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ISSUE 2015/13JULY 2015 ADDRESSING

FRAGMENTATION IN

EU MOBILE TELECOMSMARKETS

MARIO MARINIELLO AND FRANCESCO SALEMI

Highlights

• Mobile telecommunications markets are an important part of the European Com-mission’s strategy for the completion of the European Union Digital Single Market.The use of mobile telecommunications – particularly mobile data access – is gro-wing and becoming an increasingly important input for the economy.

• The EU currently does not have a unified mobile telecommunications market. TheEU compares favourably to the United States in terms of prices and connectionspeed, but lags behind in terms of coverage of high-speed 4G wireless connections.

• Europe’s long-term goal should be to make data access easier by increasing high-

speed wireless coverage while keeping prices down for users. An increase incross-border competition could help to achieve that goal.• The Commission has two important levers to help stimulate cross-border supply:

(a) ensuring competition in intra-country mobile markets in order to provide anincentive for operators to expand into other jurisdictions, and (b) reducing mobileoperators’ costs of expansion into multiple EU countries. The further developmentof policies on international roaming and radio spectrum management will be centralto this effort.

Mario Mariniello ([email protected]) is a Research Fellow at Bruegel.Francesco Salemi ([email protected]) is a Research Assistant at Bruegel.

The authors wish to thank Serafino Abate, Antonios Drossos, Stephen Gardner, J. ScottMarcus and Guntram Wolff for helpful comments. Research assistance by Afrola Plakuis gratefully acknowledged.

Telephone+32 2 227 [email protected]

www.bruegel.org

BRUEGELPOLICY CONTRIBUTION

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1. http://ec.europa.eu/priori-ties/digital-single-market/.

2. Lam and Shiu (2010), forexample, estimate that the

growth in mobile penetra-tion rates significantly

affected total factor produc-tivity growth in a number of

countries between 1995and 2004. They also found

a two-way relationshipbetween mobile penetrationrates and real GDP growth in

these countries between1997 and 2006.

3. Grzybowskiy and Ver-boven (2014) note that,

especially in recent years,mobile broadband in EU

markets has been per-ceived as a potential substi-

tute for fixed broadband.The UK telecoms regulator

Ofcom found that there is agrowing positive gapbetween mobile data rev-

enue and fixed broadbandrevenue (Ofcom, 2014).

1 INTRODUCTION

The completion of the Digital Single Market (DSM)is one of the top priorities for the European Com-mission under Jean-Claude Juncker. On 6 May2015, the Commission published a strategy out-lining how it intends to achieve that goal (Euro-pean Commission, 2015). According to thestrategy, the completion of the DSM “could con-tribute €415 billion per year to [the EU] economyand create 3.8 million jobs” 1.

A major plank of the strategy is addressing frag-mentation in the telecoms sector: access avail-ability, quality and prices vary significantly acrossthe continent, with telecoms markets defined bynational borders. Users’ access conditions are

largely determined by their place of residence. TheCommission's initial strategy document does notyet offer any concrete solutions to this, but indi-cates areas for potential future intervention.

In this Policy Contribution we specifically look atEU mobile telecoms markets and analyse poten-tial concrete measures that could contribute to theCommission’s digital strategy goals of improvingend-users’ access conditions and addressing EUmarket fragmentation through the development of

cross-border supply of services. There is no appar-ent structural reason why the supply of mobileservices should stop at EU member states’national borders. For the provision of mobile serv-ices, wireless infrastructure is needed. We focuson this for a number of reasons:

• The diffusion of mobile telecommunication hasbeen shown to be a significant factor in improv-ing productivity2.

• Mobile data consumption is growing rapidly

because of the fast take-up of smartphonesand tablets (even though a large part of thistraffic is being offloaded to Wi-Fi connectionsat home or at work) (European Parliament,

ADDRESSING FRAGMENTATION IN EU MOBILE TELECOMS MARKETS

2013, pp92-93); the vast majority of mobiletraffic will soon be generated by 4G connec-tions (Cisco, 2015).

• Mobile broadband, or wireless internet access,could soon become a valid substitute for wiredbroadband access for most typical internetuses3, in particular in low population densityareas where building fixed infrastructure mightnot be economically sustainable.

• Mobile broadband technologies are developingrapidly and although there is still uncertaintyabout the details of the next generation (5G)wireless standard, the allocation and assign-ment of dedicated spectrum bands might startas early as 2020.

The fundamental question is how European

mobile markets can be improved for the benefit of users. The often-heard answer is that barriers tocross-border competition should be gradually dis-mantled in order to move towards a pan-Europeanmarket for mobile services.

Pan-European networks imply lower productionand possibly network deployment costs, resultingfrom economies of scale. This should imply lowerprices in the short-term and more investment inthe long-term, leading to increased high-speed

mobile broadband coverage.

Avoiding the multiplication of networks would alsoreduce ‘double mark-up’ effects: when more thanone network is needed to provide a service, forexample in the case of international calls, there isa natural tendency to higher prices. Each networkowner chooses how much to charge for terminat-ing calls on its network and wants to maximiseonly its own profits without considering the nega-tive effect that such choices could impose on the

profits of other network owners. The higher theprice, the lower the demand will be for a comple-mentary good – in this case the call origination onother networks, which are also needed to make

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the call. Cross-border networks operated by singleoperators would limit that phenomenon and ulti-

mately exert a downward pressure on tariffs.Opening the borders would also mean increasingcompetitive pressure on national markets, withusers given access to a wider choice of operators.

This would not necessarily mean that a uniformtariff for all EU users should emerge in such amarket, nor that the Commission should imposesuch a price. As long as significant structural dif-ferences between EU countries continue to exist,requiring uniform prices could harm customerswith a lower ability to pay, ie customers fromlower-income countries4. Figure 1 shows the aver-age mobile operator revenue per user (ARPU, ameasure commonly used as a proxy for unit pricefor mobile services) and the average hourly salaryper person in 2013 for each EU country (exceptAustria). The correlation between the two variablesis very high. It would be hard to imagine Bulgariancustomers paying the same mobile prices as cus-tomers from Luxembourg.

To reach its goal, the Commission should aim to

ensure that markets are competitive and exposedto a similar level of competition across the conti-nent. Customers from any country could be ableto choose from a set of potentially EU-wide serviceproviders and possibly other suppliers with a localor regional focus (a scenario closer to that in theUS). In other words, the Commission's objective

4. Differences in priceswould also be expected in

more competitive markets,because of differences in

the cost of providing mobileservices in different

countries.

