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Archived Report
Telecommunications in Spain

by Bruce Kramer

Copyright 2016, Faulkner Information
Services. All Rights Reserved.

Docid: 00017724

Publication Date: 1610

Report Type: MARKET

Preview

The Spanish telecommunications market has been declining as the country's
economy continues to struggle. While very high-speed broadband and 4G wireless
services are driving growth in telecom sectors across Western Europe, Spain’s unemployment rate of
20 percent has left many people
unwilling or unable to pay a premium for these services. At the same time, the
country’s major telecom carriers do not want to be left behind the rest of
Western Europe, so they are building out their networks and offering some
services at reduced rates. Despite the difficult conditions, Telefonica remains
the dominant player in the sector and is one of the largest telecommunications
companies serving Spanish- and Portuguese-speaking markets around the world. In
order to better compete with the incumbent, the market went through a wave of
consolidation. This report discusses some of those deals as well as the
trends driving the market.

Report Contents:

• Executive Summary
• Market Dynamics
• Market Leaders
• Market Trends
• Strategic Planning Implications
• Web Links
• Related Reports

Executive Summary

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Among the 20 nations of Western European, Spain ranks
eighth in
fixed-line teledensity, sixth in wireless teledensity, and ninth in Internet
penetration. As of December 2013, Spain had 19.1 million fixed lines in
service, 50.1 million wireless lines in service, and 12 million broadband
connections. The wireless market has not grown more
than three percent in any year since 2007. It even retraced in 2012 to below 2007 teledensity levels. The fixed-line market has
also
shrunk in total lines in service each year since 2008. Furthermore,
because of slow adoption of free-market principles, the former state-owned
communications monopoly, Telefonica, is still the
dominant provider of local calling, long-distance, wireless, and
Internet services. However, Telefonica has seen its market share diminish to
challengers like Vodafone and Orange.

Despite
the global economic climate, however, substantial opportunity is still
available for Telefonica and its bigger
competitors. Broadband services, particularly DSL, were slow to take off
because the local loop was not opened until 2002. However, both broadband and
3G now have more of a presence and have seen increased competition. 4G
bandwidth has been auctioned off and providers continue to add fiber (Fttx)
connections. More recently, CMT, Spain’s telecommunications regulator,
increased competition by allowing access to the incumbent DSL and FttH
networks.

Telefonica continues to feel pressure by the country's regulatory body to
unbundle its local loop more quickly. At the same time, the Spanish telecom
market is experiencing some consolidation among the dozens of smaller
players, especially in the ISP market where more than 600 companies have
gone out of business or merged in the last decade. The remaining companies
are hoping to attract new customers and retain their existing client base by
offering innovative service bundles that combine POTS, wireless service,
television content, and high-speed Internet access. With the current state
of the economy, however, it remains to be seen who will be left standing, as
capital and infrastructure investment remains a challenge.

Market Dynamics

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Spain was once known for having a far-reaching empire and one of the most
formidable navies in the world. Today, 46.4 million people live in the
country, which is smaller than the state of Texas. Its economy is the sixth
largest in the European Union and the 16th largest in the world in terms of
gross domestic product (GDP), but Spain was hit hard during the economic
recession. The country's unemployment rate is 20 percent, which is the
lowest its been in five years but is still the second highest in Europe.

The government is a parliamentary monarchy, which means the monarch is more
of a figurehead who has little to do with governing the day-to-day operations of
the country. The current monarch, King Philipe VI, has been in power since his
father abdicated the position in June 2014. The executive branch of
the government is led by a President of Government, Mariano Rajoy, since
December 2011, in a role very similar to the Prime Minister
position in other countries. Spain has a bicameral parliament composed of a
Senate and a Congress of Deputies.

Figure 1 shows a map of Spain and Table 1 provides a snapshot of the country
and its telecom market.

Figure 1. Spain

Source: CIA World Factbook

State of the Marketplace

The modern Spanish telecom market can trace its routes back to 1924, when
the National Telephone Company of Spain (Telefonica) was created. In 1945,
the government acquired 80 percent of the company and gave it a monopoly
over the country's telecommunications sector. Telefonica remained a monopoly
until 1998, when the Spanish government bowed to pressure from the World
Trade Organization and European Union and began opening the market to
competitors. This made Spain one of the last members of the European Union
to deregulate its telecom market, but liberalization led to a steep decline
in prices. Between 1997 and 2003, the cost for international calls dropped
70 percent, domestic long distance decreased 75 percent, and local calls
dropped 16 percent.

