European telecommunications companies are experiencing a brighter outlook thanks to recent regulatory changes that promise increased competitiveness and growth in the sector. These changes focus on deregulatory efforts that could potentially enhance industry consolidation and pricing power. Andrew Lee, head of the Technology, Media, and Telecom Group at Goldman Sachs Research, provided an optimistic forecast following discussions held at the European Communacopia Conference. During the event, telecom executives deliberated on future industry projections and the implications of Mario Draghi’s recent report on the EU’s competitiveness.
Improved Market Conditions
European telecom companies are witnessing an acceleration in growth and returns, significantly driven by the recent deregulation of digital infrastructure. This has led to an environment where market restrictions are gradually being eased, which could further stimulate industry consolidation and pricing power. Despite these positive trends, investor confidence remains subdued, with consensus forecasts predicting a decline in growth by 2025. As share prices reflect these conservative estimates, the current environment offers a unique upside potential for telecom stocks if the sector’s growth sustains.
Telecom executives remain optimistic about the sustainability of these growth trends into 2025, attributing their confidence to the increased pricing power in fiber broadband and improved market performance in concentrated mobile markets. Historically mired by heavy regulation, the sector is now entering a transformative phase that opens up new growth opportunities. The deregulation efforts are particularly pivotal in reshaping the competitive landscape, making it more conducive to investment and growth. This shift marks a departure from the traditional stagnation associated with stringent regulatory frameworks.
Attractive Growth Numbers and Market Dynamics
The projected growth numbers for European telecom companies present an appealing picture, with 2-3% in top-line growth and 4-5% or higher in EBITDA, translating to double-digit free cash flow growth. These figures represent a significant shift from the sector’s historic low-growth patterns, showcasing the positive impact of deregulation efforts. By fostering a more favorable market environment, these policy changes enable telecom companies to capitalize on emerging opportunities, driving industry-wide growth and development.
Historically, the minimal growth in the European telecom sector resulted from stringent regulations designed to keep consumer prices low. These included direct price regulation in fixed broadband and market concentration regulation in the mobile sector, enforcing a four-player competitive framework. Over time, these regulations led to diminishing returns, with return on invested capital (ROIC) dropping from double digits 15 years ago to mid-single digits, now trailing below the cost of capital. This historic context underscores the transformative potential of current deregulatory efforts that aim to rejuvenate the sector.
Driving Forces of Change
The main driving force behind the current bullish sentiment is the ongoing deregulation, particularly noticeable in the fixed broadband sector. Local regulators who have already deregulated fiber broadband signify a broader trend towards easing market restrictions to encourage investment. This drive to lighten regulatory burdens is expected to spur further growth and innovation within the industry. There’s also a potential shift in mobile market concentration regulations that could provide another boost to the sector.
For mobile markets, the current focus is on encouraging investments while maintaining competitive consumer prices. Past regulations successfully kept mobile markets competitive and prices low, facilitating substantial investment in 4G infrastructure despite the stringent rules. However, returns currently falling below the cost of capital pose a threat to 5G investments, placing Europe behind the US and Asia in the rollout of 5G technology. Deregulatory changes are aimed at rectifying this imbalance and positioning Europe more favorably in the global telecom landscape.
Mario Draghi’s Influence
Mario Draghi’s report, commissioned by the EU, emphasizes the urgent need for regulatory changes to bolster European competitiveness. Draghi highlighted the necessity of market concentration to drive investment within European mobile services, advocating for a regulatory shift that encourages growth. His report has been positively received by telecom executives, who view it as a pivotal indicator of impending regulatory relaxation that is likely to foster a more investment-friendly environment.
The discussions at the European Communacopia Conference underscored a tangible shift in regulatory perception that increasingly favors investment. The recent change in the head of the EU competition authority is also perceived as a positive development, suggesting that the regulatory landscape is evolving in a manner supportive of industry consolidation and growth. These changes are expected to catalyze further investments, driving the sector towards a more competitive and dynamic future.
Investor Implications and Market Potential
European telecommunications firms are seeing a more promising future due to new regulatory changes aimed at boosting competitiveness and growth in the industry. These updates focus on reducing regulatory hurdles, which may promote industry-wide consolidation and better pricing strategies. Andrew Lee, the head of the Technology, Media, and Telecom Group at Goldman Sachs Research, shared an optimistic outlook after attending the European Communacopia Conference. At the conference, telecom industry leaders discussed future projections and the potential impact of Mario Draghi’s recent report concerning the EU’s competitiveness. These discussions suggested that the sector could benefit from a more robust competitive environment, aiding both the companies and their consumers. Additionally, Draghi’s report emphasized the importance of innovation and efficiency for the EU’s economic future, further hinting at a favorable climate for telecom companies moving forward. This combination of regulatory reform and strategic foresight appears to set the stage for a dynamic and thriving telecommunications sector in Europe.