5. Even though none has anetwork that covers the

entire land area or popula-tion of the US, each covers

more than 99 percent of the

US population. See FCC(2014), p7.

6. FCC (2014), Table II.C.2,p16.

for mobile telecommunications should be to allowdifferences in price and quality of service only if

they relate strictly to differences in supply (iecosts) and demand characteristics. In the longterm, such an approach could be expected to leadto converging tariffs across the continent, insofaras the progressive completion of the single marketas a whole (not only the DSM) will imply anincreased convergence in the levels of purchas-ing power and production costs in EU countries.

To identify how the Commission's goal of a singlemarket for mobile services might be achieved, wefirst look at EU mobile markets in comparison withthe US. We then examine how improved wirelessaccess to data by final users, increased fastmobile broadband coverage and lower prices couldbe stimulated by greater cross-border competition.We then show how policies on international roam-ing and radio spectrum management could havean impact on cross-border competition.

2 EU MOBILE TELECOMMUNICATIONS MARKETS

Mobile market structure

There are about 40 mobile network operators(MNOs) in the EU. Many operate in just one or twocountries. A restricted group of big international

BE

BG

HR

CY

CZ

DK

EE

EUFI

FRDE

ELHU

IE

IT

LV

LT

LU

MT

NL

PL

PT

RO

SK

SI ES

SEUK

0

50

100

150

200

250

300

0 5 10 15 20 25 30 35 40 45

A R P U ( € )

Average hourly remuneration (€)

Figure 1: Average hourly remuneration andaverage revenue per user, EU countries, 2013

Source: Bruegel based on Eurostat and Digital AgendaScoreboard. Note: Austria is missing because the ARPU valueis not available. The correlation between the two variables is0.81 (with 1 indicating a perfect positive correlation).

Table 1: Presence of mobile network operatorsin EU countries

MNO(s) Number of countries

Vodafone 12

Deutsche Telekom 8

Orange, TeliaSonera 7

Hutchison 6Tele2 5

Telekom Austria, Telenor 4

Telefónica 3

KPN, Belgacom, BITE, Elisa, OTE(40% DT), PPF

2

Bouygues, Bulgaria Telecom,CYTA, DNA, Eircom, EverythingEverywhere (50% DT, 50%Orange), Go, Iliad, LuxembourgOnline (LOL), Melita, MTN, NOSComunicações (formerlyOptimus), Play, Polkomtel,Portugal Telecom, POSTLuxembourg, RCS-RDS, SFR,TDC, Telecom Italia, Teledema,Telekom Slovenije, Tušmobil,VimpelCom, Wind Hellas

1

Source: Bruegel based on Rewheel’s Digital Fuel Monitor.

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companies (Vodafone, Deutsche Telecom, Telia-Sonera, Orange, Hutchison) have a larger Euro-

pean footprint, but nowhere near complete EUcoverage (Table 1). By comparison, in the US thereare four nationwide MNOs5 (AT&T, Verizon, Sprintand T-Mobile) which accounted for 95.3 percent of US mobile revenues in 20136. The US also has one

multi-regional operator (US Cellular) and severalregional and local providers.

Some companies in Europe (eg Tele2, TeliaSonera,Telenor) tend to concentrate on specific regions,such as Nordic and eastern European countries.Table 2 shows companies’ market shares across

Table 2: MNO market shares (% of SIM) in EU countries, Q1 2014AT BE FR DE IE IT LU NL PT ES UK

Pre* Post** Pre* Post**

Vodafone 29.5% 29.5% 40. 9% 40.9% 26.4% 30.3% 39% 28.8% 25.2%

Telefonica 17% 37.8% 29.2% 42.3% 29.5%

Deutsche Telekom 33.8% 32.6% 32.6% 26.1%

Everything Everywhere*** 33.6%

Orange 27.7% 41.2% 10.6% 22.9%

Hutchison 22.9% 9.3% 38.5% 11% 11.7%

KPN 28.2% 20.8% 43.6%

Belgacom 44.1% 37%

POST Luxembourg 51.7%

Luxembourg Online (LOL) 0.7%

Telecom Italia 37.5%

VimpelCom 25.1%

Telekom Austria 43.3%

SFR 32.3%

Bouygues 17.1%

Iliad 9.4%

TeliaSonera 6%

Eircom 20.6% 20.6%

Portugal Telecom 45.4%

NOS Comunicações 15.5%

BG HR CZ DK EE FI GR HU LV LT PL RO SK SI SE

Deutsche Telekom 46.6% 40.3% 44% 28.4% 33.9%

TeliaSonera 22.9% 45.8% 34.3% 41.6% 34.8% 46.2%

Telenor 34.7% 16.6% 32.2% 16.7%

Tele2 13.5% 27.6% 40.3% 42.8% 26.1%

Vodafone 23.7% 30% 23.8% 31.4%

Telekom Austria 43.5% 40% 30.3%

Orange 27.4% 39.7% 43. 2%

Elisa 26.6% 40.4%

Hutchison 9.7% 10.9%OTE (40% DT) 49.2% 23.8%

PPF 36% 22.9%

BITE 18.1% 20.4%

DNA 25.3%

TDC 50.8%

Play 18.7%

Polkomtel 25.6%

Wind Hellas 20.7%

Telekom Slovenije 58.2%

Tušmobil 11.5%

RCS-RDS 5.1%

Teledema 2.1%

Bulgaria Telecom 21.8%

Source: Bruegel based on Rewheel’s Digital Fuel Monitor. Note: Colours indicate market share rank in each country: red = largest marketshare, orange = second largest, blue = th ird largest; green = fourth largest. * Pre and ** Post: data for Germany and Ireland shows the situa-tion both before and after the Hutchison 3G UK/ Telefónica Ireland and Telefónica Deutschland/E-Plus mergers. Data for each country mightnot add up to 100% because of rounding. Malta and Cyprus are not included. *** 50% DT, 50% Orange.

7. While the financial per-formance of European tele-coms operators should not

be a primary policy concernin itself, it might be relevant

to the extent that worsefinancial performance

might result in poorer serv-

ices to users, because, forinstance, of insufficient

investment in the deploy-ment, maintenance or

improvement of networkinfrastructure or reducedinvestment in new tech-

nologies that would allowbetter utilisation of the

available resources (egspectrum, base stations).

