Research Notes

The EU is using tough regulation of the telecom industry to gain popularity among EU-sceptic

–what is next, financial support for the EU friendly media?

It is no secret that the EU has a problem in a number of EU countries. Smaller or larger population groups have helped block political projects that the European Union has launched. With the Irish no to the Lissabon treaty, a great number of European politicians and civil servants faced the enormous task of basically trying to re-establish the EU’s popularity, in order to prevent running into the showstoppers that were emerging when countries like Denmark and Ireland rejected the treaties they had spent years creating.
There is little doubt that the greatest frustration is most probably found among the many civil servants that are the backbone of the EU machinery – these employees see this as a humiliation of their efforts. The EU has many employees and especially the High Commissioners have the possibility to use their power and access to the media to launch a number of projects that make it appear as if the EU is fighting for the people. This method is not new and is well-known among politicians during election years, when they make many promises to help boost their popularity among the population.
The EU has Viviane Reding – a commissioner that is among other things responsible for the telecom industry. A woman who does not act as if she was a civil servant, but rather as if she was a politician. She is the woman that initiated the attempt to create a European super-regulator, while at the same time passing regulation across all European countries regardless of local competitive conditions. Basically you could say that she believes that the competition is equally bad in Germany, that has 4 mobile operators and 80 million people, as it is in Denmark that also has 4 mobile operators but only 5.5 million people.
It is no secret that the EU has used the telecom industry and an aggressive regulation of end user prices to try to increase popularity. The fact that almost all EU citizens have two customer relationships to a telecom operator means that lower end user prices will naturally sound good to most Europeans. But the problem is what types of industrial political consequences will this regulation have and whether the markets would actually have developed more favourably for both the operators and end users if the free market forces had naturally regulated the markets.
But it sounds good when you say that it should be cheaper to roam and it also sounds good when you promise the population cheaper SMS and mobile data. The problem is that the regulation you make on selected market areas distorts the market both technologically and regarding prices.
For the past 14 years, Strand Consult has made a living of analysing the telco markets and competition, we do business by delivering objective information about how the mobile market looks and how it will develop in the future – and we have no doubt that the regulation currently being passed will have large consequences for the industry and especially the end-users that the EU is trying to please. We have divided these consequences into the 10 following areas:
1. The regulation of mobile roaming prices makes it more difficult for operators that sell cross-border traffic via other technologies. The fact that the EU forces lower roaming prices will minimise and eventually eliminate market players that use other networks and technologies – Calling Card, IP telephony, Call Back solutions, fixed line etc. Why should the EU dictate that it is GSM/UMTS roaming that is the transport technology for international calls?
2. When you regulate EU roaming prices, what will the consequences be when citizens travel outside the EU and when citizens from outside the EU roam within the EU? Will operators try to regain some of their decreasing EU revenue from outside the EU and will non-EU operators be charged extra when roaming within the EU? In Africa, Zain and MTM have abolished roaming costs across 21 and 24 countries respectively – without any form of regulation. What consequences will EU regulation have in Africa and the pricing structure they have in their region?
3. The regulation of mobile data prices will also over time favour those operators that use GSM/UMTS, at the cost of other operators trying to sell data via other technologies like WIMAX, WiFi, CDMA, copper wire, Fibre etc. If the alternative technologies that as yet only have limited customer bases cannot use the high price levels of GSM/UMTS as a competitive parameter, they will hardly have a business case and have difficulty gaining any foothold on the market – they will die. Why should the EU dictate that GSM/UMTS is the winning technology?
4. Lower SMS prices across country borders will result in market players focusing on alternatives to the SMS technology, like for example instant messaging solutions or community solutions losing their competitive advantage on pricing and mobile operators using GSM/UMTS technology will gained some advantages that are very obvious to anyone that knows just a little about what drives competition on the market. Why should the EU dictate that a person-to-person message should be via SMS?
5. The EU has a large focus on fibre to the home and believes that it is a measure of success if there is a large FTH penetration in the country. The EU has gone so far as to contemplate whether to subsidise FTH projects as part of their large financial rescue package. Who says that FTH is the best technology in the future and the most cost efficient way of delivering products and services – shouldn’t it be the customers and market that chooses the technology that delivers the best product at the most competitive price?
6. There is also a large political focus on IP telephony. The general attitude is that if many people use IP telephony, it is an advanced market – and that is good. Who says that IP telephony is the best and most cost efficient way of delivering communication? If you use IP telephony on a UMTS network, it is in fact the most expensive way of manufacturing a voice minute.
7. The EU is trying to harmonise regulation within the EU and has therefore created a regulative framework. The problem is that the various regulators in different countries interpret the framework differently and often reach different conclusions when examining the same information. One could quite rightly question whether we really need such comprehensive telco regulation as we now have? Very few industries actually have such tough competition and decreasing prices as the telco area. What about the food industry, the transport sector, shoe industry, toy industry, auto industry, medicine or industry etc – all industries with less competition and significantly less regulation – or no regulation at all.
8. What will the industrial political consequences of a distorted competitive market situation be? Will it also distort the technology market, influence investments and influence which technologies will dominate on the future telco market? We believe the answer is yes and that the consumers will be the losers together with market players focusing on new innovative solutions. It looks like the EU’s regulations will remove the market dynamics and thereby the innovation that is the foundation of the future Europe.
9. Where are the industry politics? Is that when Viviane Reding chooses DVB-H as the mobile TV standard in Europe, or is it when you experience politicians focus on Next Generation Network and Fibre to the home? Or is industry politics when you can call a telco CEO and he can explain to you what the EU and his government’s ambitions are in the telecom area? There are many countries within the EU where governments do not view the telecom industry as an industry with millions of employees and gigantic investments.
10. How would other industries react if they were submitted to the same treatment as the telecom industry? Agriculture is subsidised by the EU, the car industries are receiving special treatment, national airlines are receiving special treatment and you can see how politicians are helping a financial sector that have themselves created the problems they  are currently facing. When the mobile operators gave billions of Euro for their 3G licenses in Europe around the turn of the century there was no helping hand – which resulted in a recession in the telecom industry and again no political help.
One thing is certain and that is that by regulating end user prices in the telco industry, the EU and especially Viviane Redding have found an effective tool to make the EU more visible among citizens that have been sceptical about the EU and the political project that the European Union actually is. There is no doubt that the civil servants are fighting to be allowed to do things their way and see the telco industry as a good case for purchasing popularity.
What will the consequences be? We believe the conswquences will be large, and that Viviane may reach her goal of there sometime in the future only being 4 telcos in the EU – like there are in the USA – so the European telecom industry might develop in the same direction as the American. But it happens to be a fact that the USA is most probably the worst role model regarding a healthy telco market and it is a fact that the USA does not currently have any significant operators outside the USA and that very few technology companies within the American telco sector have achieved international success. Their whole mobile market is primarily being driven by European technology companies and European operators – but Viviane Reding and her civil servants forget on about all this when trying to gain popularity.
At the end of the day, it may well be that a tough regulation of the European mobile market will make the EU more popular for while, but what are the long-term consequences for the industry – and especially the European consumers?
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