Operators call for lighter regulation to help fight OTTs

A group of European operators, including Orange, Deutsche Telekom, Telefónica and KPN, have written to the President of the European Council urging lighter touch regulation to help them compete with OTTs.

The letter, which was seen by the Financial Times, was signed by a bunch of interested parties and sent to Donald Tusk as well as the 28 EU heads of state. The essence of the request seems to be that regulation is a major hindrance in their commercial battle with internet players such as Google and Facebook, which use their networks to deliver services to consumers, but are unregulated.

The FT hasn’t republished the letter, but it has extracted excerpts. Apparently the operator cabal wants a “fast track of targeted regulatory reforms,” which need to tackle the perceived “asymmetries between traditional ecommunications providers and internet players,” and a “profound and sustainable overhaul of the current telecoms rules, providing for a future-proof common framework for all digital services, taking into account dramatic changes in markets, consumers’ habits and new positions of market power in the digital economy.”

In other words, the OTT era has been tough for telcos and the current level of regulation fails to address this fact, and they do have a point. While it’s quite right that telecoms is regulated, especially since many of the players are former national monopolies, if operators are constantly hamstrung while OTTs are unhindered they are likely to suffer competitively.

This letter could well have been prompted by recent proclamations from Euro competition boss Margrethe Vestager, who seems inclined to obstruct the current wave of telco consolidation on the grounds that it might hinder investment. But she and her fellow eurocrats must surely also acknowledge that investment will also be damaged by those same telcos having their margins eroded by OTTs free do compete as they please.

Graham Friend, MD of Coleago Consulting, has some sympathy for the operators on this matter. “[Vestager’s] stance seems to fail to take account of the basic principles of how firms make investment decisions. In order for a mobile operator to invest in increased coverage or faster technologies such as LTE, for example, they need to expect to earn a return on their investment that is above their cost of capital. For many operators, their current return on capital employed is well below their cost of capital – the United Kingdom is a case in point, with average industry returns in low single digits, whilst their cost of capital is in the range of 7 to 9 percent.

“To increase investment, operators need to improve their returns. This can be achieved by either increasing profits (by selling more or reducing costs), or reducing their capital employed (reducing fixed assets or reduce working capital). Competition, especially from Over the Top players such as Skype, What’s App and Facebook, have prevented mobile operators from increasing revenues. The industry has therefore been in a process of constant restructuring and cost reduction for the last ten years, and so an improvement in returns is not likely to be achieved through increasing profits.

“Operators’ only option is therefore to reduce their capital employed. Working capital is insufficiently large to have a material impact on returns, and so this only leaves a reduction in fixed assets. Mergers, along with network sharing, are one of the few options that operators can take that would make a material difference to their returns, raise them above their cost of capital and hence promote investment.”

The signatories to this letter are not looking for Europe to level the playing field by regulating the OTTs, which would be difficult anyway since most of them aren’t even European companies, but just to lighten the regulatory burden on them. Good luck with that.

UPDATE 15:00 17 June 2015:

We have now received the letter referred to above, which was written by ETNO (European Telecommunications Network Operators association), so here it is in full:

Re: Telecom CEOs comments ahead of the European Council of June 25, 2015

Dear President Donald Tusk,

With European economies undergoing a profound digital transformation driven by technology and increasing availability of fast broadband access, we would like to express our views on the urgent need for effective regulatory reform in the digital field.

The digitalisation of traditional industries is a once-in-a-generation opportunity, as well as a challenge, that Europe needs to master for future growth and job creation. We are now on the edge of a digital investment and infrastructure revolution; telecom operators stand ready to make this a reality. In this light, we believe that European policy should do its utmost to support investment and innovation by the EU telecoms sector.

Leading investors have identified regulation as the “single most important driver” of the sector, underlining that – compared to other areas of the world – the EU is the region facing the harshest regulation. For this reason, we ask for urgent reforms to remove regulatory barriers to more investment in digital infrastructure.

We are encouraged by the new Digital Single Market Strategy, which includes positive initiatives in this regard. We therefore ask the European Council to express support for a pro-investment policy approach that translates into fast and concrete actions, as robust infrastructures are the backbone of the digital economy and should be prioritised accordingly.

In this context, we believe that political commitment is required in the following areas:

We believe that both the European Institutions and the European industry share an underlying common objective: to give Europe the best growth opportunities, by supporting European citizens and businesses with smart services and powerful digital infrastructures. The Digital Single Market Strategy represents an opportunity that we should embrace together.

Yours sincerely,

Mr Timotheus Höttges, CEO, Deutsche Telekom

Mr Eelco Blok, Chairman of the Board of Management and CEO, KPN

Mr Stéphane Richard, Chairman and CEO, Orange

Mr Armando Pereira, Chairman of the Board of Directors, Portugal Telecom

Ms Dominique Leroy, CEO, Proximus

Mr Urs Schaeppi, CEO, Swisscom

Mr César Alierta Izuel, Executive Chairman and CEO, Telefónica

Mr Hannes Ametsreiter, CEO, Telekom Austria Group

Mr Marco Patuano, CEO, Telecom Italia

Mr Jon Fredrik Baksaas, President and CEO, Telenor Group

Johan Dennelind, President and CEO, TeliaSonera