8. Bruegel calculationbased on Eurostat and the

US Department of Commerce.

9. The European Commis-sion recently opened an in-

depth investigation of aproposed merger betweenTeliaSonera and Telenor inDenmark – presented as a joint venture between the

Danish operations of thetwo companies

(http://europa.eu/rapid/press-release_IP-15-

4749_en.htm). Other deals

have been either formallyannounced, pending formal

clearance from antitrustauthorities, eg the acquisi-

tion of O2 (Telefónica) byHutchison in UK

(http://www.techweekeu-rope.co.uk/mobility/4g/three

-o2-hutchison-whampoa-167859), or are rumoured,

eg the merger betweenHutchison and Wind in Italy

(http://telecoms.com/42132

1/hutchison-and-vimpel-com-in-talks-to-merge-3-italia-and-wind/) that would

further reduce the number of operators in these markets.

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10. In the US, after entriesby operators made possible

by the spectrum awardsdetermined in the first

series of large spectrumauctions (Broadband PCS)

during the mid 1990s, and aseries of acquisition that

gave rise to operators withnationwide footprints, twomergers in 2004 reducedthe number of nationwideoperators from six to four,

and successive mergerseliminated competition

from multi-regional opera-tors, eg MetroPCS acquiredby T-Mobile in 2013, Leap

Wireless acquired by AT&Tin 2014. This left US Cellular

as the only multi-regionalprovider of mobile services

that has not yet beenacquired by a nationwide

provider.

11. According to the stan-dard thresholds based onthe Herfindahl-HirschmanIndex (HHI), which is com-

monly used to measuremarket concentration. In

the EU the average HHI(weighted by population)

was 3216 in Q1 2014, indi-cating a high level of con-

centration (Bruegel basedon Rewheel’s Digital Fuel

Monitor); in the US the aver-age HHI weighted across

Economic Areas was 3027in 2013 (about a 40 percent

increase from an HHI of

2151 in 2003). Source forUS figures: FCC (2014),Chart II.C.1, p17; for 2003

figures, FCC (2011), Table 9,p47.

Europe. Because of different regulatory frame-works, however, even companies that operate

multiple networks in neighbouring countries oper-ate the network in each country on a stand-alonebasis, so that it is fair to speak about EU nationalmarkets rather than a unified EU mobile market inwhich users can buy mobile access from otheroperators active on the EU territory. The fragmen-tation of the EU market – and the resulting smallerscale of operation – has been identified as one of the factors behind the worse financial results of European telecoms companies compared to theirUS, Japanese and Korean counterparts7. It shouldbe noted however, that the absence of a homoge-neous regulatory regime is not the only explana-tion for differences in outcomes, such as useraccess prices, in Europe. For example, supply anddemand conditions vary significantly acrossEurope, much more than across the US, and dif-ferences in prices might be justified even if ahomogeneous regulatory framework was sud-

denly adopted. In average real income per capitaterms (in purchasing power standard), the ratio

between the richest and the poorest US states is1.73. In Europe, the ratio is 5.71 (or 2.91 excludingLuxembourg)8.

In the last two decades, Europe and the US wentthrough broadly similar market restructuringprocesses, with a series of merger and acquisitiondeals that significantly increased the level of con-centration in the market after the entries of newoperators in the mid-1990s and the beginning of 2000s. Figure 2 shows the major merger eventsin EU mobile markets from 2003 to 20159. Figure3 shows major merger events in the US mobileindustry from 2004 to 201410. Mobile telecom-munication markets in EU member states and inthe US are now similarly concentrated11.

AUSTRIA:Mobilkom Austria(Telekom Austria)

acquires 3G Mobile

NETHERLANDS:KPN acquires Telfort

AUSTRIA:T-Mobile

acquisition of Tele.ring

cleared with

remedies

NETHERLANDS:T-Mobile

acquires OrangeUK:

T-Mobile UK and Orange UKmerge (cleareance with remedies)

as Everything Everywhere (EE)

AUSTRIA:H3G Austria’sacquisition of Orange Austria

cleared with remedies

GERMANY:Acquisition of E-Plus (KPN)

by O2 (Telefonica)cleared with remedies

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

DENMARK:European

Commissionopens in-depthinvestigation ofTeliaSonera DK/

Telenor DK merger

DENMARK:TeliaSonera DK

acquires Orange DK

GREECE:TGP IV and Apax, which jointly control

TIM Hellas, acquire Q-Telecommunications

GREECE:Vodafone abandons its attempt to merge

with Wind Hellas because of concernsregulators would not approve it

IRELAND:Acquisition of O2 (Telefonica Ireland)

by H3G cleared with remedies

Figure 2: Merger events in the EU, 2003-15

Source: Bruegel.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Cingular Wireless acquiresAT&T Wireless and

adopts the AT&T brand

Alltel acquiresWestern Wireless

Alltel acquiresMidwest Wireless

Sprint and Nextel mergeforming Sprint Nextel

AT&T acquiresDobson

Communications

T-Mobile acquiresSunCom Wireless

Acquisition ofRural Cellular by

Verizon cleared withdivestitures to AT&T

Sprint Nextel and Clearwire Corporation form a JVcombining their WiMax businesses into a

new company, named Clearwire

Acquisition of Alltel by Verizoncleared with divestitures toAT&T and Atlantic Tele-Network

Acquisition of Centennialby AT&T cleared with

divestitures to Verizon

AT&T announcesits intention to

acquire T-Mobile

AT&T abandons bidfor T-Mobile

DOJ formallyasks to block AT&T

takeover of T-Mobile

FCC recommendsnon-approval ofAT&T/T-Mobile deal

AT&T acquiresAtlantic Tele-Network

wireless business

Sprint gives uptakeover of

T-mobile in faceof regulatory

resistance

T-mobilemerges

withMetroPCS

Softbank (Japan) acquiresSprint Nextel and takes over Clearwire

to create Sprint

AT&T acquiresLeap Wireless

Figure 3: Merger events in the US, 2004-14

Source: Bruegel.

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esting to note that price differences cannot beexplained by higher download speeds.

