BMI View: The Portuguese telecoms market is mature and exhibits volatile growth. Market saturation, low discretionary spending and over-dependence on pre-paid subscriptions all contribute to an industry outlook that is far from optimistic. However, changed ownership for all key players bar Vodafone suggests that more rational investment strategies will be employed in pursuit of more advanced, monetisable, services. This will be a boon to the weak consumer market, but the surviving operators will need to be leaner and fitter to weather the changing competitive conditions. Tower sales or spin-offs should therefore be considered, but the low-cost nature of the market will challenge even the most experienced players.
An unattractive market, from grassroots upwards
Portugal plays host to the least attractive of Western Europe’s telecommunications markets, scoring just 46 points out of a potential 100 on BMI Research’s sectoral Risk/Reward Index (RRI), published in October 2016. That score, which lags even that of Greece, was downgraded slightly to take account of the weakened Euro relative to the US dollar (telecoms investment potential is measured in dollars) as well as negative net mobile subscriber growth in the first six months of 2016. An improvement is not anticipated in the short to medium term.
Our view of the market is also coloured by increased opacity of the market’s key players. Private ownership may well provide for a more rigorous and rationalised approach to developing next-generation networks and services, but it also provides less clarity on operators’ success (or otherwise) in adapting to changing market conditions. MEO and Nos have also realigned their mobile businesses to function as part of broader converged fixed-mobile service propositions, making it difficult to compare their performances.
ARPU-dilutive convergence moves require asset sales
Nevertheless, it is clear from the available data that the roll-out of 3G/4G networks and attractively-priced data bundles has driven consumption of advanced non-voice services. In particular, there has been increased momentum in the upselling of dual-, triple- and quad-play services, reducing churn and improving customer retention. Subscription losses result from the disconnection of standalone mobile products and the replacement of dedicated mobile broadband connections (dongles, M2M SIMs, etc) either with voice-and-data smartphone packages or multi-play bundles.
Although improved customer retention goals are being met, this is coming at the cost of underlying revenue and ARPU erosion as subscriptions are being spread across multiple services. Interestingly Vodafone - the only mobile player lacking a significant wireline/convergence business - is the only operator to have seen ARPUs stabilise. MEO and Nos have seen their ARPUs dip well below the €10/month level in 2016.
While MEO and Nos can subsidise the mobile aspects of their businesses from new revenue streams such as content, value-added services and IT operations, this will still be quite limited as content - in particular - is increasingly expensive to acquire and/or make. As MEO and Nos are still in the process of transforming their businesses, we believe they will be looking at positioning those businesses for future profit growth. Non-core assets will be disposed off or wound down - MEO has already set out plans to completely shut down its copper wireline network by 2020, replacing it with fibre - and we believe costly passive infrastructure assets such as towers should be marked for disposal.
Prior to its acquisition by Altice in late 2014, MEO had been considering selling most or all of its 3,000 towers. Plans for such a sale were subsequently put on hold while Altice completed a wide-ranging strategic review and valuation of the business that resulted in the copper shut-down decision of March 2016. We had expected follow-on announcements relating to the mobile infrastructure part of the business, but this had not been forthcoming as of October 2016. The weakening of the euro relative to the US dollar means that European assets now have relatively cheap valuations; to maximise a return on its investment, Altice would be wise to wait until the currency regains its strength.
Neither Nos nor Vodafone have ever openly discussed the possibility of selling their tower portfolios, but their moves into the converged services market will also be weighing on their margins, even as income from traditional mass-market services declines. They should also be considering tower sales, if they are not already doing so.
Portugal market shares, June 2016
Little room for manoeuvre in highly competitive market
The Portuguese mobile market is highly saturated and operators’ ability to add new subscribers on an organic basis is severely constrained. Subscription losses tend to be the norm as operators move customers up the value chain. Consolidation has added scale and brought upscaling opportunities for all players, but they will increasingly find it hard to escape the fact that scale alone does not guarantee higher monthly spending per customer, while new services need to be constantly refreshed.
The mobile subscription base reached 16.584mn by June 2016, according to operator-reported data. This is equivalent to a penetration rate of 161% and we therefore believe that a great many inactive or low-value standalone SIMs will be eliminated over the coming months. As we believe all operators are potentially equally affected under such a scenario, the market share picture should not alter appreciably. As of June 2016, MEO was the leader with 44.1% of mobile subscriptions; Vodafone and Nos lagged behind with market shares of 32.0% and 22.4%, respectively. Others accounted for 1.5%.
Prior to their takeovers, MEO and Nos had been indicating that non-voice services were accounting for around 40% of mobile service revenues in late 2014. Anecdotal evidence of strong new/replacement smartphone sales and rapid increases in data traffic carried over their networks suggests that voice usage is in the minority. To capture and monetise at least some of that data traffic, operators need the funds to develop new products and services; tower sales would present a quick - albeit a one-off - solution to that problem.
Mobile Market Forecasts
Five-year outlook
BMI currently forecasts a total mobile subscriber base of 16.807mn by 2020, only a little improved on the current situation. We believe much of that growth will come from the nascent Mobile Virtual Network Operator (MVNO) sub-market; in April 2016 cable operators Cabovisão and Onitelcom commercialised their mobile services on MVNO platforms, joining Lycamobile and less successful players CTT and Mundio Mobile. A potential purge of inactive SIMs poses a downside risk to this scenario, but underlying growth trends will not be disrupted.
Active 3G/4G subscriptions numbered 5.808mn in June 2016, a low penetration rate considering 3G services have been available in Portugal for several years. However, the high rate of fibre and DOCSIS 3.0 digital cable penetration means that demand for mobile broadband is quite muted. We forecast 7.387mn 3G/4G subscriptions by 2020.
Buoyed by increased consumption of higher value converged service products, we expect mobile-specific ARPUs to average around €8/month through to 2020. The declining value of operator-billed voice and messaging services will be offset by increased spending on higher-value multi-play products, but will be undermined by dilutive effects of allowing multiple users to access a single paid account and the higher incidence of low data-usage connections such as home security/heating solutions, amongst other developments.
