Findings from the PTS in Sweden contradict some of those drawn by the EC, challenging the idea that the US telecoms market is a much more profitable place to invest
The regulator’s analysis indicates that returns in the telecoms sector declined from 8%-13% in 2008 to 5%-7% in 2022
On 28 June 2024, Sweden’s Post and Telecom Authority (PTS) published a report on telecoms operators and their returns on investment. The regulator highlights the EC’s recent connectivity White Paper, which states that the average revenue per user (ARPU) of operators in the EU is low compared to those in Japan, South Korea and the US, leading to a declining return on capital employed (ROCE). According to PTS data, the Swedish retail market for telecoms services generates revenues of around SEK50bn (£3.6bn) per year, which has been stable over the last 15 years, although the revenue mix has shifted away from fixed telephony to broadband and mobile data. Investment levels (relative to sales) have also fluctuated, with mobile network investment decreasing from 2008 to 2022 before rising. In contrast, fixed network investment increased between 2008-2017 and fell thereafter as operators’ fibre rollouts neared completion. The PTS has acquired data from listed telecoms operators for the 2008-2022 period and compared the performance of Sweden to Europe, North America and the rest of the world. The regulator finds that return on invested capital (ROIC) was around 8%-13% in 2008, depending on the region. However, by 2022, average ROIC is around 5%-7% in each region. In the case of operators in Sweden, the decline in ROIC is mostly driven by a decrease in net operating profit after tax (NOPAT).
No clear difference between returns in the EU and the US, while the capex-sales ratios in the two regions have also converged
Based on its analysis, the PTS draws five key conclusions:
Consumers in Sweden have enjoyed more value for money, with the cost of connectivity per unit of data decreasing substantially since 2008;
There has not been a clear difference in ROIC or ROCE across North America, Europe, Sweden and the rest of the world, contradicting the EC’s conclusions in the white paper. The PTS considers this finding particularly interesting in light of arguments that European markets are less concentration and have lower regulatory barriers to entry compared to the US;
Given the decline in ROIC and ROCE, it is likely that firms will attempt to increase returns either by reducing costs or by increasing prices, or both. Companies may also try to achieve higher returns through consolidation, especially if merger control become less strict in the future;
Capex to sales was higher in North America compared to Europe, including Sweden, from 2008-2013. Since then, the two regions' ratios converged, except in Sweden, where operators exhibited a higher capex to sales level (due to large investments in fibre broadband); and
In a nod to the ‘fair share’ debate, growth in fixed broadband data traffic could be managed through investments in core routers. For mobile networks, there are a number of ways to handle more data, such as increasing the availability of spectrum or investing in new sites.
Operators may have a greater incentive to merge or raise prices in future, particularly if they come under increasing pressure
The PTS outlines three potential implications of its analysis for operators in Sweden:
An increased interest in consolidation as a response to the declining returns on investment;
Price increases as a result of inflation and/or in-market mergers; and
Increased competition from other stakeholders in the electronic communications ecosystem (e.g. satellite players or content and application providers) that could put pressure on the returns of operators, as well as on prices.
The research is timely and comes amid discussions – and concerns – in the EU about the sector’s ability to deliver the investment needed to drive the region’s digital transformation, particularly without further regulatory intervention. A recent report from the EC found that many Member States are not making sufficient progress to achieving the bloc’s Digital Decade targets. As the PTS references, an influential voice in the debate is Enrico Letta, who has set out a vision for Europe’s single market and its telecoms industry, including greater spectrum harmonisation and a review of net neutrality rules. Alongside Mario Draghi’s forthcoming report on EU competitiveness, Letta’s proposals could substantially impact the EU’s strategic agenda for 2024-2029.
