The consolidation in the EU telecommunications industry has the attention of EU Competition Commissioner Margrethe Vestager and her team. They play a major role when it comes to the telecom market and how it will develop. Put simply, any mistakes that the EU government makes in defining competition will have important social consequences and be difficult to rectify.
I am a Dane and have met Margrethe Vestager many times. I have great professional and personal respect for her, and I believe she is sincere when she says that there should be fair competition in Europe. At the same time, I fear that she may be a victim of officials who are defending the failed decisions of the EU Competition Authority by misleading her about what is actually happening in the telecommunications market.
I can see this situation when I look at the USA. The American telecom regulator chief Tom Wheeler is a man I like very much and for whom I have great respect. Yet in connection with the FCC imposing Title II on the Internet, an antiquated regulatory framework, he has been victim of forces that have caused him to lose objectivity. History books are unfortunately filled with stories of talented leaders who have been misled by people defending their old decisions, rather than admitting that they were wrong and losing face.
In the last week Margrethe Vestager been quoted in the media about her views on competition in the telecommunications sector and what drives investment. She attempts to cite examples as if she is searching for proof of what creates competition and drives investment in the telecom sector. Now a number of allegations emerge that she has not seen evidence that consolidation will be healthy and have a positive effect on investment in the telecom sector.
Margrethe Vestager has not been a Commissioner for long, and I suspect that her attitudes are based on the briefings her officials have give her. I suppose that the briefings are conducted by officers who have used them to defend part of their historic decisions. It might be interesting to examine what information she has and how she builds her positions.
If I was Margrethe Vestager, I would ask my officials to make a list of all the mistakes they have made in connection with the competition cases that have been in telecommunications in the last five years. In parallel I would ask European telecommunications operators about the mistakes they believe the EU made in the processes. With a 360 degree survey, I am sure the Vestager can learn a lot about the market and the organization she is responsible for. I have observed over the last twenty years that EU officials often have difficulty admitting that they made mistakes.
What drives investment in the telecommunications market
There are many views on what drives telecom investment, and it is not hard to describe or document. If Margrethe Vestager thinks otherwise it is because enough her people have not briefed her well enough. Here are the six most important things to look at when evaluating what drives investment in telecommunications:
1. Players enter the market either because they get a license to build and operate a mobile network or because energy companies establish fiber infrastructure while they restructure their electricity grids.
2. Competition between technologies - the competition cable TV providers have created in broadband have led many DSL providers to upgrade their networks. Deployments from fiber operators have also had the same effect on DSL providers. On the cost side, we see that competition from mobile broadband has an effect on fixed broadband prices.
3. Operators defend their historical investments - owning a telecommunications company is like having a liter of milk in the fridge. Technology and frequencies have a shelf life; if it is not upgraded it or renewed, it grows sour and undrinkable. If a company doesn’t reinvest in its technology, its business will be eliminated over time.
4. Technological development can bring production costs down and drive competition. Many mobile operators have upgraded their 2G/3G network to new 2G/3G/4G networks and have increased their CAPEX.
5. Public authorities make it expensive to build infrastructure by, unwittingly or not, creating barriers to deployment. In Denmark, where Margrethe Vestager comes from, many municipalities have created barriers to building good mobile infrastructure with rules about building masts and towers as well as unnecessary delays and approval processes. These barriers reduce the abilities of operators to invest.
6. Telecommunications investments are cyclical - in practice telecommunications investments cannot be studied on a short term basis. They must be reviewed over a period of several years and in relation to the shift that triggers investment in new technology and telecommunications infrastructure. Technology has evolved rapidly in the last twenty years: 2G, 3G, 4G, new fiber, DOCIS 3.1 etc.
A large part of the CAPEX is in the telecom industry is money that is invested to keep an existing business alive. We usually compare it to the amount parents will pay to holding their children alive if they were in a respirator. In practice forward-looking investments in the short term are marginal when looking at the size of the historical investments.
Can we see evidence of the above? Yes. The US telecommunications market is an example with high investment. We describe it in the research note A civil war and three lucky punches. One can also look at the historical investments across the EU 28 which we describe in the research note The EU's Broadband and Telecom policy is not working. Europe is falling farther behind the US. It is not difficult to document what drives much of the investment in the telecommunications world, and it is not hard to imagine that Margrethe Vestager would understand herself if she looked at the evidence.
What creates competition in the telecommunications market
Looking the EU's Competition Authority’s decisions over time, it is clear that they believe that the more players there are in a market, the better investment will be. This is a very wrong assumption and conclusion, and it can easily be proven. If you look at how many telecom operators there are in the EU compared to the United States, then the EU should have a level of investment that surpasses the United States. But this is not the case. For the last decade, the United States has accounted for a quarter of the global telecommunications infrastructure investment while the EU accounts for less than one-fifth.
