Research Notes

10 reasons why EU spectrum harmonisation is a great idea but nearly impossible to implement

Spectrum harmonisation emerged as a key topic in the European Commission’s New initiative for the digital infrastructure tomorrow announced recently. In remarks to launch the consultation, Executive Vice President Margrethe Vestager observed, “We have 27 national markets with different network architectures, different levels of network coverage, different national spectrum markets and management, and different regulations. This fragmentation is a missed economic opportunity. Only if we remove such differences, we will see the emergence of a Single Market for telco. And pan-European players will emerge and be able to reap the full benefits of economies of scale.“ Benefits of such an approach include speed the transition from copper to IP/fiber networks, integrated spectrum governance and authorization at the European level, and better conditions for telecom operators to enjoy economies of scale and invest, she said.

EU Commissioner for the Internal Market Thierry Breton made similar observations at the 2024 Mobile World Congress: “. . . we will finally create a true Digital Single Market and a compelling business case for operators to engage in cross-border consolidation. . .  we should give spectrum policy a true European dimension and push for more timely and ‘affordable’ auctions. Because, in the technology race towards 6G, we cannot afford further delays in the spectrum licensing process, with huge disparities in timeline of auctions and infrastructure deployment between Member States: we cannot afford the same outcome as for 5G auctions, where, after 8 years, the process is not completed yet.”

These comments are similar to prior commissioners Alumnia, Ansip, Kroes, Reding, and Monti. However, the difference is that Vestager, the longest serving EU competition commission in history with more than a decade in her role, has had twice as long to make the Single Market for telcos a reality. It is hard to see that progress has been made on the single market for telecoms. Moreover, the industry’s performance has steadily declined during Vestager’s and Breton’s tenure. Ironically, Big Tech has benefitted the most during this time. EU profits and market share for the hyperscalers show their best performance in 20 years.

Importantly, key barriers to a single telecom market remain in that most EU member nations want to retain their spectrum sovereignty, notably in their national spectrum authority’s ability to conduct auctions, raise revenue, and specify local coverage obligations, minimum license revenue, and so on.  Nevertheless, Brussels wants increasing control over the mobile telecoms domain, including spectrum harmonisation and enforcement of competition policy and regulation.

The European Commission (EC) already exerts ultimate control when it comes to mergers of companies from different EU member states (or from non-EU member states). For mergers of companies from the same member states, the decision is made by local competition authorities. In her tenure, Vestager reviewed 7 EU mobile industry mergers, approving 5 mergers (with hard remedies) and rejecting 2. Strand Consult observes the EC’s flawed argumentation in the two rejected mergers. Vestager rejected Denmark’s merger of Telenor and Telia on the presumption that the combined entity would increase prices. After the rejection of the merger, all operators raised their prices. Hutchison UK challenged Brussels’ rejection of their merger in court and won, but lost on appeal.

Vestager and the EC claim their preference for so-called “cross-border” consolidation. “Cross-border consolidation” is not a thing outside the imagination of Brussels. The mobile operators of Argentina and Chile looking to merge, nor Canada with the USA, nor India with Pakistan, nor North and South Korea. Just because nations share a border does not mean that they can and should merge the enterprises within. In fact, European telecom operators have significantly reduced their cross-border holdings and will likely continue, as Strand Consult explains below. The EU argument for cross-border consolidation was obliberated when the EU imposed draconian price-controlled roaming.

The synergies of a merger come from in-market consolidation, the ability to reduce redundancy and a provide service more efficiently. This is why mobile operators in every country look for opportunities to reduce cost, increase productivity, and improve return on invested capital. The world’s leading 5G countries are all consolidated markets with 3, if not 2, mobile operators: USA (described below), South Korea, Japan, and China. Indeed, South Korea led the way with a 5 to 3 mobile merger in 2002, 22 years ago. This country remains at the top of global rankings on social and market measures for connectivity, in part because of consolidation and high levels of investment.

