By Ruth Bender And Simon Zekaria
In a Cold War nuclear bunker in central Paris lies Iliad SA's
bet on the future of the European telecommunications industry.
The low-cost French telecoms operator isn't expecting a nuclear
strike anytime soon. But to handle the explosion of data use on its
networks as more customers watch video on their smartphones, Iliad
is converting a 4,921 square foot bunker into a giant server
warehouse.
The bunker's location 85 feet below ground, easy-to-secure
entrances, and cold atmosphere, provide ideal conditions for data
storage.
Iliad's move illustrates the rush by European telecom groups to
invest in data-handling capabilities and faster fourth-generation
wireless networks, as consumers use their phones less and less to
make calls and more as devices for messaging apps and video.
Telecom firms are under pressure to adapt their businesses. With
revenues in European wireless markets falling due to tough
competition, tight regulation and flagging economic growth,
operators are pinning their hopes on making more money from
subscribers shifting to mobile phones for data-heavy
applications.
Unlike U.S. operators such as AT&T Inc. and Verizon
Communications Inc.'s Verizon Wireless, telecom companies in Europe
have been slow to adapt pricing schemes to the explosion of data
traffic. This stems largely from their belated investment compared
with the U.S. in faster network technology such as 4G, which offers
up to 10 times faster data speeds compared with older network
technology, allowing customers to watch TV series on their mobile
phones and tablets without the time-lag known as buffering.
"The reality of the French market is crazy," said Iliad Chief
Financial Officer Thomas Reynaud, speaking at an industry
conference in Barcelona. "Fourth-generation will be the killer
application in the years to come, but today it's still only a tiny
portion."
Vodafone Group PLC sees 4G penetration doubling over the next
year, and Deutsche Telekom AG reckons the technology should attract
premium pricing. Orange SA said average data consumption for its
customers in France is 2 1/2 times higher than for customers still
using older 3G technology. "4G is not only a popular technology,
but [also] creates more usage," said Orange Chief Executive
Stéphane Richard.
To help boost the speeds of their networks needed to handle data
traffic, operators are ramping up network capacity and speed. They
are investing in data facilities, often located in or near big
cities, where most of the data traffic flows. Vodafone eases data
center facilities in Slough, a town 20 miles from London. Proximity
to large cities cuts down network "latency"--the time that content
takes to travel over a heavy-traffic network and appear on a
device.
In addition, telecom firms are investing in content, like
partnering with video-streaming sites, which they hope will get
consumers to use more data-heavy services, for which they would
then charge more. Morgan Stanley estimates for example that a U.K.
subscriber to Vodafone upgrading to 5 gigabytes from 0.5 gigabytes
could see his monthly bill increase by around GBP7 ($11).
Many operators say that Apple Inc.'s new iPhone 6, with its
larger screen, better camera and improved resolution for video,
will drive data usage at an accelerating rate. In a report released
this week, Swedish networking giant Ericsson said there was a 60%
increase in mobile data traffic from the third quarter of 2013 to
the same period in 2014. The amount of calls made on mobile phones
stayed flat.
The telecom equipment company predicts mobile video traffic will
increase tenfold and constitute 55% of all mobile data traffic by
2020. This bodes well for operators, who can potentially make more
money from charging higher amounts for a heavier use of data on
mobile phones.
European operators are playing catch-up to U.S. carriers, which
are already reaping the benefits of investing into faster
connections after they adopted higher-speed wireless technology
earlier than their European counterparts. In the U.S., Verizon
Wireless has migrated 59% of its mobile customers to 4G since the
start of 2011, Morgan Stanley said. Over that same period, revenues
excluding handset sales and acquisitions rose by 7% on average a
year. In contrast, only 5% of Vodafone's European subscribers are
using 4G services.
Some European companies are more ahead of the game. In Sweden,
operators are starting to see the benefits of having been the first
to invest in higher-speed networks. Swedish operator Tele2 AB last
month said earnings before interest, taxes, depreciation, and
amortization rose 14% in the third quarter as customers began
paying more for using more data.
Reaping the full benefits of data will take more time, many
firms say, and eventually looks set to change the definition of
telecom companies. Vodafone's CEO Vittorio Colao said the UK-based
operator is "moving away from a mobile-metered type of company to a
broader data company."
"My son doesn't ever use voice, only messaging apps," said
Charlie Bracken, finance chief of cable company Liberty Global PLC.
"This big shift in behavior is making us all rethink."
Write to Ruth Bender at Ruth.Bender@wsj.com and Simon Zekaria at
simon.zekaria@wsj.com
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