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 cash flows.
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.