Did someone say “Consolidation”?

Enrico Letta published his keenly awaited report[1] in April 2024, outlining how European competitiveness could be improved by a series of measures intended to complete the Single Market. In particular, he pointed to the fact that until now the finance, energy, and electronic communications sectors had not been included in the construction of the Single Market:

“Three decades ago, when the Single Market was established, these sectors were intentionally excluded from its scope, deemed too strategic to be integrated beyond the national level. However, the perspective that once prioritised domestic control is now proving to be a barrier to the growth and competitiveness of these sectors at the European level and globally.” (p.51)

Why does this matter now?

“The lack of integration in the financial, energy, and electronic communications sectors is a primary reason for Europe’s declining competitiveness.” (p.8)

The problem is precisely that these sectors provide the basic inputs for most of the functioning of the European economy. And so, he made proposals for creating a Single Market also in these sectors. While all three are important, news headlines tended to focus on national consolidation in the telecoms sector. Some were simplistic:

  • Bloomberg, 16 April 2024: “EU Report Backs Telecom Consolidation, Strong Energy Market”[2]
  • Euractiv, 17 April 2024, “Letta’s report aligns with views of major telecoms on market integration”[3].

Others were more thoughtful or pointed straight at the mistake of not thinking this through:

  • Sandbu, 21 April 2024, “Europe still fails to make enough of its size — here’s how to fix that”[4]
  • von Thun, 5 June 2024. “Competition, Not Consolidation, Is the Key to a Resilient and Innovative Europe”[5]

So, what did Letta actually write?

In his report, Letta stated that the European telecoms market is highly fragmented, with more than 100 operators (p.52) in 27 EU countries. While this corresponds to three operators per country on average, which from a competition policy point of view is already a small number for healthy competition to arise, this corresponds to an average number of 5 million customers per operator, as opposed to 107 million customers in the US and 467 million in China (p.52). The conclusion is that European operators lack scale, which involves lower bargaining power with suppliers and gatekeeper platforms and lower returns from investments into research and innovation and the core infrastructure.

Add to this those national markets themselves are small, with

“multiple operators offering commoditized communication services characterised by low levels of diversification. Consequently, insufficient value creation occurs within these national markets depressing the investment in advanced networks which are essential for a competitive economic landscape.” (p.55).

Thus, Letta’s conclusion is

“Given this scenario, the mere establishment of a Single Market would not yield a discernibly different outcome unless it facilitates the growth of operators. Such growth is imperative to achieve economies of scale and scope, enabling cost reduction and fostering innovation.” (p.55)

And here comes the decisive paragraph, which for clearness we reproduce in its entirety:

“As markets still remain primarily national, cross-border consolidation could involve domestic markets making sure that competition law is respected. This must be viewed as a step in the development of European dimension cross-border operators. Establishing a Single Market for electronic communications with European operators capable of a global role is an objective which is not in contrast with the objective of keeping markets open and competitive. The scale of investments necessary in new technologies (for example edge/cloud, 6G, AI) implies that due consideration should be given to the necessity of some level of consolidation within national markets or strategic alliances between market players including pro-competitive sharing of investments in key network elements.” (p.55) [our highlighting]

This paragraph leaves no doubt that what Letta proposes is to create the conditions for successful cross-border operators with a European dimension, starting with regulatory governance: “…the fragmentation of how common rules are implemented in each domestic market hinders the ability of operators to penetrate other EU markets…” (p.56). But he pointed out before that

“Establishing an effective Electronic Communications Networks and Services can help to fix many of the current failures in a way that remains coherent with European values, and citizens’ rights and market economy principles. The process to get there is complex and a progressive approach is preferable: it has to be unrolled along some key issues.” (p.53)

The top key issue is consumer welfare, followed by infrastructure and services – not the other way round; that is, clearly, he sees national (as opposed to cross-border) consolidation either as a necessary bad, to be compensated by stronger competition from cross-border competitors, or as an option to be compared to allowing pro-competitive sharing of network investment.

Nothing is better than to have the author explain his report. A VoxEU/CEPR seminar on June 3rd, 2024, provided the opportunity.[6] There Letta said that Europe first needed to create a single market in electronic communications, starting with the key issue of radio spectrum integration, to be followed by the redefinition of the relevant markets at EU level. Then a process of consolidation can take place, towards a midway point between the present EU scenario and the US market outcome with only three continental operators.

What is the market reality?

The realities on the ground are a bit muddied, and presently we are seeing some contrasting movements. To start with, a few years back, before the tight regulation of EU call and data roaming prices and the appearance of OTTs, there was a pan-European business model based on frequent travellers and businesses, through offers of lower charges for international and roaming calls and data, the prime example being Vodafone. This business model was actually based on the market distortions created by excessively high wholesale and retail prices for international and roaming calls and duly faded away with the Roaming Regulation and wide OTT usage.

On the other hand, retail demand is fundamentally local: Purchasing power (average wages are three times higher in Germany than in Portugal, for example) and cultural traits vary strongly, and competitors vary. Thus, retail offers must be tailored to local conditions, and on the retail demand side there do not seem to be any benefits for pan-European operators.

Maybe not by chance what we have observed in recent years is consolidation at national level and deconsolidation at EU level: Deutsche Telekom and Orange merged in the UK, then sold out to BT; the challenger Hutchison merged its business in Italy, Ireland, Austria, and is now attempting to merge with Vodafone in the UK. Vodafone on the other hand is retrenching and just sold its Italian and Spanish units, i.e., its businesses in two of the largest EU states. Orange just merged with MásMóvil in Spain, etc.

A closer analysis of these cases may support the conclusions of Letta’s report – or may not. Is it a question of these markets being too small, or being too competitive? If an EU-sized market were even more competitive, what would the outcome be? In the end, operators might prefer cosy national markets, especially if they are allowed to merge.

There are some indications of movements in the opposite direction, of course. To start with, several tower companies have been buying up mobile operators’ towers, building up a trans-EU presence. Either this is a sign of significant returns to scale at infrastructure holding level that were waiting to be materialized, or it is the outcome of a financial bubble created by low interest rates and operators need for liquidity that has now burst.

Finally, new operators keep coming, though they are few. Free/Iliad, a French company, now also operates in Italy, Ireland, and Poland, though in the latter two markets it entered though acquisitions. Digi, a Romanian company, entered Spain and Italy and is preparing its launch in Portugal and Belgium, having announced that they would not copy the existing operators’ business model. Clearly, some operators continue to see cross-border opportunities — the game continues.

[1] Enrico Letta, “Much more than a market – Speed, Security, Solidarity Empowering the Single Market to deliver a sustainable future and prosperity for all EU Citizens,” April 2024, https://www.consilium.europa.eu/media/ny3j24sm/much-more-than-a-market-report-by-enrico-letta.pdf

[2] https://www.bloomberg.com/news/articles/2024-04-16/eu-report-calls-for-telecom-consolidation-strong-energy-market

[3] https://www.euractiv.com/section/digital/news/lettas-report-aligns-with-views-of-major-telecoms-on-market-integration/

[4] https://www.ft.com/content/f6200dc5-e42b-4356-9951-70ca3a94cd0a

[5] https://www.promarket.org/2024/06/05/competition-not-consolidation-is-the-key-to-a-resilient-and-innovative-europe/

[6] “Competition Policy RPN – New Industrial Policy, Competitiveness, Competition: Framing the Trade-Offs,” https://www.youtube.com/watch?v=jIduIUOILAY.

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