Euro TMT Market Updates: Italy

Italy remains a highly challenging market for operators and we expect this to continue for many more years, though we have seen a modest easing of competitive pressures and expect the worst years are behind us.

We expect increased competitive pressures in the broadband market, with newer entrants, notably Iliad, FWA players and utilities, securing growth both by increasing overall market penetration and by taking share from incumbent players. Expansion of FttH is likely to facilitate a broadening of the competitive landscape, but the scope for pure price-based competition is somewhat limited given a fairly narrow band of prevailing price points and only a modest gap (~€7-10 euros/month) between wholesale and retail pricing.

Competition in mobile remains tough, but has eased versus recent years, with market-wide churn much reduced and only a narrow price-gap between most players in the value segment. Telecom Italia’s relative outperformance in the mobile market versus Vodafone and WindTre has evaporated in recent quarters, but overall the performance of the incumbent MNOs is less worrisome than in the past.

We see little scope for ARPU growth across the board, but also do not expect material further ARPU declines – this should mean modest revenue decline for incumbents, which can be more feasibly offset by cost cutting.

We see a fair likelihood of a tie-up between Optics (TI’s former netco) and Open Fiber being agreed in the next couple of quarters, which would substantially de-risk Optic’s operations. Barring a deal with Open Fiber, we expect Optics to see increased revenue and EBITDA pressure in the coming years, before stabilising later in the decade.

Relative Value

The Italian market has been one of the toughest operating environments in Europe over the past several years with Iliad’s entry disrupting the market to a severe degree. We view Iliad as well incentivized to continue its strategy of providing simple and affordable products, and therefore do not see an easing of competitive intensity as a high