Good Politics, Bad Economics – Analysys Mason’s response to the EU proposals

Good Politics, Bad Economics – Analysys Mason’s response to the EU proposalsThe European Commission released “Connected Continent: Building a Telecoms Single Market”, a legislative package which they have stated is aimed at “building a connected, competitive continent and enabling sustainable digital jobs and industries”.

Analysys Mason Partner James Allen (Head of Regulation) and Tim Harrabin (Senior Adviser) comment:

The overall summary is that the proposed regulation may be good politics, but it is not good economics.

Overall outcomes:

The outcomes for consumers and for investment from these changes may not be as the Commission desires.


Focusing on mobile, they are looking for:

  • removal of almost all of the premium for international calls within Europe
  • removal of charging for incoming calls whilst roaming in Europe
  • net neutrality, so removing the ability to charge a premium for access to certain (Internet-accessed) applications
  • either “roam like at home”, or decoupling
  • work towards improved harmonisation of allocations and allocation timescales for future spectrum releases (“jam tomorrow“).

All bar the last are materially negative for mobile operator margins; the fourth is likely to lead to the offer of decoupling (which we already knew about) as being less negative for operator margins than “roam like at home”, at least in the short run.

Investment incentives

The combined effect is not positive for investment in fixed or mobile networks, despite the Commission’s rhetoric.

Efficient pricing

The Commission appears to be using the “death of distance” – the fact that the costs of providing international calls are not that much higher than national calls – to argue that prices should be similar in structure. This is not efficient, because operators know that consumers are more price sensitive for local and national calls. Forcing the price of national and international calls to be the same means that operator revenues will decline even if as is almost inevitable the operators put up the price of national calls slightly to compensate for the loss in margins (a “waterbed effect”). The same applies to roaming. Ultimately anything that reduces total revenues in the industry is bad for investment.

The contrast with the device market is quite striking. iPhones do not have a removable memory card slot, and Apple charge a substantial premium for models with higher memory. Apple do this because consumer preferences allow them to: they make more money with that pricing structure despite the manufacturing and marketing costs being very similar for both models (it is “allocatively efficient”). This is analogous to the higher prices for international (in-EU) calls which the Commission does not accept. The problem therefore is not that the costs of calls to European destinations are too high, the problem is that consumers do not flock to operators offering low prices to such destinations- because if they did, all operators would do so already. (Some operators do already offer this: Free in France is one example)

Fixed networks

In addition to net neutrality and removing voice premiums for international calls in the EU, there are also a number of specific proposals on fixed networks, in particular in relation to creating common wholesale products across the EU. Difficulties here are likely to be practical – changes to the nature and interfaces of the wholesale products used by ISPs (such as the current local versions of fibre-based wholesale products) in all 28 countries. These changes and difficulties will introduce as much uncertainty in the medium term (in order to create these new products and migrate to them) as the policy aims to remove in the long term. It will certainly be a challenge to encourage investment by alternative operators planning to buy the existing wholesale products in the interim until this significant uncertainty is resolved; as a result incumbents and cable operators will probably make net gains in the short term. Again the outcome may not be as the Commission desires.

Consumer protection

The Commission is also seeking to impose a number of specific consumer protection measures directly including introducing an option to terminate (after 6 months) and rules on cancelling “rolling” 12 month contracts. Free email forwarding services after leaving an ISP are also floated. An EU regulation seems like overkill to deal with these kinds of issues which can already be dealt with locally.

Changes to the regulatory framework

The Commission are also keen on a “passport” scheme to allow an operator to be authorised to operate in any EU country and to make it more common for end users to buy services from telcos established in other member states. However, wrapped up with this is a right to equal treatment by the different Member States in objectively equivalent situations, enforced by the Commission – thereby obtaining a veto on national regulatory decisions. This is a power they were specifically denied in negotiations over the 2009 package, which will be contentious. The right to equal treatment goes towards centralising regulatory decision making (at least as regards what the appropriate remedies are in “objectively equivalent situations”) – though not yet a single European regulator.

The authorisation regime is already very light touch; buying services internationally seems an attractive idea, but a host of operational issues including customer language support, brand awareness, USO funding, numbering, and lawful intercept are likely to keep service provision national in scope even if the cross-border supply was technically feasible.

The regulation also creates the possibility of dispute resolution across borders (a dispute between BT and FT about some matter in France could be resolved by Ofcom in the UK, albeit taking ARCEP views into account).

Some of the proposals will probably be modified in discussion with the European Parliament and the Council.

#Analysys Mason# Bad Economics# Connected Continent# Good Politics# The European Commission