Europe has lost as much as €100m in earnings (EBIT) each day to digital disruptors and telcos in other regions for the past 10 years, which has impoverished the bloc’s digital economy. But this can be changed if industry and regulators embrace transformation. The Accenture Strategy research for ETNO finds that Europe can gain up to €4bn a day by being at the centre of the digital ecosystem.
However, we need a digital overhaul of Europe’s industrial fabric and institutions. And this should be supported by urgent policy action that aims to promote equal competitive digital advantage across the region, as well as enable telcos to collaborate across an open ecosystem. Three areas of digital value creation have the potential to steer Europe onto the path into a successful digital future: an ecosystem around the Internet of Everything (IoE), pervasive low-latency networks and institutions that are recreated for the digital world.
Consumer Survey 2017
• Telecoms services are crucial and will remain so in the years to come, but online purchases and online messaging and calling will gain further importance;
• 36% of consumers use streaming, most of them via OTT services;
• For international calls, most citizens use online services and expects to do this more and more;
• When choosing a mobile or fixed broadband provider, quality is more important than price;
• 68% of consumers prefers bundles rather than individual contracts;
• Large majority of Europeans have abundant choice of broadband providers;
• Changing broadband provider is first driven by the offer, then by price or a specific problem;
• Majority of EU citizens are familiar with the broadband technology they use, but awareness and familiarity with features such as Latency, Packet Loss & Jitter is limited.
Building the Gigabit Society: An Inclusive Path Toward Its Realization
Although Europe has come a long way in developing its digital economy, there are substantial benefits to gain from further transition toward a true digital society. Forty percent of the economic growth between 2015 and 2020 is expected to be due to a digital society driving job creation and prosperity.
The European Commission has crafted a vision of a Gigabit Society in which all Europeans reap the benefits. This vision is accompanied by an ambitious target to improve Europe's broadband infrastructure.
BCG estimates that this infrastructure upgrade, if delivered exclusively via fiber-to-the-premises (FTTP) approach, will cost €660 billion, which represents about 25 years of investing at the current pace. Clearly these investments will have to be funded in large part by the private sector. A time frame of 25 years is not in line with the Gigabit Society objectives set by the European Commission. Accelerating the investment pace will be a significant challenge because willingness to pay substantially more for higher broadband speeds is limited and the returns on investments in the telecom industry have been historically low over the past years.
Although the telecom industry has embraced the Gigabit Society, it will need to navigate multiple tradeoffs when charting a practical, inclussive path toward its realisation.
Five Priorities for Achieving Europe's Digital Single Market
European telecom operators are investing heavily for citizens and for the economy: by 2020, our industry will allocate €86bn to broadband deployment. Despite this effort, a BCG study for ETNO estimates that an investment gap of €106bn will persist unless we take action with major regulatory reforms.
For this reason, ETNO supports the European Commission in its review of the Telecoms Framework and encourages a swift, broad re-thinking of Europe’s policy and regulatory tool-set for the digital age. It is not about one industry only, it is about the whole economy and offering more to European citizens.
Reforming Europe's Telecoms Regulation to Enable the Digital Single Market
The study, Reforming Europe's Telecoms Regulation to Enable the Digital Single Market, details how a reformed regulatory framework can both safeguard competition as well as incentivize the investments in advanced next-generation access networks (NGA) required for the EU to reach its Digital Agenda targets and for the European Digital Single Market to become a reality.
While it has long been a leader in innovation and the technologies that comprise the backbone of the digital economy, Europe has fallen behind in ultrafast mobile and fixed Internet connectivity. Many markets in Asia and North America enjoy fibre access penetration that is up to 20 times higher and penetration of LTE that is as much as 35 times greater. The BCG study projects that by 2020 the shortfall in investment needed to meet EU Digital Agenda targets for broadband coverage and penetration could aggregate between €110 billion and €170 billion. The result for European consumers and businesses is slower, less reliable connections, leading to less value for consumers and lower economic growth.
The study proposes five measures that will reverse the regulatory root causes of lagging telecommunications investment and help to unlock the funding required to build the ultra-fast connectivity that is increasingly the lifeblood of the digital economy:
1. Substantial deregulation of fixed-line wholesale access
2. A level playing field for network operators and digital services providers
3. Spectrum policy that accelerates the build-out of mobile networks
4. Permitting healthy consolidation in mobile
5. Harmonizing rules and procedures to unlock cross-country synergies
Taken together, BCG estimates that these five measures would increase telecom operator cash flows by a cumulative total of €105 billion to €165 billion by 2020 and asserts that a significant portion of these funds would be available for additional investment in next-generation networks. Along with the rollout cost savings that DG Connect initiatives, such as the pending "less digging = more broadband" regulation, are expected to deliver, this program would significantly close Europe’s next-generation network investment gap, fuel growth and add jobs, and bring the goal of a vibrant Digital Single Market much closer to reality.
A Future Policy Framework for Growth
Telecommunications is one of Europe's most important economic sectors. Its largest companies have invested in building businesses in every continent. The services it provides—in particular the broadband and wireless infrastructure underpinning the Internet—are central to many other sectors of the economy and to the daily lives of almost every citizen. Its history of innovation and growth has been trumpeted as a major achievement of the European Single Market.
Yet financial performance has lagged of late, because of an imbalance between those investing in the Internet and those benefiting from its impressive growth; an erosion of the industry's pricing structures as over-the-top (OTT) substitutes bypass existing tariff structures that charge for voice and messaging bypassed by over-the-top (OTT) substitutes; a fragmented sector that restricts innovation and increases costs; and an adverse climate of regulatory price cuts, restrictions on commercial strategy, and high taxation of essential spectrum. On the positive side, demand for the industry's core offering—communications—is growing dramatically. The adoption of new services—from videoconferencing to social media—is accelerating in all demographic segments, powered by rapid technology evolution in network infrastructure, services, and devices.
Against this backdrop, A.T. Kearney has researched the health of the European industry, its plans and prospects to return to growth, and the contribution that the policy framework can make. We cooperated with the industry association ETNO, interviewing many of its members (and some operators that are not members) and discussing our findings with ETNO's leadership, but this report is an independent report that does not necessarily represent the views of ETNO or its members. In this report, we offer these findings as a contribution to an important debate on the future of the industry. This discussion is active in the policy arena: the European Commission has recently demonstrated an important realignment in its thinking on fibre investment and the related wholesale price regulation, and it will shortly review key market definitions and issue recommendations on non-discrimination and costing methodologies. All governments have been debating revisions to the treaty governing international communications via the International Telecommunications Union (ITU).
Many industry players are considering how their businesses must evolve to remain competitive in the marketplace and attractive to investors. Each company will pursue its own strategy, and inevitably some will do so more successfully than others, but each of them, we believe, must address three broad strategic imperatives:
- Break out of the deflationary price spiral and move to pricing models that better reflect the value for the customer
- Raise the effectiveness of innovation and launch new services that can compete with global champions
- Move beyond the pursuit of incremental efficiency gains and pursue the path of consolidation and transformation common to maturing, capital-intensive industries
For each of these, the policy framework in Europe must evolve—not to disappear nor to substitute the work of management and investors, but to eliminate roadblocks and create a level playing field.