OREANDA-NEWS. Fitch Ratings says in a new report that the increasing take-up of long-term evolution (LTE or 4G) supports the mobile service revenues of European telecoms operators, but comes at a price as investments in network and spectrum gain importance. Fitch also believes that improvements in revenue are mainly due to the uplift in mobile average revenue per user (ARPU), as users move from 3G to 4G tariffs, rather than existing LTE users moving to a more expensive tariff with a greater data allowance.

Improving trends in mobile are key to Fitch's stable outlook for western European telecoms for 2016 as many European telecoms companies derive a significant share of revenue from mobile services. Incumbents like Deutsche Telekom, Orange and Telefonica, are benefiting from LTE take-up as mobile data revenue growth helps to offset fixed-line revenue declines.

Improving trends in mobile services should have positive implications for EBITDA, given the scalability of 3G and 4G networks. However, network quality rather than pricing is becoming a more significant competitive factor, with implications for capex. Future free cash flow generation is likely to depend on operators' investment ambitions and the quality of their networks relative to the competition. Market-leading operators usually have the highest market share of revenue and traffic, but also generate the highest mobile service revenue per MHz of spectrum. Economies of scale and greater network efficiency lead to a financial advantage, especially where price premiums for network quality are high.

The EC is proposing to open the 700MHz band to mobile services by 2020. To date, only French and German operators have secured 700MHz licences. For the remaining markets, the potential cost of these valuable frequencies remains an area of uncertainty.