Research Notes

The new EU proposals on how to harmonize the European telecommunications market has gained a lot of attention

– Here’s the straight talk version of what the EU Commission said

The new EU proposals on how to harmonize the European telecommunications market has gained a lot of attention. Here’s the straight talk version of what the EU Commission said.

A few weeks ago the European Commission led by Neelie Kroes published their proposal on how to regulate the telecommunications market. There is no doubt that the commission has some noble goals. At the same time the suggestions have inevitable and enormous consequences. As such, it is appropriate that there is a vigorous debate. It can be taken as a sign of democracy.

The proposal is written in such a way that each person will find in it something to like and not to like. There are so many details that it makes the typical person’s eyes glaze over to read it, but Strand Consult and others have been diligent to do it. In spite of the negative financial situation, Strand Consult encourages the Commission to maintain positive thinking and listen to critics. The proposal, rather than being killed by praise, can be saved by criticism. Politicians often sugar coat the bitter pill, but if the Commission were to put it straight, they would confess that there are significant costs and pain to achieve the long term goal of a digital single market.

In an earlier research note Strand Consult described the proposal and its 8 false assumptions. One of the key features of the proposal is reform of mobile roaming. The proposal, without intending to, creates a market for arbitrage that exploits the 28 different markets in the EU each with their own underlying cost structure and tax regime. The real solution would be to harmonize the underlying structures. If those things were fixed, prices would naturally fall and equilibrate based on improved efficiency. Strand Consult has described those challenges in its research notes EU Commission proposal for cheaper roaming means collapse of the European mobile industry and ”Roam like home” is probably dead.

To be sure, there are good ideas in the proposal. One is consolidation. There is dire a need for consolidation of the telecommunications market in Europe, and it is clear that the Commission wants it to happen. The medicine advocated by the EU could be called euthanasia for those parts of the industry that are terminally ill and will die at some point. What is hard to swallow, however, is the Commission’s assertion that the proposal will stimulate investment in the short term.

If anything, Strand Consult expects that investment will be reduced further. There will likely be a shake out period , of about 3-5 years. Thereafter the industry will find out how a stable, consolidated telecommunications market functions, how much cash flow to expect, and what investors can stomach.

Indeed the proposal’s aim, though not stated in so many words, is to create a telecom crisis to kill off the weak players. Thereafter, the operators that survive will build the consolidated enterprises of tomorrow.

What Neelie Kroes and the Commision should have said was:

We believe that there is a need to consolidate the European telecommunications industry. We have made a proposal which acts as a poison to the speed the slow death of the weak and force them to become part of the consolidation. We also know that it will mean massive layoffs in the industry. We know that the downside is lower investment in the next 3 to 5 years, but the upside that in 5 to 7 years, things will be better than they are today. What we can’t determine, however, who are the strong and who are the weak.

At the risk of a macabre comment, the slow death could be the makings of a reality TV show about the telecom industry. Just take the script from Big Brother or Survivor. It will be interesting to see who will be the biggest loser.

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