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Viviane Reding

EU Telecoms Commissioner

Europe's Telecoms Incumbents: Friends or Foes of a Single Telecoms Market?

CEO Summit of the European Telecommunications Networks’ Operators Associations
Venice, 25 October 2008

Ladies and Gentlemen,

This meeting here in Venice is quite an event, and I would like to thank Telecom Italia for having organised it with skill and talent. You have brought together all the main players in the European telecoms debate: the three rapporteurs of the European Parliament; the acting President of the EU Council of Telecoms Ministers; the Chairman of the European Regulators Group; and representatives of the European Commission. You have made sure that the telecoms incumbents of most EU Member States are represented today. And you have also invited US operators and regulators to join us. This already enabled us last evening to start discussing, during a very interesting evening[1], the "Policy challenges for the global telecoms industry", which you have chosen as the title of today’s discussions.

The fact that you, with your colleagues of Europe’s telecoms incumbents, manage to bring together this kind of audience shows your enormous influence in the telecoms debate. In many ways, our meeting today is comparable to an informal Council of Telecoms Ministers – or even a "trilogue" between the 3 institutions. And I am well aware that the position of most telecoms ministers in Europe on telecoms regulation is not that far away from that of their respective national telecoms incumbent.

The special relationship between Europe and its telecoms incumbents is thus naturally the topic which I would like to address this morning. After speaking about the history, the economic situation and the perception of telecoms regulation, I will also make some remarks about the current financial crisis and Europe’s evolving single telecoms market.

1. Europe and its telecoms incumbents – a relationship of fruitful tension

Europe's telecoms landscape is special, and certainly different from that of the United States. This is chiefly because of Europe’s 27 telecoms incumbents.

Most of Europe's incumbents share the same history: They were formerly public administrations enjoying a national monopoly for the provision of fixed voice telephony. Following the EU decision to open the telecoms markets to competition, these public administrations were forced to transform themselves quite radically during the 1990s. You had to adapt to a new market environment, get used to being challenged in your leading market position by new market entrants and get used to telecoms regulation. I know well that this was not always an easy process for many national telecoms incumbents. And it is quite clear that in the regulatory departments of many telecoms incumbents – often divisions of 50 to 100 regulatory experts, many of them formerly working in the national telecoms ministries –, there was initially not a lot of love for the European Union and the European Commission which had triggered this process of market opening.

The magnitude of this transformation of Europe’s telecoms markets can be compared with the process which started in the US with the break-up of AT&T in 1984 and the creation of the national long distance companies as well as the seven regional Bell operating companies. But Europe’s process of transformation was less radical:

We in Europe did not choose the revolutionary method of breaking-up telecoms monopolies by means of competition law. We choose instead the softer, evolutionary, but also more time-consuming path of regulating the former telecoms incumbents by sector-specific rules administered by national telecoms regulators – a process which has been remarkably successful in the past and which is possibly very typical for the special European approach to regulation. However, it is also a process which is not yet completed, but still ongoing.

Up to now, there are two main differences between the US telecoms markets and the EU situation:

  • First of all, the US achieved, partly thanks to the radical shake-up of the market in the 1980s, a considerable degree of infrastructure-based competition. In the US, we have today the long distance and local telecoms operators, as well as strong cable operators, which have a market share of 55% in the US broadband market. In contrast to this, we in Europe have mostly vertically integrated operators and a much lower level of infrastructure-based competition, with some exceptions to this only in Belgium, the Netherlands and Denmark.
  • Secondly, as the US implemented regulation on a nation-wide level under the guidance of the Federal Communications Commission, the US is today characterised by a telecoms market of continental dimension. This has given rise to the creation of regional operators providing seamless services to their customers across the federal states. In contrast to this, we in Europe have entrusted regulation initially to the national telecoms regulators, thus matching exactly the scope of the market of the respective former national monopolies. As a result of this, Europe continues to have- 27 different regulatory systems in telecoms. Cross-border footprints of telecoms operators thus continue to be an exception on Europe’s telecoms market, and cross-border telecoms services are virtually non-existent.

It is clear that in the US, AT&T still plays quite an important political role up to now. But I would say that in Europe, there is certainly no policy maker who can afford to ignore the incumbents.

With respect to employment, Europe’s incumbents represent nearly half of the 1 million employees within the EU telecoms services sector.

Given their history, there is still a vast majority of Europe's incumbents who are at least partially owned by the State. For instance, Deutsche Telekom is 31.3% owned by the German state, France Telecom at 33.1%, TeliaSonera at 45%, Belgacom at 50%, and P&T Luxemburg even at 100%. Only a minority of telecoms incumbents are no longer owned by the State: BT, KPN, Telefónica and Telecom Italia are certainly the most notable examples for this, even though you will probably agree that the lack of a formal ownership link in these cases does not mean that the government would view you as companies like any other.

Beyond ownership links, Europe’s telecoms incumbents play a very important economic role.