Though Margrethe Vestager and the European Commission claim to want a Digital Single Market, it is unrealistic that they will push for significant change. It will take a new Commission to shake things up. There will be an election later this year. A new Commission will form in 2025, and it will take another year for that commission to organize itself and develop policy, and then, perhaps by 2026 or 2027, there will be a proposal, which wil likely be more of the same aspirational talk with little action. The gap between EU and the USA and leading Asian countries will likely have widened further.

This note examines the important issue of spectrum harmonisation and the likelihood of achieving the Commission’s vision in 10-20 years. There is not a single policy of spectrum harmonisation. It can be explored on various levels: technical, administrative, economic. Already there is signficant technical harmonisation of European spectrum at the continental and global level. The idea could also mean that EU member states harmonise their allocation policies, timelines, and so on, something which already happens to a significant extent, though not perfectly. Spectrum harnonisation could also mean the creation of an EU authority to manage and allocate frequencies across the EU. While the idea seems theoretically sound on one level, it is not possible poltically or legally given the set up of the EU. Moreover, it is unclear that an EU soectrum authority could improve performance over the set of member states, unless it had better information, tools, capabilities, authorities etc.

Strand Consult has analyzed mobile industry topics for more than 25 years. Strand Consult has followed the spectrum market from the first issuance of GSM licenses in the late 1990s, to the wild period of 3G auctions in 2000 to the latest 5G auctions in the last 5 years. Check out Strand Consult’s signature comprehensive report reviewing the empirical and academic data on mobile industry mergers and the role of spectrum in its signature report Understanding 4 to 3 mobile mergers.

10 cold hard facts on EU spectrum harmonisation

  1. EU member states want to maximise revenue. Allocating the radio spectrum though licensing is a key source of revenue and political control for nation states. No EU member state would willingly give that authority to the EU.
  2. Existing spectrum licenses must be honored. Once a license has been bought and sold, the nation state spectrum authority can’t change the terms without risking a lawsuit for breach of contract. The EU does not have the authority to rewrite national spectrum contracts, as much as it would wish. Theoretically a nation could impose eminent domain or a takings clause to reclaim a license before expiration, but then it would have to compensate the license holder for the loss and breach.
  3. EU removed a key reason for spectrum harmonization when it imposed roaming. The premise of a pan-EU operator is one which delivers seamless service though economies of scale predicated on pan-EU network and pan-EU spectrum. Operators which have pan-EU networks need not set up roaming agreements. Their customers use the same network as they move through the EU. However, the EU wanted prices that looked as if there were already panEU networks. When the EU imposed the roaming regime, it obliterated the financial incentive to invest in a pan-EU network and spectrum. No rational operator would build a pan-EU network to deliver efficient prices if the EU dictates the outcome in advance.  Read Strand Consult’s collected research on roaming.
  4. There are no pan-European operators for pan-European spectrum. The precondition for finding buyers for pan-European spectrum is the existence of pan-European operators. Aside from the political re-organization which would be required at the nation state level (devolving national spectrum authorities to an EU spectrum authority), the situation requires that the highly fragmented European mobile market experience cross-border consolidation for which there is a little to no business case. There are few, if any, synergies to consolidate across borders.
  5. Telecom companies are de-leveraging their cross-border holdings. The EU wants more cross-border consolidation, but telecom groups are going in the opposite direction. Norway’s Telenor has exited Hungary, Bulgaria, Montenegro and Serbia. Spain’s Telefonica’s left Ireland by divesting its position O2. T-Mobile said goodbye to its business in neighboring Netherlands. Sweden’s Telia chucked its business in neighboring Denmark. The Dutch KPN sold shares in E-Plus and Base in Germany and Belgium. The French Orange sold its Spanish business to Masmovil. On top of that, Vodafone looks like a company that needs to be split into atoms and sold in chunks. Telenor is in 3 EU countries. Telia is in 5 countries. Hutchison is in 6 countries incl. UK. Operators like TDC (Denmark), Odidio (Netherlands), 1&1 (Germany) are in just one country. None of these operators, either in the first or the second group, could justify buying “pan-European” spectrum and then selling the rights to other operators. The economic exposure will be too great and only a model like the one we know from tower companies will be able to lift the purchase of pan-European spectrum. The result will be mobile operators without passive infrastructure and spectrum. In fact, it already exists, and it is what is called an mobile virtual network operator, MVNO. 
  6. The EU has no tax/fiscal authority. The EU does not set tax rates or collect tax. As such, it is unclear whether and how the EU could collect and distribute spectrum monies. Euroskeptics see such a development as the open door to climate related fees and other pan-European duties and levies for health, transport, and so on.
  7. European spectrum licenses have a finite life. Unlike US spectrum licenses which have more liberal conditions including their long life and tradability, European countries only offer spectrum licenses for short periods like 15-25 years. In Norway, Tele2 found itself with a mobile network but without spectrum. It went from being a mobile operator to being MVNO when ICE bought almost all its spectrum when the frequencies came up for renewal.
  8. While the market can solve for many administrative problems, spectrum management is stilla complex regulatory undertaking. While the European Commission wants to harmonise and accelerate 5G deployment across the EU, it is unclear whether it if was charge, if it could do it better. A key question is how the spectrum would be allocated across countries and how revenue would be collected and distributed among the 27 member states of the EU. The cost of spectrum varies greatly across the EU. Historically, spectrum has been very expensive in Germany and England, while it is relatively inexpensive in the Baltic States.Spectrum auctions have been practiced globally for some 30 years, and while they continue to improve, they are not perfect. Administrative allocations are not perfect either. Strand Consult described this its note following the award of US auction design and innovation by the Nobel Committee on economics in 2020.
  9. Spectrum auctions are not perfect. Spectrum auctions have been practiced globally for some 30 years, and while they continue to improve, they are not perfect. Administrative allocations are not perfect either. Strand Consult described this in its note following the award of US auction design and innovation by the Nobel Committee on economics in 2020.
  10. New spectrum has the best potential to be harmonized. It will be possible to harmonise new spectrum that comes into play (e.g. 600 MHz). However, there is not a single mobile operator covering the 27 EU countries and thus there is not a buyer for pan-European spectrum.

