The state of European connectivity. How ready are we for 5G?
Finding the missing link
Back in the mid-1980s, the Maitland Commission identified The Missing Link—a report of the Independent Commission for World-Wide Telecommunications Development—correlating access to connectivity with social and economic development and urging urgent policy reform to bridge the digital divide. It signaled the end of state-run monopolies, incentivized massive private sector investment, and generated a boon for consumers. At the same time, European industrial strategy established Groupe Speciale Mobile which, through a combination of global harmonized spectrum allocation and sector liberalization, drove huge scale economies making made in Europe mobile tech an affordable reality across the globe, and doing so far sooner than anyone could have imagined.
European connectivity today
Europe, once synonymous as a mobile leader, is now very much on the back foot. 4G deployment, uptake, and quality lags behind leading regions by a few years:
- 4G Subscriptions: In 2019, 4G as a percentage of total subscriptions was only 42% in Central and Eastern Europe, 69% in Western Europe compared to North East Asia 88% and North America 91%.
- Mobile download speeds: From a 100-country benchmark, Canada and Korea topped the list with speeds of 59 Mbps, with Sweden placed 21st, Germany 23rd, France 24th, Spain 27th, Italy 33rd and the UK 36th—all with speeds below 30 Mbps.
- Householder fibre penetration: According to OECD statistics, in 2019 the average percentage of fibre connections to total fixed broadband is 29%. European countries above the average include Sweden 69%, Spain 62%, Norway 50%, while France 19%, Italy 2.4%, Germany 1.3% and UK 1% are all belo.
The coronavirus crisis has, in the eyes of some, further exposed Europe’s relatively poor position. When traffic distribution shifted due to lock downs, the Commission called on video streaming platforms to prevent the “continent’s broadband networks from crashing”. Policy makers across the pond mocked the need to do so. “In Europe, the internet has been regulated using outdated communications rules designed for telephone monopolies” Senator John Thune said, adding that US policy has encouraged firms “to invest in the latest communications infrastructure…when coronavirus hit and internet usage soared, American networks were ready.”
There is mixed debate in Europe about whether the 4G lag matters in terms of lost consumer or producer welfare that may have otherwise materialized. But the 4G leaders in North America and North East Asia are unequivocal on the first mover benefits their citizens and economies have reaped. It’s no wonder then that they are hell-bent on staying ahead in the 5G race, as the prize is substantially greater.
The Financial Time’s says that as “5G will be a foundation on which new AI, autonomous car systems and cloud computing will be built. Countries ahead in the race to install 5G should have an advantage in these areas too”. So convinced is Korea that 5G is critical to its future that the government is investing around a third of the $25 billion needed to establish nationwide 5G networks and ecosystems. And in the US, being a 4G leader provided “Being ahead in 5G is expected to create “
Has the link gone missing?
The policy objectives formulated post-Maitland, to promote competition, incentivize investment and drive down prices were well achieved. But the market conditions to which the post-Maitland formula is applied today have been turned on their head, and market outputs are no longer meeting political ambitions.
European investment per capita is expected to remain at 40% the level in Korea, about half that of the US, and some two thirds the level in Japan. Over a sustained period, Europe has and will continue to invest many hundreds of billion Euros less than our peers, leaving us with an investment and connectivity deficit. As connectivity is now a “must have” for all the economy and society, this issue should be front and center of policymakers’ concerns.
There seems to be a series of conflicting forces in play, between markets and their regulatory environment:
- For many market players the return on capital employed is below the cost of capital which has created a momentum for consolidation, but previous four-to-three mobile mergers have either been blocked or when approved, the requisite remedies reduce the efficiencies the merger was supposed to unlock.
- While large scale markets such as the US, China and India allow consolidation, some EU member states are favoring new entrants when auctioning off 5G spectrum.
- Some spectrum auctions are designed to artificially inflate prices, which impairs balance sheets and chills investment. Spectrum fees account for around 15-20 percent of the industry’s return on capital and could be traded off to incentives more infrastructure deployment.
- Policy makers expect ubiquitous coverage, but the competitive landscape and regulatory environment have pushed capex to sales ratios to all-time highs, meaning the private sector capex envelope is at best static.
This makes stark reading when we consider the gigabit connectivity targets policy makers have set. Worse still, is the news buried in footnote 15 of the Commission’s working document Identifying Europe's recovery needs, which states “market forces will not guarantee the achievement of the…targets,”. Citing a forthcoming European Investment Bank study that estimates the investment needs required, the Commission expects “private funding will cover about one third of [the amount] leaving an estimated investment gap on an annual basis of around €42bn until 2025.” This should be seen as a hammer blow for how the industry has been governed. When the same gigabit targets were announced by the previous Commission in 2016, the private sector investment shortfall was estimated at only one third.
So, is Europe ready for 5G?
According to the Commission’s 5G Observatory, when it comes to 5G trials, Europe excels with the count at 191 as of March 2020, along with 138 future 5G-enabled cities. But perhaps the more telling indicators suggests the glass is half empty. Only 11 member states have 5G roadmaps and just 20.5% of 5G spectrum has been released, although there is high variance between member states as the Digital Economy and Society Index shows.
Figure1: 5G readiness (assigned spectrum as a % of total harmonised 5G spectrum), 2020)
According to a broader 5G Readiness Index from consulting firm, inCITES, which grouped 39 European countries into five tiers, the top and bottom tiers are empty. Figure 2 shows that a total of twelve countries made the second tier, with twenty-two in the third and five in the fourth.
Figure 2: Europe 5G readiness index
How should gigabit connectivity be delivered in Europe?
If policy makers are serious about delivering gigabit connectivity and enabling cross-sector innovation that can drive carbon neutral growth, then we need an across-the-board policy shift. To this end, the Council of Ministers has a plan. In its “conclusions on shaping Europe’s digital future”, the Council recognizes that the coronavirus pandemic has demonstrated the need for fast and ubiquitous connectivity, but that in many European regions, this is not yet put in place. To remedy this, the Council calls on the Commission and member states to improve investment conditions by:
- public funding programs, where necessary at European level, to support investment in very high capacity digital network infrastructure, particularly in rural areas
- awarding 5G spectrum frequencies by the end of 2020, taking into consideration any delays due to the COVID-19 pandemic, under predictable and investment-conducive conditions
- ensuring effective and transparent processes permitting for the accelerated roll-out of very high capacity infrastructures, including fiber and 5G
- implementing on a timely basis the relevant measures in line with the 5G cybersecurity toolbox
In addition, the Council calls:
- for member states to “reduce the costs of network deployment and facilitate the roll-out” which can account for up to 80% of the cost of deploying high-speed networks
- for the Commission to “review the relevant state aid rules… including the Commission’s broadband guidelines” not leas to ensure “the deployment of very high capacity connectivity in rural and remote areas.”
If the recommendations above can quickly move off the page and into action, then the continent has a fighting chance of racing back into contention. Commissioner Vestager understands that 5G will be the “backbone of digital tech”. Indeed, realizing the full potential of expansive connectivity and 5G could deliver €2.2 trillion to the European economy by 2030.
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