Emerald Group Publishing Limited
A single European telecommunications market is a mirage
A regular column on the information industries
Article Type: Rearview From: info, Volume 17, Issue 1
Peter Curwen is a Professor at Newcastle Business School, University of Northumbria, Newcastle, UK.
With a new European Commission now in place, the creation of a Digital Single Market is at the top of the agenda. But, as the recent European Parliamentary elections indicate, there seems to be less and less appetite for closer integration in Europe. However, this has not prevented Professor #B1 from arguing, rather implausibly in my view, in favour of further centralization in a single European telecoms market.
Pogorel’s argument proceeds broadly as follows:
European equipment vendors are losing ground to Chinese vendors even in Europe.
Nokia in particular has lost its way.
Some European markets such as the UK, France and Italy enjoy low mobile subscription rates.
But the tight regulation which brought about these low prices is blamed in some quarters for the lack of investment.
Furthermore, US subscribers pay less per unit of usage because they use their devices more intensively.
Regulators in individual European countries struggle to resolve critical issues such as the optimum number of operators or whether control by foreigners should be permitted.
All of which reveals “a lack of doctrine and vision” […] “bordering on blindness”.
The solution is accordingly “a continent wide industry, offering quality, continent wide subscription services”.
He concludes that the solution is definitely not to consolidate within individual countries, thereby enshrining oligopolies and driving up prices. Rather, it is to consolidate on a Europe-wide basis. He points out that the USA has two carriers that are individually larger than the three largest European Union (EU) carriers combined, and that it is an illusion to claim that there are only four mobile operators in the USA, as there are large numbers of other facilities-based providers and a slew of mobile virtual network operators (MVNOs). Accordingly, each sub-market is supplied by multiple operators. He concludes this section by stating that, “As for Japan and China, the differences are big: they have only three”.
He adds further that the sub-optimal scale of markets in Europe has resulted in the slow development of long-term evolution (LTE) compared to the USA, partly because the large US operators can influence world standards and persuade vendors to provide the necessary equipment – as can China Mobile.
His solution is to have a low number of “actors” active in most European countries, “allowing for four operators on each market”. So why is this not happening? Because, he argues, individual country regulators are refusing to look at the wider picture and are maintaining in business many sub-scale operators, thereby depriving the “actors” of investment capacity. He notes that whereas there are big operators in Europe – Vodafone, Orange, Telefónica, Deutsche Telekom and Telecom Italia – they “prefer to play the multi-domestic game and take modest advantage of market regulation”. Furthermore, as they operate extensively outside Europe, they cannot pursue the more sensible path adopted by US and Asian operators of concentrating heavy investment within the home market.
It is hard to know where to begin with a refutation of the above arguments, given the sequence of assertions set out mostly as generalizations. Let us begin, however, with the vendors which receive an occasional mention. It is certainly true that European vendors such as Nokia have lost their way, although that has been due to strategic errors – it has also happened to the likes of Motorola. It is also true that this has opened up opportunities for Asian vendors, but it is a cut-throat business and Samsung, for example, is currently feeling increased pressure from Chinese vendors that are able to leverage their huge domestic market. It is a very dynamic sector and hence it is difficult to predict winners and losers several years ahead, but it is hard to see how a European champion can be re-created from existing vendors without the use of trade barriers which would, in turn, invite reciprocity in Asia.
It is also true in principle that the largest networks such as Verizon Wireless can potentially induce vendors to prioritize their spectrum bands when assembling devices with LTE capability. Nevertheless, the most commonly used operating system (O/S) is Android, which is commonly found in European devices, and the LTE device market in Europe has concentrated so far on the 1,800-MHz and 2.6-GHz bands, thereby providing pan-European scale for vendors. Equally, Verizon Wireless has concentrated on a specific section of the 700-MHz band not used by the other large US operators, which ironically means that vendors in the USA must provide devices capable of handling multiple sections of the band. According to Pogorel, vendors listen to operators that have “hundreds of millions of customers in single markets with unified standards”, but whereas that may be true for China, it does not apply to the USA, where only two operators can muster (not much more than) 100 million customers apiece and where they do not use common spectrum bands.