However desirable in theory, a pan-European spectrum model faces many hurdles, political, regulatory, and economic. In the first order, the buyers do not exist. European telecoms are reducing their pan-European operations and do not demand pan-European spectrum. It is not enough for the European Commission to wish for cross-border consolidation if the reality is that it is not politically or economically possible. If the Commission wants to forward a Digital Single Market concept for telecoms, it should focus on the things it can control like merger approval and deregulation. A lesson from the USA is in order.

USA vs. EU mobile telecom market comparisons

The European Commission frequently invokes the USA as the model for the Digital Single Market for its 450 million people. The USA is a single market of 340 million people with a common language, currency, and Constitution. Mobile telecom operators can serve the whole country without having to register in 50 states and honor 50 sets of laws. The US has the advantage of a distinct federal system, which the EU is not.

EU policymakers attempt to mimic, through design of EU policy, features which are endemic to the US federal system. However, this is not necessarily a copy-paste policy exercise. Just because something works in the USA does not mean it is feasible in EU, and vice versa.

For example, US mobile operators acquire spectrum licenses for the entire country from a single authority, the Federal Communications Commission (FCC). However, there is no pan-USA spectrum as such. US licenses are offered through partial economic areas (PEAs). In practice the country’s spectrum licenses cover the radio spectrum like a set of puzzle pieces, which operators can put together to create a big picture. License life is essentially unlimited, so licenses can be traded and sold (there is a robust secondary market), subject to FCC approval. These features and the ability of US operators to get economies of scale through consolidation, allows them to practice spectrum owners’ economics. They bear the risk of their asset, but they also reap the award of long term investment.

European operators, by contrast, are consigned to spectrum renters’ economics. They can only hold licenses for a short period of time (10-15 years). Licenses are difficult to trade. Moreover, an European mobile operator which wants to operate in 27 EU nations must contend with 27 nation state spectrum authorities.

