This article is part of our special report The health of Europe’s telecom sector.
Europe’s largest telecom operators say artificially-made competition is making investments in new networks not worth the cost of borrowing money, whilst alternative operators, consumer groups and regulators do not see a problem.
In the 1990s and early 2000s, Europe’s telecom industry was largely dominated by the so-called legacy operators such as France Télécom (now Orange), Vodafone, Deutsche Telekom, and Telefonica.
As the telecom market was liberalised, many actors entered the arena, the Mobile Virtual Networks Operators (MVNOs). These service providers are much more agile and can make more competitive offers than the traditional actors, as they do not have infrastructural costs.
Innocenzo Genna, a telecom legal expert, told EURACTIV the benefits of this ‘golden age’ of the European telcos were due to public policies enacted by governments that were often also companies’ shareholders.
By contrast, legacy operators consider that public policy also played an important role in artificially creating competition by lowering the entry barriers, as shown by the larger number of MVNOs present in Europe as opposed to other parts of the world.
Can there be too much competition?
For Genna, the legacy operators are experiencing low profit margins because telecom services have become public utilities and have missed the train to move into more added-value markets, such as the cloud sector.
At the same time, the telcos argue that the telecom sector’s wholesale costs for their services have been among the most deflated in the last decade in Europe, where mobile revenues have stagnated or shrunk in contrast with surging ones in the United States and China.
Yet, in Genna’s view, this assumption ignores the fact that MVNOs are paying legacy operators to use their networks. Prices are not regulated and are influenced by market accessibility, he added, stressing that MVNOs do not invoice a retail price lower than their total costs.
Still, the legacy operators point to the fact the presence of market players should be proportionate to the capital intensity of a market, which in the telecom case increases with every new generation of networks such as 5G and fibre.
In other words, according to the former monopolists, the somewhat artificial competition has squeezed their profit margin to the point that, in some cases, the cost of borrowing money is higher than the return on investment.
Therefore, the lack of a business case for investing in new networks would result in an investment gap to keep up with Europe’s ambition to have broadband connectivity for every EU citizen by 2030 as part of the Digital Decade target.
Is there an investment gap?
Earlier this month, Internal Market Commissioner Thierry Breton said that the market capitalisation of European telcos consistently falls behind that of their US counterparts and that Europe is lagging behind in terms of 5G deployment compared to other regions.
Breton has been the main driver of an initiative based on the senders-pay principle, which would require large traffic generators to chip in on infrastructural costs to improve the investment conditions in new generations of networks.
On Thursday (15 June), the Commission presented some preliminary findings on implementing the digital targets at the Digital Assembly in Stockholm, pointing out that only 73% of households are currently covered by 5G and only 56% by fibre.
For Breton, the most optimistic investment gap projection until 2030 is €175 billion, an estimate that might further grow as it does not consider cloud computing or network virtualisation.
However, according to the European Competitive Telecommunications Association, which represents alternative operators, the investment gap that the European Commission estimated is, in fact, closing, as it dropped from €500 billion in 2016 to €175 billion in 2023.
Similarly, Cláudio Teixeira, legal officer at the European Consumer Organisation (BEUC), told EURACTIV that he did not witness a market failure either that “requires regulatory intervention”.
The Body of European Regulators for Electronic Communications echoed the argument that they do not consider there to be a problem, pointing to the internet ecosystem’s proven ability to adapt to new conditions.
Three or four operators?
The telcos’ malaise in Europe seems to be embodied by Vodafone, the closest to a pan-European operator, present in 13 European markets and with partnerships in tens more.
Vodafone has consistently scaled down its European operations in recent years. The new CEO, Margherita Della Valle, is the former CFO, a figure usually more focused on reassuring shareholders rather than investing in long-term growth.
Under the new leadership, Vodafone is reportedly considering withdrawing from Italy or Spain, which are among its worst-performing markets in terms of return on investment.
In November, Vodafone sold chunks of its mobile tower company, Vantage Towers, to American equity funds. On Wednesday, the company confirmed a deal to merge with Three to become the UK’s largest operator.
In other words, many telecom operators see market consolidation as the only way to avoid selling their infrastructure piece by piece to international speculators.
In particular, the telecom operators have been quietly hoping for a revision of the current competition doctrine of the European Commission, which has prevented the mergers of mobile operators from four to three.
The hopes for a change of approach in favour of consolidation are currently pinned on the Orange-MasMovil case in Spain, on which the EU regulator has opened an in-depth investigation in April.
[Edited by Luca Bertuzzi]
