The digital infrastructure investment dilemma: what’s next (if anything) in European telecoms consolidation?

The EU’s antitrust watchdog is rarely so blunt. But on 6 March 2024 at the OECD in Paris, Olivier Guersent, Director-General of the EC’s competition directorate was clear: the EC rejects the premise that further consolidation in national telecom markets around Europe must happen in order to unlock the significant investments required in the sector.

Guersent’s comments follow the adoption of a White Paper by the EC on 21 February which grapples with the very significant problem of how Europe’s digital infrastructure needs can be met for the future.

There is a strong link between the increased deployment of fixed and mobile broadband and economic development. Higher speeds and new generations of mobile networks have a positive impact on GDP. But estimates suggest that reaching current Digital Decade targets for Gigabit connectivity and 5G may require a total investment of up to €148 billion.

The White Paper notes that “the current financial situation of the EU electronic communications sector raises concerns for its capacity to find funding for the substantial investments that are needed to catch up with the technological shift.”

Most telecos are operating below the cost of capital as the economics of providing 5G get harder. One stop gap solution over the last several years has been the spin off by some of their infrastructure into “netcos”, “infracos” or “towercos”. Equity markets have to a certain extent rewarded companies that focus on just part of the telecoms jigsaw. But at the same time, private investors need to see a clear business case for profitability and higher margins if they are going to commit capital.

For years, network operators have been telling policymakers that they are struggling to make the profits they need to keep making the necessary investments. Over the last two years, the so-called “fair share” debate has been resurrected from years past and kept front and centre by those telecoms which want data-hungry content platforms, such as Google or Netflix, to at least partially foot the bill for the rollout of the infrastructure which they use.

The new White Paper from Brussels shows that the EC is listening. But it doesn’t think that more telecoms consolidation in individual countries is the answer.

In the EU, 16 Member States have three mobile network operators. Nine Member States have four and two Member States have five. In some countries, such as Denmark and Italy, the number of service providers is greater than the number of distinct mobile network infrastructures due to existing network sharing arrangements.

The EC’s power to vet deals under the EU Merger Regulation has played a significant role in the evolution of this picture. In the period 2012 to 2014, under Competition Commissioner Joaquím Almunia, the EC approved three four-to-three mergers with remedies: H3G/Orange Austria, H3G Ireland/02 and Telefonica Deutschland/E-plus.

But Almunia’s successor Margrethe Vestager has not been so forgiving: the EC’s objections to the proposed TeliaSonera/Telenor JV led to that deal being abandoned in 2015. In 2016, an attempted move from four to three in the UK (H3G UK/Telefonica UK) didn’t get out of the starting blocks and gave rise to litigation in the EU courts in Luxemburg which remains ongoing eight years later.  In Italy, Vestager allowed the third and fourth-largest operators to form a JV in 2016 but only with the divestment of spectrum and base station sites to a new MNO (H3G Italy/WIND JV).

There was a sigh of relief in many quarters when in February this year, the EC allowed the Spanish market to move from four MNOs to three with its conditional approval of the Orange/MásMóvil JV. But looks can be deceiving. With the remedies it extracted, the EC has tried to ensure that Spain’s largest MVNO, Digi, is equipped to grow into a new fully-fledged fourth MNO.

If further national consolidation is not the answer and not allowed, then what is?

As one of a raft of ideas the EC is now consulting on until 30 June 2024, the White Paper urges the creation of a true EU Single Market for telecoms. Right now, there are “27 national markets with different supply and demand conditions, network architectures, different levels of coverage of very high-capacity networks, different national spectrum authorisation procedures, conditions and timing, as well as different (albeit partly harmonised) regulatory approaches”.

If these obstacles were to be removed, the White Paper says, the incentives might then be there for cross-border consolidation.

Commissioner Vestager stressed, on announcing the White Paper, that “there is no shortcut to scale other than creating a true Single Market”.

In the meantime, Guersent in his recent OECD remarks strongly rejected claims by Europe’s largest telecom operators that the US telecoms market works better because it is more concentrated. No, he says: there is not more investment per subscriber in the US, nor better connectivity, and consumers don’t pay less there. But he did admit that market capitalisation in the US is better – while at the same time retorting that it is not the EC’s job to protect that for companies.

Across the Channel, all eyes  are now on the UK, with the CMA currently examining Vodafone’s and Three’s plan to form a 51/49 percent JV and thus reduce the number of players from four to three. This time, Brexit gives the UK competition regulator, and not Brussels, the final say on consolidation in that market. Britain, for one, is always going to be a national market.

The UK deal doesn’t just have to clear antitrust hurdles. It’s been called in for review under the National Security and Investment Act, amid concerns over Hutchison’s links to China.

There is no easy answer to the digital infrastructure investment dilemma. But it is key to achieving the societal benefits offered by digital transformation. This is an area where Europe is already taking the lead through initiatives such as the AI Act. Solutions need not be mutually exclusive.