Network investment

Generally speaking, the telecommunicationsindustry is characterised by large fixed costsrelated to the acquisition of spectrum licenses andthe roll-out of networks with sufficient geographiccoverage and capacity (bandwidth), and by smallvariable costs of providing actual services. Inabsolute and per capita terms, the US investsmore than EU countries in telecommunicationsnetwork infrastructure. EU operators have in thepast indicated that their apparent investmentunderperformance is a consequence of smallerrevenue streams compared to US operators. LowerEU mobile telecoms revenues are likely to bepartly explained by the greater maturity of EU mar-kets: between 2005 and 2013, mobile cellularsubscriptions per 100 people (the penetrationrate) increased from 96 to 125 percent in Europeand from 68 to 96 percent in the US (Bruegel

Mobile end-users’ prices

The Organisation for Economic Cooperation andDevelopment publishes every two years data onprices for mobile services. The most recent datawas collected between August and September2012 (OECD, 2013). Several EU countries hadlower prices than the US. This was the case in par-ticular in those countries where there exists atleast one ‘challenger’ that does not compete inother EU markets with the very same operatorsactive in that country (eg Finland, Estonia andPoland) or where Hutchinson was present (eg Aus-tria, Denmark, Sweden and the UK). Before itembarked on a series of acquisitions, Hutchinsonwas a ‘challenger’ in all countries where it oper-ated, being consistently the smallest operatorwith market shares well below 20 percent, andoften just around 10 percent. The difference inprices between US and Europe is particularlyacute when considering services that includedata. Figure 4 shows download speed and pricesof wireless broadband in OECD countries. It is inter-

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Figure 4: OECD wireless broadband basket, Sept 2012, Tablet 250MB (top) and Tablet 2GB (bottom)

Source: Bruegel based on OECD. The panels show (i) the price of the least costly options in OECD countries for baskets of wireless broadband which include total charges for 250MB (top) and 2GB (bottom) of data for tablet use per month in USD PPP(left axis) and (ii) the broadband speed of the contract in megabits per second (right axis). The correlations between pricesand download speeds in the two figures are about 0.09 for the 250MB basket and 0.17 for the 2GB basket, suggesting littlerelationship between the two variables.

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12. This is what is referredin the literature as non-

monotonic (inverted-U)relationship betweencompetition and

investment/innovation(Aghion et al, 2005).

based on World Bank). The increase in revenues inthe US is mainly due to the increase in penetration

rates, similar to what European operators experi-enced during the mid-2000s (Figures 5 and 6).

An analysis of OECD countries for the latest avail-able year shows a high correlation between

mobile revenues and investment in per capitaterms (Figure 7). However, the correlation does notsay much about the existence or direction of acausal relationship. Both per capita investmentand revenue are highly correlated with countries’per capita GDP. Furthermore, different labour costsneeded to build base stations or other networkinfrastructure could significantly affect the mon-etary amounts invested in different countries,even for similar costs of equipment. Also, the useof different accounting practices means that dif-ferent companies might compute the same finan-cial items (eg revenues and capital investment)in substantially different ways, implying thatsimple comparisons of these figures could be mis-leading.

In general terms, increased revenues can alwaysbe a result of lower competitive pressure. Compe-tition stimulates investment by pushing compa-nies to invest and innovate as they seek otherpotential revenue sources (for an overview, seeMotta, 2004; for an application to the telecoms

sector, see Nardotto et al, 2015). Competitionmight however reduce the incentive to invest if itimplies a reduction of expected profits after aninvestment is made12. The clearest example iswith innovation: companies would not invest ininnovative projects without a patent system toshield their inventions when their new products

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Figure 5: Mobile revenue in the EU and US, €billions, 2005-12

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Public telecommunications investment per capita (left scale)

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Figure 7: Public telecommunication investment per capita, telecommunications revenue per capitaand GDP per capita in OECD countries in 2011

Source: Bruegel based on OECD. Note: public telecommunication investment per capita (left axis, in US$), telecommunicationrevenue per capita (right axis, in US$) and GDP per capita (left axis, in thousand US$). The correlation between revenue percapita and investment per capita is 0.84, while GDP per capita has correlation of about 0.73 with both revenue per capita andinvestment per capita (with 1 indicating a perfect positive correlation).

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POLICY CONTRIBUTION ADDRESSING FRAGMENTATION IN EU MOBILE TELECOMS MARKETS

13. However, note that thisis not the only effect a

patent system might haveon incentives to innovate.

Especially in cases in whichthe boundaries of the

patents are fuzzy, incum-bents can use patents they

hold to block potential rivalsor to extract rents frominnovative firms, reducing

their incentives to invest ininnovative projects.

can be imitated so quickly and cheaply that theyare not able to earn a sufficient return on their

investment13

. Hence, the contemporaneous cor-relation between revenue and investment con-veys little information about the link between thetwo variables, if not accompanied with informationon the profitability of future new investment byoperators.

Mobile broadband connection (LTE/4G)coverage and speed

It should be noted that investment in itself mightnot be that relevant if that does not translate intoinfrastructure that directly benefits users. A meas-ure of total expenditure on investment does notconvey complete information on the benefits deliv-ered. For example, territories with different struc-tural features are likely to require different levels of investment. Less densely populated areas mightrequire higher investment. This does not mean thatusers from those areas are better off than usersfrom areas where investment levels are lowerbecause the population is geographically moreconcentrated. For that reason, it is very important to

measure the outcome of an investment rather thanthe investment expenditure in itself.

The core benefit of new infrastructure is increasedcoverage, speed and reliability of communication.In that context, the ability of users to access fastmobile telecommunications everywhere in Europenow and in the future should be the main concernfor EU policymakers, rather than the amount of investment expenditure.

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Figure 8: LTE coverage in 2014

Source: Bruegel. Note: LTE coverage for European countries is taken from the Digital Agenda Scoreboard and shows the percentageof households living in areas covered by LTE in 2014. The US data shows the percentage of the population living in areas coveredby LTE in January 2014, and is from the FCC (2014), Table III.A.2, p31.

