Xfera Plans to Launch Mobile Operations in December

Xfera, TeliaSonera’s Spanish unit, has scheduled the roll-out of its W-CDMA network in seven Spanish cities for this December. The operator plans to invest 1.3 billion euro (US$1.7 billion in rolling out mobile services over the next five years. The company's owners include TeliaSonera (76.6%) and Spanish construction and services group Actividades de Construccion y Servicios (ACS) (19%). They are yet to decide whether to operate under the Xfera brand or a new name. At launch, Xfera's network will cover a quarter of the Spanish population of 41 million. Xfera also has a domestic roaming deal with Spain's number-two cellco, Vodafone Spain, to offer services in areas where it has not yet built its own infrastructure.

Xfera was awarded one of four Spanish UMTS licences in 2000. Spain's 3G licence holders were obligated to offer next-generation services on a commercial basis by end-2004. However, Xfera has failed to launch 3G services in accordance with UMTS licence requirements, owing to a lack of investment. The telecoms market regulator (CMT) then extended Xfera's deadline until mid-2007, with the threat of revoking the licence if this was not met.

Xfera was still looking for a strategic investor at the beginning of 2006 to help finance its 3G roll-out. Hong Kong's Hutchison Whampoa and Egypt's Orascom Telecom were potential suitors to acquire a controlling stake in the operator, ranging from 51% to 63%, but negotiations failed. In May this year, TeliaSonera came to Xfera’s rescue and increased its 23% stake to a majority holding. TeliaSonera's acquisition of the remaining 80% of cash-strapped Xfera from its previous shareholders—Corporacion Financiera Alba, Abengoa and Abertis Infraestructuras—for a symbolic 1 euro (US$1.28), marked the turning point for Spain's new entrant (see Spain: 24 May 2006: TeliaSonera Plans to Increase Stake in Xfera to 80% and 3 May 2006: Government Plans to Revoke Xfera’s UMTS Licence). By mid-2006, its shareholders had already laid out 530 million euro.

Outlook and Implications

Competitive Landscape: Xfera is now moving into the Spanish mobile market and will compete against Telefónica Móviles España, Vodafone Spain and Amena. Telefónica Móviles España is the largest player, controlling 46.2% of the market at end-2005, followed by Vodafone Spain on 29.9% and Amena on 23.9%. Despite SIM-card penetration currently exceeding 100%, the market has room for a fourth operator. Xfera targets at least 600,000 customers by mid-2007 and 2.7 million subscribers, or 5% market share, by 2012.

Spain also awaits the entry of its first MVNOs, expected by end-2006. At the beginning of this year, Spanish telecoms regulator CMT took steps to ensure that the three existing mobile players opened their infrastructure up to MVNOs, in an attempt to increase competition in the cellular market. According to the new regulation, existing cellular operators are obliged to finalise MVNO negotiations within two months of being approached by potential MVNOs. Unlike France, Germany, and the United Kingdom, Spain still lacks MVNO operators. Their arrival is now unavoidable, despite earlier protests from the existing mobile players. Spain has 13 MVNO licence holders, with more than 100 applicants for MVNO licences. German telecoms group Deutsche Telekom (already present in Spain via its internet unit Ya.com), alternative telco Jazztel, BT España, and Sweden-based Tele2, are among those that have plans for Spanish MVNOs. Other MVNO licence holders are Telecor (represented by department store El Corte Ingles), Carrefour, and Basque regional operator Euskaltel. MVNO arrival is likely to set off fierce price competition and drive down mobile service prices for consumers (see Spain: 28 August 2006: Thirteen MVNO Licence Holders in Spain, 30 June 2006: Jazztel in MVNO Negotiations, 27 June 2006: Tele2 Plans MVNO Launch by End-2006 and 29 May 2006: BT España Plans to Launch MVNO Operations in 2007). Earlier this year, U.S. mobile handset vendor Motorola projected sales of more than 20 million handsets in the Spanish mobile market during 2006, a year-on-year (y/y) increase of 8-10% (see Spain: 24 June 2006: Motorola Expects 8-10% Y/Y Growth in Spanish Mobile Handset Market).

Regulatory Issues: The CMT has taken measures such as supporting MVNOs to boost competition in the mobile market. In addition, its recent decision on mobile termination fees is likely to affect Xfera's operations and growth. The CMT plans to introduce reductions in the mobile termination fees that cellcos and fixed-line operators pay to existing mobile operators for terminating calls on their networks. It is expected that the cuts will take place over two years, from 1 October 2006. Effectively, termination charges paid to Spain's leading cellco, Telefónica Móviles España, will be cut by 47.7%, while those to Amena will fall by 54.3%, and to Vodafone Spain by 48.8%. The regulator also plans to standardise termination charges across the three operators at around 0.06 euro (US$0.08) per minute, compared with current charges as high as 0.131 euro per minute (in Amena’s case). Xfera has asked the CMT for a 40-60% discount on the mobile termination fees it has to pay other cellular operators, in order to boost its growth potential after launch (see Spain: 7 August 2006: Spanish Regulator Cuts Mobile Call Termination Fees).

3G Services: Spanish mobile operators continue to reorganise themselves in order to improve profitability, reduce debt levels, migrate their pre-paid customers to post-paid packages, and launch an array of 3G services. Voice services continue to be the main source of revenue, but data services are becoming more significant; SMS accounts for the largest part of these, with MMS starting to pick up. Spain's first 3G services were launched by Telefónica Móviles España and Vodafone Spain in May 2004, and Amena followed in October that year. However, 3G penetration remains low in Spain. In addition, Vodafone Spain and Amena commercially launched HSDPA technology in June 2006. The former offers HSDPA services in eight major Spanish cities, including Barcelona, Madrid and Valencia, while Amena's HSDPA offering covers five cities (see Spain: 27 June 2006: Amena, Vodafone Spain Launch HSDPA and 31 May 2006: Vodafone Spain Launches Mobile TV Service).

Earlier this month, Vodafone Spain selected Chinese vendor Huawei as the supplier for the expansion of its W-CDMA network. The deal will enable the operator, which has more than 1.2 million 3G subscribers, to significantly reduce its operating costs, maximise the benefits offered to customers, and improve its competitive position (see Spain: 9 August 2006: Huawei to Support Vodafone Spain W-CDMA Network Roll-Out).Xfera will enter the market against this competitive background.