The end of the current mandate by the European Commission is partially marked by the two expected reports from Draghi (on economic competitiveness) and Letta (on the future of the European Single Market). Amid this context, the European Commission has indicated that it will propose a Digital Networks Act (DNA), which aims to redefine the governance of the telecommunications sector in the EU, what may have an enormous impact on the role of Big Tech companies in European soil as well as the economic future of telcos, thus influencing in the policy guidance that the Digital Single Market that is foreseen will bring in the future.
Initial efforts to transform the approach to telecommunications services
As a first step, the European Commission launched an open consultation which compiled 437 responses and 164 position papers. Main feedback was made up of three areas. First, the need to address emerging technologies such as network virtualization, edge cloud, artificial intelligence, and open networks. The transition towards software-based, cloud-native networks will require the transformation of business and regulatory models, security of vendors and investments. Second, for the EU Single Market to happen, the EU needs to streamline and simplify administrative requirements and facilitate cross-border consolidation, as one of the main challenges in the telecoms sector is its fragmentation into national markets. Third, there is a need to ensure security of telecoms sector, as it is a major strategic area.
After this consultation, the European Commission has launched a White Paper on the future of the telecommunications sector, by setting out future scenarios for the EU’s infrastructure and how to address problems in several areas: connectivity, spectrum acquisition and management, investment needs, legacy networks’ sustainability, and security.
Main challenges faced by telecoms companies
The need to address the European telecommunications scenario is not carried out by chance. While network innovation and investments are increasing, the sector still faces a large number of challenges, that the EU aims to address through these initiatives. Lower profitability and investment are major problems. Also, 5G in Europe reached 80% of the population, a high but still low figure compared to other countries, such as South Korea and the United States (98%). Also, gigabit-capable coverage is still far from the EU’s Digital Decade Targets (79.5% in Europe compared to 98.5% in China or 89.6% in the United States).
Also, the Important Project of Common European Interest (IPCEI) on Next Generation Cloud Infrastructure and Services is facing delays and limitations in its implementation due to an expectations mismatch in funding and governance issues across the participating Member States.
The increase of usage of technologies will require higher devoted efforts to the speed, volume and capacity of digital infrastructure. If the Metaverse is to spread, estimates point to an increase between x5 and x40 with respect to the streaming of HD videos. According to the European Investment Bank’s estimates for 2014 to 2020, the investments needs in that period to reach a global benchmark for broadband services required €75 billion and faced a gap of €30 billion. The European Commission estimates an investment gap of €65 billion by 2025 Public funding VS private funding.
Additionally, EU telco markets are fragmented. In the EU the general rule of at least four telco operators by Member State deprives telco companies of the financial means to keep up with increasing investment needs. The financial situation of EU telco companies is far from ideal. For instance, the Compound Annual Growth Rate of the Average Revenue per User since 2015 for EU telcos has been -1% for both fixed and mobile services. Another proof of a challenging financial situation is the evolution of the share price of the six main big techs and the Eurostoxx 600-Telcos. This is also reflected in the market capitalization of EU telcos and big techs: whereas EU telco market capitalization is below €0.3 trillion that of the six largest big techs is above €7 trillion.
Further policy needs for the telecoms sector and next steps
The European Commission has raised the “fair share” proposal, which aims to make OTTs (main traffic users as companies) and telcos (main network providers) share the costs of the development and deployment of new networks in Europe. In this post, we argue that telecoms companies are a strategic, if not critical, sector in the EU, and they should be protected and promoted. The sustainability of economic services, the security guarantees and consumers’ rights remain an important topic.
However, the fair share proposal also brings some issues when it comes down to EU’s goal of achieving strategic autonomy. As Elcano Royal Institute argues in its Policy Paper “A Connectivity Package for the EU: Considerations on digital strategic autonomy”, there are some issues to take into consideration. First, there is a competition across Member States. First, there is a geographical: some northern European countries, which also have strategic telco companies, opt for a centrally managed fund, while southern European countries advocate a ‘fair share’ direct payment mechanism. The direct payment would mostly benefit telco companies that have a greater level of network deployment in Europe. This is the case of companies from Southern and Western Europe, but not from Northern Europe, which have less network penetration.
Second, there are differing interests: Member States do not all have the same interest in this topic because not all have large, strategic, national telco companies. Meanwhile, some countries contribute state shareholdings to some operators that result in them having two ‘chairs’ in this discussion. Also, bandwidth coverage and deployment rates show major differences across Member States. Some countries, such as Ireland, host a large number of big tech headquarters in EU territory, which might disincentivize Irish participation in this discussion.
Third, there is a divide in the approach to either national or EU-level oversight: countries proposing the ‘fair share’ mechanism have advocated for different oversight procedures. For example, the French telco association has proposed an SPNP model based on a gigabyte tariff at the European level, so that national authorities can rely on it to adapt their own decisions.
Fourth, the peer-review process: this PRP mechanism is not part of the ‘fair share’ proposal. However, the Digital Decade 2030 Policy Program stipulates the promotion of this peer-review process across Member States, by which they might exchange best practices on specific aspects of policies, measures and actions, and might help to improve the attainment of certain targets of the Digital Decade.
Fifth, industrial policy: the Digital Decade 2030 aims to foster multi-country projects and European Digital Infrastructure Consortiums (EDICs) with at least three Member States. However, this public support for multi-country projects should be used in case of market failures or sub-optimal investment situations. How market failure is defined in scope, resources, ex ante or ex post might vary greatly across Member States.
We argue that measures need to be taken to reinforce the position of EU telcos, if the targets of the Digital Decade are to be reached. In particular, we consider it necessary to reform the EU’s telco regulatory framework and to introduce efficiency obligations for data traffic, while not invoking large obligations to big tech and OTT providers.