The coverage of Long Term Evolution (LTE) net-works – a standardised broadband wireless com-

munication technology usually advertised as 4G –is greater in the US than in the EU. In 2014, US cov-erage reached 98.5 percent of the population,compared to 79.41 percent of households in theEU (Figure 8). One explanation for such a differ-ence is the delay by many European countries inassigning the radio spectrum necessary to pro-vide 4G services over LTE technology. As Figure 9shows, the US started to assign spectrum muchearlier than EU countries. The first US auction tookplace in 2006 while the first auction in Europe tookplace in 2008 in Sweden. For those EU countriesthat were faster in auctioning off spectrum, a sim-ilar, or greater, level of coverage to the US can beobserved, while the only two countries with cov-erage still below 50 percent, Cyprus and Bulgaria,have yet to assign spectrum in the 800 MHz band.Also, some US operators (eg Verizon) had a greaterincentive to quickly adopt LTE because their net-works, unlike those of their European counter-parts, were running on technologies that provideda significantly lower level of service. This alsoforced the other operators in the US to quickly

respond and deploy LTE networks.

In terms of connection quality, download speed isgenerally faster in Europe than in the US. Figure10 shows that in several EU countries averagedownload speeds and peak download speeds arefaster than speeds in the US, and that the per-centage of consumers with a connection that isfaster than 4 megabits per second (Mbps) inmany European countries is higher than in the US.

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3 IMPROVING EU MOBILE MARKETS

The previous section showed that the area inwhich the EU has the most catching up to do ismobile coverage of 4G connections. This is trueeven taking into account that Europe is catching

up on LTE thanks to the progressive deploymentof networks following spectrum assignments that

were late relative to the US. This finding suggeststhat the European Commission should implementa strategy that helps to increase the coverage andpenetration of high-speed mobile broadband while

United States:Auction-66

Advanced WirelessServices (AWS-1)

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700 MHz band

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auction

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auction

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auction

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auctionFinland:

800 MHzauction

Belgium:800 MHz auction

United States: Auction-97Advanced WirelessServices (AWS-3)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Figure 9: Major recent US spectrum auctions and major EU 4G spectrum auctions

Source: Bruegel.

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Figure 10: Average speed, Average peak speed and percentage of connections above 4 Mbps, 2014

Source: Akamai. Note: Yearly averages were computed using quarterly data published by Akamai in its State of the Internetquarterly reports (see https://www.stateoftheinternet.com). When data in some quarters for some countries was missing(data for Romania was available only for Q1 and Q2; data for Croatia and South Korea was not available in Q4), the average forthose countries was computed using the data in the available quarters. Similar rankings, with several European countriesoutperforming the US, can be obtained using other speed measurements (eg Ookla/NetIndex and OpenSignal).

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14. http://www.consilium.europa.eu/en/press/press-

releases/2015/07/08-roaming-charges/.

15. At the time of writing,the provisions have still to

be formally adopted. Thecurrent text leaves openquestions about how the

regulation will effectively beimplemented.

guaranteeing access at affordable prices, particu-larly in view of the adoption in the long-term of

new technologies such as 5G, on which the delaysexperienced with 4G should not be repeated.

A particular emphasis should be placed on dataaccess, rather than voice and text. The recenttrend in mobile telecoms has been the increasingimportance of data traffic: while voice traffic wasbasically flat from Q1 2008 to Q4 2014, data traf-fic increased 54 percent year on year and nowgreatly exceeds voice traffic (Akamai, 2015)(even though a large part of this traffic is offloadedto Wi-Fi connections at home or at work; see Euro-pean Parliament, 2013, pp92-93). Data isexpected to represent an even a larger share of traffic in the future, especially as voice and textmessages are themselves going to be data pack-ets running over shared links. This is already thecase with services like WhatsApp, an alternativeto SMS, and Voice over IP (VoIP) services such asSkype, which provide an imperfect alternative totraditional telephone call services.

A significant increase in cross-border competition

would help Europe to pursue the objectives of greater coverage and affordable access: theexpansion of cross-border networks and serviceswould reduce investment costs and increase prof-itability while preserving the incentive to supplyfast and reliable mobile services at affordableprices, for the reasons discussed in the introduc-tory section.

To stimulate cross-border competition the Com-mission, the European Parliament and the Coun-

cil of the EU should use their regulatory powers tomake it relatively more attractive to operate cross-border networks instead of focusing on domesticmarkets. Aghion et al (2005) explains the theorythat we apply to this context: companies areattracted by the prospect of higher profits. Lowercosts of entry into cross-border markets andincreased competitive pressure in domestic mar-kets should create an incentive to ‘escape’ domes-tic competition and seek profits across borders.Conversely, increased domestic profits because

of a reduction of competitive pressure mightrender new investment relatively less attractive.This is particularly true if new investment toexpand network reach across borders involves a

risk that significant domestic rents will be lost:expanding supply across borders means impos-

ing a threat to the rents of other operators in othernational markets, potentially leading to retaliation.The bigger the domestic profits, the more an oper-ator has to lose from a cross-border service supply‘war’ between EU-wide operators.

Following from this, we consider two policies thatcould have a positive effect on cross-border com-petition by increasing the relative profitability of aservice provided on an EU-wide basis, comparedto a service provided to domestic markets only:(1) international roaming and (2) radio spectrummanagement.

3.1 International roaming

To a great extent the debate about the conver-gence on a single European tariff has overlappedwith the debate around international roamingcharges. In July 2015, the European Parliamentand Council agreed in principle on a draft regula-tion that would eliminate roaming charges withinthe EU14. The new rules would reduce roaming sur-

charges on national tariffs to €0.05 per minute forvoice calls, €0.02 per SMS, and €0.05 per MB of data downloaded from April 2016. From June2017, surcharges would be eliminated. ‘Fair use’limits would be implemented to prevent exploita-tion of arbitrage possibilities through permanentroaming (ie customers using SIM cards from low-price countries for domestic use).

Under the regulation, prices would still be differ-ent in different countries, but the same price

would have to be charged whether customers con-nect to their provider’s home network or a networkin another country15. By comparison, within theframework currently in force, international roam-ing services tend to be expensive, especially com-pared to similar domestic services, and the pricedifference is not primarily due to differences in theunderlying costs. There are three main drivers thatmake international roaming more expensive thandomestic mobile access. First, customers are onaverage different (occasional roamers might have

higher purchasing power than the average domes-tic user and their need to use mobile communica-tion services might differ when travelling, forexample). Second, roaming requires access to

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16. Since roaming arrange-ments are usually recipro-

cal and operators try tohave a balanced flow of traf-

fic between themselves,operators do not choose

their roaming partners onlyon the basis of the whole-

sale price offered, since inthis framework roaming is

not only a cost but also asource of revenue, and

larger operators might bepreferred as partners eventhough another small one

was offering a better whole-sale price (Shortall, 2010).

