Some Regulators Want More Investment, But European Telcos Have a Profit Problem

Neelie Kroes, European Commission Vice President of the European Commission, responsible for the Digital Agenda for Europe, has a tough job, and so do telecom service providers these days.

It would be fair to say European communication tariffs have been relatively high, compared to U.S. tariffs, perhaps for obvious reasons, such as the fact the the U.S. market is continent-sized, meaning international tariffs do not apply, where in Europe a substantial amount of calling, texting and Internet usage occurs on an international basis. 

It is fair enough to argue that European regulators believe promoting competition leads to benefits for consumers (lower prices, more choices). It would also be fair to say pro-competitive policies in Europe have worked as predicted. 

It would also be fair to note that what is good for consumers sometimes is not so good for providers, since one person's cost is another person's revenue. 

The conundrum is that policies that promote competition also can depress service provider ability and willingness to make investments in next generation networks. Since telcos operate in private capital markets, inability to generate financial returns sufficient to assure lenders they safely can make loans to telcos is a big problem. 

Distressing though it might be, the service provider business case for next generation network investments is harmed, not helped, by pro-competitive policies that have the effect of depressing earning potential.

Competitive service providers who lease wholesale facilities would disagree, as they are helped by the pro-competitive policies. But investment in the networks everybody uses is an arguably different matter.

Kroes objects to cash being funneled to shareholders, rather than invested in the network. 
"My wish is that the money will be spent in your sector, and not put in shareholder's pockets," Kroes says. 

The problem is that unless carriers pay shareholders the expected dividends, and maintain share prices, the ability to attract investment also wanes. So the catch is that profits, dividends and share prices bear directly on ability to invest in networks. 

In that regard, roaming rate reductions, which are good for consumers, paradoxically also make it harder for service providers to justify next generation network investment. 

Europe is not alone in facing that challenge. U.S. regulators likewise confronted the issue, and concluded that for structural reasons (the existence of two fixed network competitors in virtually every market), wholesale access (which depressed network owner revenue) was not preferable to competition between network owners. 

In other words, where Europe had tended to favor policies that promote competition but arguably reduce incentives to invest in next generation networks, U.S. regulators chose to spur investment, while trusting that fixed network operator competition would be sufficiently robust to yield consumer benefits as well.

Some (not most competitive providers, for obvious reasons) service providers would disagree about the degree of competition, but how many end users, in any customer segment, would claim they really are worse off, pay more and have fewer choices and new services than before? Precious few, one guesses.

That is not to say European regulators or service providers can make the same choice. The U.S. market structure (competing cable and telco broadband networks in virtually every market) cannot be replicated easily in Europe, if at all. 

So a tough balancing act will have to happen. Oddly enough, the benefits of competition and investment stand opposed, to a large extent.