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Focus on the US telecom market

by Yves Gassot

The United Statesí telecommunications services industry posted consolidated sales of EUR 239 billion in 2011. Compare this figure to those of the related television services industry (116 billion) and the European telecommunications sector (248 billion for the EU-27). For the past two years or more, mobile services revenues (126 billion) have surpassed those from broadband and data (53 billion) and the shrinking fixed telephony segment (60 billion) combined.
Like most Western countries, the industry has experienced major upheavals in recent years. For decades US telephony had been essentially structured around a private monopoly. In 1982, as the result of an antitrust lawsuit, AT&T agreed to divest itself of its regional companies. It preserved its domestic and international long-distance activities but then had to fend off aggressive competition in those markets from MCI and WorldCom, while the regional companies remained very dominant in their local markets. Ultimately the heightened competition in long distance and the overinvestment that led to the bursting of the bubble (and the historic collapse of WorldCom) in the early 90s paved the way for the Baby Bells. After multiple mergers, including the ultimate absorption of MCI and AT&T, the Baby Bells grew up into the two market leaders: Verizon and AT&T.

While both American and European markets are hemorrhaging landlines (-9% per year in the US) and the related phone revenues, there are at least two differences on the US side:

  • The influence of cable, which is available to some 90% of households: In just five years, cableís market share of new broadband subscribers has leapt from 40% to more than 80%. AT&T and Verizon are only competing where they have made massive investments to rebuild their access networks (U-verse for AT&T, mainly with hybrid FTTN technology, and FiOS for Verizon, with FTTH/B). Note that ARPU for these two operatorsí triple play bundles in these areas is over USD 140, in stark contrast with the ARPU of triple play offerings in Europe . It is possible that the difference in television spending between the two regions is one of the particular challenges European operators face in achieving a satisfactory return on their FTTH investments. For many years Europe seemed ahead of the rest in broadband development with the success of ADSL, but cableís ability to offer ever-higher data speeds (thanks to Docsis 3.0) and Verizonís and AT&Tís newly built FTTx networks have turned the tables when it comes to super-fast broadband.

  • Strong mobile revenue growth: For a long time the mobile segment in the United States seemed to lag behind its European counterpart in terms of penetration rates, handicapped by the presence of multiple competing standards (CDMA, GSM, iDEN). But here too the tables have turned over the past two to three years. Verizon Wireless has established itself as the world leader in 4G (with more than 10 million LTE users as of Q2 2012), followed by AT&T, Sprint and MetroPCS rollouts now. Plus, while Europeís revenues are shrinking by 3% to 4% per year, the US market continues to grow in value at a pace of about 5% annually. Several factors can explain this difference. First is the impact of the macroeconomic situation on the markets in the south of Europe, which has resulted in plummeting revenues in Greece, Spain and Italy. In France, the more recent entry of low-cost operator Free has further accentuated the downward trend in that market. But even in Germany revenues have slipped the past several years. In the States, on top of a strong subscriber growth rate (+6% per year), the increase in data revenue spurred by the smartphone boom has more than offset the drop in per-minute prices for mobile calling. This is much less true in Europe, where competition is much more competitive and the attrition rate is much higher , driving down prices. Thus in the one case we see ARPU continuing to trend upward (especially for Verizon and AT&T), while in the other case ARPUs seem doomed to slide further.

In these differences we can see why the marketsí valuation of telecom securities varies depending on whether they are looking at the big European operators or the North American market leaders.
Are US operators benefiting from a lack of competition, while Europe is handicapped by its more than 90 active mobile operators (EU-27)? This is a much-discussed point. According to the Herfindahl-Hirschman Index (HHI) the US market, which has four national operators and a handful of others with more limited coverage , is less concentrated than most national markets in the Old World, and much more so than the European market as a whole (if the entire 27-country Union were considered a true single market). Furthermore, if you consider the advantage of the economies of scale in a market as large as AT&T and Verizon have (each with more than 100 million customers), the absence of any truly pan-European operators seems to be a handicap.
Overall, though American operators too must face the major changes of an all-IP world where services and applications are shifting to OTT players, this marketís leaders appear to be in the best position to deal with these challenges.


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