The recently published Draghi report on European competitiveness offers radical proposals to reverse Europe’s competitive decline compared to China and the US. This column argues while the report rightly recognises that the availability, affordability, and quality of telecoms services are a key driver of European competitiveness, its recommendations on telecoms are misguided and dangerous.
On 10 September 2024 the Draghi Report on European Competitiveness was finally unveiled, highlighting Europe’s sluggish economic performance (Draghi 2024a, 2024b). The report correctly identifies major obstacles, such as underinvestment in innovative activities but also in physical infrastructure such as the energy grid. Draghi offers radical proposals to reverse Europe’s competitive decline compared to China and the US. Radical proposals may be needed, but those on telecoms are misguided and dangerous.
Telecoms and European competitiveness – some facts
The quality of telecoms services depends on the available telecoms infrastructure and these services are an important input for many business activities. Thus, the availability, affordability, and quality of telecoms services are a key driver of European competitiveness. This has been rightly recognised in the Draghi report. It is backed up by many studies assessing the benefits of high-speed broadband on a series of economic outcomes. 1
When it comes to investment in quality and coverage of telecoms networks, there is no compelling evidence that Europe lags behind. 2 Additionally, retail prices for fixed and particularly for mobile telecoms services are lower in Europe than in other parts of the world, and very much lower than in the US. 3 Robust telecom networks and affordable prices are crucial for Europe’s competitiveness, because this is key infrastructure that is used by every single citizen and every business. This is why it is so essential to discuss this topic: if prices were to increase, or infrastructure to deteriorate or fall behind the technological frontier, the competitiveness gap with our global competitors would increase even further.
Perhaps more important than looking at comparing aggregate figures between the EU and other countries is the observation that there is a lot of variation among EU member states. For example, by 2022, the Netherlands, Romania, Portugal, and Spain each had more than 90% coverage of FTTP or DOCSIS 3.1 cable networks, compared with an EU-wide average only of 73%. 4 Being more forward-looking and less obsessed with comparisons, it is a good time to ask how the policy towards digital infrastructure should develop.
Draghi’s proposals on telecoms and its shortcomings
The report’s main recommendation for telecoms markets is to relax merger control and encourage consolidation within the sector, claiming that larger companies could boost investment in network infrastructure. The report goes further. To encourage consolidation, telecoms markets should be defined at the EU level – as opposed to the member state level. Moreover, innovation and investment commitments should be given greater weight in EU merger clearance rules. Specifically, remedies should be focused “on commitments to invest according to detailed time schedules, launch of services or access to data or platforms, rather than partial de-consolidations or the transfer of physical assets” (Draghi 2024b: 75)
We challenge the notion that telecoms consolidation will address the diagnosed investment shortfall and improve European competitiveness. We question the premise that this can be achieved by simply “choosing” a broader market definition, while the reality remains that telecom markets across Europe are still predominantly national in scope. We warn against remedies consisting in merging parties’ promises of higher investments and the allocation of scarce spectrum without safeguards against monopolisation.
The fiction of a single EU-wide telecoms market
Retail markets remain largely national: consumers cannot freely choose telecom contracts from across the EU but are restricted to offers from their country of residence. While the EU’s roaming regulation – despite initial strong opposition from telecoms incumbents – has been a key step towards integration, it has not fully succeeded in achieving this. Strengthening roaming regulations could help further integrate the market, but it won’t be enough. Similarly, the proposal to harmonise spectrum auctions across member states is a positive move, yet it is unlikely to be sufficient on its own to create a fully integrated EU-wide telecoms market. Finally, while it is true that some large telecoms companies have expanded and become key players in other member states, entry into each other’s market is still limited and tightly regulated at the national level.
Cross-border versus within-border consolidation
Consolidation through cross-border mergers could bring benefits to European businesses and consumers. However, this does not require an overhaul of merger control. Existing merger rules do not hinder cross-border mergers; both national competition authorities and the European Commission are unlikely to oppose mergers that do not significantly increase concentration within national markets.
The proposals of the Draghi report – similarly to those from the Letta report (Letta 2024) and together with voices from large telecoms companies – argue instead de facto for consolidations through intra-national mergers. They propose a broader, EU-wide market definition, which would artificially de-concentrate the relevant market, thereby making intra-national mergers appear no longer problematic on paper.
If markets are not EU-wide, pretending they are would allow for mergers that would be detrimental to European businesses and consumers, by leading to higher prices, lower investment, and ultimately weakening Europe’s competitive position in the long term.