  • First of all, in a European telecom service market worth € 347 billion, or 2.9% of the EU’s GDP, incumbents account for 71% of aggregated revenues.
  • Secondly, the incumbents account for 72% of total investment in the sector.
  • And last but not least, incumbents continue to be key for Europe’s competitiveness in the world: six of the top ten telecoms companies in the world are European; and five of them are incumbents.

Of course, this economic power has a direct relationship with the level of competition on the telecoms market. I will not spoil our discussions by recalling, here in Venice today, all the well-known figures about the market shares of the companies around the table. Just three examples;

  • Regarding the mobile market, three out of four European citizens are subscribers of one of the four main mobile groups: Deutsche Telekom, Vodafone, Telefónica and Orange. Three of these groups are mobile branches of fixed incumbents.
  • Regarding the retail broadband market, the incumbents’ market share remains stable at around 45% in 2008.
  • 81.7% of EU fixed subscribers still rely today on the incumbent's infrastructure for direct access.

Of course, many of you will see these figures as demonstration of your economic success. You will certainly understand that the Commission and national regulators have to look at them also from the angle of effective competition. These figures also show to us that ten years after the opening of markets to competition, the job of regulators is only half done. I know that you do not like me saying this. But this is my role as European Telecoms Commissioner. It is because of your economic and political power that the Commission has to remain vigilant, as the independent guardian of competition in the European Union.

2. Europe’s telecoms incumbents and regulation

Some words at this stage about telecoms incumbents and regulation. In this context I know well that for many telecoms incumbents, the term “regulation”, especially if combined with “Europe”, still has a very negative connotation. Some of you have come to me in recent years to ask for a “regulatory holiday” – as if regulation was something that you could simply suspend when you feel like it.

Some of you also have come to me in the past weeks and told me that now, because of the financial crisis, it would be time to soften or even to abandon telecoms regulation. Let me address this request once and for all today in this meeting.

First of all, I firmly believe that regulation taking care of competition always has a positive effect on the economy. Times of economic difficulties are thus not a reason to suspend the principles of competition law. The European Commission shows this very clearly in these days, when we apply swiftly and non-bureaucratically our state aid rules to new aid packages.

Secondly, there is a very interesting lesson from the ongoing financial crisis for the overall perception of regulation. It is certainly not over-regulation that has caused the financial crisis! Financial market regulation will rather now become an urgent priority for policy-makers around the globe. As a Christian Democrat who believes in the social market economy, I always call for caution in this respect, especially when I see now some countries praising the State as the right response for everything. Regulation as such has no added value. Regulation must always be targeted to the problem and achieve results effectively and within a reasonable time-frame. But you and your lobbyists should be aware that the times when one could simply say “no regulation” to have policy makers and public opinion on your side, that these times are over now.

I note with interest that in Germany, a country with a strong “anti-regulation reflex”, the mood has changed dramatically in the past months. In 2005, 28 per cent of Germans thought that the State would regulate “too much”, while 25 per cent thought it would regulate “too little”. In October 2008, only 8 per cent of Germans still thought that the State would regulate “too much”. While 37 per cent thought that the State would regulate “too little.”

The telecoms sector is certainly different from, though linked to, the financial markets. I am personally convinced that, for the time being, and if we want to continue the evolutionary path of Europe’s model of telecoms regulation, we cannot do without some regulation and some regulatory supervision in the telecoms markets. We have of course to be flexible in our approach, and add new incentives for investment, as we propose to do it in the Commission’s Recommendation on Next Generation Access. I invite ETNO to make use of the ongoing public consultation to give the Commission a common view on this important matter, especially as regards the risk premium needed for legal certainty when investing into next generation networks. But competition must remain the main driver for market development. This is particularly important in telecoms because this sector exhibits features such as network effects, positive externalities and economies of scope and scale which tend to favour bigger market players.

We could only make regulation superfluous in the telecoms sector if we were to take radical regulatory decisions to remove competition bottlenecks once and for all. To give you one example: if the industry decided today to move at once to a “bill and keep”-system in Europe, we would no longer need to regulate termination rates. But I understand that this is a decision that many of you would not be prepared to take today. So “bill and keep” will continue to be an option for the medium term – but it will be achieved not by revolution, but step by step, by progressively lower termination rates across Europe, as the Commission is recommending. And this process will continue to require regulatory pressure both from the Commission and from national regulators.

Let me say a last, more nuanced word about telecoms incumbents and regulation, because I am well aware that there are clear differences among ETNO members. I note well that there are some of you who have started to accept and live with regulation. In the UK, BT has accepted functional separation and is even advocating this model as “competitive advantage” abroad, as it is clear, gives legal certainty and stimulates investment. And also Telecom Italia is now going voluntarily, in cooperation with the Italian regulator AGCOM, into the direction of non-discriminatory access to its network; the Commission will monitor the results of these efforts here in Italy very closely to see if the process is completed as ambitiously as it has started.

3. Europe’s telecoms incumbents and the unused potential of the single market

Let me finally turn to the still unused potential of the single market for telecoms incumbents.

