21 January 2021

Until a few years ago, there was a prevailing trend of consolidation in European mobile markets – for example, in Germany, Austria and Ireland. However, we have more recently seen several new entrants, with 1&1 Drillisch entering the German mobile market and the launch of Iliad Italy.

The news from Portugal’s recently completed entrant auction indicates that Másmóvil – the fourth operator in Spain – is set to become Portugal’s fourth mobile operator under the Nowo brand. Is this a sign that we can expect a wave of entrant mobile operators in Europe?

Four indicators for entry

For a viable business case for entry, a new mobile operator requires an environment that allows it to both gain market share as well as construct its network cost-efficiently. We identify four major factors which affect these two imperatives:

  • Is there sufficient market space for a new entrant to compete?
  • How easy is it for the new entrant to build volume? Does it already have a foothold in the market?
  • Is there a mechanism for the new entrant to acquire spectrum at a reasonable cost?
  • Is the new entrant readily able to access infrastructure, especially good quality cell sites?

We illustrate these indicators by considering the rationale for recent new entrants in Germany, Italy and Portugal, contrasting with two countries – Greece and Czechia – which recently conducted 5G spectrum auctions but new entry did not occur.

Is there sufficient space to compete?

This is ostensibly a question of how many players a market can support. Germany was historically a four-player market until the acquisition of E-Plus by Telefonica. Given the size of the German mobile market (~110 million subscribers) and that 1&1 Drillisch was already a significant MVNO (mobile virtual network operator) prior to entry, there appeared to be sufficient space in the market. The entry of Iliad Italy was a direct consequence of the four-to-three consolidation of Wind Tre, again indicating that four players can be supported in the larger European markets.

In smaller markets, such as Portugal, Greece and Czechia, the case for four players is less evident, given their relatively long history as three-player markets. However, as we see below, ARPU in three-player markets is typically higher than in four-player markets, so there arguably may still be some space to compete.

Figure 1: 2019 market ARPU in selected European countries [Source: Aetha]

Does the entrant already have a foothold in the market?

In Germany and Portugal, the entrant already offered mobile services as an MVNO before deciding to build its own infrastructure. However, while 1&1 Drillisch was a significant MVNO with around ten million mobile customers, Nowo is primarily a fixed service provider with a limited wireless customer base. Nonetheless, in both cases there is a strong existing brand and customer base to leverage. In Italy, however, Iliad was completely fresh to the market.

Both Czechia and Greece have limited MVNO markets; and while both countries have fixed operators that do not offer mobile services, they tend to be relatively small in scale.

Is there regulatory intervention to help entrants acquire spectrum?

New market entrants generate increased competition, typically leading to price erosion – see for example the impact on market ARPU in France & Italy. This benefit to consumers is one of the main reasons (among others, such as stimulating innovation) why regulators can be keen to promote entry. Intervening to provide preferential access to spectrum is an important mechanism to encourage entrants.

Figure 2: Price erosion following entry of challenger MNOs [Source: Aetha]

Iliad Italy’s entry was facilitated by the divestment of some of Wind Tre’s spectrum as part of the merger remedies. Similarly, a new player acquiring spectrum in Portugal without the distinct entrant auction would have been much less likely.

In the recent Czech auction, a single 2×10MHz block in the 700MHz band was reserved specifically for non-incumbent operators. Likewise, Greece’s 5G auction implicitly reserved 100MHz spectrum in the 3500MHz band for an entrant, if one had participated in the award and competed with the incumbents in other bands.

However, there was no such reservation in the 2019 German auction – 1&1 Drillisch was required to outbid the incumbent operators for the spectrum it acquired.

Can the new entrant readily access network infrastructure?

Iliad Italy was able to acquire cell sites ahead of its launch due to the Wind Tre merger remedies. It has since sold its infrastructure to the TowerCo Cellnex, whose market presence furthers Iliad’s opportunities to lease new cell sites. Similarly, the presence of Cellnex in Portugal (Cellnex owns all of incumbent operator NOS’ towers) should help Nowo deploy its network more easily than having to find its own sites or sign an agreement directly with a competitor.

In 2019, there was no large independent TowerCo in Germany. While 1&1 Drillisch would have seen its existing fixed points of presence as a useful resource, it did not have the same advantages as Iliad or Nowo. Similarly, there is not a well-developed independent tower market in Greece (with Vodafone and Wind Hellas already having a network sharing JV). In Czechia, independent České Radiokomunikace owns around 1000 cell towers, which could have provided a starting point for a new entrant.

What does this tell us about the likelihood of entrants in the future?

As illustrated below, where the conditions have been conducive for entry, entrants have appeared. However, only time will tell whether these entrants are sustainable or if we will see a swift return to consolidation – as was the case following Tele2’s entry in the Dutch mobile market.

Figure 3: Summary of indicators for each entrant case study

Looking ahead, the next main opportunities for entrants are the upcoming spectrum awards in Denmark, Poland, Spain and the UK (outside of any remedies from merger activity). However, as these are all already four-player markets, entrants appear unlikely. Additionally, the award formats do not offer any advantage to non-incumbents (e.g. entrant reservations).

Further ahead, Belgium is a three-player market and the government has mooted the possibility of an entrant reservation in the upcoming auction. Otherwise, there appear limited further potential cases in Western Europe, and although Eastern Europe does have mostly three-player markets, the typical market profile is sufficiently similar to Greece and Czechia that we would not expect a wave of new entries.

Perhaps, then, the recent appearance of entrants may be more of a short-lived fashion than a long-lasting trend.

Authors

Lee Sanders
Lee SandersPartner
Jonathan Wall
Jonathan WallManager
Callum Lerigo
Callum LerigoBusiness Analyst