Evidence on the effects of telecom mergers
Empirical evidence consistently shows that telecoms mergers lead to higher prices and are unlikely to boost investment. The report by Lear et al. (2024) provides a new empirical analysis based on data from 29 OECD countries for the period 2009-2019. 5 They find that one additional mobile network operator (MNO) is associated with a 7% reduction in average revenue per user (ARPU). The relationship is even stronger when focusing on Europe only, where an additional MNO is associated with an average 9% reduction in ARPU. Mobile virtual network operators (MVNOs) have a limited impact on prices despite offering lower tariffs. The report also finds no evidence that higher market concentration leads to higher investment. On the contrary, markets with more MNOs tend to see higher overall investment: one additional mobile operator leads to a 9% increase in total investment. 6
Merger remedies
While mergers in mobile telecoms can harm consumers, competition authorities can mitigate this by imposing commitments that address their potential anti-competitive effects, such as higher prices, lower investment, or reduced innovation. In fact, the Draghi report foresees the problem that telecoms firms may not invest as much as socially desired after merging and proposes investment commitments as a condition for merger approval. This is a classic example of a behavioural remedy, which is notoriously difficult to enforce. Over time, market conditions change, making previously agreed-upon investment levels either too large or too low. Such remedies fail to restore competition permanently, requiring constant monitoring. Moreover, if the merged entity openly failed to meet its investment commitments, the competition authority might resort to penalties, but it is unlikely that it could order a de-merger which would entail economic and social costs. Thus, the expectation that such behavioural remedies will achieve the desired outcomes seems overly optimistic in light of the evidence from these markets to date.
Indeed, several intra-national telecoms mergers have been approved by the European Commission subject to remedies, which have failed to restore competition. A notable example is the 2012 H3G Austria/Orange merger in Austria, where the remedy required the merged entity to offer spectrum to a new entrant MNO and grant wholesale access to part of its network under pay-as-you-go (PAYG) wholesale terms. Eventually, no firm bought the spectrum and the wholesale terms were likely too onerous for virtual operators. The Austrian Federal Competition Authority (BWB) lately criticised the remedy as ineffective (Bundeswettbewerbsbehörde 2016). 7
Towards a more integrated telecoms market
The Draghi report points out that Europe would greatly benefit from the creation of a truly European-wide telecoms market. In our view, reducing barriers to competition in the internal market is key to deliver better outcomes for consumers and to strengthen Europe’s innovativeness and competitiveness. Facilitating entry of telcos into other national markets is helpful in this respect. However, when it comes to offers that rely on own infrastructure, markets are likely to remain national or even regional in most places.
The Draghi report is unclear on drawing a line between cross-country and within-country effects and, in line with its stance towards mergers, proposes a change in the auction design that could allow for a single operator to obtain as much spectrum as it wants as long at its retail market share is less than 50%. 8 Apart from implementation issues, we would argue that this proposal is flawed as, depending on the interpretation, it would allow one or two operators to acquire all the available spectrum. This is an outcome that Europe should avoid.
Nevertheless, the European Commission can take or promote several initiatives in the direction of a more integrated market. Streamlined access regulation to a few bottlenecks could help entry in cross-national markets. Currently, spectrum licenses are awarded at a national level without much harmonisation. We agree with the proposal in the Draghi report “to harmonise EU-wide spectrum licensing rules and processes and to orchestrate EU-wide
auction design features to help create scale” (Draghi 2024a: 31), although it may not be likely that the EU member states agree to such a harmonisation. This makes it clear that it is the national governments that have to get their act together for telecoms companies to benefit from cross-country efficiencies. Industrial policy to boost investment in certain technologies and regions as they bring great externalities to Europe as a whole is also needed. But the way to achieve that is not via the wrong type of consolidation.
Disclaimer
Tomaso Duso is member of the German Monopolies Commission and, in this function, he worked on topics related to telecommunication regulation. He also worked on several projects consulting the European Commission on competition policy in telecommunication markets. The views expressed in this article are those of the author and may not in any circumstances be regarded as stating an official position of the German Monopolies Commission.
Massimo Motta was was chief competition economist of the European Commission (2013-2016) and in that capacity he worked on some telecom mergers.
Martin Peitz has worked on various projects which received funding from CERRE. Over the last ten years, they have been unrelated to the issues addressed in this article.
Tommaso Valletti was chief competition economist of the European Commission (2016-2019) and in that capacity he worked on some telecom mergers. In 2015 he co-wrote a report on mobile consolidation which received funding from CERRE.
Source : VOXeu