Unfortunately, the fact that Spain got such a late start on deregulating the
market still lingers today as Spain's fixed-line, mobile, and broadband density
rates are among the bottom third of Western Europe. The market was also hit hard
by the recent economic recession: between 2009 and 2015, the market went from
41.7 billion euros to 25.4 billion euros. Late deregulation also means
competitors have had less time to compete against the incumbent than in other
countries, so Telefonica remains the dominant player.

Regulatory
Landscape. The
Spanish telecommunications market is overseen by the National Commission for
Markets and Competition (CNMC). This agency was created in 2013 and absorbed
several smaller regulatory agencies, including the Commission for the
Telecommunications Market (CMT), the National Competition Authority, and the
organizations responsible for the postal, airport, railway, and energy sectors.
The CNMC is made up of a president and 10 members, all of whom are elected by
Parliament and serve for a six-year, non-renewable term.

The European Commission strongly opposed Spain's decision to create this
super regulator and even threatened to sue over it because it was the first
country in Europe to merge several industry regulators with its competition
authority.

Since the market was opened to competition, prices for
fixed-line services have dropped by more than 50 percent; however, greater
consumer price reductions are anticipated as more competitors gain access to Telefonica’s local loop. The decision by telecom
regulators to allow Telefonica to offer access to
cable ducts, rather than its new fiber-optic network, raised concerns among
the alternative operators, in that they are prohibited from offering
high-speed services to increase the competition. Now, however, Telefonica
has entered into reciprocal agreements with Vodafone and Orange to share their
fiber-optic infrastructure over the next twenty years.

The Spanish government passed a new General Telecommunications Act in 2014,
replacing the previous law that had been in place since 2003. The law was
passed by all four of the country's major political parties, but not before
179 amendments were made to the law. The new telecom policy is designed to:

• Promote investment in next-generation wireless services and broadband
  Internet access by eliminating taxes on licenses and authorizations.

• Requiring all citizens to have access to broadband connections of 10M
  bps by 2017.
• Promote collaboration between operators and the government.
• By 2010, half of all Spaniards must have access to 30M bps broadband
  while the other half must have access to 100M bps connections.
• Increase the authority of the county's telecom regulator by increasing
  the size of the fines it can impose.

Fixed Line. As of December 2015, Spain
has a fixed-line teledensity of approximately 41
percent, with 19.2 million residential and business lines installed, including
copper, fiber-optics, and coaxial connections. Like many countries around
the world, the fixed-line density has been declining as more and more people
turn to wireless technologies for telephone service. Telefonica had been reporting a
declining share and subscriber base for quite some time, but it now seems
that alternative operators have only seen minimal growth, or slight declines,
finally putting the market into a downward trajectory.

Spain’s
requirement for new carriers to construct their own networks is encouraging
many players to put their infrastructure dollars into advanced data and
wireless networks, which are often less costly and faster to build than
traditional networks. Telefonica
has an aggressive program of modernization to capitalize on the Internet
explosion, as it has invested substantial resources into broadband networks. These actions have enabled Telefonica
to recoup substantial funds as a reseller of bandwidth as well as add
bandwidth capacity to its existing networks. However, Telefonica is not up to
par compared with its European counterparts. Smaller competitors are
seizing the opportunity to expand in this area using ADSL2+ and VDSL
services, which will help them capture improved market share and per customer
pricing with triple-play and video-on-demand services.

Spain
has more than 1.3 million kilometers of fiber-optic cable, and the county has
been expanding its infrastructure through several fiber roll outs.
Internationally, Spain has coaxial submarine connections to the United
Kingdom, the United States, South Africa, Argentina, Italy, Japan, Morocco,
the Netherlands, Algeria, and Mexico.

The following table shows how the number of fixed lines has evolved over the
last 10 years.

