Last Tuesday in Brussels was one of the most important conferences in the telecommunications world in 2015. It may become more important for the international telecommunications industry than the Mobile World Congress or CTIA shows in 2015 and 2016. The FT-ETNO Summit was where telecom operators and investors got answers to the most important question today: Who determines the speed and direction of the telecommunications market in Europe--Is it Margrethe Vestager from DG Comp or Andrus Ansip and Günter Oettinger from DG Connect? The answer is that in the same way that Margrethe Vestager in Denmark came from a small party to become the de facto leader of country’s government led by the Social Democrats, Vestager has vanquished the competing voices in the European Commission to ensure that DG Comp alone determines the speed and direction of EU telecom market in the future.
The European Commission’s dream of creating a Digital Single Market looks increasingly like an illusion. It follows in the fashion of the feel good-look good politics for which this branch is known, the style of boasting that the institution is doing something good for European citizens without any substance. One either needs to be a politician or a fool to be believe in a top-down approach to creating a digital single market without any respect to the underlying economics, like the attempt to harmonize price across 28 nations without addressing spectrum or tax differences across the region.
DG Comp is playing small ball; micro-managing markets at the national level and to thinking that their efforts make the EU “competitive” as a whole. Their heavy-handed tactics to keep their thumb on the Danish market of 5.6 million is equivalent to controlling the market cap of greater Hamburg. The penny-wise, pound-foolish approach to regulate the mobile market where a customer spends per month the same as what he spends on coffee and croissants in two days in a Copenhagen café shows that not only is the European Commission not serious about making the EU competitive, they do not have the cognitive ability to understand telecom economics.
Let’s put Danish mobile prices in perspective. What a consumer pays for a taxi ride from the Brussels airport to the center of town equals what a Dane pays in mobile tariffs for four months. Consumers get 10-40 times in value for mobile connectivity versus what they pay. There is no such thing as high prices in the mobile industry. Imagine if Vestager directed her energies to breaking taxi monopolies instead of struggling telecom companies. She would save consumers more money than a year’s worth of expenditure on mobile subscriptions.
But no. Regulators and competition authorities can’t resist the temptation to continue to trample on telecom, even though the industry struggles to recoup historical investment. Moreover telecom regulations are designed to thwart any kind of innovation or service that operators would use to differentiate themselves to compete in the market. It is no surprise that regulators have declared Uber illegal in Brussels. Uber’s success did not necessarily come from low prices but a focus on giving customers a pleasant experience and quality service that taxi monopolies refuse to deliver.
Micro-management in the form of national retail regulation is a symptom of the challenges facing the EU. European citizens cannot see how the Commission will contribute positively to the society. Europe is the least attractive region for in the world for telecom investment, with Vestager’s Denmark being the least attractive country in the EU. This was the feedback from a group of international investors at the FT-ETNO event, or more appropriately “savers”, the world’s pension funds that invest on behalf of workers’ retirement and are looking for stable, long term investments. The pension fund managers complained that not only can the EU not deliver a reliable long term framework for investment, but they change the rules during the game.
Strand Consult is known for its annual predictions and the links to its predictions going back to 2002. Our view is that one should not judge a fortune teller on what he says about the future but whether his last prediction was right. When it comes to the EU's telecommunications policy, Strand Consult has been consistently right. There is much to suggest that the free fall as the European telecom industry today will continue and become worse. The future is not bright, and the observations from our research notes are becoming real: EU Commission’s schizophrenic telecom policy: hurts investments, costs jobs, and pulls EU's digital development even further back compared to other parts of the world.
The fact is that citizens in the EU have for several years seen the region decline compared to other parts of the world. Strand Consult described the challenges for European telecommunications in a series of research notes. See:
1. EU Vice President's Neelie Kroes new proposal for the "Digital Single Market in the Connected Continent" is a ticking bomb in the European telecommunications market and will likely have a negative impact on telecom investment in coming years
2. EU Vice President Neelie Kroes and the dream of a digital single market in Europe
3. EU Vote on Roaming and Net Neutrality: Monitoring citizens on mobile is okay, but don’t touch the internet
4. The EU’s Broadband and Telecom policy is not working. Europe is falling further behind the US
It’s telling that representatives from DG Comp’s merger unit did not attend the FT-ETNO event but sent Andrus Ansip as the bearer of bad news. Ansip’s speech reminded us of “Piggy” in the book “Lord of the Flies,” the boy who tries to uphold the old-fashioned way of doing things in a world that has been turned upside down. It’s amazing that a man who comes from a country that pulled itself out from Soviet control could be so subdued by Vestager, but he has changed his tune to sing her song.
