Research Notes

EU telecom regulation is the art of the possible. This week’s ITRE Committee vote kills net neutrality to save free roaming. But rest assured that net neutrality will be resurrected, once EU leaders have assured their re-election

While the EU Commission has pursued a lot of nice-sounding policies, it has avoided fundamental reforms that would reverse Europe from falling behind in the digital economy. When it comes to the digital single market, EU leaders have shown that the next election is more important than Europe’s competitiveness in the global economy. Strand Consult’s report Understanding Net Neutrality and Stakeholders’ Arguments reviews Europe’s many economic challenges and examines EU telecom regulation and politics.

The crucible of “consumer protection” is used to support a variety of flawed telecom policies. One example is net neutrality which purports to protect consumers by regulating operators. Operators exert relatively little influence on consumers, whereas consumers’ internet experience is largely determined by their mobile devices, operating systems, search engines, social networks, and content/application providers. These players, however, are exempt from net neutrality. While Strand Consult supports anti-discrimination rules, such rules need to apply to the entire internet value chain to protect consumers.

Another EU “consumer” initiative is free roaming. It sounds good to consumers, to be sure. Yet it’s simply pandering in time for May elections. Free roaming shortchanges both consumers and operators. It gives consumers artificially low prices in the short run, as they don’t pay the real costs for what they consume. In the long run, operators can’t make any profits, so they don’t invest in networks. Ten years ago the EU accounted for one third of the world’s broadband investment. Today it’s less than one-fifth. Strand Consult has documented this decline in a number of its reports.

The real reason there are roaming charges is the fault of the EU itself. No one firm that is allowed to serve the whole of EU, so it has pay a traffic toll each time it crosses the border.

But consumer protection is expedient and subject to political whim. The EU’s Committee on Industry, Research and Energy (ITRE) demonstrated that it can kill net neutrality to save roaming. But this is not hard to understand. Europeans care more about their wallets than network traffic management. With elections coming up in May, incumbents want to remind voters that they’re doing something, and so what, if they stick it to the operators.

The EU Commission’s drive for the digital single market has been falsely characterized as a face-off between the telecom industry and consumers. Industry and consumers have more in common than politicians reveal, and the things that would help the telecom industry the most would also help consumers in real and tangible ways. Consider the improvement to employment and competition if the EU had one low tax rate across 28 nations. Imagine the efficiency gains of removing 28 fiefdoms of telecom regulation, eliminating boundaries so that a true digital single market could flourish. A digital good or service created in one location would be immediately available in all others. Such a reform would disenfranchise a lot of government workers, but it would be a boon to consumers.

A number of politicians and organizations claim to represent consumers. Truth be told, most consumers don’t know, much less care about net neutrality. What they want is simple: an increasingly better internet experience with more and better applications at an increasingly lower price. At least the ITRE vote leaves the door open to firms solving that conundrum, allowing firms the freedom to contract to find ways to serve their customers.

What net neutrality supporters want is essentially a cartel: a rule that states that firms agree to the price of zero for quality of service. If content providers made such an arrangement amongst themselves, it would be an illegal, anticompetitive practice. But it’s legal if politicians propose it. As a class, net neutrality rejects a number of business models, even those consumers enjoy today and especially sponsored data programs which were specifically designed to help people of low-income.

EU politicians grandstand about how they are keeping the internet open and free, but this is nonsense. As Strand Consult documents in its reports, politicians don’t have a clue how the internet works, and they unwittingly support the policies that put Europe at a disadvantage.

At the end of the day, someone has to build the network and deliver the traffic, so the internet is anything but free. But the idea that the internet is free is a canard promoted by Google and Facebook who offer “free” search engine and social networking services. Meanwhile someone else is paying dearly for this affair—namely users who are only too happy to give away their information, advertisers who are increasingly willingly to pay Google and Facebook, and operators who build the networks to deliver the data. This works great for Google and Facebook, which not only avoid paying taxes in Europe, but have amassed market caps larger than any operator. So in some respects, net neutrality guarantees the bad status quo for Europe with continued free delivery subsidies for internet applications which are overwhelmingly American (think YouTube and Netflix which make up 20-30% of European traffic), but it doesn’t do much to help European internet companies. Consumers do pay for internet subscriptions, but at artifically low prices, which barely allow operators to break even, let alone earn a profit.

The EU Commission has avoided taking the painful, but necessary steps to make Europe competitive, namely harmonizing tax regimes (removing the tax loopholes that create unfair competition between American internet companies and local players) and removing the barriers to consolidation so that firms can get scale. If EU was really interested in consolidating the telecom sector, they would stop trying to micromanage prices and instead let firms merge and sort out the costs. There is nothing that works better in the consumers’ interest than to allow firms to compete—without regulatory distortions–to serve their customers.

Nothing the EU leaders have done has helped to make the EU competitive with the rest of the world. The US has 15 of the world’s top 25 internet companies; the EU has just one. The best the EU can offer are feel good policies such as praising the app economy with a ludicrous claim that 5 million people will be employed making apps by 2018. If politicians want a new constituency, they should sooner court the Union of European Sushi Makers, for there are more more people gainfully employed making sushi than apps. And EU politicians need to start courting new constituencies soon because their bad policies have so damaged the telecom industry that some 10% of the telecom workforce is being laid off for lack of profitability.

When the dust settles after the elections in May, expect to see vocal representatives of fringe constituencies pick the net neutrality fight again. They won’t be satisfied until the European operators are regulated down the drain.

To learn more about net neutrality and prepare yourself for the debate, buy our report Understanding Net Neutrality and Stakeholders’ Arguments.

Contact us to get a copy of the report

Request the report