Research Notes

Lack of telecom investments will create the next EU crisis. Action from the Commission is too little, too late, and too slow

The EU was hit by a financial crisis in 2008, and it is on track to be hit by a digital crisis. Bad telecom policy has deterred investment in the region for a decade. Europeans will not be able to get networks when they need them. It’s not a question of subsidies; there is enough cash flow in the industry to make investments. Operators make the minimal investments to defend existing networks, but no European operator can justify larger outlays in such an uncertain regulatory environment.

The new EU commission has made important strides to an improved telecom framework, but they need to implement quickly. It has already been a year since Strand Consult made this research note about the coming digital crisis and to comment on Neelie Kroes package for the Connected Continent and digital single market. Telecom investors still see an uncertain future for telecom.

In 2003 the EU led the world in mobile telecom, but bad policy changed that. The region accounted for a third of the world’s telecom infrastructure investment but that level has plummeted to less than one-fifth today. Global leadership of European phone makers has evaporated. No significant European Internet companies have emerged, and when it comes to the Internet, Europeans overwhelmingly use America-maden platforms, operating systems, services, and applications.

Strand Consult made this research note when Jean-Claude Juncker’s commission took office. They have been at the helm for a half year and have proposed the right plan to boost jobs, growth, and investment—with the appropriate focus on investment in broadband and telecommunications networks. In addition the Commission released its Digital Single Market Strategy with three key program areas:

1. Better access for consumers and businesses to digital goods and services
2. Shaping the environment for digital networks and services to flourish
3. Creating a European Digital Economy and Society with long-term growth potential

Net neutrality and roaming, the feel-good/look-good politics driven by the populists at the end of Kroes’ term, have been appropriately de-prioritized in the new plan. These things have nothing to do with achieving the goals of the Digital Single Market: tapping new areas of growth, reinforcing competitiveness, driving innovation, and creating new jobs.

EU Commissioners need to implement their plan immediately so that EU will be positioned to win in the world again. Interestingly the New York Times Editorial board opposes the Commission’s efforts to help EU companies develop innovative services, probably because the Commission’s plan levels the playing field between European and American service providers, whereas for too long American firms have enjoyed preferential conditions versus their EU competitors. Moreover the new plan demands that the American giants Google, Amazon, Netflix and others, pay their fair share for the resources they consume and pay taxes like European firms.

Wisely German Chancellor Angela Merkel has stood up against the demagoguery of net neutrality advocates who whine about fast and slow lanes, a marketing concept they invented. By supporting managed and specialised services, Merkel wants to ensure that German and European innovation gets the smart lane of the Internet—allowing innovation where it needs intelligence. Net neutrality, predicated on the idea of the “stupid network”, is a recipe for the dumb lane. The New York Times simply wants Americans companies to continue to enjoy an unfair advantage.

As for the folly of net neutrality, look no further than Netherlands and Slovenia where regulators cannot even interpret the rules that were foisted upon them through overnight advocacy. The painstaking, measured approach which telecom regulators are accustomed has consistently showed that existing EU law already provides ample protection for consumers and competition. Because net neutrality rules and definitions are sufficiently vague, there is a risk that any new complaint becomes a “net neutrality” violation even if it has nothing to do with the network.

European telecom regulators have wanted to use resources more efficiently, but net neutrality requires that they increase staff to hunt for imaginary violations. Indeed the FCC, America’s telecom regulator, just asked Congress for a 23% budget increase to hire the lawyers it needs to chase down operators. This brings the agency’s budget to nearly one half billion dollars. In a marked reversal to its successful, hands-off the Internet approach, the 1934 telephone monopoly rules recently adopted, allow the FCC to regulate rates, set price controls, tax broadband, and most disturbing of all, legitimize the network surveillance which Europeans so despise.

In any event, it’s not surprising that the American rules are already being challenged in court, most notably by a small broadband provider with only 700 customers. American operators need at least one full-time staff person just to keep up with FCC regulations. Bad regulation is a detriment to market entrants, an irony as the rules were billed as supportive to competition. But make no mistake, net neutrality has always been subterfuge for enshrining the market position of the established Internet companies; that’s why Google, Netflix, Amazon, Ebay, and other players have lobbied so hard for it on both sides of the Atlantic.

There is no doubt that there is a long way to go to achieve a digital single market in the EU, but at a minimum the Commission must implement the basic tasks they have outlined: facilitate ecommerce, eliminate geo-blocking, and simplify VAT across EU countries. They also identify coordinating spectrum across countries, increasing transparency on platforms, and reducing piracy. The Commission recognizes the role of digital skills. Europeans need to be educated so that they are prepared to take IT jobs. Moreover the EU needs to foster the environment so that the best innovators and entrepreneurs stay on the continent–or come to the continent, not to Silicon Valley.

The is one crucial component on which the whole system rests is investment in networks. Without it, there is no innovation or digital economy. It is the single largest—and most important–input.

However, Strand Consult is afraid that the EU has passed the point of no return. The region may be too far gone and incapable to pull together the implementation of the digital agenda. The EU Comission’s plan is right, but their action is too little, too late, and too slow. Without immediate action, Juncker and the rest of the digital agenda team will leave office just like Neelie Kroes: big ambition but no results.

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