Network sharing agreements have flourished over the last few years, but France Telecom and Deutsche Telekom’s proposed procurement joint venture moves a step further into technical cooperation.
With the explosion of data traffic, network operators will…
Network sharing agreements have flourished over the last few years, but France Telecom and Deutsche Telekom’s proposed procurement joint venture moves a step further into technical cooperation.
With the explosion of data traffic, network operators will face massive investments in infrastructure. The chairman of French telecoms regulator ARCEP, Jean-Ludovic Silicani, recently estimated that French operators would have to invest E20bn over the next 15 years. With the erosion of their margins, operators are now looking at any areas where they can save costs. Network sharing may have made a dent in a larger sphere of possible cooperation.
Dr Roman Friedrich, head of communications, media and technology (Europe) at Booz & Co, said: “There are clear rationales behind sharing procurement. On the one hand telecoms operators are suffering from decreasing margins while facing the fixed cost of infrastructure. On the other hand, they compete for the same customers and the same kind of revenues. So it makes sense to share procurement to have better prices with suppliers.” This view was echoed by a telecoms banker, who said: “It’s rare to see two operators set up a common subsidiary like that in Europe and it’s pretty clever to share innovation spending instead of raging a price war.” While joining forces to save costs sounds like a good idea, one can nevertheless wonder whether rival operators would not be fearful of losing a competitive advantage by sharing technological innovation. A banker suggested that such an agreement was only possible because France Telecom and Deutsche Telekom’s footprints did not overlap in many places. In his view, other operators are less likely to follow suit unless it is in areas where they do not compete fiercely.
But for Friedrich, such joint ventures do not threaten competition since the end-customer will still be able to choose between rival offers.
“Such agreements do not pose competition issues as retail offerings remain independent from the infrastructure roll-out and service development where operators try to get scale synergies. But it will remain limited to back office,” he said.
He also expects smaller players to join procurement agreements in order to benefit from the price advantage that larger corporations’ purchase volume can bring.
The limit to cooperation is perhaps defined by the types of services that can be jointly offered.
As Mike Greening, vice president at CSMG, put it: “There is a fine line between collaboration and competition.
For sectors such as ehealth which require a country-bycountry approach, operators can collaborate in working with vendors developing new technologies, and take their own propositions to market in parallel. Alternatively, for global or cross-border industries such as the car industry, they can jointly respond to a demand for services.” Telecoms operators have perhaps entered into a phase where their growth will lie on a compromise between cooperation and competition.
One banker even suggested that technical cooperation was the solution France Telecom and Deutsche Telekom found since politics had prevented the two state-owned incumbents from carrying out a full-scale merger.
Friedrich too believes that this type of collaboration can constitute an alternative to mergers, saying that by entering these agreements operators got the benefits of operational synergies without the restrictions imposed by shareholders’ issues.
But M&A bankers need not worry, consolidation is showing no signs of slowing down.
By Caroline Lauer
Deputy Editor, TelecomFinance caroline.lauer@telecomfinance.com
