Macroeconomic and market environment
The macroeconomic environment in Western Europe is one of slow and tentative growth. The recovery remains uneven with protracted low growth and low inflation expected to feature in 2015, with the possibility of deflation in several markets. Annual GDP growth is projected at 1.2 % in 2015 and 1.5% over the medium term.
The three largest geographic markets for Colt are the UK, Germany and France. GDP in these countries grew in 2014 from 0.3% in France through 1.0% in Germany to 2.7% in the UK. Growth in the UK and Germany is expected to improve in 2015, but France is expected to be weaker. Italy, Spain and Portugal are also important markets for Colt and these economies are expected to improve towards moderate growth in 2015, from 0.8% growth in Portugal, 1.9% growth in Spain, and a decline of -0.5% in Italy in 2014.
With the KVH acquisition Japan has become another important market for Colt, and here the economy fell into recession in the third quarter of 2014. Policy responses such as quantitative and qualitative monetary easing are expected to lead to recovery in 2015–16. Slower growth in China may also have important regional effects, partly explaining recent downward revisions to growth in much of emerging Asia.1 However, the Asia Pacific ICT services market in which KVH operates is currently growing at around 12% per annum.2
In Network Services, the market for fixed line network services in Western Europe is forecast to grow 1% in the medium term with 12% growth in Ethernet balanced by a 19% decline in leased line services (mainly SDH).3
In Voice Services, the market for enterprise customer spend across Colt geographies is forecast to decline by 12.2% per annum over the medium term4 due principally to substitution of traditional voice by mobile, email, social media applications, other over-the-top services and continued price erosion. Conversely, fixed enterprise VoIP services are forecast to grow 11.6% and IN by 3.7%.5
Data Centre Services markets vary city by city, with pan-European peers posting growth rates ranging from 9% to 14%. Colt is focused on the colocation market which is expected to grow 8% across Western Europe in the medium term (from 2014 to 2018).6
In IT Services, the enterprise IT market is largely flat, but within this there are pockets of growth. Using Gartner data we estimate the total market size in 2014 for all the markets in which Colt IT Services currently participates is US$31bn, and this is expected to grow at 9% CAGR 2014 to 2018. This includes infrastructure services, cloud compute services, infrastructure utility services and hosting. Within this the cloud infrastructure market is expected to grow 32%6 and managed hosting, which still constitutes a large proportion of Colt IT Services existing business, is growing at 8%.6
- Source: IMF–World Economic Outlook, October 2014 and January 2015.
- Source: IDC (2013), Fuji Chimera research (2013), KVH analysis.
- CAGR 2011 to 2017, Source: IDC EMEA Telecom Database Ovum Enterprise Ethernet Service Forecast 2011–18.
- 2012 to 2017. Source: Ovum Enterprise Consumer Fixed Voice Forecast 2014–19.
- 2012 to 2017. Source: IDC EMEA Telecom Database.
- Source: Gartner Market Research Forecast: IT Services, Worldwide, 2012-2018, 3Q14 Update, September 2014.
Colt operates in markets that remain highly regulated. Colt is subject to economic regulation such as competition law, communications sector regulation and other forms of regulation such as data protection. Colt also recognises the importance of regulation as it applies to its customers.
As a communications services provider, Colt is subject to sectorial rules. National Regulatory Authorities (NRAs) in the European Union operate within a common European regulatory framework. This focuses on Communications Providers who dominate defined economic markets which vary between Member States. NRAs conduct regular market reviews to assess whether there is effective competition and, if one or more providers has a dominant position, they can impose regulatory remedies. Colt is not deemed to be dominant in any market except for some national markets for fixed call termination. For Colt, the existence of the European Framework is generally beneficial, since it provides the basis for NRA's regulation of the terms and conditions (including pricing) of some wholesale services that Colt purchases from incumbent operators.
Impact of regulatory developments on Colt
Voice call termination
Similar to other operators, Colt's revenue has been impacted by the reduction in mobile and fixed termination rates. We expect mobile termination rates will converge to just below 1 Eurocent per minute on average across the EU by around Q3 2015, with the exception of Germany and Switzerland, where rates are expected to remain higher. Similarly, we expect fixed termination rates to stabilise at approximately 0.1 Eurocent per minute from January 2016, again with Germany and Switzerland being an exception. The total impact of termination rate reductions on Colt revenue in 2014 was €20m (2013: €38m) with the period of most significant reductions now behind us in most markets.
