Top European telecom operators are unable to raise prices evenly to combat inflation across Western Europe, highlighting a split between northern and southern markets.
Many telecom operators are looking to pass on some of the burden of rising energy and labor costs to customers through price hikes. In northern markets, companies have been able to either increase prices or keep them stable without experiencing high churn. In southern markets, however, pricing in rising costs has been more challenging.
In markets like the U.K., Norway and Belgium, telecom operators reported growing revenues, including average revenue per user, in the quarter ended June 30. In Germany, France, Switzerland and the Netherlands, both overall revenues and ARPU remained largely stable. In Spain and Italy, two of the most competitive markets in Western Europe, both metrics tumbled.
"Price sensitivity among consumers varies considerably across Europe," said Adrian Baschnonga, global technology, media and telecommunications lead analyst at consultancy firm Ernst & Young. The firm's research found, for example, that one-third of Swedish households are concerned about potential broadband price hikes, versus nearly two-thirds of households in Italy and Spain.
The difference reflects years of heightened competition in Southern Europe, where new market entrants often used low-cost offers to try to grab share, Baschnonga said.
North vs. south
One of the best markets for operators in Europe is the U.K., where all carriers have included automatic price increases in contracts with customers in line with the inflation rate. BT Group PLC reported 5% year-over-year revenue growth for its U.K. consumer unit in the second quarter as broadband ARPU climbed nearly 8%. BT Group's mobile ARPU for the U.K. consumer unit advanced more modestly, up 0.6%.
Vodafone Group PLC's second-quarter revenue grew 6.5% year over year as its mobile ARPU increased by 8%. Churn from contract customers choosing to drop service increased slightly during the period, to 12.5% from 12.2%.
Virgin Media O2, the joint venture between Liberty Global PLC and Telefónica SA, was a market outlier, reporting revenue growth of 0.2%. CEO Lutz Schüler attributed the weaker performance to promotional pricing and lower automatic increases in its contracts versus those of competitors. Virgin Media O2's fixed ARPU will increase later this year as more people are coming off their minimum contract length, Schüler said.
"Most northern markets like the U.K. have a clear leader in subscriber and revenue share, which would take some jeopardy out in implementing price increases by having a sort of buffer to cushion the short-term effects of price changes," said Theodore Calaor, a telco analyst at Kagan, a media research group within S&P Global Market Intelligence.
Competition rules
Conversely, there is no clear leader in southern markets like Italy and Spain, making price hikes riskier, Calaor said.
In Italy, Telecom Italia SpA reported a revenue decline of 4.8% in the second quarter, while Vodafone's income fell 2.3%. Wind Tre, a joint venture between Wind and Hong Kong-based CK Hutchison Holdings Ltd., saw its revenues in the country fall 6% in the first half of the year.
"All players operating on both mobile and fixed have so far chased the price leader of the moment, with the result that users are quite accustomed to frequent changes of operator," said Massimo Comito, a former Telecom Italia executive who now works as a technology, media and telecommunications investment adviser. "I think it is difficult to assume, at least in Italy, that all the operators will manage in unison to raise prices if at least one of them does not stop chasing the first hare that runs."
Italy is the only market where the three major operators posted declines in revenue and ARPU. A fourth, Xavier Niel's iliad Holding SAS, is set to report its financial results at the end of August. Iliad has been growing revenues quickly in both Italy and France as a market challenger.
In Spain, Telefónica was the only leading operator to report increased revenue and ARPU in the second quarter, at 1.3% and 3.1% growth, respectively. The pending merger of the Spanish operations of Orange SA and MásMóvil Ibercom SA, announced last month, will reduce the number of operators in the country, which some expect will give more leeway to all operators to raise prices.
Testing price limits
S&P Global Ratings analyst Mark Habib said Southern European operators might try "tentative price hikes" as a test, but not of the same magnitude as those seen in Northern Europe.
In Switzerland and the Netherlands, telecom executives pointed to challenging market conditions, though revenues and ARPUs in those countries remained more stable than in southern markets.
"Ongoing competition and price pressures led to a further decline in revenue from telecoms services," Swisscom AG said of its Swiss business, which reported a 0.4% decline in second-quarter revenue.
In Germany, Deutsche Telekom AG reported revenue growth of 2.7% thanks to growing net subscribers. Its mobile ARPU was flat.