Figure 2. Number of Fixed Lines and Density Rate,
2005-2015

Source: ITU-D

Wireless. At the end of 2015, Spain had 50.9 million mobile
customers, a density rate of 108 percent. This is a significant increase
from a decade before that, when there were 38.6 million customers and the
density rate was 90 percent. Mobile
telephone market revenue will be driven by an uninterrupted expansion of
mobile data services and Internet-based services. To prepare for the growth in
high-speed mobile data services, all the mobile network operators had their
fourth-generation LTE networks operational by the middle of 2013.

Fourth-generation services have grown quickly since they were introduced. By
the end of 2013, Spain had 5.6 million 4G customers. By the end of 2015, that
figure reached 23.8 million.

The following table shows how the wireless market has evolved over the last
ten years in Spain.

Figure 3. Number of Wireless Customers and Density Rate, 2005-2015

Source: ITU-D

Internet. The Spanish broadband
sector got off to a late start because the country was one of the last
in the
European Union to deregulate its telecom industry, but the demand for
high-speed access has now begun to soar. The total number of broadband
connections rose from 3.4 million subscribers in 2004 to 13.6 million in
2015 (a 28 percent density rate). These statistics show promising potential, but Spain still falls short
when compared with its European Union neighbors. The country ranks 21st
of the 34 members of the Organization for Economic Cooperation and
Development in terms of broadband penetration rates.

This chart shows how the broadband market has evolved over the last 10 years. 

Figure 4. Number of Broadband Customers and Density Rate,
2005-2015

Source: ITU-D

Most customers who wish to
subscribe to Internet services do so through Telefonica,
which requires a land line, so DSL is the most popular form of service. Broadband access is available mostly to the major
cities and towns within the country, although several mobile operators have extended LTE service country-wide.
Fiber-optic service is also becoming increasing popular, and there are now more
fiber customers in Spain than their are cable-based Internet subscriptions.

The following graph illustrates how DSL is the most popular form of
broadband Internet connection.

Figure 5. Breakdown of Broadband Subscriptions by
Technology

Source: OECD

Market Leaders

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The Spanish
telecommunications industry is becoming a fairly dynamic market, despite a
slow push to liberalization. Telefonica still
dominates the country’s communications, most notably in the fixed-line,
wireless, and Internet markets. New entrants continue to join the market,
however, bringing greater competition, lower rates, and new technologies.

Telefonica. Telefonica is a major player in the global
telecommunications market. With over $51 billion a year in annual revenue and
125,000 employees, it is the second largest telecommunications carrier in
Europe and the largest company in Spain. According to information published
by Spain's telecom regulator, Telefonica
owns 52 percent of the market for landline telephone service, with about 9.9 million lines in operation. Competitors have been able to
nibble away some of the company’s market share, but the closest competitor in
the local market is Vodafone, which has about 21 percent of the market. Because Telefonica is
the only Spanish telecom operator with a nationwide fixed telephone network,
all other organizations wanting to offer services must purchase broadband
access products from Telefonica.

Telefonica has countered any
encroaching competition by reducing prices, offering perks like free voice
mail, and rolling out service bundles. Most of its newer service bundles are
built around letting people watch television over the company's network. For
example, the Movistar Fusion TV allows people to purchase television content
over their smartphones, while other packages combine fiber-optic Internet
access with telephone content.

Telefonica is also a major player in the global telecom market, with a
presence in 17 countries across the world. Most of its international
operations are focused on countries with large populations who speak Spanish
or Portuguese, including Argentina, Brazil, Chile, Colombia, Costa Rica,
Ecuador, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Peru, Uruguay,
Venezuela. Telefonica also has a presence in Germany and the United Kingdom.

In the wireless market, Telefonica operates under the Movistar brand name.
Movistar currently holds 39 percent of the wireless market in Spain. With fixed broadband services, Telefonica,
under its Terra ISP brand, is the market leader, with more than 5.8 million
subscribers and 47 percent of the broadband market. The bulk of these customers
are using xDSL services and most of the others using FttH.
Terra is
the largest ISP in Spain and a major player in several Spanish-speaking
countries, including 16 nations in Latin America. The modern-day company was
founded in 2000 when it acquired Lycos, a popular search engine and Web
portal.

Telefonica is also the largest broadband provider in Spain. It has 5.8
million customers and 43 percent of the market.

Vodafone.

