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European telcos desperately seeking steady margins

PARIS (Reuters) - The deep recession hitting Europe has compounded problems in the already saturated and highly competitive mobile market and will force operators to seek strength in numbers and cut more costs.

“In Europe, every five-year-old has a phone,” said a telecoms manager, who declined to be named.

“Margins have steadily been declining all over Europe... in the UK and Spain they are eroding to nothing rapidly, Germany is still flat and there is some growth in the Czech Republic, Macedonia,” the manager added.

Vodafone, the world’s largest mobile phone company by revenue, for example has seen margins in the UK shrink to around 22 percent from around 33 percent three years ago. Deutsche Telekom’s T-Mobile UK had to digest a margin decline of more than 40 percent to 15 percent in that time.

So far, operators have adapted by expanding into emerging markets, which are seen driving global mobile revenue growth to $855 billion dollars by 2012 from $700 billion euros in 2008 according to advisory firm IDC.

They have also begun to offer data services to encourage customers to spend more by enabling them to search the Internet, listen to music and share photos with friends.

“That means European mobile revenue growth increasingly depends on how much the operators can stimulate additional use of existing services and promote uptake of new services,” IDC said in a study of the European mobile market.

“So far, their success in both respects has been steady but not spectacular.”

Under normal circumstances those measures would be sufficient to keep margins steady, but with the impact of the global recession and increased regulation designed to lower cell phone tariffs, mobile operators will have to do more.

“Even without the credit crunch, all signs indicated that the industry was reaching saturation,” Daiwa analyst Michael Kovacocy told Reuters.

“We’ve now had an erosion of voice (revenues) driven by maturity of that industry, competition and adverse regulation, and this is not going to alleviate itself once the macro economy comes back,” Kovacocy said.

THREE RESPONSES

“We can do three things in our industry, cut costs, consolidate and share networks,” the telecoms manager said, explaining that cost cutting could entail outsourcing of anything from call centers to IT development.

“But when you outsource IT development you are really cutting into the meat of the business and you relinquish control over innovation,” the telecoms manager said.

Network sharing has already begun to catch on: In March Vodafone and Telefonica agreed to share network infrastructure in four European countries to meet demand for mobile broadband, while saving hundreds of millions of pounds.

Vodafone, which also has deals in other countries, said it could save up to 10 percent in costs through passive sharing deals such as the one agreed with Telefonica.

Consolidation is a trickier issue.

Analysts and executives agree that consolidation in Europe is needed but said it was hard to tell when it would start.

France Telecom’s finance chief Gervais Pellisser told the Reuters Global Technology Summit the environment was difficult because financial markets lacked the stability to provide funding, and he noticed signs of increased protectionism.

On recurring rumors that France Telecom’s Orange brand could buy T-Mobile UK, Pellissier quashed speculation saying there was no interest because with a competitive market such as the UK, you could not guarantee holding on to the customers.

Companies could opt for a consolidation in kind by combining two businesses instead of a takeover as it would not require cash or a premium and save costs by shutting down one network, closing excess shops and cutting jobs.

“Business needs to get really ugly though before companies agree to that” the telecoms manager said.

But despite the three-pronged response, pressures will continue as smaller rivals have a field day, offering simple voice plans which do not include subsidized handsets.

Stan Miller, the head of Dutch operator KPN’s international mobile business, told Reuters that operators would have to lose their fixation with average revenue per user (ARPU).

“ARPU schmarpu... You can have 100 euros ($138) ARPU, but what happened to the margin you actually make, what happened to your cash flow?” he asked at the summit.

KPN has enjoyed huge success in Europe since it launched the first of its many no-frills offerings four years ago.

France’s number two broadband player Iliad has said it also sees the chance to offer cheap mobile deals and will bid for the fourth license, which is expected to come up this year.

On top of competition pressures, operators will also have to confront new challenges after the European Commission adopted guidelines to slash the cost of routing mobile calls, known as MTR rates -- an important revenue stream for large carriers which has also acted to prevent new entrants to the market.

($1=.7254 Euro)

Editing by Hans Peters

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