Research Notes

EU and BEREC celebrate the 100th anniversary of the Bolshevik Revolution with increasing “nationalization” of the telecom industry

While free markets may have given rise to the mobile revolution and the commercialization of the Internet, many European politicians and telecom regulators believe that centralized government and control is the way to the digital future. 2017 marks the 100th anniversary of the Bolshevik Revolution, when Vladimir Lenin established what became the Soviet state. Some may think that communism is dead, but it is in fact alive and well, dressed up in feel good/look good policies designed to help desperate politicians centralize power in bureaucratic institutions.  Look no further than roam like home and net neutrality as Soviet central planning with a human face. Strand Consult has warned about this for years. See EU Commission’s schizophrenic telecom policy: hurts investments, costs jobs, and pulls EU’s digital development even further back compared to other parts of the world.

The fall of the Berlin Wall and the liberation of Easter Europe was less than 30 years ago, but many have forgotten there was no telecom paradise behind the Iron Curtain. Zev Katz, an expert of Soviet history at the Massachusetts Institute of Technology, observed that the USSR, “…saw no great merit in devoting major resources to the development of the mass telephone network for the convenient communication between private citizens” and that the telephone system was “amongst the most underdeveloped and inefficient elements of the Soviet communications system.” The telephone existed primarily for bureaucrats, telephone books were next to non-existent, and receiving a telegram was considered a celebratory event even as late as the mid-20th century.
A Question for Investors
The question operators and investors around the world have to ask themselves is whether growing telecom regulation is in fact a form of nationalization of the industry, effectively depriving owners of their assets without compensation and whether such actions should be challenged by shareholders as illegal regulatory takings.  Net neutrality and Open Internet are euphemisms for government regulation designed to control the price and traffic of data. There is no need for politicians to say that they are nationalizing an industry if they simply adopt a policy that gives them de facto power.

Indeed the nationalization is all the more effective if it has the appearance of serving the public interest, particularly if regulators can ride the coattails of sentiment created by astroturf advocacies and activists. Consider French telecom regulator Sebastian Soriano who admits that sponsored activism made him sympathetically “emotional” to the call to “Save the Internet” led by some of the world’s richest  foundations (Ford and George Soros’ Open Society Foundations) and corporations, notably Netflix.  

Soriano, an appointee of the French Socialist Party, is the  incoming Chair of the Body of the Regulators for European Telecommunications (BEREC). At a recent BEREC meeting he emphasized the importance for telecom regulators to enforce price controls, noting “National Regulators in every country have to control the retail offers of operators to make sure they are respecting the roam like at home principle.” Central planning is attractive when it is cloaked in customer-centric marketing such as roam like home, but all the same, it is the epitome of communism, a centralized pricing regime proffered to serve the people but effectively increases costs on the poor to serve the rich.  This grotesque regulation now makes people pay more for mobile services on the 353 days they don’t travel so that service can be “free” on the 12 days that they do travel. Mandating the same price to use the mobile phone whether one is in Greece or Germany is the kind of rule that Lenin would love.

With Soriano at the helm, BEREC will pusch for net neutrality not only to regulate internet access but internet applications. France’s ARCEP has been clear that neutrality needs to apply across the entire Internet and desires regulation accordingly. Recall that Soriano worked for French minister Fleur Pellerin, an outspoken critic of the American giants who called for such regulation. Soriano describes his plans in How to regulate the Internet Giants, calling American companies “barbarians”, accusing them of “uberising” industry, and declaring that they be graded against a new regulatory critieria and be “unbundled” of their algorithms.  Needless to say, these rules would apply to fledging European startups as well.

EU politicians may pay lip service to wanting to be competitive with the US and Asia, but their actions demonstrate a preference to use the presence of foreign companies to amass political power rather than to unleash the domestic economic forces which could challenge the giants.  It is no coincidence that increasing regulation of the telecom sector has been coupled with the growth of online advertising oligopoly. Net neutrality denies telecom operators the ability to manage their networks, price their products, and create advertising alternatives. Imagine how disruptive free or advertising-supported internet access would be if operators were allowed engage in the same advertising models as Google search. From Google’s perspective, a €2.4 Billion fine from EU competition authorities is likely preferable to dynamic competition. The fine represents 3% of Google’s annual revenue and is the cost of doing business in the EU.  Google will likely support platform regulation, for even if it comes as a cost, it ensures the status quo and ensure that no disruptive competitors will challenge its dominance.

