Telecom: Advantage France and Germany

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

 

The United States still leads the pack in fixed-line services. But France and Germany have the advantage in mobile ones.

The McKinsey Quarterly, 2003 Number 1 The enormous productivity growth in telecommunications that Germany and France experienced during the late 1990s helped them outpace the United States by a wide margin (Exhibit 1). By 2000, German productivity had even edged past the US level, while France had closed the gap with the United States considerably. These dramatic advances resulted largely from the liberalization of fixed-line markets and from much faster productivity growth in mobile services. But the overall figures hide big variations within the sector.

Liberalization drives fixed-line advances

In fixed-line services, a liberalized market and the privatization of national incumbents in the 1990s increased competition and shareholder pressure. As a result, the incumbents shed excess labor and cut tariffs. Traffic increased and, with a smaller workforce, labor productivity rose. Germany outstripped France for two reasons: Deutsche Telekom cut more jobs in the fixed-line business than did France Télécom; and Integrated Services Digital Network (ISDN) services were adopted more quickly in Germany, thanks to a Deutsche Telekom marketing campaign, lower prices, and the greater availability of this technology there as compared with other European countries. The subsequent jump in the number of telephone lines required only marginal extra labor.

Germany and, to a lesser degree, France have more telephone lines in relation to hours worked by telecom employees than does the United States, which nonetheless has the highest level of overall productivity in fixed-line services, since both the number of linesandthe traffic per line must be taken into account. Traffic per telephone line about three times higher in the United States than in France and Germany explains the gap: this extra utilization gives the US fixed-line telephone companies a 40 percent productivity advantage over their European counterparts. Two-thirds of this gap is linked to long-distance traffic, though prices are similar in all three countries. Traffic is higher in the United States, among other reasons, because of the greater wealth and mobility of its population, the larger proportion of working-age adults who hold jobs, and a population that is spread across a much larger area.

French mobile operators lead the pack

Move to mobile services and the positions are shuffled. In 2000, French mobile-telecom operators were about a third more productive than German operators and more than twice as productive as US ones. Germany s mobile operators are less productive because of relatively low traffic per subscriber. In the United States, the problem is the fragmentation of the market.

Mobil e penetration rates and total labor inputs were similar in France and Germany during the 1990s, but French traffic per subscriber was much higher: in 2000, the average mobile customer in France made calls totaling 120 minutes a month, compared with 62 minutes in Germany. A number of considerations help to explain this gap, including differences in the com-plexity of pricing schemes and the effect of national cultures on mobile-telephone behavior.

Completely different factors hamper US mobile operators. Although mobile-traffic levels in France and the United States are similar, US mobile providers log about twice as many hours worked per subscriber as do French and German ones. At the heart of this problem is the US approach to licenses, which were auctioned for relatively small geographic areas, thereby creating a multitude of operators (Exhibit 2). France has three mobile-telecom providers and Germany four, with an average of about 10,000,000 subscribers each. But in the United States more than 50 operators serve fewer than 200,000 customers each, and not many providers have more than 1,000,000 subscribers. The duplication of fixed labor pools in areas such as marketing and human resources prevails throughout the US industry, so the labor economies of scale that operators exploit in France and Germany just aren t available to most US providers.

Regulators can encourage the continued rapid growth of mobile-telecom productivity by rejecting policies that support the fragmentation of the industry. In the United States, its further consolidation would raise productivity to French or German levels. In France, better fixed-line operations would ensure large productivity gains, while the German mobile industry must identify ways to stimulate demand. Meanwhile, the development of data communications services including mobile data services, fixed-line data services for businesses, and residential broadband services will also generate further productivity growth in telecommunications.

 

Notes:

Thomas Kneip is a consultant in McKinsey s Munich office, Eric Labaye is a director in the Paris office, and Jürgen Schrader is a director in the Düsseldorf office.

This article is part of aMcKinsey Quarterlyspecial package on findings from a study by the McKinsey Global Institute. To read another article from the collection, please select from the following.

Reviving French and German productivity: Differences in IT spending are not the root cause of the gap between US and European productivity. Europe s basic problem is inappropriate regulation that hinders innovation.

French and German banking: Showing IT s strength: All three drivers of productivity innovation, demand, and consolidation must be exploited to achieve the full benefit of each.

French and German trucking: IT for the long haul: Continued consolidation is needed but won t be enough only IT-enabled innovation can help road freight companies enjoy productivity growth rates like those of the late 90s.

 

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