The European Commission’s wants pan-European operators, but there are none. Rather there are 16 operators groups, 17 individual network operators, and 91 networks across the 27 member nations. Many European competition authorities would like it to stay that way; they believe that because there are more operators, there must be more competition. However, these authorities fail to account the role of technology in creating competition in the market. It does not matter if you have 500 3G operators if the prevailing mobile standard is 4G/5G. If you want to do new and better things, you need the next level of technology.

Moreover, the EU wants complete, ubiquitous 5G coverage, but it is far from that today. By contrast, the US has three nationwide  mobile network operators offering 5G. The US leads the world in 5G adoption, approaching 60 percent with more than 232 million subscribers. EU 5G adoption is about 30 percent.

The US has enjoyed five successive years of increasing investment in mobile cellular networks, the most recent annual figure of $39 billion amounts to 70% of the EU’s total telecom network investment. US investment supports a staggering number of cellular sites, 425,000 and growing. US advanced mobile networks deliver increasing speeds and data, some 75 trillion megabytes annually and some 3 trillion voice minutes of voice calls per year. US investment is also significant in fixed technologies, and when taken together, the US enjoys a per capita telecom network investment of $150 versus €110 in China and just €104 in the EU. 

Importantly the ability of the US mobile industry to invest reflects a highly-capitalized, consolidated market. Moreover US operators engage vigorously in lawsuits to protect their property rights (whether license rights, network management etc) from what they perceive as misinterpreted, misguised enforcement of some regulation at the FCC.

The USA is by no means perfect in spectrum policy. Presently, the country is beset by the national embarrassment of the expiration of the loss of the FCC’s spectrum authority and the partisan refusal to reinstate it. While the GOP-led House introduced the Spectrum Auction Reauthorization Act of 2023, reauthorization has stalled the Democrat-led Senate. Adding insult to injury, the pipeline of frequencies for 5G/6G is empty, with the Congressional action to restock also stalled.

Meanwhile the US Department of Defense sits on vast stores of valuable, but inefficiently used spectrum, which it refuses to relinquish. Moreover, the Pentagon insists on dictacting frequency configurations for its obsolete weapons systems, which consigns US actors to subsist on a mish-mash of frequencies which misalign with inernational standards. Nevertheless, the US military when it operates with allies abroad, it uses the proper spectrum bands.  US competitors (read China) have noted the the US spectrum debacle and forge ahead to maximize mid-band spectrum for 5G/6G. Moreover, China wisely avoids squandering its precious frequencies for unlicensed use. The FCC gratuitously give away 1200 MHz of beachfront spectrum to Big Tech; China does not make the same mistake.

The US, it could be argued, also has spectrum disharmonisation in that the allocation of frequencies for commerical and government use are divided into two differnet spectrum authorities with different sets of rules and procedures. About one-third of all frequencies is managed by the FCC for commecial purposes with the two-thirds remaining being held by the federal government. The former is subject to a measure of market discipline and continues to improve in efficency and value of the use. The latter is governed by processes and agencies which have changed little in a century.

The takeaway for Europe, however, is that the US is not perfect, but it does offer important lessons which favor consolidation, long license life, and indeed, litigation to protect property rights.

What could be done in Europe

We are sure that there are many suggestions as to what could be done in the European Union. We would say that if you first went from a model where you buy the right to use spectrum for a limited period of time to owning it in perpetuity, then you make a big step in a positive direction.

Such a model will create the foundation for spectrum companies in the same way as one has tower companies. In other words, a market in which companies buy spectrum and lease it to operators which build and run mobile networks. 

This model could be very interesting not only for investors, but for players who want to build and operate regional networks such as national mobile operators, fiber players who want to launch FWA solutions, as well as for those who want to build and operate private networks.

One thing is certain, and that is that the European telecommunications market is a mess. EU policymakers have talked about these problems for almos two decades without finding solutions to stimulate investment and innovation.

Let’s put it very simply, Margrethe Vestager’s and Thierry Breton’s story sounds great, but it’s unrealistic to an investors’ timeframe.

Learn more about spectrum and mobile market consolidation by ordering Strand Consult’s report Understanding 4 to 3 mobile mergers.