Research Notes

What creates competition in the telecommunications industry? Can the number of mobile operators be compared with the number infrastructure equipment providers like Huawei, Ericsson, Nokia, Samsung and ZTE?

There are two critical debates in the telecom industry. One is about mobile market consolidation, a market in which Deutsche Telecom, Vodafone, Telenor, Telefonica, and Orange describe as the need for 4 to 3 mergers. The other debate is how many suppliers are needed to ensure competition in the infrastructure equipment market.

Strand Consult has analyzed these issues and has described the benefits of consolidating the mobile market. Strand Consult has also studied the use of Chinese equipment from suppliers like Huawei and ZTE. Our research describes in detail how switching from Huawei and ZTE to non-Chinese suppliers does not increase cost. Indeed using Chinese equipment is associated with increased security risk and associated cost, and as such, gives advantage to those providers which opt out from Chinese equipment.

Simply put, competition in these mobile network and infrastructure markets is not driven by the number of providers, but rather, technology. If an operator does not upgrade its network to the latest technology, it will lose market position. Similarly, if an infrastructure provider does not innovate its equipment, it will lose customers.  

Strand Consult’s Senior Vice President Roslyn Layton, PhD testified under oath to the U.S. Senate Judiciary Committee on the need and benefits of mobile industry competition and consolidation. She testified on a panel with T-Mobile USA CEO John Legere and Sprint’s Marcelo Claure in favor the TMO-Sprint merger. Strand Consult has written repeatedly about the benefits of mobile industry mergers. The key benefits of consolidation from 4 to 3 mergers by mobile providers are the increase in rollout of new technology by the merged entity.  This has been observed in many mergers across countries. Indeed, the desire for the merger itself is driven by competition, both amongst the mobile industry players and with the larger broadband market in which mobile providers compete with fixed line and other wireless technologies.  The merged entity wants to deploy a new technology across a larger customer base with better returns to scale. Competition authorities which blocked or deterred mergers arguing that reducing the number of providers increases prices and reduces competition and innovation have found their decisions overturned in the courts for lack of evidence.

Countries with high levels of wireless investment and innovation have consolidated markets. Consider the fact that US telecom operators have invested twice as much in infrastructure per capita than the average of operators in the European Union for at least a decade. A similar trend is observed in Japan and Canada, countries with consolidated markets and high levels of investment and innovation.  It is not surprising that the EU has lagged on 5G as European authorities have been reluctant in many countries to allow needed consolidation.

The same technological competition is driving the dynamics in the infrastructure market. Just as the mobile market has evolved from 2G in the 1990s to 5G today, the type and number of equipment providers has changed with technology.  Many equipment providers did not last the 2G and 3G generations. The consolidation of the infrastructure business from more than 20 providers two decades ago to 5 providers today has not increased prices. Today’s operators get more value for money than ever. This will continue whether it’s 5 or 3 providers.

Indeed, it is not the number of equipment firms that drives the industry, but the underlying patents in wireless technology. The value of the patent itself is a measure of the quality of technology. Firms compete vigorously to win competitive advantage through research and development and their overall licensing, partnership, and distribution strategies.  Qualcomm is a key player in wireless patents, but it does not make the equipment. Nokia and Ericsson both patent technology and produce equipment.  Huawei has the most patents of any firm in the market, but its patents have relatively low value because they do not reflect standard essential elements of wireless technologies. As such, restricting Huawei and ZTE impacts technology and competition very little. If anything, the restriction of Chinese firms has opened the door to new players such as South Korea’s Samsung and many emerging firms across countries both with hardware and software solutions.

As we have seen with mobile markets in which competition continues vigorously even when the number of network providers is reduced to 3, we can predict similarly with the infrastructure market. If the infrastructure market of Huawei, Ericsson, Nokia, Samsung, and ZTE is reduced to 3 providers, competition will continue vigorously because of the underlying competing technologies and strategies delivered by the firms themselves and associated markets.

Indeed, the decision to restrict Huawei and ZTE has little to do with competition; it’s about security. Huawei itself is an extension of the Chinese military, and ZTE is a state-owned enterprise of the Chinese government. In a statement on the security of 5G in Sweden based on investigations by the Swedish Parliament and Armed Forces, Klas Friberg, Head of the Swedish Security Police, declared “China is one of the greatest threats to Sweden. The Chinese state carries out cyber espionage in order to promote its own economic development and to develop its military capability. It does so through comprehensive intelligence collection and theft of technology, research and development. This is something we have to take into account as the 5G network is being built. We cannot make compromises when it comes to Sweden’s national security.”  Any country that takes its national security seriously cannot rely on Chinese network equipment, unless it has no problem with China’s cyber espionage.

More largely, theories of competition hold that the players in a market are neutral to each other militarily, that they are not attempting to use military might and espionage to gain advantage.  This is clearly not the case with Huawei and ZTE in which Chinese government uses these firms as extensions of its geopolitical strategy. We can also examine the dynamic in the other way. If we want to increase competition, we insert a new technology into the market, rather than add another provider using the same technology.

In practical terms for the EU, one can look the numbers of the mobile operators themselves.

The operators which have removed Huawei equipment include Telenor in Norway, Telia In Norway, TDC in Denmark and most recently, Tele2 in Sweden, and Orange and Proximus in Belgium. All these operators have ripped and replaced Huawei equipment without increasing cost or slowing rollout. Indeed, TDC is the first to launch 5G in Denmark. The CEO of Proximus noted,  “No higher costs with Nokia and Ericsson than Huawei…” Separately, John Legere from T-Mobile USA noted that removing Huawei has no impact on its US business.

There is no academic or practical evidence showing that consolidating the mobile market from 4 to 3 operators harms competition. The same can be said for the market for mobile network infrastructure equipment.   On the plus side, mobile operators which remove Chinese equipment can improve security, protect their customers, and reduce risk and cost associated with the theft of property and violation of privacy.

Strand Consult´s new report The real cost to rip and replace Chinese equipment from telecom networks critiques claims in the media and explains how a proper economic analysis must be prepared to examine the impact of restricting Huawei and ZTE. In practical terms, hardware and software within the network are constantly being upgraded and improved as mobile standards evolve from 2G to 3G to 4G to 5G, and in many cases, operators may offer a blend of different standards in the same network as they upgrade. In general, European operators are facing an upgrade of 4G networks built between 2012 to 2016.  Equipment must be removed anyway to facilitate 5G, so it’s a good time not to go forward with Huawei.

Contact Strand Consult to get your free copy of the report “The real cost to rip and replace of Chinese equipment in telecom networks.”

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