BRUEGEL POLICY CONTRIBUTION ISSUE 2015/13 JULY 2015 ADDRESSING FRAGMENTATION IN EU MOBILE TELECOMS MARKETS MARIO MARINIELLO AND FRANCESCO SALEMI Highlights • Mobile telecommunications markets are an important part of the European Com- mission’s strategy for the completion of the European Union Digital Single Market. The use of mobile telecommunications – particularly mobile data access – is gro- wing and becoming an increasingly important input for the economy. • The EU currently does not have a unified mobile telecommunications market. The EU compares favourably to the United States in terms of prices and connection speed, but lags behind in terms of coverage of high-speed 4G wireless connections. • Europe’s long-term goal should be to make data access easier by increasing high- speed wireless coverage while keeping prices down for users. An increase in cross-border competition could help to achieve that goal. • The Commission has two important levers to help stimulate cross-border supply: (a) ensuring competition in intra-country mobile markets in order to provide an incentive for operators to expand into other jurisdictions, and (b) reducing mobile Telephone operators’ costs of expansion into multiple EU countries. The further development +32 2 227 4210 of policies on international roaming and radio spectrum management will be central [email protected] to this effort. www.bruegel.org Mario Mariniello ([email protected]) is a Research Fellow at Bruegel. Francesco Salemi ([email protected]) is a Research Assistant at Bruegel. The authors wish to thank Serafino Abate, Antonios Drossos, Stephen Gardner, J. Scott Marcus and Guntram Wolff for helpful comments. Research assistance by Afrola Plaku is gratefully acknowledged. BRUEGEL POLICY CONTRIBUTION ADDRESSING FRAGMENTATION IN EU MOBILE TELECOMS MARKETS 02 ADDRESSING FRAGMENTATION IN EU MOBILE TELECOMS MARKETS MARIO MARINIELLO AND FRANCESCO SALEMI, JULY 2015 1 INTRODUCTION 2013, pp92-93); the vast majority of mobile traffic will soon be generated by 4G connec- The completion of the Digital Single Market (DSM) tions (Cisco, 2015). is one of the top priorities for the European Com- • Mobile broadband, or wireless internet access, mission under Jean-Claude Juncker. On 6 May could soon become a valid substitute for wired 2015, the Commission published a strategy out- broadband access for most typical internet lining how it intends to achieve that goal (Euro- uses3, in particular in low population density pean Commission, 2015). According to the areas where building fixed infrastructure might strategy, the completion of the DSM “could con- not be economically sustainable. tribute €415 billion per year to [the EU] economy • Mobile broadband technologies are developing and create 3.8 million jobs”1. rapidly and although there is still uncertainty about the details of the next generation (5G) A major plank of the strategy is addressing frag- wireless standard, the allocation and assign- mentation in the telecoms sector: access avail- ment of dedicated spectrum bands might start ability, quality and prices vary significantly across as early as 2020. the continent, with telecoms markets defined by national borders. Users’ access conditions are The fundamental question is how European largely determined by their place of residence. The mobile markets can be improved for the benefit of Commission's initial strategy document does not users. The often-heard answer is that barriers to yet offer any concrete solutions to this, but indi- cross-border competition should be gradually dis- 1. http://ec.europa.eu/priori- ties/digital-single-market/. cates areas for potential future intervention. mantled in order to move towards a pan-European market for mobile services. 2. Lam and Shiu (2010), for example, estimate that the In this Policy Contribution we specifically look at growth in mobile penetra- EU mobile telecoms markets and analyse poten- Pan-European networks imply lower production tion rates significantly tial concrete measures that could contribute to the and possibly network deployment costs, resulting affected total factor produc- Commission’s digital strategy goals of improving from economies of scale. This should imply lower tivity growth in a number of countries between 1995 end-users’ access conditions and addressing EU prices in the short-term and more investment in and 2004. They also found market fragmentation through the development of the long-term, leading to increased high-speed a two-way relationship cross-border supply of services. There is no appar- mobile broadband coverage. between mobile penetration ent structural reason why the supply of mobile rates and real GDP growth in services should stop at EU member states’ Avoiding the multiplication of networks would also these countries between 1997 and 2006. national borders. For the provision of mobile serv- reduce ‘double mark-up’ effects: when more than 3. Grzybowskiy and Ver- ices, wireless infrastructure is needed. We focus one network is needed to