17. In order to avoid thisproblem, the draft regula-

tion allows operators toapply for an authorisation to

add a surcharge to theextent necessary to recover

costs.

18. This can happen whenoperators are prevented

from price discriminatingwhen supplying a service to

two group of customerswith significant differences

in the structure of theirdemand. For a discussion

on the welfare effects of price discrimination, seePapandropoulos (2007).

19. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:172:0010:0035:EN:PDF.

20. http://ec.europa.eu/ information_society/news-

room/cf/dae/document.cfm?doc_id=2734.

multiple networks owned by different operatorsresulting in ‘double mark-up’ effects (ie the

increase in price due to lack of coordinationbetween suppliers of two complementary goods,in this case access to separate networks) and, inthe case of international roaming, inefficient bar-gaining processes16. Third and most importantly,international roaming services are expensivebecause they are normally sold in bundles withdomestic services. Customers, who predomi-nantly use domestic services, tend to choose anoperator on the basis of its domestic offer – henceoperators have little incentive to compete andreduce their tariffs in the international roamingmarket. Furthermore, at least at current prices,price reductions do not seem on average to stim-ulate demand and generate higher usage of roam-ing services for voice and text (Marcus et al,2013).

For this reason, the European Commission haspreviously introduced price caps at the wholesaleand retail level and measures aimed at increasingtransparency and avoiding bill shocks. The statedultimate goal of the Commission is a ‘roam like at

home’ (RLAH) scenario, in which prices of mobileservices do not change “just because [con-sumers] have crossed an invisible internal border that is supposed to have disappeared” (Kroes,2011). This in practice means equalising roamingand domestic charges in order to allow consumersto replicate their typical domestic consumptionpatterns while travelling in other EU countries.

RLAH charges could leave operators facing poten-tially drastic business challenges. For example, an

operator from a low-income country might have adomestic retail price that is below the wholesaleprice the operator would need to pay to get accessto a host network in a high-income country, leav-ing the operators with negative margins on roam-ing services. The operator could then find itunsustainable to offer roaming services in theEU17. Moreover, establishing a direct link betweenthe price charged for domestic use and the pricecharged to international roamers could introducedistortions in domestic markets, which could lead

to price increases18

.

A better solution would be for users of interna-tional roaming services to face conditions similar

to those for customers living in the country theyare visiting – sometimes referred to as ‘roam like

a local’ (RLAL, see Marcus et al, 2013). This wouldavoid arbitrage effects without the need for a ‘fairuse’ limitation clause, while potentially signifi-cantly reducing roaming prices. RLAL conditionscan be achieved through the design of a regula-tory framework so that competition in the roamingmarket is stimulated (while not preventing com-panies from charging different prices in differentmember states, if the economic conditions sorequire).

The EU Roaming III regulation19 introduced a numberof structural measures, in force since July 2014,with this aim: MNOs were required to unbundleroaming services from their domestic offerings andgive the option to “alternative roaming providers” tooffer these services to their customers.

The implementation of these ‘decoupling’ meas-ures has however been unsuccessful. Very fewalternative operators have so far entered themarket and it is unlikely that others will enter inthe near future. This might be because of the lack

of commitment on the part of the Commission toenforce the measures. Even before the entry intoforce of the decoupling measures, the Commis-sion proposed other regulatory measures in thecontext of the Telecom Single Market package20,overlapping with Roaming III. In particular, MNOswere offered the possibility to escape theunbundling requirement by entering into pan-European alliances with other network operatorsand making RLAH offers to their own customers.Even though it was unlikely that any MNO would

have entered such alliances, the fact that theycould use them to escape the structural decou-pling measure was enough to destabilise alterna-tive roaming operators’ business plans by makingtheir future profitability uncertain.

The new regulation's elimination of roaming sur-charges suggests that the EU institutions havelittle intention of credibly pursuing the decouplingsolution. However, the RLAH provisions do notaddress the structural problems that are behind

high roaming prices and might have unintendedconsequences for domestic prices and MNO com-petitiveness in home and other EU member statemarkets (BEREC, 2014). The Commission should

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21. This risk is also presentfor bidders who are willing

to buy lots only in one

country if they are allowedto buy multiple lots andpackage bidding (ie the

possibility to submit singlebids for packages of lots) is

not allowed, but is ingeneral mitigated by the

possibility to switch tosubstitute lots if one of the

lots they were bidding forbecame too expensive and

by the possibility towithdraw (usually with a

penalty or some othermechanism that ensuresbids represent

commitments fromparticipants) their bid.

therefore commit to seriously enforce decouplingmeasures, especially in case the RLAH caps result

in serious market distortions.

If successfully implemented, structural measuresaimed at stimulating competition in the roamingmarket would imply a reduction of operators’ rev-enues from hosting roamers on domestic net-works. International roaming revenue accounts for5-12 percent of EU MNO revenues – with marginsoften higher than 60 percent (Wall Street Journal,2014). The effective implementation of structuralmeasures would therefore not only reduce costsfor travellers. It would also expose domestic net-works to increased competition, reducing theirdomestic revenues. Moreover, opening roamingmarkets to competition would provide MNOs witha concrete incentive to become more competitiveinternationally, since the measures would createthe opportunity for profitable entry into othercountries’ markets. Effective implementation of structural measures to open up internationalroaming markets could stimulate operators toexpand their service across borders.

3.2 Radio spectrum management

Radio spectrum (hereafter spectrum) is a scarceresource that is essential for MNOs to provide wire-less communication services. The public man-agement of spectrum can be divided into twophases: allocation and assignment. Allocationrefers to decisions over the uses of given bandsof spectrum (eg for wireless communications, tel-evision or radio broadcasting). Allocation in the EUis done by member states within a framework of

international coordination and harmonisation,designed to counter cross-border interference.Harmonised supra-national allocation of spectrumalso brings other benefits, such as enabling wire-less device manufacturers to produce the samedevice for use in many countries with associatedeconomies of scale, and enabling users to use thesame device in other countries. Assignment refersto the award of rights to use a portion of a specificband of spectrum. In the EU, the right to use spec-trum for commercial purposes is currently

assigned on a national basis by member states,most commonly through auctions.

