Debates about financial returns on telecom network capital would recede if Europe could tackle this under-consumption problem
Around 50% of European households passed by an FTTH network were connected to it but only 10% of households actually use a gigabit-speed connection, which is supposed to be the unique selling point of fibre. Similarly, only around 7% of the population had a 5G subscription in early 2023 despite widespread availability of the technology.
The figures were revealed by telecom industry veteran and inquiry chair at the UK’s Competition and Markets Authority Richard Feasey, speaking at the WIK Conference 2023. Feasey believes low adoption rates of new technologies in Europe mean most of their benefits are not being realised.
“Although some argue the demand side challenge is the overconsumption of video services by European households, the real issue for investors and policymakers is obviously underconsumption of the new infrastructure,” he said. “Any industry would have challenging returns if only 10% of the addressable market takes your product. If we can change this then concerns about supply side conditions in telecoms would quickly recede.”
He added that debates about financial returns on network capital would also recede if Europe could tackle this underconsumption problem. “It is arguable that Europe does not spend enough public capital on telecoms infrastructure,” he said.
Feasey believes that rather than trying to restructure the telecom sector – which inflates asset-owner financial returns with no assurance of expected additional investment – governments should focus on public subsidies, which he said are more efficient and targeted when it comes to accelerating infrastructure.
Returns on investment
Feasey stressed that policymakers should be aiming to ensure financial returns are sufficient to attract enough capital to achieve other objectives, whereas firms and investors will be aiming to maximise financial returns. “The two are complementary, but they are not the same,” he said.
Policy objectives should be to maximise the economic and social benefits or returns obtained as a society from the use of the infrastructure. “This is likely to happen when new technologies are quickly and widely available (coverage and capability) and rapidly and widely adopted by users (adoption),” he said.
However, Feasey said the mood in Brussels seems to be that economic and social returns from telecoms infrastructure should be higher than they are. ETNO says that FTTH coverage is expected to reach 90% of households by 2030 rather than the 100% envisaged by the Commission’s Digital Decade target. WIK has also produced numbers for the Commission about capital requirements. 5G population coverage in Europe is around 80% today, less than in the US and China.
Supply side levers
Feasey said concerns that the market would underprovide services that were affordable has been a feature of European telecoms policy since privatisation in the 1980s. But the idea that public finance would be reintroduced into a sector that had recently been privatised was not seriously considered.
The 2007-8 financial crisis and the pandemic changed this as European policymakers came to believe that the telecoms sector was resilient to economic downturns and could play a role in driving the continent’s wider economic recovery and public subsidies began to feature and be used to achieve targets like with broadband.
Feasey questions whether current spending is enough. “Korea has spent $32 of public funds per capita p.a., which is about 3x France, the highest spending European country,” he said. “The US has spent $11 per capita p.a., which is also more than every European country except France. New Zealand spent $24.6.”
“It could be argued that any shortfall in telecoms infrastructure in Europe is the result of insufficient public finance rather than any insufficiency in terms of private capital or returns for investors,” he added.
In contrast with places like New Zealand or Australia most of the European public finance has taken the form of grants to private firms rather than public institutions taking equity stakes in those firms. Feasey suggested there was a lack of evidence public finance risks crowding out private capital which would otherwise have been invested.
“Public subsidies have two very important advantages,” he said. “The first is that the returns which go to private investors are directly related to and conditional upon the additional coverage. No additional coverage, no subsidy.”
“Second, the subsidy is targeted in the sense that it only affects the recipient firm and the specific infrastructure required. The grants will not affect or inflate financial returns for other firms in the market or on other assets that the recipient might itself already own,” he added.
Changing market structures hasn’t worked
Feasey said changes in market structure had not been very significant overall in Europe because mergers have uncertain and unpredictable consequences for coverage and adoption of new technologies and it is difficult to make merger approvals conditional on the achievement of specific outcomes.
He added that policymakers have been wary of proposals that contemplate significant changes to market structure when these are presented as a way of delivering greater economic or social benefits or meeting targets.
This is because mergers are: “likely to create opportunities to inflate financial returns for all asset owners and not just in relation to the additional assets which policymakers may want to see deployed by the merged firm.”
Telco restructuring has more impact
Corporate restructuring, he said, has shown some limited evidence of positive outcomes as telcos combine network assets and mobile operators have spun out towers. “The PPF Group put mobile infrastructure assets into a private vehicle separate from the existing publicly quoted retail business in the Czech Republic in 2014,” he said. “Financial returns to shareholders in the traded retail business grew by ~90% and the level of network capital investment by 40% in the following five years.”
“I think more significant corporate restructuring is likely to be driven by technology and the virtualisation of telecoms infrastructure,” he said. “The last ten years saw the standards and virtualisation technologies being developed. In the next ten years I expect us to see the impact for the way in which telecom assets are organised, owned and operated and for this to be quite different from the past.”
Feasey stressed that corporate reorganisation is not and should not be driven by policymakers. “Changes were made to the Communications Code some years ago to encourage firms to explore different organisational forms, like collective ownership of networks, but these did not have much impact,” he said.
“The same applies to calls by policymakers for the industry to create pan-European firms, which have little or no industrial logic under current economic and technological conditions,” he added.
“Corporate restructuring is the starting point, without which significant changes in market structure or business model are unlikely to be achieved, he said. “Even if nothing else follows, corporate restructuring seems to improve both financial and economic and social returns from assets. New technology and competition, not regulation, will drive this.”
Net neutrality uncertainties
Feasey reflected on calls by telcos to charge large traffic generators like Netflix for access to customers suggesting it doesn’t change the telco business model. “I think this suffers from the same uncertainties and ‘leakage’ concerns as proposals to change market structures,” he said. “This would be addressed the revenue went to a public authority who would distribute the extra funds alongside the other subsidies that are already being provided to the industry. But that makes it another source of public funds rather than a change in the business model.”
He added: “To change the business model would first require very fundamental changes in industry structure – and net neutrality regulation – to provide infrastructure owners, or a single owner, with sufficient leverage to impose fees.”