Single Market fragmentation affecting telecom operators

The telecommunications sector consists of fixed incumbent operators and their challengers often relying on wholesale access to networks for their services, cable operators that have

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built their strength around content delivery but now compete head to head with the more traditional players, mobile operators and satellite platforms.

The sector has, as a whole, witnessed strong price competition over the last years and limited innovation. The previously cited analysis by DG ECFIN³⁷, notes that the national orientation of the current framework may have contributed to "inconsistencies in its implementation"

including as regards market analysis and remedies "thereby forcing multi-country operators to duplicate costs and limiting opportunities to realise economies of scale". Similarly the lack of standardised wholesale offers fit for multinational corporations increases the operating costs for such operators. The resulting regulatory uncertainty contributes to making markets "less attractive for entry and reduces incentives to invest, especially in riskier new generation access networks". Annex IV presents the state of the electronic communications markets in more detail.

Figure 13 – Global Fixed Traffic 2010-2018

Source: Ericsson Mobility Report Nov 2012

Business models in Europe are still largely based on (declining) voice revenue; operators have not yet managed to successfully monetise the growing demand for data (see Figure 17 on data traffic below). Despite competition from global content and applications providers (e.g.

Skype, What'sApp) that have disrupted traditional services of telecom operators, there has so far been limited differentiation of products or few new services which in other parts of the world have helped increase revenues even as voice has become a commodity which operators increasingly offer for 'free' as part of packages. The fragmentation of the legal framework related to sector-specific consumer protection rules increases compliance costs for business wishing to offer services cross-border, which in turn is a disincentive to international expansion and cross-border provision of services.

37 "Market Functioning in Network Industries – Electronic Communications, Energy and Transport". European Economy. Occasional Papers. 129. February 2013. Brussels.

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More competition and access to a larger market can be expected to spur such innovation and new business models. This can help grow the size of the overall 'pie' and enable revenues to rise as many consumers would likely be willing to pay more for more and better-quality services, particularly those tailored to their needs and 'lifestyle' choices³⁸.

Fixed networks

The telecoms sector and in particular the fixed segment in Europe is not performing well in comparison with other regions. The European telecoms market is characterised by stagnation in terms of revenue and investment. In global capital markets, institutional investors play a crucial role and their confidence in European markets has been eroding as European operators underperformed compared to their peers in other parts of the world (figure 14). While the level of investment is influenced by a number of factors including the health of the economy, regulation, compliance costs and legal certainty are all important factors in the assessment of possible returns on investment, particularly as investments in next generation infrastructure tend to be expensive and are typically earned back only over a longer period of time.

Figure 14 – Telecom Service Providers Performance (Total Return)

Source: HSBC

38 This is confirmed by a recent Eurobarometer survey (2013).

42 Figure 15 – Net Debt/EBITDA

Source: HSBC

European companies are also highly indebted in comparison to their peers (Figure 15).

While fixed line investment per capita was flat both in Europe and the US for most of the past decade, spending levels in the US and Canada are currently about two to three times as high as in Europe.

According to HSBC, over the period 2006 – 2012, domestic investments of EU incumbents as measured by CAPEX to sales lagged those of larger network operators in other developed economies such as the US, Japan or Korea (figure 16).

Figure 16 - Domestic Capex/Sales of EU Incumbents vs International (2006-12)

Source: HSBC

Cable

Cable is currently the strongest performer in the EU telecom sector. Despite a few larger players and notably one operator with presence in some ten Member States, the European cable industry is very fragmented with more than 1500 operators serving the market. Scale matters in this industry as bigger players have more negotiating power in acquiring content and end-user equipment (routers, set-top boxes). Cable networks cover mainly densely

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populated areas and are not generally extending their network footprint. However, they have been able to successfully build on their TV customer base and upgrade their Internet services to very high speed. Much of the original legacy infrastructure investment has been written off, and the additional cost of upgrading to ultra-high speeds is much more limited for cable (Docsis 3 technology) than it is for traditional fixed networks.

Despite their relative strength, and lighter access regulation, cable operators are generally running separate national operations rather than offering integrated services from a single headquarters base in Europe. This illustrates the fragmentation of the European market and the difficulty for even a large single company to deal with the variety of rules, conditions and national specificities from one place in Europe.

Mobile

Mobile data traffic is increased very much in EU as in the rest of the world but average data consumption per user is very low compared to US. The fragmentation in Europe with twenty-eight spectrum authorities, twenty-twenty-eight sets of access rules and frequency assignment conditions is a barrier to integrated cross-border provision of mobile services. Different sets of consumer protection rules equally stand in the way of the efficiencies of a larger market.

The difficulty for consumers from outside a Member State to access services, due to excessive roaming tariffs particularly in data, creates disincentives for operators to offer services outside their home border and at times might even provide incentives to reap benefits from higher tariffs in less competitive markets. Business models have not yet fully caught up with the trend of massively increasing mobile data traffic (see figure 17) and given competitive pressure, revenues have steadily declined.

Mobile data traffic has exploded over the last years while mobile voice has increased very moderately.

Figure 17 – Global Total Traffic in Mobile Networks, 2007-2012

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Source: Ericsson Mobility Report Nov 2012

Satellite

Satellite holds the smallest segment of the telecom market. While satellite services cover large parts of Europe, they have generally not been able to offer cross-EU services without a presence in the Member State. The current general authorisation requirements are one of the reasons. Even where there is no need for any uplink equipment in a Member State, satellite operators are usually required to notify and to fulfill the relevant associated obligations.

National conditions may sometimes prove burdensome and there is a great variety of rules and levels of applicable fees which fragment the Single Market.

4.4 Single Market fragmentation affecting telecoms equipment and device