Ansip offered some pseudo-scientific, technocratic comments, that “cross-border” consolidation is better than “in-country” consolidation. This is just a fancy way for the Commission to say that it doesn’t like three network operators in a market. In fact the economics of investment favor fewer operators in a market. The countries that the Commission says are leading--the US, Japan, South Korea, and China--are all consolidated, highly capitalized telecom markets The problem is that EU only has the aptitude to describe competition by counting players. They are stuck in a pre-Internet paradigm that fails to incorporate the role of technology in creating competiton. We can forgive Ansip for not being an expert on the topic; he is known as the “robot” in his country Estonia because he simply read the lines put in front of him. He does the same thing in Brussels too.
In any event, cross-border consolidation does not make economic or financial sense. Up to 75 percent of costs in a national mobile market are redundant. Operators spend a quarter of their revenue poaching each other’s customers. With penetration as high as 125 percent in some EU markets, there are no greenfield opportunities. There is only a regulator-facilitated race to bottom for the lowest price, destroying value and eliminating any profits that could be used for investment.
The "synergies" that the EU describes across borders are marginal. In the EU28, there is no harmonization for spectrum, taxes, terms & conditions, and so on, and the Commission doesn't have the appetite to address this, as it would be too upsetting for member states. In practice, it is capital-intensive for an operator to expand across borders. It makes more sense to shore up profitability first within the national market before expanding to another country. That revenue has to exceed or at least cover expense is intuitive to any small business owner, but these basic economics go out the window when it comes to DG Comp.
An additional deterrent to cross-border expansion is the regulatory cost and risk. Only large, global operators have the staff and expertise to navigate such bureaucratic minefields. As was shown in Denmark, no operator or investor wants to the be the new 4th player as DG Comp foolishly hoped. That is, in essence, why the deal was abandoned.
As for the "more for more" model proffered by the Commission, that consumers will just consume more data and operators will earn more money, it does not exist. The facts and history show that disruptive technological change is what drives competition on the telecom market. It is not regulators who have succeeded to create competition, but rather technology which drives prices down. When consumers switch to free Skype for long distance and WhatsApp for SMS, those revenues are not coming back. Operators' new offers for data don’t cover the lost revenue from traditional voice and messaging service. Vestager, Ansip and the Commission fail to understand this, and the telecom industry suffers as a result. See What drives competition on the broadband market in the USA and what will stimulate it in the EU?
Also at the FT-ETNO Summit was Günter Oettinger talking about 5G and how Europe should lead the revolution to mobile utopia. Politicians in Brussels love to talk about the evolution of 2G, 3G, 4G, 5G, like some financial orgy. But let's look at facts. Back in 2000, there was the same talk about 3G and that it would bring new services with ARPU doubling from €36 to €72. Not only did ARPU never get that high, here we are 15 years hence and ARPU is less today than it was in 2000, and we have evolved from 2G to 4G.
The dream of 3G was an illusion that became a financial nightmare also known as the “IT & telecom bubble". While national governments profited handsomely from the spectrum auctions, most operators never recovered the billions of euros they spent on 3G. As such, one should not be so optimistic as Mr. Oettinger is about 5G. With his tall tales of the future, he is the Baron Munchausen of the European Commission.
The problem with 5G is that value creation will be in the service layer and thus outside the operators' business. Operators have the capital intensive area of spectrum and infrastructure, where profits are slim to none. It used to be that mobile operators earned money on the services they sold from their networks. But that business has now moved to Apple and Google. Consumers increasingly buy communication services from Google and Apple’s app stores, not from operators.
The speeches and actions of Vestager, Ansip and Oettinger demonstrate that they know little about the world of telecommunications. The future is not bright for the EU, so politicians prefer to spin dreams for the future like 5G and cross border. It’s a more pleasant story than facing facts. But people should know the truth. A honest conversation, while difficult, could at least put industry on the right track, lessen the shortfall, and while not eliminate, at least slow the decline of the EU.
Acid Test - Did Strand Consult get it right?
The bottom line from the FT-ETNO Summit with its speeches from the Commission and the feedback from telecom operators and investors is this: the EU is not on track to a profitable telecom industry, the investment gap of €100 billion needed for next generation networks will not be bridged, and the Digital Single Market is an illusion. Strand Consult’s prediction: no confidence.
That Ansip recommends "cross border consolidation" and "more for more" shows that the Commission fundamentally does not understand the telecommunications market. There is no viable model for cross-border consolidation as all of the synergies are to be found within the national markets themselves.
Oettinger can be optimistic about the future and weave visions of 5G and the Internet of Things, but Europe will never get there if DG Comp micro-manages the process. If operators are not allowed to make their own business decisions and they can’t get scale on a national level, they will never grow to pan-European size.
The failure of the merger between Telenor and Telia in Denmark, brought on by DG Comp pressure--will have consequences in Europe and the rest of the world. The Danish disease is spreading to the rest of EU, poisoning mergers in the UK, Belgium and Italy. It will spread to the rest of the world, just like net neutrality, a euphemism for Internet regulation, started in the US, and is now in place or on track in 50 countries. The sad part of telecom regulation is that generally only the worst ideas are shared.