The Future Was Bright
Early attempts by the European Commission in the 1990s to introduce competition into the mobile sector by introducing third, fourth and fifth licences were hugely successful: not only did the new entrants herald a new era of low cost telephony, but they brought with them innovation and new services on a level hitherto not experienced.
However, by failing to implement sufficient safeguards to protect the young competition, or even by discriminating against Challengers, the very future of mobile competition in Europe is now threatened.
“The Commission seems to be agreed on the need to increase competition, but I’ve never seen a market where competition has increased by limiting the number of players,” Thorsten Dirks, CEO, E-Plus
The Fundamental Challenge
Where EC regulation has fallen down is in addressing the structural gap that has been allowed to grow between incumbents and Challengers. Since they arrived on the scene in the 1990s Challengers have been playing catch up, investing in their networks while incumbents, with taxpayer-subsidised networks already in place, have been sitting back and enjoying massive profits. In most European countries, incumbents have more than double the number of customers; more than four times the annual revenues; and more than ten times the annual profit. When it comes to trying to ensure markets are fair and open to competition, this is enough of a problem, but it is made worse by the fact that incumbents are using these excess profits partly to try and put competitors out of business, which is causing this structural gap to widen.
This statement is true for all of Europe, with the exception of the United Kingdom (The UK has 4 mobile operators that have market shares between 23% and 25%, not including the fifth operator “3”).
- Market shares remain low (either in number of subscribers or in value) and under the 20% share of revenue threshold considered by OFTEL (2001) and Orange (2003) as a minimum required to ensure a lasting presence on a national mobile market.
The reasons for these differences are mainly historical and structural. This means that the same historical development can be seen in several countries:
- The incumbents' financial power is much bigger than the Challengers': the EBITDA of the incumbents is always higher than the turnover of the Challengers.
The graphs clearly illustrate that challengers would need to delve deeper into their pockets or take on more debt to start up and develop their activity. This is due to historical and structural reasons beyond their control.
One size does not fit all
The current regulatory framework offers an opportunity to level the huge differences between the incumbents and the Challengers through asymmetrical regulation. However, several national regulators are late with the implementation of the current regulation and have not made a decent market analysis or reflected the results of such market analyses in their remedies, which leads to the imposition of inadequate remedies. If this is left to continue, the result will be that existing market distortions will remain or even become exacerbated.
The Danger of Duopoly
The current state of regulation actually threatens to stymie competition, rather than promote it, either by failing to take into account key structural market mechanisms that enable competition to flourish or, in some cases, watering down or dismantling these mechanisms. Although some of the future regulation tries to solve some competitive issues, we believe this not to be sufficient.
Without adequate regulatory support in the areas such as frequency discrimination, switching costs, mobile termination rates, On-Net/Off-Net pricing, wholesale roaming and the retail and corporate market, challengers risk not being able to realise the full potential of competition. Less competition merely transfers money from the pockets of consumers to those of shareholders, which is exactly what happened prior to the arrival of Challengers in the first place: high prices, low innovation and big profits for the select few.