Will other European fixed broadband markets end up like the UK?

Mergers and acquisitions abound in European broadband markets this month: the German ISP United Internet announced this week that it intends to acquire the DSL subscriber base of its competitor, freenet, for about EUR123 million, and Tiscali finally found a buyer for its UK operations. TalkTalk Telecom’s recently announced acquisition of Tiscali UK gives control of more than 74% of the UK’s retail fixed broadband market to three very different major players, and potentially signals the cessation of M&A activity in the UK fixed broadband market. The remaining operators have little to offer one another: those that differentiate are strong enough to stand alone, and those that do not are not necessarily valuable enough to merit acquisition. Germany is taking a step towards, and the UK is joining, other highly consolidated European markets such as France and Sweden, playing out one potential endgame for fixed broadband across Europe.

Figure 1: Equivalent UK retail fixed broadband market share, 1Q 2009 [Source: Analysys Mason, 2009]

Depending on the country, major operators tend to fall into one of the following six categories, and it is likely that a maximum of only one of each type can survive in most broadband markets.

• The incumbent: Incumbent operators will continue to maintain a significant market presence because their brands are strong and, in most cases, consumers have a high level of trust in them. Incumbents also have the advantage of market inertia, in that a proportion of subscribers are relatively insensitive to which player provides their services and would therefore remain with the incumbent irrespective of the relative strength of its offering.
• The price-leader: Price-leaders with simple fixed-line service propositions (such as TalkTalk and Tiscali in the UK, or Tele2 in other markets) may not be able to thrive in a recession simply because they have too little margin to invest in as a means to buy customer loyalty. To counter this, players are attempting to achieve greater economies of scale through mergers and acquisitions such as the deal between TalkTalk and Tiscali.
• The value bundling player: An approach not fully emulated in the UK, but popular in France, is that of Iliad (operating under the brand ‘Free’), which has offered a bundle of broadband services priced at EUR29.99 per month since 2002, later adding new services (such as IPTV, and flat-rate and international voice calling) and higher-speed broadband access. Iliad’s highly successful approach was to continue to develop and increase the perceived value of its service at no extra charge.
• The content-centric player: Cable (and satellite) operators frequently have larger content portfolios and longer-standing relationships with content rights holders than their telco counterparts. Spend on TV services seems relatively protected from the effects of the recession, so content-centric players will find it easier to maintain service differentiation and, as a result, their market shares during the downturn. The UK is a tough market for TV services because of the presence of two well-established and successful pay-TV operators (BSkyB and Virgin Media) and a strong free-to-air DTT proposition.
• The ‘premium’ or high-speed broadband player: The evidence of demand from other European markets suggests that most consumers are reluctant to pay a significant premium for a suite of services based on higher access speeds, which would be required to fund the network roll-out. However Virgin Media, as with many other cablecos, is well positioned to offer higher-speed services over its cable network relatively inexpensively.
• The mobile-centric player: Mobile-centric players have an opportunity to maintain their shares of the broadband market as long as their fixed and mobile services are bundled attractively, but they have little incentive to prevent fixed–mobile broadband service substitution, which could undermine any growth in the fixed broadband subscriber base. O2 and Orange offer fixed broadband services alongside their mobile services in the UK: O2’s share of the retail broadband market is growing, but Orange’s is shrinking.

A market that consists of only a few of these players is likely to become the norm throughout Western Europe – particularly in markets where a single player competes strongly on more than one front (such as SFR in France, which is both mobile-centric and follows the value bundling strategy, or Virgin Media in the UK, which aims to compete on both content and speed). More-fragmented markets, such as Germany or the Netherlands, have a proliferation of operators with relatively undifferentiated propositions and are therefore ripe for consolidation – as the freenet acquisition indicates.

Whether European markets eventually consolidate to two or six major players, few customers will be left for operators that do not dominate in one of the above areas. Any remaining business is likely to be slowly squeezed into a niche market – the market share of players outside of the top 20 European broadband operators is already compressed to 38% of all subscribers, shared between thousands of players. In the long term, many operators will need to follow Tiscali’s lead by consolidating their operations, and picking their markets wisely.