Time for change
It’s no secret that, compared to the rest of the developed world, the European telecoms sector is in bad shape. A decade ago, the continent’s thriving communications market was the envy of Asia and North America, with its nations pioneering the technologies that formed the backbone of the digital economy. But 2014 is a very different story.
Despite huge growth in internet traffic across fixed broadband and of, course, wireless connections, revenue is stalling. The European Telecommunications Network Operator’s Association (ETNO) forecasts revenues from fixed network services across Europe will decrease by around two per cent annually between now and 2020, in stark contrast to the rest of the world, which can expect continuing revenue growth.
And it’s not just revenue; industry now widely recognises that investments in European telecommunications infrastructure are dwindling. ETNO states that investments have declined by some two per cent a year in the past five years, while the money ploughed into other international markets has risen by the same rate, across the same time period (see Figure 1 and Falling European operator returns).
As Europe’s consumers experience slower connections than US and Asia-based customers, economic growth could stall leaving the continent playing catch-up in more than just the telecoms industries. So what’s the driving force for Europe’s woes? In short: inconsistent, distorted and outdated regulation.
‘Networks and the competitive situation differ a lot between member states in Europe, so it isn’t possible to implement the same regulatory set-up – including regulated products, obligations and cost models – in all European countries,’ says Freenasp Mobedjina, vice president of strategy and business development for broadband services at Sweden’s largest operator, TeliaSonera. ‘But any uncertainty and lack of predictability has a significant negative impact on investments in infrastructure. Operators badly require stability and long-term rules.’
As Mobedjina highlights, regulation across Europe has historically focused on creating competition in existing networks without encouraging operator investment in new networks. Two key priorities have been to reduce end-user prices and incumbent market share, with policy makers only focusing on investment in the last five years.
‘As you can imagine, measures designed to encourage the [original] priorities, don’t necessarily deliver the third,’ he says.
But regulatory change, to encourage investment, is now critical. For example, deployment of infrastructure needs to take place well beyond urban regions, where the potential customer-base is lower. And in Mobedjina’s words: ‘It is now extremely important to create a less complex and more predictable regulatory environment to boost investment in [such] infrastructure.’
Pat Galvin, director of regulation and public affairs at Eircom, the largest telecommunications provider in the Republic of Ireland, concurs and emphasises that the root cause behind regulatory problems has been the sector’s breathtakingly fast rate of change. ‘The scale and complexity of our market is enormous and the ability and capacity, of regulation within our existing framework, to keep up with it, despite best intentions is a challenge,’ he says.
The original EU regulatory framework was designed to oversee the single national copper infrastructure, built with public subsidy, and owned and operated by monopolies. During the 1980s, this framework largely focused on privatisation, but come the 1990s, attention had shifted to the fixed incumbents and pushing competition in networks.
By the turn of the century, competition amongst services was being promoted, reflecting the more complex landscape, but now the industry needs more. Infrastructure, today, consists of a complex patchwork of local networks within a single member state, some operating under competitive conditions and others requiring regulation. Each network has a different performance and different technical capabilities, and this has brought myriad regulatory challenges concerning data services, the internet, and more.
As Galvin points out, the EU updated its regulatory framework for electronic communications in 2009 in a bid to adapt to rapid sector developments, but even some of these relatively new measures are already outdated.
‘One thing we have learned is that competition is becoming more and more intense as different platforms are rolled out,’ he says. ‘The principle of regulation is to act as a proxy for competition and then withdraw as competition emerges, but it’s often the case that measures are maintained for far longer than necessary, diminishing a company’s ability to invest.’
Does present regulation hamper investment? Galvin is adamant ‘hamper’ is too strong a word but like many of his peers in Europe-based telecoms businesses, he is certain current practices do not encourage forward thinking.
‘I think there needs to be more creative thinking, if our current framework is to deliver the type of investment we need. And in terms of changing the framework, there needs to be more of a deregulatory agenda,’ he says.
Time for change
Thankfully, regulatory concerns and dwindling industry revenues have been noted by the European Union. Late last year, the Commission put forward a telecoms package reform for a single market for electronic communications, named ‘The Connected Continent’.
Its proposals are designed to facilitate access to all services, including the telephone and Internet, for consumers by relieving cross-border restrictions and unjustified additional costs. Key elements of the proposal included simplified EU rules, harmonised consumer rights, promotion of net neutrality across the continent, and of course the abolition of roaming charges on incoming calls as well as coordinated spectrum assignment for mobile operators.
Speaking at a press conference marking the release of the proposed legislative package, Neelie Kroes, vice-president of the EC in charge of the digital agenda, stated: ‘Current trends are unsustainable for our economy and without the infrastructure to compete, we aren’t going anywhere in any sector.’
Her EC research had highlighted how, for example, investment in fibre-to-the-premises networks had been limited across Europe with most next-generation broadband connection provided through cable networks where further expansion isn’t expected. In contrast, Asia can claim the largest market for FTTx technologies with North America boasting some 50 per cent of the fixed broadband market served by cable with expanding FTTH coverage.
