Europe Mobile Operators Will Merge, Because Scale Matters

Economies of scale always are important in the global telecom business, which is one reason why firms tend to become bigger, and fewer, over time. A consolidation process has been underway in most regions and countries since at least 2001, but many believe Europe will be the focus of much activity in the years ahead, in large part because scale economies have not yet been maximized.


With the mobile market saturated, and average revenue per user dropping, scale is nearly always seen as one way to arrest the negative impact on service provider revenues. Simply, if organic growth is difficult, a service provider can buy growth by acquiring new customer bases and revenue streams outside the existing market.


Of course, volume alone does not "cure" declining average revenue per user problems. But greater scale allows service providers to operate more efficiently, wringing costs out of operations. On the other hand, one typical way of compensating for declining ARPU is to increase sales volume. Selling more units helps keep total revenue in line, even when ARPU is lower. 


European mobile data use has so far failed to compensate for the sharp decline in mobile voice revenue, according to Wireless Intelligence research. A 2011 study found that mobile ARPU across the 27 European Union (EU27) countries had fallen by 20 percent over the last three years, dropping from EUR25 in 2007 to EUR20 in 2010 on average. 


The drop was caused primarily by ongoing declines in the average per-minute price for voice calls, which dropped from EUR0.16 to EUR0.14 in the EU27 mobile markets over the period.


Over the past decade, smaller service providers have been buying other companies, and larger tier-one service providers have been making cross-border investments to boost scale. 


But Yankee Group Research VP Declan Lonergan isn't so sure the consolidation process will proceed as much as some believe, though. "There will certainly be more sharing of networks, joint-procurement partnerships, and even acquisitions of fourth-placed operators by market leaders within individual markets," he says. "But it would be naive to think national regulators will stand by and watch all of the work they have done to foster competition during the past twenty years be swept away by a wave of consolidation."


Nor will the wave of consolidation necessarily reduce the amount of competition in national markets. Longergan believes "all European countries will still have at least three competing operators five years from now, along with at least two viable MVNOs."