European regulatory shift towards supporting fibre investment
The European Commission's (EU) and national regulators' push to increase investment in fibre reflect the policy targets set by the EU Digital Agenda.1 The direction they are now setting looks to allow greater reward for infrastructure investment. The overall stance of policy makers is increasingly deregulatory, including a more merger friendly environment.
A regulatory environment rewarding infrastructure investment has positive implications for Colt, yet the policy also carries risks. First, there is a risk of increased churn at the lower end of the market. Nevertheless, customers may be willing to trade increased bandwidth at a lower cost delivered by residential providers against the benefits of security, service quality and resilience offered by Colt, in particular in the Small and Medium Enterprise (SME) segment.
Second, there is a risk that regulatory changes are not implemented in a balanced way. Multi-site businesses need a single provider for all their national sites. To give businesses choice, service providers need to be able to buy business grade wholesale access connections on regulated terms where markets do not provide them. To be effective these inputs need to allow providers to be responsive to customer needs from a technical, quality and cost point of view.
In addition to wholesale access connections, regulated access to duct and dark fibre are crucial enablers for increased infrastructure investment, thus giving business customers adequate choice. Such access facilitates our network expansion strategy, allowing us to control our network assets more fully. Customers value this because they understand it allows Colt to provide increased levels of quality assurance and service flexibility compared to where Colt connects a customer through an off-net connection.
Colt will continue to work with regulators at national and EU level as well as through industry associations to secure a balanced outcome.
Opportunities of cloud computing
A large number of EU and national legislative measures around security and the protection of data continue to evolve. These are most notably European data protection reform, draft legislation on cyber security both at national and European levels as well as specific requirements for the security of telecommunications networks. For example, the draft Cyber Security Directive2 requires security measures for SMEs and providers of "critical infrastructure" (including but not limited to energy, financial services, transport and health). National implementation of this EU legislation is likely to go hand in hand with specific national rules in this space. These proposals are in part already reflected in demand by our customers who seem to be ahead of policy makers: Colt customers are asking increasingly for greater assurance around the protection of their data, including specific security policies and measures. Colt considers these policy proposals as an opportunity as long as their implementation is balanced and pragmatic.
Colt continues to focus on providing customers with security assurance based on certification to ISO 27001 where required. During 2014 we have further extended the scope of our certification to include our MPLS network, along with a number of other related services. This scope will continue to increase in 2015 to cover more services. During 2015, we also plan to move our existing certifications from ISO 27001:2005 to the latest ISO27001:2013 version of the standard. In certifying elements of our network, we are also addressing the generic requirements of Article 13 of the European Framework Directive.3
The proposed EU Data Protection Regulation, likely to come into force in 2017 at the earliest, will replace the current patchwork of national laws. While Colt expects this to simplify compliance through a consistent set of rules, Colt already understands and fulfils customer requirements in relation to the protection of customer data in each Colt footprint country. Colt's extensive data centre estate, spread across Europe and Asia, allows customers to choose where their data resides when they put it into the Colt cloud.
Colt is watching the policy debates in this field closely and engages in discussions with key stakeholders, including our customers, to ensure that we are in a position to meet regulatory and customer concerns as legislation, threats and customer demand for solutions evolves.
Management of regulatory risk
Colt manages regulatory risk by ensuring that changing requirements in each footprint country are identified and tracked centrally to facilitate communication to the relevant parts of the business. This facilitates early identification of regulatory changes and patterns across countries, in turn facilitating business planning and adequate responses. This includes working with regulators to achieve pragmatic solutions in satisfying a public policy aim, providing evidence in support of regulation where appropriate, or litigation as may be required.
- "Digital Agenda for Europe" is that every citizen in Europe should have access to 30Mbps broadband by 2020, with 50% of subscribers taking up 100MB/s services. https://ec.europa.eu/digital-agenda/node/1505.
- Proposal for a Regulation of the European Parliament and of the Council laying down measures concerning the Europe single market for electronic communications and to achieve a Connected Continent, and amending Directives 2002/20/EC, 2002/21/EC and Regulations (EC) No 1211/2009 and (EU) No 531/2012.
- Directive 2002/21/EC of the European Parliament of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services ("Framework Directive").