In a recent interview Soriano stated that the EU has lagged in tech and telecom for 15 years, but somehow believes that the EU will triumph in the Internet of Things (IoT) because of magical European “unicorns.” His olive branch is that EU will not be regulate the IoT (or at least not right now). No one in the real world who has witnessed what has happened in the EU during the last 15 years, notably aggressive open access regulation which removed the incentive to invest in telecommunications infrastructure, takes such a statement seriously. The EU has fallen as the world leader in telecom investment, from one-third of the world’s total in 2003 to less than one-fifth today. Of the six European phone manufacturers which thrived during the period, none remain. That the EU can decimate its tech and telecom sectors and then expect to emerge victorious in the next wave of innovation is magical thinking. In any case, the EU is already at a disadvantage for 5G and the Internet of Things because net neutrality is a bomb under the future European innovation. BEREC guidelines specifically prohibit telecom providers form innovating in certain kinds of technologies. See one of the first of many hypocrisies and unintended consequences of this misguided regulation with the fact that free Spotify in the Tesla is a violation of net neutrality.

What is the impact for operators in the EU
There were hopes that Jean Claude Juncker’s presidency of the European Commission would bring a turnaround for the ailing European telecom industry which once led the world in investment, mobile phone manufacture, and innovation. Juncker had a vision to help the EU exit the financial crisis, create jobs, and restore global competitiveness. All that the Juncker presidency has been able to achieve on the telecom front are look good-feel good polices for roaming and neutrality. More than a decade of flawed policies has reduced investment and innovation, and EU has fallen further falling behind the US and Asia.

To be sure, there is a role for telecom regulation, but its goals were achieved decades ago when state telephone monopolies were privatized, and mobile communications emerged, disproving regulators’ assumptions about natural monopolies. That we experience increasing telecom regulation is not because of market failure or operators doing bad things, but because politicians and regulators see the opportunity to centralize power.  Indeed Last fall the European Commission proposed creating an uber agency for telecommunications based in Brussels which would supersede BEREC, a confederation of 28 national regulators, which some see as inefficient and ineffective.

Policies that work to create investment and innovation
Fortunately there are good examples of how to manage the telecom sector, and investors have taken notice. The US has experienced a resurgence with a new President and electoral rejection of heavy-handed industrial regulation. Investors are bullish about commitments of regulatory reform and the return to the market-based approach which reigned from 1996-2015. Empirically the American approach has worked better than the European, as Americans enjoy a greater variety of broadband networks, more data, and greater innovation in Internet services. 

New Federal Communications Commission Chairman Ajit Pai was in Stockholm on June 26 outlining his vision of Broadband for All. To Brussels bureaucrats “Broadband for All” means subsidies, access regulation, and naïve view of public private partnerships. But to Americans it means removing the regulatory barriers that deter private investment (both on paper and on the ground), making more spectrum commercially available, and allowing flexible use for spectrum. Notably the FCC is moving to reduce the illegal accumulation of regulatory power by rolling back Title II, heavy-handed rules which have caused a 5% decline in investment and 75,000 lost jobs from reduced network deployment.

If anyone should know the failings of the USSR, it is the Europeans. For much of its life, the EU project was conducted to integrate former communist countries into Western capitalist democracy. Sadly Brussels has lost sight of that goal and instead seeks to solidify its own power, rather than to empower the people and enterprises of the region to take risks, invest capital, and innovate. EU telecom policy has had a negative impact on telecom investment and innovation for more than a decade, but the EU persists administering more bad medicine, as if a greater dosage will increase the likelihood that it will work.  

This is bad news for shareholders whose assets are attacked by regulators in the name of the people. At the 100th anniversary of the Bolshevick Revolution, it’s an important moment to take stock of the lie that increased regulation stimulate investment and innovation.  Investors are clear that the EU is on the wrong track in telecom policy including roaming, net neutrality and mergers.  The deregulatory approach implemented by Bill Clinton in 1996 in the US has proved that creating a free market is the way to stimulate investment and innovation. US outperforms EU on all points: investment, innovation, urban vs. rural deployment, network diversification, and next generation networks. Moreover the decked is stacked against EU on 5G.

If EU doesn’t get back on track, the next crisis for the EU will be digital, and be the result of lack of investment.  Strand Consult requests more transparency the EU does telecom policy in the future. Bureaucrats should answer critical questions

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