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Straight Talk Telecoms

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Mobile communications was the motor for growth in the European telecoms sector during the 1990s and first decade of this century. But in recent years growth has stalled and revenue declines of up to 10% have become the norm for most incumbents.

The good news is that in 2015 we are seeing a gentle recovery. We are now in the 2Q15 financial reporting season and operators including EE, Orange, KPN, and Vodafone are telling a similar story – one of revenue stabilization in core European mobile markets.

So, what can we expect for the rest of 2015 and beyond? Will there be a sustained period of revenues? Can the sector return to growth? Or is there a new disruptive force around the corner ready to plunge the industry into a fresh period of decline?

The market has stabilized in the last year because price declines have slowed. Disruptive fourth and fifth operators have either been acquired or have decided that further price erosion will hurt their own businesses as well as those of their competitors. And the long process of regulation-driven price cuts in termination rates and roaming is drawing to a close. But it is too early to talk about price rises, despite encouraging signals coming out of markets such as Austria and Germany (both of which have seen market consolidation).

Growth in mobile data adoption and consumption has been a common theme for European mobile operators. LTE take-up is strong and has undeniably helped to slow ARPU erosion. The arrival of cheap LTE devices will ensure that growth rates are sustained. But converting higher data consumption, and a better data experience, into higher revenues is challenging. Most operators now offer tiered pricing rather than unlimited data usage. However, few operators have succeeded in shifting consumers onto more expensive data plans to match increased data consumption; rather, they have offered bigger data allowances to keep customers and retain spend.

Although multiplay and quad-play offerings have become central to telecoms operators’ strategies in Europe and beyond, the effect they have on mobile revenues remains mixed. Cable and fixed operators seeking to protect core broadband and TV revenues are likely to depress mobile revenues by offering mobile at a discount. The newer wave of incumbent-driven quad-play is aimed at high-end users and, in many cases, only available to mobile users who sign up to LTE. Discounting is integral to the bundle and operators are offering discounts in the range of 10% to 20%, resulting in the migration of more customers to higher-end LTE price plans.

When it comes to generating revenues from new mobile services, operators continue to make agonizingly slow progress. Bundling services such as music and video has become more of a strategy for service differentiation aimed at protecting core revenues rather than a drive for new, incremental revenues. Some operators are beginning to report on M2M revenues in financial results, but Europe trails the US in the connected-car sector: AT&T reported 1 million connected cars in the second quarter.

The continued growth of WiFi availability and usage is making it hard for operators to sell more connected devices. But sustained growth in mobile data traffic suggests that WiFi is not eroding the value of smartphone data.

Disruption from service providers themselves is as likely to come from companies that retail mobile services as from those that own networks. In the future these companies will include device vendors, digital media firms, and standalone MVNOs, which are all adding connectivity to their existing products and services.

The overall picture is one of relative stability in the European mobile market. This is an improvement on recent years where the combined impact of disruptive operator competition, regulatory intervention and uncertainty, and the erosion of SMS revenues sent the sector into decline. The glory years of European mobile may be long gone, but with a more stable outlook, telecoms operators have a reasonably strong foundation on which to pursue broader ambitions in converging telecoms, television, and ICT markets.

Straight Talk is a weekly briefing from the desk of the Chief Research Officer. To receive this newsletter by email, please contact us.

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