European Telecoms: Spain The Outlier As Prices Recover

Spanish telcos market has been very competitive over the past four years with low cost brands

After a EU telco “virtual” trip approaching key themes that includes pricing, COVID impact, infra monetization, BoA Global Research concludes that Spanish price pressure is the exception. “Price competition is intense with early back-to-school activity and the return of football”, the analysts explain. They met with Euskaltel, Masmovil, Vodafone and Telefonica.

In MasMovil they spoke with Head of IR & Finance, Javier Marin and IR Luis Prota. The company remains confident in their value proposition despite significant price discounting in the market around them and notes the potential economic need for wider consolidation. New PE (private equity) ownership is not expected to change their strategy nor medium-termguidance.

Recent developments: The market is becoming more competitive. Masmovil saw Telefónica and Orange follow Vodafone with unlimited data mobile-only packages. Vodafone and Telefonica gave 40-50% discounts over headline price, €20-25 per month; no promotion yet from Orange, around €40. Also seeing change to normal patterns in terms of earlier back-to-school and football campaign; LaLiga and Champions League finished July/August, this gave rise to promotional activity by Telefonica and Orange on football withbig discounts of 50%. Seeing more initiatives in the mid end with Virgin/Euskaltel launch recently. Orange fulfilled promise oflaunching convergent propositions with Simyo and Republica Movil, tariffs around 10-20% cheaper than comparable offers. This has increased the number of convergent brands on the Spanish market, from 13-14 brands before summer to around 16-17. August was weaker for mobile portability for Masmovil, but broadband so far is so good. Consensus is FY broadband adds 330-340k, have done 220k for H1.

At Vodafone, BoA Global Research spoke with CEO Antonio Coimbra.Vodafone also observing an increase in competitive intensity, but is competing well with its Lowi fighter brand and a more for more strategy.

Spanish market: The last month saw Orange repositioning. In the low end, Orange’s brands are matching Virgin and Digi. The more risky moves are by the main Orange and Telefonica (Movistar) brands, which have reduced entry points to lower levels. In the low end Vodafone is competing tactically with Lowi, also taking a more for more approach similar to Telefonica and Orange pre-COVID with mobile and fixed prices increasing up to €3 per account, in convergent up to €6, moving mobile to unlimited data and in fixed increasing speed from 100 Mbps to 300 Mbps. Sept back-to-school promotional activity is high, up to 50% over 6 months, insome cases 12. In football, Vodafone is seeing aggression between Telefonica and Orange (no longer Vodafone).

Euskaltel, where the analysts spoke with CEO Jose Maria Garcia, is confident that its flexible value proposition through the Virgin brand should succeed, while agility on wholesale platforms and viaalternative sales channels should ensure an optimal approach.

COVID impact: Euskaltel has managed the COVID process well, allowed customers to suspend the service rather than have people churn. This gives the opportunity for customers to come back online. Particularly this was done for the SOHO customers, also promotions to students. Euskaltel’s regions are some of the least impacted by COVID; business in territories are industrial, long-termbusinesses with high GDP. The company is a 25-year old company with very solid, long-term relationship with customers in both SOHO andB2B; in many cases, see increase in services to some customers, particularly B2B. In residential, the firm is seeing traffic volumesalmost back to levels in May, this is the result of continuing high levels of home working still.

Price sensitivity: Spain has been very competitive over the past four years with low cost brands, there are now 4 million customers churning every year. Now customers ask more for value, they want reliable internet/TV, good customer care. It has seen how Vodafone increased prices this week on future 5G, seeing the same at other operators, also Euskaltel increasing prices. Customers don’t only care about price, they did this in the past, therehave been a lot of clauses, misleading info and penalties, etc.

CFO Laura Abasolo was the contact peron in Telefónica. The Spanish telco remains firmly committed to its strategy, but notes the need to go farther and faster: (1) it remains committed to investment grade credit, managed existing maturities well, will look to increase EM debt; (2) could still consider a Latam demerger, also sub 50% Telxius; (3) Spanish momentum improved, UK solid but slower handset availability, Brazil prepay and FTTP momentum better.

Focus on Spain:

Competition: ARPU can be stable or slightly increasing in H2; this is the aim internally. There’s no doubt low end competition dilutes ARPU. But net adds can have a positive impact on the top line. Telefónica still thinks there is room to move customers up theladder in the high end with additional content and new service such as Alarm, Telefonica customers also have priority service withdedicated agents, this is important in current conditions.

Capex trajectory: Two years from now, Spain capex should come down. FTTH coverage is nearly complete. Telefonica notified 2k out of >8.5k local exchanges to close. The ones Telefonica is closing are the ones that only Telefonica is in, so there’s lesssavings. But Telefonica will accelerate plans, wants to be copper free by 2025. By that point, most 5G should be done, capexgoing forward should be lower vs. current levels.

Wholesale: Wholesale business has always been important, almost 20% of revenue, obviously profitable. Aſter the loss of Yoigo, it’s growing again and there’s potential with copper wholesale moving to fibre wholesale. Telefonica has to be conscious of thelink between wholesale and retail. Some wholesale contracts from competitors have not been rightly done; Telefonica will go forwholesale opportunities but is mindful of terms.