22 January, 2024

The State of Digital Communications 2024

This 2024 edition of the State of Digital Communications Report paints a bittersweet picture. On the one hand, network innovation is starting to take-off and the investment by European telecoms operators is reaching historic levels. On the other hand, global competition in the connectivity value-chain has started biting Europe, and the financial health of the telecoms sector is far from improving.

This raises critical questions about Europe’s ability to deliver on the promise of Open Strategic Autonomy and to lead in future communications technologies.

Europe’s connectivity value-chain: a “lead or lose” moment

• This year’s report, for the first time, tracks progress on key network innovations, including 5G standalone (5G SA), Open RAN, cloud and edge cloud. These technologies will define leadership in connectivity and services in the next decade and will, as a result, be crucial to achieving Europe’s Open Strategic Autonomy in tech.
• In use of 5G SA and new RAN technologies, Europe significantly trails Asia, but does currently better than North America in some respects. When it comes to edge cloud, Europe trails both Asia and North America.
• In August 2023, only 10 out of 114 operational 5G networks in Europe were ‘5G SA’ (i.e. a network that uses a 5G core network, meaning it has no dependency on 4G LTE). This means Europe trailed Asia with its 17 5G SA networks, but performed better than North America, which had 4.
• In terms of Radio Access Network (RAN) technologies, telecoms operators continued to demonstrate a firm belief in Open RAN: with 11 trials and developments in 2023, Europe was ahead of North America (8), but behind Asia and Japan (19).
• Worldwide, the importance of tech companies in the operations of telecoms businesses is demonstrated by the cloud and IT spending of telecoms operators: in 2023, for the first time, we expect telecoms operators to spend more on external cloud and IT providers than on their own in-house services: external opex is expected to hit USD35 billion as opposed to USD33 billion in-house, thus reversing a historical trend.
• In 2023 Europe counted 4 commercialised edge cloud offers, all from ETNO members. Despite this, Europe trailed both the Asia-Pacific region, which counted 17 offers, and North America (9). Similarly, in the same period, we counted 59 operative edge nodes in Europe, as opposed to 159 in North America.
  
  
  European telecoms: lower profitability, lower investment

• Historical trends in telecom markets remain fundamentally unchanged this year. The European telecoms sector continues to underperform global peers both in terms of revenue and in terms of investment.
• The report finds that European operators have in effect absorbed inflation on behalf of their customers, meaning that revenue decreased in real terms. EU telecoms retail revenues rose in 2021 and 2022 by only 0.7% and 2.1% respectively, growth figures that are more than offset by inflation, which stood at 2.9% in 2021 and 9.2% in 2022.
• Average Revenue Per User (ARPU) in Europe continues to trail all global peers. In 2022, mobile ARPU was EUR15.0 in Europe, as opposed to EUR42.5 in the USA, EUR26.5 in South Korea, and EUR25.9 in Japan.
• Underperformance in revenue is reflected also on the investment side of the equation. In 2022, telecoms capex per capita in Europe stood at EUR109.1, lower than in Japan (EUR270.8), in the USA (EUR240.3) and in South Korea (EUR113.5).
• In absolute terms, however, European telecoms investment reached EUR59.1 billion in 2022, up from EUR56.3 billion the previous year. Around 48% of the investment was dedicated to fixed access, over 20% to mobile access, and the rest covered aggregation and core transport networks, IT and various non-network assets such as offices.
• ETNO members – in line with the past – remain responsible for the largest part of Europe’s telecoms investment, with ETNO representing 67% of the total sector capex.
• For comparison, tech giants’ direct investment in digital infrastructure other than in data centresstood at under 5% of ETNO investment in these assets.
  
  

5G: Europe lags all global peers

• In 2023, 5G in Europe reached 80% of the population, up from 73% the previous year. However, Europe still trailed all its global peers: South Korea (98%), the US (98%), Japan (94%), and China (89%).
• The European median mobile downlink speed of 64.1Mbit/s was lower than that in the USA (97.1Mbit/s), in South Korea (121.1Mbit/s) and in China (171.6Mbit/s). 
• Europe also has lower mobile usage: in 2022, Europeans used an average of 14.2GB/month, compared to 17.5GB/month in South Korea, 16.2GB/month in Japan and 15.6GB/month in the USA.
• By October 2023, European operators had spent a total of EUR26 billion at spectrum auctions for the principal 5G bands.
  
  

Gigabit connectivity: still far from the EU Digital Decade Targets

• In 2023, Europe still trailed all global peers on availability of gigabit-capable networks but was ahead in terms of FTTH roll-out.
• Europe’s gigabit-capable coverage reached 79.5% in 2023, as opposed to 98.5% in China, 97.0% in South Korea, 89.6% in the USA, and 81.4% in Japan.
• In comparison, Europe’s FTTH coverage of the population (excluding FTTB) reached 63.4%, better than South Korea’s 59.9% and the USA’s 49.3%.
•  Our estimates confirm that by the end of the decade almost 10% of the European population will still be without access to a fixed gigabit connection in 2030, thus falling short of the ‘full gigabit connectivity’ target.

Fundamentals of the sector: fragmented markets, weaker financial health, lower employment

• European retail markets taken as a whole remain uniquely fragmented. In 2023, Europe counted 45 large mobile operating groups with more than 500.000 customers, compared with 8 in the USA, 4 in both China and Japan, and 3 in South Korea.
• ROCE, return on capital employed, is a common metric to determine the return of investment. The ROCE for ETNO members has almost halved in the recent past: in 2017 ROCE was 9.1%, while in 2022 it was 5.8%, signalling that it is increasingly difficult for European telcos to generate adequate returns.
• In parallel, the sector’s investment capacity continues to be stretched. In 2022, capital intensity for European telcos (i.e. capex as a proportion of revenue) remained very high at around 20%, a level higher than global peers. Coupled with weak revenue, this results in an increasingly indebted sector. In 2022, the net debt/EBITDA ratio of ETNO members touched 2.60, the highest it has been in recent years.
• While revenues decreased in real terms, the cost of suitably skilled labour, of equipment and of raw materials kept on rising for telcos. Some of this was absorbed by efficiencies related to network operations. However, sadly, this also had a cost in terms of employment: ETNO companies employed 493 000 people in 2022 in their domestic markets, down from 550 000 pre-pandemic, in 2019.