Crossing the Digital Divide: Why an EU Single Market for Telecoms is Vital for Economic Growth

By Johann Benson, Transatlantic Economy Analyst

As a part of its 2020 Digital Agenda, launched in 2010, the European Commission seeks to eliminate mobile roaming charges and increase access to the next generation of high-speed internet – crucial steps toward the creation of a Digital Single Market. A single market for internet and other telecommunications services would allow European operators to exploit economies of scale that are currently unobtainable. According to the Commission, it would give the EU’s recession-stricken economy a much-needed boost – up to €110 billion per year, or more than 0.8% of GDP. However, declining investment in telecom infrastructure and fragmented regulation represent major obstacles to achieving this goal, stifling innovation within the telecom sector and adversely affecting growth in other sectors of the economy.


Numerous studies have concluded that the lack of an EU-wide digital market is an impediment to the commercialization of innovative ideas because firms are forced to adapt products and services to the regulations and technological constraints of each country. This means that economies of scale cannot be exploited to the same extent as, for example, in the United States; sometimes, these barriers also make it unprofitable to launch new services. And while there are a handful of telecoms – such as Telefonica, Vodafone, and Deutsche Telekom – that have extended their reach across borders via subsidiaries, Europe has no continent-wide operators. Instead, the EU is a patchwork of about 1,200 fixed-line providers, nearly 100 other mobile operators, and an additional 200 mobile virtual network operators. While consolidation is not the stated aim of the Single Market, consolidation of some sort – either through mergers and acquisitions or airline-style telecom alliances – is a prerequisite for taking full advantage of the Single Market.


Despite the large number of operators across the EU as a whole, national telecoms markets still tend to be dominated by incumbents with inherent advantages. In recent years, however, caps on roaming charges, increased competition, and the Eurozone recession have made a financial dent in the telecom sector. Mobile-service revenues for the year ending in March were down 8.6%. This drop in revenues has resulted in a steady decline of investment of about 2% per year over the last five years, leaving Europe with only 6% of the world’s 4G connections and igniting disputes between internet content providers and telecoms operators. European telecom companies warn that eliminating roaming charges – an important source of revenue – will have adverse effects in the form of further cuts to investment. To help boost declining investment in mobile information and communication technologies, the Commission has said it will devote €50 million of public funds for research into wireless 5G technology. Fibre to the Home Council Europe has estimated that deploying fiber cable across the entire EU would require a total investment of about €200 billion.


As a first step toward creating a pan-European digital market, Neelie Kroes, European Commission Vice-President for the Digital Agenda, has proposed an “EU passport” for telecom groups that would allow operators to offer services across the entire EU. An “EU passport” for telecoms is only half the answer, however. A truly single market for telecoms must ensure that all EU members recognize the same legal framework governing internet and other telecom activity, as diverse regulations are currently the primary stumbling block to the cross-border provision of e-services. According to Michel Barnier, European Commissioner for the Internal Market and Services, only 20% of all online retailers offer goods and services cross-border.” The EU’s lack of uniform standards for electronic payments, e-invoicing, e-signature, e-identity, and e-contracts has led Mr. Barnier to lament that every day “consumers willing to buy online are blocked by access, payment or delivery problems…and businesses lose new opportunities because of divided national markets.”


Although the telecom industry is not happy about plans to eliminate roaming charges, it does support the creation of a single market with fewer regulatory burdens. Yet the biggest hurdle will likely come from governments seeking to protect their national incumbents, and – in the case of mobile communications – reluctant to forfeit the revenue that wireless spectrum auctions generate. Debt-laden governments often set high reserve prices for spectrum, such that wireless spectrum In Italy, for example, is nearly six times more expensive than in Denmark. Thus, the creation of a single market for telecoms with Brussels-based spectrum auctions would push prices to converge, eventually allowing market forces rather than regulation to eliminate roaming charges.


It is important to note that the Digital Single Market would not only benefit consumers shopping online and using mobile phone and internet services outside of their home country. It would also promote the growth and expansion of businesses in other sectors of the economy. Uniform regulations and EU-wide access to high-speed networks would spur the use of cloud computing services, e-health systems, e-education, e-government, and multi-location collaboration. Cloud computing, in particular, could boost small and medium enterprise (SME) growth considerably. Cloud computing allows firms to flexibly scale their information and communication technology capacity, thereby lowering their up-front investment costs. In the Digital Single Market a business could use one provider for cloud computing services in all its offices in the EU. According to one estimate, if all SMEs were to take advantage of cloud computing, the economic gain over ten years to SMEs alone would outweigh the costs of deploying an EU-wide fiber network.


In addition, the Digital Single Market could be a boon to another lifeline for SMEs: the banking sector. In conjunction with an EU banking union, a digital single market would allow banks to expand their services across borders much more rapidly, as – theoretically at least – there would be no need to establish a physical presence before commencing operations. Furthermore, automated online transactions have been calculated to be about 20 times less costly than the equivalent transaction conducted in a branch. Last but not least, with the expansion of smart grids and increased machine-to-machine communication just around the corner, all signs indicate that the information age is still in its infancy. Nonetheless, Europe’s ability to capitalize on future developments will depend on successfully moving toward a Digital Single Market today. 

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