Fragmentation in the assignment of spectrum hin-

ders the creation of operators with a larger Euro-pean footprint for several reasons. Auctions in dif-

ferent countries are run at different times. Whenbidding in early auctions, bidders willing to oper-ate in multiple countries face aggregation risks(the so-called ‘exposure problem’)21. Bidders thatwant to operate in multiple countries are likely tocalculate their bids for individual lots (ie the rightsto use a certain range of frequencies in a givengeographic area to provide wireless communica-tion services) on the basis of the value that thewhole bundle of licenses they want to obtain willhave if ultimately acquired. The bundle value islikely to be higher than the sum of the singlelicenses. For instance, an operator might find itmore profitable because of economies of scale tohold licenses for both France and Spain comparedto the average profits that two operators wouldmake if each held one of the licenses. Biddersseeking licenses in multiple countries face the riskof paying too much in early auctions, if they fail tosecure other licenses in later auctions whose syn-ergies would have justified the higher price.

Fragmentation in assignment procedures also

reduces the ability of bidders to switch to substi-tute lots in other countries if lots in one countrybecome too expensive. Instead each assignmentprocedure is a separate exercise with its own par-ticipation costs, resulting in less flexibility toswitch between lots compared to single EU-wideauctions. Furthermore, an operator would only beable to substitute expensive lots in one countrywith those in countries where auctions have yetto take place and might regret choices made inearly auctions if guesses on the prices in later auc-

tions turn out to be wrong.

Separate assignment procedures thereforerequire bidders that desire to obtain licenses inmore than one country to work on the basis of guesswork about the outcomes of future auctions,which tends to make bidding strategies insequences of auctions more complex and mightpush some bidders to bid more conservatively.

To reduce costs for operators and incentivise the

deployment of networks with a larger Europeanfootprint, there should be a move towards EU-levelassignment of spectrum, with a suitable transitionperiod to take into account the variable features

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22. For instance, in somecountries there was no

demand for spectrum in the3.4-3.8 GHz band. See

http://ec.europa.eu/transparency/regdoc/rep/1/2014/EN/1-2014-536-EN-F1-1.pdf.

23. While it is not yet clearwhat precisely 5G mobile

technologies would be, theyare presumed to be tech-

nologies offering largerthroughput and better spec-

tral efficiency and scalabil-ity. It is likely that in order to

do this, different technolo-gies and spectrum at very

high frequencies(microwaves) should be

used. These technologiesare supposed, according tothose participating in their

development, to hit marketsbetween 2020 and 2025.

See 5GPP (2014) and GSMAIntelligence (2014).

24. The FCC determines thelots to be sold in these

auctions in what is calledthe band plan, in which the

portion of spectrum to besold through the auction is

divided in specificfrequency ranges (‘blocks’)

and the US territory isdivided according to some

geographic partition foreach block.

25. For instance, methodsbased on a proportion of the

bidding units assigned toeach lot or the information

revealed by the bids sub-mitted during the auction (if

detailed enough) could beused. However, further

study on mechanisms forsplitting revenues is surely

needed if Europe decides tomove in the direction of a

centralised auction withpackage bidding.

26. Furthermore, also the

estimated annual profits of mobile operators in 2009($151.7 billion) were muchhigher than the cumulative

revenues.

of each country’s market. For example, countriesmight differ in terms of their uses of spectrum

bands, demand for spectrum22

or license periods.With that constraint in mind, the harmonisationprocess should proceed as quickly as possible, sothat the Commission and member states areready for the allocation of frequencies to be usedby future electronic communications technolo-gies, such as 5G23.

Ideally, the EU should implement a system similarto that in the US, where the Federal Communica-tions Commission (FCC) assigns licenses in dif-ferent geographical areas through a singleauction24. This would reduce aggregation risks forbidders willing to purchase spectrum in multipleEU countries by reducing the amount of guess-work needed for their bidding strategies. Sinceoperators would have to participate only in oneauction offering the possibility to bid for licensesin the EU or possibly the European Economic Area,participation costs would likely be significantlyreduced. Expenditure in terms of public resourceswould also likely be lower than the cumulativecost of separate auctions in each member state.

From a practical perspective, the Commissionshould involve national regulatory authorities inthe design of the auction, in order to take intoaccount the characteristics of individual nationalmarkets and to exploit national regulators' experi-ence with auctions. Lots should be still definednationally to avoid any sovereignty concern andbecause markets will remain regulated on anational basis for the foreseeable future. Thisreform should be coupled with a more harmonised

regulatory framework across EU countries thatwould allow MNOs expanding across Europe tooperate the networks in the different countries asa single one. The auction format should be decidedon a case-by-case basis to adapt it to the details of of the economic scenario and to benefit fromfuture innovations in auction design.

The revenues obtained from the lots in eachmember state should either be transferred to therespective member state or be subtracted from

the sums they have to transfer to the Commission.

One complex issue would be the split of revenuesbetween countries when package bids (ie bids for

a bundle of lots) are allowed. An option would be toallocate revenues on the basis of the expected

profitability of licenses25

. In practice, memberstates would need to delegate the actual sale of the licenses to the Commission, working along-side national regulators, but would still retain con-trol over the use of spectrum, such as theconditions attached to the license.

Centralised pan-European auctions have so farbeen resisted by member states concerned aboutsovereignty issues linked to the loss of controlover spectrum and potential revenue losses. Inthe system we have outlined, member stateswould retain control over license conditions, whilethe Commission would just act as a delegate forthe sale of spectrum, meaning that loss of controlover market structure downstream and sover-eignty considerations relating to the use of spec-trum should not represent an issue. The main riskwould be the possibility of stalemates because of lack of agreement between member states ontiming, the details of auction design, harmonisa-tion of license conditions or the mechanism forsplitting package bids.

As for revenues, it is important to stress that anefficient and competitive telecoms market ratherthan revenues should be the main objective of spectrum auctions. An allotment of spectrumrights that enables an efficient and competitivewireless telecoms market is likely to generatebenefits for consumers that are much greater thanrevenues accruing to public finances. Hazlett et al(2012) found that a conservative estimate of theannual consumer surplus ($174 billion)

generated by mobile services in the US in 2009substantially exceeds all auction revenuescollected by the FCC from 1994 to 2009 ($53billion)26. Considering that design choices aimedat increasing revenues are not costless and mighthave negative impacts on welfare in thedownstream market (eg reducing the number of licenses to assign), it seems natural that revenues(as a non-distortionary/lump-sum form of publicfunding) should be an objective only insofar asthat objective is in line with efficient and

competitive telecoms markets.

