Independent States. With this level of maturity, there is limited scope for future subscriber growth in the region. The unique subscriber base will reach 450 million by the end of 2020, which is a growth of less than 5 per cent from the current level, while the penetration rate will reach 81 per cent by the end of the decade.
The GSM Association’s recent report titled “The Mobile Economy: Europe 2015” discusses the role of 4G and the subscriber base, the growth of mobile networks and their contribution to the regional economy, as well as upcoming mobile networks in the region. Excerpts…
4G uptake in Europe
In early 2015, 80 per cent of the European population was covered by 4G. This number is expected to exceed 90 per cent in early 2016, and grow further to 93 per cent by the end of the decade. Improved coverage, the availability of more devices at a broader range of price points, and the increasing use of music and video streaming services are some factors driving its increased adoption. Long term evolution (LTE) connections as a proportion of the total connections in Europe are set to almost triple from 20 per cent in the third quarter of 2015 to close to 60 per cent by 2020. This will leave Europe trailing North America, but position it in second place globally in terms of LTE adoption.
A key factor behind the increasing coverage and adoption of 4G is spectrum allocation. Over the past several years, most European countries have auctioned 800 MHz digital dividend spectrum, which had been freed up by the switch from analogue to digital broadcasting. More spectrum will be required to meet future needs as data traffic continues to grow, and some countries in Europe have taken the lead. Germany was the first to auction the second digital dividend band, including the L-band, in an auction earlier in 2015, which, along with the 900 MHz and 1800 MHz bands, raised more than Euro 5 billion.
Another key reason for the growth of 4G is the rate of smartphone adoption, which crossed 50 per cent in 2014 and is expected to have been 60 per cent by the end of 2015. This growth in smartphone adoption is happening at the same time as operators in Europe move away from subsidising handsets on similar broad scales as in the past. This follows the example of operators in other mature markets like the US and South Korea.
Due to the increased 4G coverage and device adoption, data usage is continuing to grow strongly across Europe. The average monthly data usage for Western Europe is set to grow from less than 1 GB per month in 2014 to nearly 6 GB per month in 2019, a compound annual growth rate of 45 per cent. There is a clear correlation between 4G adoption and data usage across developed markets, with 4G coverage and the increased adoption of 4G-capable devices clearly encouraging greater data usage. Although the use of third-party video sharing applications has continued to grow, operators are increasingly bundling video and audio streaming applications with their tariff offers, usually focusing on 4G data and LTE-capable devices. European operators are effectively monetising the growth in data usage through the use of tiered data plans.
After several years of strong growth, there are signs that data growth may have plateaued. For example, Vodafone reports that the aggregate mobile data usage across its entire European base is growing at more than 60 per cent year on year, down from 70 per cent in late 2014 or early 2015, but still almost double the annual growth in 2013. However, a reacceleration cannot be ruled out.
Mobile industry’s contribution to economic growth
The mobile ecosystem consists of mobile network operators; infrastructure service providers; retailers and distributors of mobile products and services; handset manufacturers; and mobile content, application and service providers. These firms’ direct economic contribution to the GDP is estimated by measuring the value they add to the economy, including employee compensation, business operating surplus and taxes. In 2014, the total value addition generated by the mobile ecosystem was Euro 154 billion (1 per cent of the GDP), with network operators accounting for the majority (almost 70 per cent).
In addition to their direct economic contribution, firms in the mobile ecosystem purchase inputs from providers in the supply chain. For example, handset manufacturers purchase inputs from microchip providers while content providers require services from the IT sector. Furthermore, some profits and earnings are spent on other goods and services, stimulating economic activity in them. It is estimated that in 2014, this additional economic activity generated a further Euro 92 billion in value additions (0.6 per cent of the GDP) in Europe.
The use of mobile technology continues to drive improvements in productivity and efficiency for workers and firms.
The use of mobile technology continues to drive improvements in productivity and efficiency for workers and firms. For example, it reduces unproductive travel times and facilitates improved logistics for businesses and workers in services and manufacturing. These productivity impacts are estimated to have been worth around Euro 254 billion in 2014 (1.6 per cent of the GDP). Overall, taking into account the direct, indirect and productivity impact, the mobile industry made a total contribution of Euro 500 billion to Europe’s economies in value-added terms in 2014, equivalent to just over 3 per cent of the region’s total GDP. Finally, mobile operators and the ecosystem provided direct employment to approximately 2.3 million people in the region in the same period.
Taking into account factors like a slowly improving economic environment, the declining impact of mobile termination rate cuts and other regulatory impositions, the increasing adoption of tiered data plans and the overall increased data usage, the monthly ARPU on a per unique subscriber basis will bottom out in the next year to around Euro 24 and then grow slightly. Helped by the strong growth in data traffic and a reduction in regulatory headwinds, recurring (service) revenues are set to return to growth. On a Europe-wide level, revenues are forecast to grow modestly from 2017 at a rate of only around 1 per cent per year through to 2020.
The outlook for margins should also improve with the recovery in top-line trends, as well as the impact of consolidation deals in several markets in the past few years. Apart from top-line recovery, other factors positively affecting margins include lower levels of handset subsidies and the greater outsourcing of sites to third-party tower companies, which allow related costs to be booked as financing rather than operating expenses. At the same time, investments in 4G networks, spectrum auctions and the overall network capacity have raised the level of capex from less than 15 per cent of revenues at the beginning of the decade to around 20 per cent in recent years. Taking the revenue, margin and capex outlook into account, the sector’s financial outlook looks healthier than it has in a number of years. However, the cash flow margins remain well below their historic averages and could raise questions over the industry’s ability to finance the next wave of investments in 5G.
Future networks in Europe
Operators in many countries across the region have already launched rich communications services, and there is growing momentum behind voice over LTE (VoLTE) and voice over Wi-Fi deployments. Vodafone claimed the first commercial VoLTE deployment in Germany earlier in 2015, and the company is now rolling out the service in other European markets. It is currently available in eight countries across Europe, while high definition voice technology is available in the vast majority of countries.
With 4G network coverage having expanded significantly in recent years to stand at more than 80 per cent of the population, operators across Europe are also moving to deploy LTE-Advanced (LTE-A). LTE-A offers much faster speeds through carrier aggregation. There have been tri-band LTE-A launches in a number of countries; for example, Swisscom recently claimed that it had achieved peak speeds of 436 Mbps in live trials.
There are also a number of 5G initiatives at the national level. A 5G innovation centre recently opened in the UK with a range of backers, including the UK government; operators like EE, British Telecom, Telefónica and Vodafone; and equipment vendors like Huawei, Fujitsu and Samsung. The current focus areas include plans to develop a 5G testbed network and to ensure that 5G innovations will directly benefit consumers.
Moving towards a digital single market
A key challenge for European developers and internet companies is the lack of scale in national markets in comparison with the US or emerging markets in Asia like China and India. This challenge is compounded by the different national regulatory and legal environments, and an overall regulatory environment that is often not supportive of innovations and new digital products and services. To reduce barriers and foster growth in the entrepreneurial community across the region, the European Union has developed its digital single-market strategy, which requires increased investments and innovations in digital networks. It recognises the need to remove online hurdles for businesses and consumers, and create an environment of innovation in digital services and networks. With a new set of rules that encourage investments in the mobile sector and next-generation broadband, there is a real opportunity for realising the potential of the digital single market.
Based on a report by the GSM Association titled “Europe Mobile Economy 2015”