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Summary

Things are looking up in Europe. After several years of decline, revenues for a group of large European telcos increased by 4% in 2015, to €232bn. Capex also grew for this group of nine, up 12% to €40bn. Prospects for this year, though, are flat to down, at least for their core European operations. Given the constrained revenue climate, telcos tend to link capex outlays tightly to either new revenue streams or future operational efficiencies.

Europe’s race for the best networks props up capex, just barely

Europe’s communications service providers (CSPs) operate in highly competitive markets. Most operate in multiple geographies, each with its own regulatory and competitive landscape. Customers are highly demanding. Marketing campaigns highlight coverage and performance issues, making it essential to invest heavily in the network. The problem is that revenues in Europe have been falling for years. For our group of nine large CSPs, revenues fell from €273bn in 2010 to €222bn in the four years to 2014. The 4% increase in 2015 didn’t do much to reverse this. Pressure has been heavy to carefully manage costs in this environment.

Our group of nine spent €39.7bn on capex in 2015, up 11% from 2014; in dollar terms, however, capex was $44bn, down 7% year over year due to the euro’s 16% depreciation versus the dollar in 2015. Only Telecom Italia actually increased capex in dollars, up 3% to $5.5bn. TI has accelerated European capex outlays aimed at “future proofing” the network, targeting FTTx, LTE, cloud platforms, and network transformation. In Brazil TI has focused on phased upgrades of its radio access network to 3G and 4G; 4G starts to take over in Brazil in 2017–18.

Three other European carriers had significant increases in capital intensity (capex/revenues): Orange, Telekom Austria, and KPN. Highlights from 2015 include the following:

  • KPN’s capital intensity grew 2 points to 18.5% in 2015. Spending targets include ongoing FTTC/H rollouts, carrier aggregation for increased capacity and speed in the radio access network, and an IT “Simplification” program aimed at saving opex and lowering headcount.

  • Telekom Austria’s capital intensity was also up 2 points, to 14.1% – still low but the highest for TA since mid-2012. Strong customer demand is pushing TA to accelerate its fiber rollout schedule, adding in G.fast and Vplus in some areas.

  • Orange was the group’s third-largest spender, after DT and Telefonica. Orange’s second half was very strong in 2015, growing capex by 22% in euros versus 2H14. Orange is investing heavily in fiber, mainly in France, Spain, and Poland, and in mobile radio upgrades, including a growing 4G push in its Eastern European and MEA markets. It’s also deploying an IoT service based on a dedicated LoRa network.

Similar priorities appear for other European telcos, whether capex is up or not: ongoing upgrades to speed and coverage of high-speed access networks (FTTx and LTE); network transformation of some kind (NGN, all-IP); “cloud” investments (data center infrastructure/software, SDN/NFV); and internal-focused IT revamps aimed at increasing operational efficiency, deploying services faster, and (sometimes) better competing with rivals from the OTT space. They’re also investing to expand their scope of addressable markets – pushing more into video as well as launching entirely new service types enabled by IoT connectivity.

Telcos also must reserve cash for spectrum and licenses, over and above their capex budgets. DT spent €3.8bn on spectrum in 2015, for instance, while Telefonica, Orange, and others with multinational mobile operations also bear these costs. At the same time, at least some of Europe’s telcos are slimming down their networks by spinning off assets. That’s been happening in cell towers for many years. In 2016, though, Telefonica is considering a sale of its entire domestic network of cell towers, data centers, and some subsea cable. The telco model is evolving.

Forecast outlook

For Western and Eastern Europe, respectively, Ovum expects zero and +1.2% revenue growth in 2016. Fixed revenues are slightly sturdier than mobile sales, as growth in consumer video and enterprise cloud tends to benefit fixed operations.

Eastern Europe will have an average capex year in 2016, devoting about 18% of revenues to capital spending. Some countries, Poland for instance, have already reached their capex peak from the combination of 4G and FTTx expansion. Others, like Romania, are still scaling up.

Western Europe is facing cuts. Capex/revenues measured 17–18% for the past two years, far above the region’s historic average of around 14%. Lots of focus is on capital spending to lower opex. The benefits can be highly speculative, though, while the costs are front-loaded. Vendors need to come armed with evidence (e.g. TCO studies) to help justify some of these investments.

Appendix

Further reading

“OTT capex exceeds $60bn in 2015 on back of data center builds,” TE0006-001187 (February 2016)

“US telco capex flattens to just below $70bn in 2015,” TE0006-001181 (January 2016)

Telco–OTT Partnerships Tracker: 2H15, TE0004-001056 (January 2016)

“Telco spin-offs enable the rise of a new breed of network specialists,” TE0006-001177 (January 2016)

Cable Dominates Telecom Sector M&A in 2015, TE0006-001176 (January 2016)

Communications Provider Revenue & Capex Forecast: 2015–20, TE0006-001167 (December 2015)

Communications Service Provider (CSP) Revenue & Capex Tracker: 3Q15, TE0006-001172 (December 2015)

Telco Data Centers: Build, Buy, or Lease?,TE0005-000774 (December 2015)

Network & Tower Sharing Analyzer: 3Q15, TE0006-001144 (November 2015)

Author

Matt Walker, Principal Analyst, Intelligent Networks

matt.walker@ovum.com

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