Vodafone is now Telefonica's biggest competitor after it acquired Groupo Ono, a
major cable company, in July 2014 for 7.2 billion euros. This deal puts Vodafone
in a position where it can offer landline and mobile calling, cable television
services, and broadband Internet access across the country. Its main service
bundle is Vodafone One, a package that combines all of those services into a
single bill, and the company reports that 50 percent of its customers in Spain
sign up for some sort of bundled plan.

The combined company has 21 percent of the landline market, 27 percent of the
wireless sector (including 39 percent of all 4G customers), and 22 percent of
the broadband market.

Orange.

Orange countered Vodafone's acquisition of Groupo Ono by successfully launching
a $3.9-billion takeover campaign for JazzTel, a publicly listed
telecommunications carrier that had been focusing on the business market since
it was founded in 1977. The deal was approved by the European Commission in May
2015 after a lengthy investigation into the impact that further consolidation
would have on the Spanish telecommunications market. Regulators ultimately
approved the deal after Orange agreed to divest part of its fiber-optic network
to MasMovil and give that company wholesale access to its landline and mobile
networks so a fourth carrier can enter the market.

The combined company has 20 percent of the landline market, 27 percent of the
mobile market, and 22 percent of
both the broadband sector.  

Yoigo.

Yoigo is a relatively small player in the market,
especially after the recent consolidation. It has about three million customers
and eight percent of the market. This company is at a competitive disadvantage
because it is only a mobile player and thus cannot offer service bundles. It
placed a bid to acquire the fiber-optic assets that JazzTel was forced to divest
as part of its merger with Orange, but it fell short. As a result, TeliaSonera
sold the company in October 2016 and exited the market. 

The following charts show market share information for the landline, mobile,
and broadband sectors.

Figure 6. Market Share for Spanish Landline Market

Source: CNMC

Figure 7. Market Share for Spanish Mobile Market

Source: Carriers

Figure 8. Market Share for Spanish Broadband
Market

Source: CNMC

Market Trends

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Spain was
one of the last countries in western Europe to deregulate its
telecommunications industry, so there has been a tremendous amount of change
in a short period of time. The industry is still in transition as the market
is starting to constrict a bit after companies rushed into Spain upon the
opening of the market to competition and after the effects of the recent
global economic crisis. Although many minor players are being eliminated, a
couple of larger vendors are establishing themselves as legitimate
competitors to Telefonica. Today, there are a
handful of companies fighting with the incumbent across almost every sector
of the market.

Market Regulation

The European Commission is keeping an eye on the National
Commission for Markets and Competition (CNMC), Spain's new industry regulator.
As discussed earlier in this report, the country's decision to create CNMC out
of several other regulators and the country's competition authority was
controversial.

Since starting operation in 2013, the agency has been busy. It
overhauled wholesale broadband regulations, put tighter controls on spectrum,
and levied fines against against several carriers for not porting customer
telephone numbers quickly enough.

Industry
Consolidation

The Spanish telecommunications market went through a
massive wave of consolidation in 2014 and 2015 when Vodafone acquired Groupo Ono
and Orange took over JazzTel. These deals reduced the number of players in the
market but better positioned Vodafone and Orange to compete with Telefonica. The
Orange / JazzTel deal came under much scrutiny from the European Commission
because it involved the combination of two telecommunications carriers, while
Vodafone bought a cable company. While the Commission ultimately approved the
deal, it did voice concerns that consumers would see priced increase because of
it.

The real loser in this wake of these two major acquisitions
is Yoigo, the Spanish wireless subsidiary of TeliaSonera. It is now even further
behind the rest of the market in terms of subscribers, and it cannot offer
service bundles like Telefonica, Orange, and Vodafone. It is probably only a
matter of time before TeliaSonera backs out of the market.

Service Bundles

Service bundles continue to be an important part
of the market. According to market regulators, 60 percent of all landline calling plans and 93
percent of all broadband subscriptions are part of a bundle. The regulatory
agency also reports that there were 5.2 million quadruple play packages as well
as 700,0000 quintuple play packages. Cable
operators, however, are making strong progress in this area. About 90 percent
of all cable customers subscribe to more than one service, and 56 percent of
these customers subscribe to a triple-play bundle. Cable operators in Spain
(and other parts of Europe) are not the only companies providing television
content. Telefonica has its television operations,
so the cable companies there do not have the same leverage as cable providers
in the United States.

