June 7 (The following statement was released by the rating agency)
European internet service providers may increase
customer bills to help pay for network investment and limit further pressure on
cash flows if the EU introduces rules preventing them from discriminating
between different types of data traffic, Fitch Ratings says.
The proposals, which have not been published, but which were outlined by
commissioner Neelie Kroes in a recent speech to the European Parliament, are
known as net neutrality. They mean ISPs would not be allowed to block or
throttle back broadband speeds for high or excessive users of services such as
Skype, YouTube and Netflix. ISPs, particularly incumbent telecom companies, are
investing heavily in their networks to accommodate the massive expansion in
data, but we believe that the content providers will be the main beneficiaries
of this growth.
Meaningful revenue- or investment-sharing agreements between ISPs and content
providers have failed to materialise so far. Forcing ISPs to treat all data
traffic equally would prevent them from transferring some of the costs to the
content providers by charging premium rates to carry or prioritise their
traffic. It would also reinforce the trend of services such as Apple's iMessage
and Skype video calls taking over from mobile operators' own messaging and
voice-call services, which is already hurting revenue.
According to Kroes' speech, ISPs would still be able to offer different levels
of service to their customers at different price levels. We believe they could
therefore choose to partially offset the high cost of new infrastructure by
increasing tariffs for end-customers. But while high-speed internet services are
increasingly a "must-have" for consumers it is unlikely that tariff increases
would be enough to fully cover the cost of investment. This could also affect
These cash flows are already under strain, particularly among southern European
incumbents such as Portugal Telecom, Telecom Italia and Telefonica,
which have made substantial cuts to shareholder dividends, partly to protect their network
investment plans. The pace at which content streaming, smart devices and
bandwidth-hungry social media are growing is likely to maintain this pressure
for investment by operators.
We continue to believe that commercial imperatives and the competitive
environment will remain the biggest drivers of operator investments, more so
than regulation. Markets like the UK, the Netherlands and Portugal have all had
a relatively high level of fibre investment, driven by the presence of strong
cable and pay-TV competition. Investment in content in markets like Belgium and
more recently the UK are also a function of the competitive environment.