Digital transformation: a future agenda for Europe
The 5G race is on.
Yet, while European technology is at the fore, the first deployment and use cases are likely to take place elsewhere. The FT reports that Sweden’s Ericsson (80) leads the way globally for 5G trials and launches, followed by China’s Huawei (64) and Finland’s Nokia (45). But by 2023 almost half of 5G connections will be in North America, a third in North East Asia and only a fifth in Western Europe (as we recently reported in our quarterly Ericsson Mobility Report).
Is regulation handicapping EU digital transformation?
So European policy makers, financiers and industry leaders, gathered at the FT-ETNO summit in Brussels recently, had a lot to consider. While some regulators may have found solace in Europe being crowned a global frontrunner in that field, industry accolades went to China and the US for their respective leadership in innovation and business. The key question for the summit then: how can industry stakeholders ensure that the European economy can compete?
The resounding cry from operator CEOs is for a new industrial policy to align regulatory practices with political ambitions and bolster Europe’s chances of global digital leadership. The two key asks are for a massive cost-reduction programme to facilitate network deployment, and that regulation should pass an investment-and-innovation-readiness test.
Telefonica CEO José María Álvarez-Pallete’s sobering address put Europe’s conundrum into a stark context. His frank diagnosis was that Europe’s regulatory regime is not working and it drives a lagging market. Between 2012 and 2017, average sector revenues shrank by 17 percent while valuations have fallen almost in half. Despite this huge headwind, capital expenditure in Western Europe has increased substantially. There is a will. But is there going to be a sustainable way?
Compared to other regions, Europe’s telecom market remains fragmented and sub-scale. Something must give. An obvious remedy is deregulation, consolidation and a forward-looking pro-investment framework which Mr. Pallete estimated could propel the value of Europe’s data economy to more than €700 billion by 2020 from €300 billion today.
5G is key for future EU business sustainability
Coining a popular strapline from across the Atlantic, Orange CEO Stéphane Richard said that it was time to “make Europe great again”.
Joining the call to show a united European front, Deutsche Telekom CEO Timotheus Höttges who, on the back of his company’s bold commitment to deliver 50 Mbit/s to 99 percent of the German people by 2020 (with speeds doubling by the end of 2022 and a graduation to 5G by 2025), described how telecom networks are “super critical enablers” and essential for economic growth and social wellbeing.
Indeed, according to 2018 Nobel Laureate William Nordhaus, only a small fraction of the returns from technological advances are captured by producers with most being passed onto consumers. And with some €300 billion investment required over the next few years, Mr. Höttges said regulation should be paired back and spectrum auction rules should not be a further handicap.
Mid-band spectrum quantity is key for deployment and competition
Investors have been sceptical of the industry’s capability to generate returns and it is little wonder that Europe lags behind China and the U.S. in terms of investment, said Mr. Richard describing the recent Italian spectrum auction was a “disaster” that sent the “worst possible signal” to investors. The €6.5 billion pledged is equivalent to 30 percent of Europe’s annual mobile investment.
The multiband auction design was culpable on several fronts. Not only did it set aside spectrum for a specific player and impose a high reserve price but also in the mid band range it offered an artificially scarce amount of spectrum. Moreover, the asymmetric lots ensured there would be winners and losers, a dynamic that drove record prices (some seven times higher than a comparable Spanish auction held a few months earlier). Ericsson President and CEO Börje Ekholm highlighted that the Italian auction fees were equivalent to two years of capex.
The mid-band packaging allowed only two of four operators to acquire significant spectrum quantities. An effective duopoly was created which economic theory suggests will be bad for consumers due to higher prices and lower take up and bad for governments because of restricted connectivity which stunts economic growth and the higher tax receipts that go with it.
The European industry is in transition, from 4G to 5G and from copper to fibre. To foster and accelerate this move, five themes emerged:
- Speed up 5G by swiftly maximising the release of new spectrum, doing so in a way that incentivises deployment
- Incentivise fibre deployment, by pivoting away from the ladder-of-investment approach towards a U.S. style of infrastructure competition
- Reduce the cost and increase the speed of building out infrastructure by removing deployment barriers
- Enable scale efficiencies by allowing market structures to evolve
- Promote permission-less innovation by moving regulatory intervention from ex-ante to ex-post
Spectrum, deployment, deregulation: How the U.S. is winning the race to 5G
Although the conundrum may be complex, a template for success might easily fit onto one page. Ever looking over their shoulder, the Federal Communications Commission (FCC) is seeking to further compound America’s 5G lead and ensure lasting superiority.
But why the urgency?
It’s about the past. Being the first to deploy 4G at scale, the U.S. became a testbed for 4G innovation which delivered the app economy, boosting annual GDP by some $100 billion. It’s also about the future. Accenture estimates that for the U.S., 5G could drive 3 million new jobs, $275 billion in private investment, and whopping $500 billion in new economic growth.
With their eyes on the prize, the FCC’s one-page template has three legs:
- Continue to flood the market with spectrum by auctioning an additional 5GHz of mmWave spectrum by end-2019, doubling the amount total spectrum in the market, and looking to make 844MHz of mid-band available too
- Remove deployment barriers by speeding up access to utility poles, establishing a 60-day shot clock for small cell approval with a cost recovery approach to fees. Doing so could save $2 billion, stimulate incremental investment of $2.4 billion and extend coverage to 1.8 million homes and business
- Modernise regulation by removing outdated rules that add cost and complexity to incentive network-based innovation
Can Europe get on the same page?
Perhaps. Mr. Ekholm noted that communications networks are critical national infrastructure and are as important as roads, railways and other crucial economic arteries. As such, license terms should be extended and presumed to be perpetual. Doing so will increase certainty and investment.
To achieve its great potential, 5G needs to be expansive, with fast and low latency communications capacity available everywhere and employed in ‘verticals’ not yet much penetrated by connectivity. To achieve this, networks will require densification. Whereas Europe has slightly more land mass than China, Mr. Ekholm stressed that China already has nine times as many as base stations.
According to HSBC telecom regulation in Europe continues to be the least favorable to investors of any region globally and is likely to be a major contributory factor as to why the industry’s returns fall short of its cost of capital.
Yet at the summit it was clear that the European operator CEOs had a great appetite, purpose and sense of urgency to get the job done. Policy makers would do well to note their enthusiasm and vision. Rather than rigid rules, legislators and regulators should grasp the opportunity to empower an intelligent, sustainable and connected continent.
Read Ericsson’s Mobility Report to find out more about 5G, as well as the latest trends which are predicted to drive the mobile industry over the next five years.