provide a service, for boven (2014) note that, on this for a number of reasons: example in the case of international calls, there is especially in recent years, a natural tendency to higher prices. Each network mobile broadband in EU • The diffusion of mobile telecommunication has owner chooses how much to charge for terminat- markets has been per- been shown to be a significant factor in improv- ing calls on its network and wants to maximise ceived as a potential substi- 2 tute for fixed broadband. ing productivity . only its own profits without considering the nega- The UK telecoms regulator • Mobile data consumption is growing rapidly tive effect that such choices could impose on the Ofcom found that there is a because of the fast take-up of smartphones profits of other network owners. The higher the growing positive gap and tablets (even though a large part of this price, the lower the demand will be for a comple- between mobile data rev- enue and fixed broadband traffic is being offloaded to Wi-Fi connections mentary good – in this case the call origination on revenue (Ofcom, 2014). at home or at work) (European Parliament, other networks, which are also needed to make BRUEGEL POLICY ADDRESSING FRAGMENTATION IN EU MOBILE TELECOMS MARKETS CONTRIBUTION 03 the call. Cross-border networks operated by single for mobile telecommunications should be to allow operators would limit that phenomenon and ulti- differences in price and quality of service only if mately exert a downward pressure on tariffs. they relate strictly to differences in supply (ie Opening the borders would also mean increasing costs) and demand characteristics. In the long competitive pressure on national markets, with term, such an approach could be expected to lead users given access to a wider choice of operators. to converging tariffs across the continent, insofar as the progressive completion of the single market This would not necessarily mean that a uniform as a whole (not only the DSM) will imply an tariff for all EU users should emerge in such a increased convergence in the levels of purchas- market, nor that the Commission should impose ing power and production costs in EU countries. such a price. As long as significant structural dif- ferences between EU countries continue to exist, To identify how the Commission's goal of a single requiring uniform prices could harm customers market for mobile services might be achieved, we with a lower ability to pay, ie customers from first look at EU mobile markets in comparison with lower-income countries4. Figure 1 shows the aver- the US. We then examine how improved wireless age mobile operator revenue per user (ARPU, a access to data by final users, increased fast measure commonly used as a proxy for unit price mobile broadband coverage and lower prices could for mobile services) and the average hourly salary be stimulated by greater cross-border competition. per person in 2013 for each EU country (except We then show how policies on international roam- Austria). The correlation between the two variables ing and radio spectrum management could have is very high. It would be hard to imagine Bulgarian an impact on cross-border competition. customers paying the same mobile prices as cus- tomers from Luxembourg. 2 EU MOBILE TELECOMMUNICATIONS MARKETS To reach its goal, the Commission should aim to Mobile market structure ensure that markets are competitive and exposed to a similar level of competition across the conti- There are about 40 mobile network operators nent. Customers from any country could be able (MNOs) in the EU. Many operate in just one or two to choose from a set of potentially EU-wide service countries. A restricted group of big international providers and possibly other suppliers with a local or regional focus (a scenario closer to that in the Table 1: Presence of mobile network operators US). In other words, the Commission's objective in EU countries Figure 1: Average hourly remuneration and MNO(s) Number of countries average revenue per user, EU countries, 2013 Vodafone 12 Deutsche Telekom 8 300 LU Orange, TeliaSonera 7 IE Hutchison 6 250 Tele2 5 CY UK SE 4. Differences in prices NL DK Telekom Austria, Telenor 4 200 BE would also be expected in SI ES DE FR Telefónica 3 MT more competitive markets, SK EU FI KPN, Belgacom, BITE, Elisa, OTE 150 2 because of differences in CZ EL (40% DT), PPF ARPU (€) HU IT the cost of providing mobile HR PT Bouygues, Bulgaria Telecom, services in different 100 PL CYTA, DNA, Eircom, Everything countries. EE Everywhere (50% DT, 50% BG LT 50 Orange), Go, Iliad, Luxembourg 5. Even though none has a RO LV Online (LOL), Melita, MTN, NOS network that covers the Comunicações (formerly 1 entire land area or popula- 0 Optimus), Play, Polkomtel, tion of the US, each covers 0 5 10 15 20 25 30 35 40 45 Portugal Telecom, POST Average hourly remuneration (€) Luxembourg, RCS-RDS, SFR, more than 99 percent of the Source: Bruegel based on Eurostat and Digital Agenda TDC, Telecom Italia, Teledema, US population.