Meanwhile, recent ETNO figures indicate that the lion’s share of European countries, including the UK, France, and Germany, have at best a little over 40 per cent FTTx coverage and sparse FTTH penetration (see Figure 2).
As part of her speech, Kroes emphasised promoting growth in the fibre, as well as mobile telecommunications, sector by ‘cutting red tape and making it easier for new companies to invest in new networks and new services.’ She painted a tired picture of how telecoms companies can operate in all member states but do not, because of different access rules and tariffs, and nationally enforced rules that take time and money to deal with. To this end, the EC proposes a single EU authorisation so operators only have to deal with one authority on licensing issues as well as a veto on national decisions to prevent over-regulation and inconsistent practice from national telecoms regulators. The package also emphasises the need to apply pan-European non-discrimination obligations to prevent current preferential treatment of operators with significant market power.
‘The aim is to gradually make the telecoms sector a ‘normal’ economic sector with limited ‘ex-ante’ rules and responsibility shifting to ex-post regulation,’ says Kroes.
‘This package is crucial for the telcos sector itself... [and] is the biggest thing that the European Institution could finalise in 2014 to boost growth and jobs,’ she adds. ‘We hurt consumers, we hurt the economy and we hurt our strategic future if we don’t act, and we can’t wait.’
Many parts of the package have been welcomed. As TeliaSonera’s Mobedjina says: ‘Price regulation is the part of regulation that primarily creates uncertainty [for us]. So the commission’s recommendation that opens up a removal of price regulation of fibre is a key factor for creating a more investment-friendly regulation.’
But not everyone is keen to adopt the entire package. Amid wider industry concerns over the single transfer of authority from national regulators to the EU as well as complaints over a lack of public consultation, ETNO has stepped up to voice its members’ gripes. The organisation agrees with Commission vice-president Kroes’s diagnosis of the European telecoms market and shares the over-arching objectives of the proposed package, but believes additional measures are crucial to achieve a successful single market in today’s telecoms sector.
‘You know, we as consumers enjoy the best prices and quite a good quality of service compared to other regions but change has come,’ says ETNO’s director, Daniel Pataki.
According to Pataki, greater deregulation across the entire telecoms sector is critical and he emphasises how the EC package will fail to initiate significant deregulation in fixed-access networks. His organisation recommends, for example, substantial deregulation of fixed-line wholesale access to kick-start investment in next-generation networks and services, as well as levelling the playing field between network operators and ‘over-the-top’ service providers.
‘The proposals do not address the excessive regulatory burden on the main network investors in Europe... access regulation should focus on one level of the network only and price regulation should end where there are competing next-generation access infrastructures,’ he says.
He also believes communications services should be re-defined to ensure competing services receive equal treatment. ‘When you are looking at regulation, it’s not just about new technologies and infrastructure, the whole value chain has changed,’ he says. ‘We have so-called internet players, social media... the connected continent is a good step in the right direction, but we think it should be more ambitious.’
“In July 2012, Krues announced an initial plan to revise recommendations and costing and we see this as a symbolic change,’ he adds. ‘The connected continent is a second step to revising regulation, but a thorough review should be carried out at the next term of the commission.’
But despite the industry’s desire for more, any telecoms package is unlikely to be adopted before the current European Parliament dissolves in April, for elections in May.
As member states consider the telecoms package, Greece, currently holding the rotating presidency of the EU’s Council of Ministers is asking these nations to concentrate negotiations on proposals more likely to be completed ahead of elections.
In light of the now widely acknowledged decreases in revenue and investment, regulatory change is inevitable. As Eircom’s Galvin puts it: ‘We need to get the balance right between getting rid of parts of the framework that are not delivering and not throwing out anything that is progressive. But we do need new framework elements that recognise sustainable investment challenges,’ he adds. ‘This has to take priority.’
Falling European operator returns
In July 2013, The Boston Consulting Group, commissioned by ETNO, published its report: Reforming Europe’s Telecoms Regulation to Enable the Digital Single Market. Alongside single market proposals, author Wolfgang D Bock, and BCG colleagues reported startling figures.
Between 2008 and 2012, Bock and colleagues reckoned European telcos lost nearly €70 billion in aggregate market capitalisation while over-the-top digital service providers, device manufacturers and cable companies gained more than €200 billion.
What’s more, the return on capital for leading telco incumbents in France, Germany, Spain and the UK averaged 9 per cent from 2007 to 2011. Over the same time, the average return on capital for leading access seekers – companies that rent infrastructure access from incumbents at regulated wholesale prices ranged from 13 per cent to 21 per cent.
‘These are long-term trends that show no signs of abating,’ wrote Bock. ‘We expect revenues of
the European telecommunications sector to continue to contract over the next decade by as much as 2 per cent a year until 2020, representing a cumulative decline of €70 billion to €190 billion.’
And as the author added: ‘This will further diminish investments in next-generation networks.’
As part of the report, BCG and ETNO lay out the strategy and roadmap for reversing these negative trends, claiming recommended measures could deliver EU countries up to €750 billion in GDP growth and 5.5 million jobs.
But, as Bock asserted, all stakeholders, from government and industry, must act jointly for a ‘common benefit’.