In any case, generally speaking, if efficientlydesigned, a centralised auction should not leave

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member states worse off in terms of auction rev-enue. This would mostly depend on whether the

total revenue from a centralised auction is at leastequivalent to the cumulative revenues yielded bynational-level auctions.

It is impossible to know whether this would be thecase: the number of variables that affect auctionrevenues and the complexity of players' biddingbehaviour make any estimate very speculative(see Milgrom, 2004, or Salant, 2014, on spectrumauction design). However, there are a number of reasons to think that a centralised EU auctionwould not reduce aggregate revenue, if properlydesigned27.

A hypothetical EU auctioneer would have an inter-est in maximising the participation of operators inthe auctions for the licenses in each country inorder to maximise aggregate revenue and achievea more efficient assignment. National auctioneers,however, would look only at their national rev-enues and assignments without considering, forexample, that imposing a higher reserve price thatdiscourages some bidders from purchasing spec-

trum in their country could also reduce the will-ingness of these same bidders to participate inauctions in other countries with potentially com-plementary licenses. This suggests that an EUauctioneer might be able to achieve higher totalrevenues and a more efficient assignment.

Furthermore, the reduced aggregation risk and thereduced amount of guesswork for bidders wouldreduce bidding uncertainty. That reduced cost (orexpected cost) and uncertainty could be reflected

in more confident bids, increasing the likelihoodof obtaining larger revenues.

Ultimately, however, if revenues were the mainobjective of these auctions – and they should notbe, as discussed above – these are still going tobe minor details. The elements that are likely tohave the greatest influence on auction revenuesare design features meant to attract bidders andto discourage collusive and predatory behaviouror other strategic manipulation, ensuring effective

and robust competition in the auction and aneffective 'revelation mechanism' through whichinformation on bidders’ characteristics is dis-closed28.

Of course, any potential benefit of coordinatedspectrum assignment would be undermined if

there is no mechanism to preserve or increasecompetition in the mobile market, for instance bypreventing incumbents from hoarding spectrumin order to undermine rivals. Spectrum is both aninstrument in the hands of the Commission toreduce costs for operators seeking to expand theirEuropean footprints and a tool to introduce ormaintain, when needed, competition in nationalmarkets. Spectrum aggregation limits, such as set-asides and spectrum caps, have often been usedto maintain or introduce competition in themarket, avoiding concentration of spectrum in thehands of few operators. When implemented cor-rectly, these measures helped to foster competi-tive mobile markets29.

Furthermore, if the Commission believes that fastdeployment of high-speed mobile networks is fun-damental, it could try to induce member states toinclude more stringent roll-out conditions in thespectrum licenses assigned through the cen-tralised auction. This however would translate intoreduced revenues, since MNOs would internalise

these costs in their bids. More importantly, less-stringent conditions would enable a more cost-efficient roll-out.

4 CONCLUSIONS

Further integration towards a ‘single mobile tele-coms market’ in the EU is certainly desirable. How-ever, integration is not an end in itself; rather, it isimportant to clarify the goals that integration ismeant to achieve. For example, unless income

levels converge in the long term, the emergenceof mobile tariff plans so that users are charged thesame price everywhere in Europe is neither obvi-ous nor necessarily desirable.

Action from the European Commission to improvethe functioning of European mobile markets iswelcome. The priorities should be increasing cov-erage of high-speed mobile connections, andmeasures to support the creation of ‘pan-Euro-pean’ networks – networks operated by compa-

nies with a wider European footprint. WiderEuropean networks tend to be more efficient: theypromote cross-border competition and reducedeployment and operational costs, ultimately

27. In terms of individual

revenues, while it is possi-ble that some of the rev-

enues might decrease,arbitrage between lots indifferent countries would

tend to generate more com-petitive prices (more reflec-

tive of the true value of spectrum). Centralised auc-tions would represent a sort

of insurance for countriesthat for some reason could

otherwise be late in assign-ing their spectrum, for

instance because of someproblem freeing frequen-cies from previous users

(see Klemperer 2004,Chapter 5, pp164-166 for

reasons why countries auc-tioning later might see their

revenues reduced).

28. Among the reasons whyauctions are preferred to

comparative hearings (alsocalled ‘beauty contests’), in

addition to being more

transparent methods, isthat the regulator managing

the spectrum might nothave the information neces-

sary to identify who wouldbe the best users for the

spectrum on sale. The auc-tion allows the spectrum

management agency to letthe operators reveal

through their bids whichamong them is best suited

to use a certain block of spectrum. However, since

the lots sold in these auc-tions are rights to use an

essential resource to oper-ate in a market, spectrumaggregation limits should

be used in order to be surethat bids do not contain thevalue for an incumbent of a

less competitive or moreconcentrated market, or

any other incumbencyadvantage. If properly

implemented, spectrum

aggregation limits wouldalso ensure that revenueand efficiency of the mobile

markets are not conflictingwith each other.

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stimulating investment while keeping accessprices low. It is particularly important to ease

access to mobile data traffic.

The Commission should start in areas where it iseasier to appreciate the benefit of intervention:international roaming and spectrum management.By intervening efficiently with clear policy meas-ures in these areas, the Commission could obtaintwo outcomes: (a) stimulation of competitionwithin national mobile markets; (b) reduction inthe cost of cross-country expansion of supply. Acompression of profits in domestic markets wouldincrease the incentive to look for profits in inter-national markets, possibly through securingbigger scale and a potentially more efficient pro-duction cost structure. A compression of costs forinternational operations would make such a strat-egy even more profitable.

On roaming, the Commission should not abandonthe idea of seriously pushing structural measuresto increase competition in the international roam-ing market and to move towards a ‘roam like alocal’ scenario. For spectrum, centralised auctions

implemented in a way resembling US auctionswould make it easier for operators to expand theirfootprints, and the use of spectrum aggregationlimits would ensure that such a shift does notresult in less competitive mobile markets.

An important caveat is that international roamingand spectrum management are only two out of anumber of policy areas in which the European

Commission could intervene. Policies in otherareas might have equally relevan

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