I remember well that only four years ago, I had a very strange visitor in my office in Brussels. He was the CEO of one of Europe’s largest telecoms incumbents. When I mentioned in our discussion the “single market for telecom operators”, he first looked at me, in disbelief. He then said very categorically: “I am not interested. My business future is not in Europe. It is in the US.” Well, this gentleman is not a CEO any more. But his words still reflect, I know this only too well, the views of many of you present today.

If I look around this room, I have to say that the telecoms companies who regularly come to talk to me about the need for a single market in telecoms are – US companies. Ladies and gentlemen, is this not surprising? Can it really be true that only AT&T, Verizon and Vonage want to do business in Europe across borders? That only US companies have a business model that would allow them to make it profitable to offer telecoms services in 5, 10 or more EU countries?

CEOs of many European telecoms incumbents often tell me that telecoms markets would be “mainly national”, and this is a view wide-spread among many Telecoms Ministers as well. This is, honestly, nonsense! We are talking here about a sector where business is based to a large extent on radio spectrum and the Internet Protocol – and thus on technical resources that, by definition, do not know economic borders. It is also a sector based on a consumer demand which crosses borders – just think of your business customers who would like to have seamless communication services, whether their subsidiary is based in Helsinki, Bilbao or Sofia, and this at similar conditions across Europe.

Your US competitors understand this well: At home, they are used to doing business in a single market. So for them, a single market is nothing sensational. For them, it is obvious that regulatory fragmentation of an economic area comes at a high cost.

So if there is no technological or business need for fragmentation of our single European market in the telecoms field, only one possibility remains: It is a deliberate policy choice. A choice of telecoms ministers and regulators to have not one, but 27 telecoms markets.

Are you as Europe’s telecoms incumbents really sure that you want to continue to support this policy choice? I know that it may be convenient, in the short term, to enjoy the protection of national rules and regulations. In some cases, a weak national regulator, willing to listen a lot to the national government and to the incumbent and prepared to ignore regulatory developments in neighbouring countries, may be a wonderful thing to have. Perhaps, this will allow you for some time to keep competition from abroad at bay. And to prolong badly needed transformation and modernisation processes a bit longer.

But is regulatory fragmentation and national protectionism really in the long term interest of Europe’s telecoms incumbents?

It is certainly not in the long term interest of the European economy, especially of all your business users. Poor and inconsistent national regulation is extremely damaging for Europe’s economy, in particular in a growth sector such as telecoms. Professor Martin Cave has recently calculated that the present lack of a single telecoms market comes at a very high price for Europe’s economy. According to him, the additional cost of regulatory fragmentation in telecoms is €20 billion per year for Europe’s businesses. Commission experts believe this figure to be still a very conservative estimate.

€20 billion which Europe could save per year by improving its regulatory system and advancing its single telecoms market – ladies and gentlemen, there is thus no time to lose! Let us act rapidly before the effects of the financial crisis trickle down through the rest of the economy. Let us give a new spur to Europe’s economy by making a bold move to complete the single telecoms markets.

A single telecoms market would in my view offer a great potential not only to the European economy at large, but also to Europe’s telecoms operators themselves. Today, incumbents derive only between 5% and 27% of their income from their European business outside their home country. This leaves substantial scope for growth. But it is clear that at present, it remains difficult for, say, a French operator to invest in Spain if regulatory decisions on next generation access differ substantially in both countries. And I compare with interest your comments on regulatory issues with that of your subsidiaries in those Member States where they are in the position of a new market entrant.

It is even more clear that – to mention a particularly drastic example – operators will be hesitant to invest in the promising Romanian market if the chief of the national telecoms regulator can be fired twice within 3 years, followed each time by a complete reorganisation of the national regulatory authority by Government Emergency Decree! This is exactly the kind of problematic situation Professor Cave refers to when he talks about the cost of poor and inconsistent regulation.

It is good for the European economy to have healthy incumbent operators who are able to invest in large scale projects spanning the whole territory of the EU. It is good to have incumbent operators who are able to invest abroad and to become significant market players in some of the fast-developing regions of the world. But for this, we need to create the right regulatory conditions in Europe.

Let us therefore complete swiftly the ongoing work on Europe’s telecoms reform package which, following the impressive vote of the European Parliament on 24 September, has now reached political maturity. The new framework will encourage operators with a cross-border footprint to become truly pan-European operators. It will also encourage national regulators, via the new Office for the European Telecoms Regulators, to add a badly needed European perspective and stronger independence to their work at national level. A final agreement is within reach, and it could allow us to complete the single telecoms market in Europe by 2010.

I call on you, incumbents, and your association ETNO, to re-think your policy recommendations to national ministers. You have to take a decision: Do you want to be friends or foes of a single telecoms market in Europe? Do you really want to let, for short-term reasons, the single market slip away to your US competitors? Or do you want to show the way to a modern, competitive European telecoms sector which will, once again, be the driving force for growth and jobs in the whole European economy?

Ambitious political decisions on Europe’s single telecoms market are certainly the best response to our sector in the current economic situation. But we need to act now.

Thank you very much for your attention.

[1] I regret that there was one very important European CEO who did not make it to yesterday's evening discussions. But I of course understand that it is not always easy to resist the attractions offered by Venice at night ....

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