If you look at the remedies that have been associated with a number of the telecom mergers, the EU competition officials have historically considered MVNOs as actors that can increase competition and investment in the telecommunications market. We at Strand Consult are probably some of the people who know most about the MVNO market in the world, and we have a number of reports and research notes that document that MVNOs are not small operators that create competition. MVNOs are alternative distribution channels that focus on narrow segments and reduce the mobile operators’ cost of customer acquisition. This is described in the research note Telecom operators, regulators and competition authorities need-to-update their knowledge of what creates competition in the market. Here are four factors that should be considered when regulators define consolidation remedies.
Competition is also created through technology. Consider the changes driven in the telecommunication market by the entry of over the top (OTT) players. This fact is missing in the EU's assessment of competition in the markets with consolidation. Consumers have switched from traditional operator provided long distance to VOIP providers such as Skype, which now account for a third of the world’s long long distance calls. WhatsApp has eliminated a large portion of many mobile operators SMS revenues, up to 20% in some cases. The research note Tier 0: A new category of telecom operators is born. The reign of Tier 1 operators Orange, Vodafone, Telefonica and Deutsche Telekom is over explains the competition that OTT players creates in the telecommunications market.
Just as in bar fight, onnly two guys are needed to start a fight. Similarly in telecommunications, two technologies--or even an evolving technology--can create meaningful competition, for example an operator with 2G vs. another with 3G. It is also such that if an operator falls behind in relation to its better technological competitors, the operator must lower prices, thus creating economic pressure on competitors. Similarly, an operator with a new technology can frequently produce services more cost efficiently than competitors, and thus the new technology also drives competition.
I am sure that some of the people who have likely misled EU Competition Commissioner Margrethe Vestager would argue that the above evidence does not conclude that consolidation is a prerequisite for investment. Let us assume for a moment that they are right. This would mean then that Europe is a healthy telecommunications market with a high level of investment. It should not be difficult then to attract and retain investment needed in the EU.
But we all know that this is not the case. Sadly the EU's own studies show that the region faces major challenges because there is not enough investment in telecom infrastructure. Over the last decade American operators have invested almost twice as much as European. In Canada and Japan, operators have invested at more than twice the rate of those in Europe. These three markets have all allowed consolidation. The report The EU’s Broadband and Telecom policy is not working. Europe is falling further behind the US describes the research and provides the evidence Margrethe Vestager requires.
What should Margrethe Vestager should do
The EU Competition Commissioner needs to lift her level of knowledge. I fear that some of her officials do not tell her the truth for fear of facing criticism for their past decisions. Vestager needs to learn something about how OTT players affect competition in the EU, and she should look at why investment levels in the US, Canada and Japan are significantly higher than in the EU.
The position taken by Margrethe Vestager starkly contrast to the position taken by other EU commissioners when it comes to investment. In connection with the new Commissioners, see our research note Good bye Neelie Kroes. Welcome to Juncker's ICT team: Ansip, Katainen and Oettinger. Let's hope you can deliver on promises made but not kept by Neelie Kroes. It’s an article that Margrethe Vestager should read.
With the M & A activity in Europe now, the EU Competition Commission should reflect on the past and the mistakes. It is important that Vestager understands what drives investment and competition in the telecommunications market. By not even mentioning the role of OTT players on the telecommunications market, competition authorities are not giving Vestager the whole picture.
One could also recommend that Vestager to talk to her boss Jean-Claude Juncker, the president of the European Commission and with Günther Oettinger, the European commissioner for the digital economy and society. They have argued that European telecom companies should be allowed to consolidate so that they can be more competitive and invest more. Many of Europe’s operators would like more clarity on the the EU's official policy on market consolidation.
Margrethe Vestager comes from an EU country that has had historically one of the highest levels highest MVNO activity. She should sit down with the founders of some of these MVNOs and ask them whehter they are small operators or focused distribution channels.
Vestager can easily and quickly lift her knowledge level if she wants to. She needs to think about the future and how we will remember her. One day we will look back at her decisions. We will be able to judge whether she was the mother of a rebirth of a healthy telecommunications market with a high level of investment that gave EU citizens access to modern communications. Or whether what she produced is stillborn: a weak, undernourished telecommunications industry that has not delivered the infrastructure needed for modern society. Simply put, the choice to allow operators to consolidate today will drive whether or not investment happens in the future. Markets that consolidate have greater capital to make investments.
One thing is certain: Margrethe Vestager created success in Denmark. The question is whether she'll create success in the EU telecom market. I hope for the former and fear for the latter.