ETNO says EU telecoms face a 'lead or lose' moment

In its State of Digital Communications 2024 report, ETNO said Europe is facing a "lead or lose" moment for its connectivity ecosystem, and that the market's current fundamentals are cause for alarm because they are steering the sector in the direction of "lose".

"Users are expecting new networks and Europe's competitiveness relies on innovative connectivity. This is why we must take urgent policy action to help strengthen the European telecom sector," warned ETNO director general Lise Fuhr. "The status quo – both in terms of investment and of policy – will not deliver the levels of innovation that are so desperately needed to sustain growth and deliver on the Open Strategic Autonomy."

Open strategic autonomy refers to the EU's stated aim of essentially having the means to safeguard its own interests, whether they be security, economy, energy and so-on. As ideas go, it has gained weight since Covid, and Russia's invasion of Ukraine.

Anyway, ETNO's report comes a day after Vodafone issued a similar warning in a report of its own, describing the current situation as a widening 'connectivity chasm' between Europe and the rest of the world.

Voda leant heavily on the slow progress of 5G standalone (SA) deployments. ETNO draws attention to this as well, noting that 10 5G SA networks have launched in Europe, better than North America which has four, but trailing Asia with its 17.

The scope of ETNO's report, put together by Analysys Mason, extends to other areas too, not the least of which is Open RAN. In Europe, ETNO said there were 11 trials and 'developments' in 2023. Again, this is more than North America (eight) but fewer than Asia and Japan (19).

When it comes to mobile speeds, median throughput in Europe (64.1 Mbps) is lower than the US (97.1 Mbps), South Korea (121.1 Mbps) and China (171.6 Mbps).

It is a similar story with 5G coverage. 80 percent of Europeans were covered by 5G networks in 2023, compared to 98 percent in both South Korea and the US, while coverage in China and Japan reached 89 percent and 94 percent respectively.

Europe fares better when it comes to fibre-to-the-home (FTTH) connectivity. Excluding fibre-to-the-building (FTTB), coverage reached 63.4 percent of the population last year, ahead of South Korea (59.9 percent) and the US (49.3 percent).

While there is certainly room for improvement, so far this doesn't exactly describe a connectivity crisis. However, the sector's health isn't great when it comes to the financial fundamentals.

Mobile ARPU in Europe was €15 in 2022, compared to €42.5 in the US, while South Korea and Japan notched up €26.5 and €25.9 respectively. On the fixed side, Europe is ahead of South Korea, but lags Japan slightly and is well behind the US.

For ETNO and its members, investment levels and returns are perhaps the clearest sign that all is not well.

In 2022, European telco capex per capita stood at €109.1, lower than Japan (€270.8), the US (€240.3) and South Korea (113.5). Return on capital employed (ROCE) among ETNO members has also fallen sharply from 9.1 percent in 2017 to 5.8 percent in 2022.

As for what to do in order to address these issues, ETNO leans heavily on two ideas: tackling overly-competitive markets, and righting the imbalance between the fortunes of telcos compared to those of Internet giants, also known as content application providers (CAPs).

ETNO estimates that CAPs have invested around €17 billion in European digital infrastructure between 2018 and 2021, which equates to around 29 percent of what telcos spent in 2022 alone. It estimates that €16 billion of that sum went on data centres, while the remaining €1 billion was spent on a mixture of transport networks, Internet peering/direct transit and caching.

"CAPs have so far invested almost nothing in European physical networks that are closer to end-users than caches, and certainly nothing at all in European FTTH or the physical RAN, which are by far the two largest capex buckets for operators," ETNO said.

ETNO stops short of repeating its call for a fair contribution to networks from CAPs, but it certainly references the debate, and notes that in the US, a bill has been introduced that seeks to spread some degree of infrastructure cost to larger CAPs.

It will be interesting to see how this debate plays out.

If ETNO members get their way, and CAPs start contributing to network deployment costs, then where in the value chain does that leave operators? Should CAPs start lobbying for a say on network deployments and vendor selection since they will be on the hook for a proportion of the bill?

The other lever ETNO pulls at is competition. Europe is historically more competitive than elsewhere, putting downward pressure on ARPU, which is limiting ROCE and restricting capex.

"The European retail telecoms market remains highly fragmented. Market consolidation is one of the key levers that would accelerate the creation of a European Telecom Single Market," said ETNO. "Despite this, so far, there have been few signs that competition authorities are ready to promote substantive in-market consolidation in Europe. This, so far, seems to somewhat contradict both the high-level political goal of creating European scale and the advice of most analysts and investors."

Either of these solutions puts EU lawmakers in an awkward position.

Lean towards charging CAPs, and it sets up a showdown with the lobbying and legal might of Silicon Valley's biggest tech giants, who will threaten to pull out of markets or pass costs onto end users. However, permit in-market consolidation, and millions of registered voters potentially face higher prices and less choice at a time when household budgets are stretched to say the least.

Given that the EU is said to be on the verge of approving the Orange-Masmovil merger, consolidation appears to be its preferred direction of travel.