Orange, Vodafone, and Telefonica are uniquely positioned in that they both
have the ability to include wireless services in their service bundles,
although other competitors can offer similar packages with contractual
partnerships. Comprehensive service packages that include broadband Internet
access with landline and wireless calling have been very popular in other
parts of Europe, and they will likely have a similar effect in Spain.
Wireless services may be a critical part of these service bundles.

Strategic Planning
Implications

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Spain
occupies an area of 194,883 square miles and is the second largest
European nation sharing borders with Portugal, France, and Andorra.
Spain’s Mediterranean Sea coastline is 5,758 miles. The nation’s population is
about 46 million. Most of the country’s industry and infrastructure is built
out from the two traditional centers of Madrid and Barcelona.

A
longstanding proponent of the world marketplace, in 1961 Spain was a founding
member of the Organization for Economic Cooperation and Development (OECD), a
coalition of 29 member countries committed to a market economy and
pluralistic democracy. OECD countries produce two thirds of the world’s goods
and services. Similarly, Spain was one of the first nations to join the
11-member European Union to bring a common economic denominator to the entire
region. Spain’s unemployment levels ballooned to 13 percent during the first
half of 2001, one of the highest levels in Europe, although the government
has made tremendous economic strides to comply with European Union
requirements. 

However,
although the economy did recover to a low unemployment rate of eight percent
in 2007, the first quarter of 2014 saw a staggering unemployment rate of
more than 25 percent which came down a touch to 23.67 percent by the third
quarter of the year. Spain’s struggling economy exhibited a 3.6 percent
reduction in the GDP between 2008 and 2009, which is the first time it did
not increase after a 16 year streak. Spain’s economy has not improved since
the downturn.

In
entering the Spanish market, it is important to take into account the
country’s special position in world affairs because of its colonial legacy. Spain
has played a central role in developing close ties with the United States
through the Transatlantic Agenda. Likewise, by promoting closer contacts with
Latin America, countries such as Brazil, Mexico, and Chile have benefited
from increased investments in the areas of banking, tourism, financial
services, and telecommunications. Spain’s telecom companies have played a
major role in developing improved infrastructures within the region. 

In
Spain, 20 percent of all R&D is related to telecommunications and
computer development. The Spanish telecommunications market is the fifth
largest in Europe; it is fully liberalized and highly dynamic. Although Telefonica still retains a dominant position in most
market sectors, the new regulatory regime brought about by EU directives has
created a wider sphere for competition, particularly in reducing licensing
impediments and in providing better remedies against market dominance through
a redefinition of dominant position. However, the regulatory agency is not as
aggressive in forcing Telefonica to unbundle its
local loop, which would promote even more competition, particularly in the
fixed-line and Internet markets, and would drive consumer prices down
further. The recent breakup of Auna, with mobile
provider Amena going to France Telecom and the
cable business going to ONO, is likely to have a dramatic effect on the
market by permitting France Telecom to compete across a wide range of
services and by completing ONO’s national footprint.

With
the advent and proliferation of ADSL2+, new services like WiMAX and FttH,
and upgrades by Spanish cable
operators, the triple-play market is ripe. In fact, other broadband
applications, such as IPTV, mobile data services, mobile television, and VoIP, can be marketed to gain a significant competitive advantage.

Growth forecasts in the broadband and pay TV markets are
solid. However, fixed line services are way down and the wireless market has
even experienced a contraction in the number of subscribers over the past four
years.

Web Links

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• National Markets and Competition Commission (CNMC): https://www.cnmc.es/
• Orange: http://www.orange.com
• Telefonica: http://www.telefonica.com/
• TeliaSonera: http:www.teliasonera.com/
• Vodafone: http://www.vodafone.com/
• Yoigo: http://www.yoigo.com/

About the Author

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Bruce Kramer is a regular contributor
to Faulkner Information Services who has written over 200 articles and white papers
on the technology industry over the last 16 years. In addition to
working as an independent author and analyst, Bruce is a former Senior
Editor for Faulkner Information Services and has over a decade of
experience in the supply chain management and business process
outsourcing industries.

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