When European Commission President Ursula von der Leyen delivered her first State of the Union Address in September 2020, she spoke compellingly about the importance of regional connectivity. At a time of unprecedented digital acceleration, she said it was unacceptable that 40% of people in rural areas still did not have access to fast broadband connections – and she promised to change that. “We want to focus our investments on secure connectivity, on the expansion of 5G, 6G and fibre,” she said.
We agree. At Ericsson, we share the belief that digital infrastructure will play a pivotal role in the recovery from the pandemic and that 5G will be central to its success. There is recognition that 5G is a must-have technology to stay relevant. The IMF has even recommended the establishment of temporary tax incentives to bring forward investment to accelerate deployment. But right now, it is hard to build that infrastructure because of EU competition policy that effectively undermines the EU’s Single Market and create fragmentation.
The result is that over 100 mobile operators are now active within the EU’s Single Market, while China and the USA have three ‘consolidated’ players on their respective ‘single markets’. Faced with such strong and agile competitors in other world regions, the fragmented nature of the EU market is not helping its performance.
A mixed picture of progress
Mobile markets have high fixed costs and in Europe these account for around 20% of revenues. The GSMA estimates that some $175 bn will be invested in Europe between 2020-2025 which is only 60% of the amount expected to be invested in North America. According to ETNO, per capita telecom investment in Europe is 15% lower than in South Korea and more than half that in Japan and the USA. Over the last 15 years, average telecoms spend per capita has fallen by 16% in Europe, while in Korea and the USA it has increased by 19% and 24% respectively.
In Europe, operators need to deploy up-to-date digital infrastructure but returns on capital are often below costs, which discourages capital investments and delays build-out. In mature markets like Europe, the natural tendency is to merge to improve margins and investment. Yet in national markets where consolidation from four to three players was allowed during the last decade, all but one of the approved mergers included remedies that either created a new fourth player or curtailed the efficiencies the merger hoped to achieve. In Italy, for example, when the market consolidated from four-to-three, one condition was that the merged firm would have to give up spectrum so that a new mobile player could be created. In Ireland, a similar remedy was imposed but no firm took it, which left spectrum unused.
This is a failure of competition policy. In reviewing mergers and acquisitions from a national and consumer perspective, a vital 21st century truth is being overlooked: telecommunications are the nervous system of the Single Market’s economy, so connectivity also needs to be viewed through the lens of competitiveness of the EU as a whole.
Apart from being too stringent on approving four-to-three consolidation compared to the USA and Australia, the European Commission’s current methodology falls short because the timeframe of the merger assessment is not long enough to factor in dynamic efficiencies (e.g. during the 4G era, gigabit costs fell by more than 95% while data consumption increased exponentially, a trend that is set to continue with 5G). In addition, the market definition is too narrow and does not include proper consideration of over-the-top players who offer the same service but under different regulatory conditions.
Doubling down on prioritising investment
To get a sense of the impact that infrastructure investment is having, consider the enterprises it is empowering. Since 2010, China’s share of tech companies ranked in the top 100 global firms by market capitalisation has trebled and the US share has almost doubled. And Europe? Over the same period, Europe’s share has shrunk by three-quarters.
If the current failures of competition policy are effectively addressed in the short term, step change 5G will be able to deliver equivalent performance to fibre solutions for suburban and rural areas. 5G Fixed Wireless Access (FWA), for example, has a cost to benefit ratio greater than 10 in rural areas because deployment can be much cheaper and quicker than alternatives. FWA is perfect to provide fast broadband to the 40% of rural people that lack access, closing the Single Market’s digital divide and doing so before this Commission’s term ends in 2024.
As we look beyond 2024, attention across Europe is now focused on how to achieve a sustainable, inclusive recovery. With 5G, Europe has a chance to add €2.2 trillion to its economy by 2030 if the right policies incentivise investment. A recent report by Analysys Mason says that 5G-enabled digital transformation can drive €250 billion in benefits for just €42 billion in cost, of which €10 billion would be required from public sources. Treating 5G rollout as a Single Market issue will ensure EU citizens and companies have equitable access to this transformative technology and drive an economic boost.
As other world regions read the mood music of this moment and through their competition policy, incentivise investment through consolidation, where does this leave the rollout of 5G in Europe and its rural regions, as highlighted by President von der Leyen? Put simply, pervasive 5G coverage requires competition policy to pivot so that investment incentives are maximised and private sector investment is amplified through targeted public subsidies. Taken together, these measures could efficiently establish step change 5G as the Single Market’s open and inclusive innovation platform, providing gigabit connectivity quickly to wherever it is needed in the EU whilst future proofing the Single Market, ensuring it is as competitive as its regional peers.
According to ETNO, over the last 15 years, average telecoms spend per capita has fallen by 16% in Europe, while in Korea and the USA it has increased by 19% and 24% respectively.
A recent report by Analysys Mason says that 5G-enabled digital transformation can drive €250 billion in benefits for just €42 billion in cost, of which €10 billion would be required from public sources.