So how do China and the USA really differ? Simply put, the Chinese Government determines the structure of the mobile market, including the choice of technology. It has opted to restrict the market to three operators, although MVNOs are beginning to make an appearance. Obviously, this provides economies of scale, but is Pogorel seriously suggesting that the structure of the European market should be determined by taking control over private companies in Europe to emulate the situation in China?
As for the USA, while it is true that there are large numbers of local networks and MVNOs, the reality is that the Federal Communications Commission (FCC) has been forced to concede to pressure, leading to consolidation. With the takeover of the likes of Leap Wireless, the “big four” national operators now dominate almost every sub-market, especially given that they have affiliations of various kinds with most of the competing small networks of any consequence.
He also cites Japan, but the history of that market stems from the initial dominance of NTT, and it has been too difficult for new entrants – or foreign operators such as Vodafone, for that matter – to establish themselves, so the three-firm structure is pretty much set in stone despite the overall size of the market. Oddly, Pogorel fails even to refer to India – the world’s second-largest market – where there are far too many operators but consolidation is a struggle, especially given the excessive number of bureaucratic and political organizations involved in regulation. It is also notable that the largest market in Africa – Nigeria – still has six operational networks. Put bluntly, it is more difficult than it seems to draw relevant comparisons, and Pogorel is too selective in this respect.
Pogorel is correct about the large operators in the USA withdrawing from foreign markets to concentrate all their investment upon the home market. However, it must be noted that they first had to acquire those foreign assets, in which respect they (in previous incarnations) acted exactly like their main European counterparts at the time. On the other hand, he is simplistic in stating without qualification that Asian operators also concentrate on growing their home markets. What about Japan’s Softbank and its recent forays into the USA, and is not Bharti Airtel one of the most acquisitive of all operators overseas despite the size of its home market?
It is also true that most of the larger European operators have chosen to maintain a wide range of overseas assets, but again there is a problem of comparing like with like. First of all, Telecom Italia is hardly relevant, as it only operates in Italy within Europe and it effectively only has one major overseas asset, in Brazil – at least for now. Furthermore, it is indirectly controlled (for now) by Telefónica. For its part, Telefónica is bi-regional, and it is absurd to suggest that it should divest itself of its Latin American assets to become a European champion. Meanwhile, Vodafone, Orange and T-Mobile are well-aware of the downside of minority stakes in foreign networks and have recently made moves to shed them, to be replaced with fixed-wire assets that allow them to provide triple-play in Europe.
However, shedding assets is not done by waving a magic wand. You need a well-funded buyer that has an interest in a minority stake, which is a fairly tall order to achieve. And because Pogorel wants the same small group of operators to be present across most of Europe, he seems to be implying that these unwanted assets should be bought by other major European operators. Alternatively, as he welcomes inward investment, he may be inspired by the recent attempt by América Móvil to buy Telekom Austria and KPN, but the only other potential buyer on the horizon takes the unlikely form of AT&T. Or is he, perversely, pinning his hopes on China Mobile?
Restructuring the European mobile market would take at least the rest of this decade, even assuming that the European Commission somehow acquires the power to dictate strategy to private operators, not to mention the (presumably) enforced transfer of powers from EU state regulators to the Commission. Crucially, Pogorel is wholly silent on these issues. He simply calls for all involved parties to “take the situation in their hands and build the European telecommunications single market into an industry powerhouse”. Unfortunately, this all sounds like wishful thinking and requires a far more convincing case to be made if Europe’s telecoms operators are to change strategy or for the EU Member States to agree to further integration.
Pogorel, G. (2014), “A single European telecoms market”, available at: http://esharp.eu/big-debates/the-digital-agenda/231
About the author
Peter Curwen is Visiting Professor of Mobile Communications at the Newcastle Business School, Newcastle, UK. Peter Curwen can be contacted at: mailto:firstname.lastname@example.org