Draghi (2024a, 2024b, “Draghi Report”) sets out proposals to stem the decline of EU competitiveness, focusing on three areas: closing the innovation gap with the US and China, developing a joint action plan for decarbonisation and competitiveness, and increasing security and reducing dependencies. The Report analyses 10 sectors, among which is “Digitalization and advanced technologies”, and 5 horizontal policies, including “revamping competition [policy]”. In this note, we will comment on these two in the context of the first area.
The proposed “revamping” of competition (Section 2, Chapter 4) involves the adoption of 10 measures, some of which advocate to shift the focus of competition enforcement from the short-run effects on consumers (essentially, prices) to a forward-looking assessment that also takes into account “the weight of innovation and future competition” (Measure 1) and “security and resilience criteria” (Measure 3), benefiting consumers by making new technologies available and increasing security. Measure 8 is to “Reinforce ex-post versus ex-ante regulation and monitoring”, while Measure 9 advances to “Introduce a ‘New Competition Tool’ (NCT) in four areas”. Together with Measure 10 “Accelerate the decision-making processes and increase the predictability of decisions”, these proposals are more controversial, in that they propose to deviate from the recent path of competition enforcement.
The other measures imply a strengthening or widening of existing provisions: “Provide clear guidance and templates on novel agreements, coordination and co-deployment between competitors” (Measure 2), “Apply effectively the new powers associated with the enforcement of the Digital Markets Act (DMA) and the Foreign Subsidies Regulation (FSR)” (Measure 7), and “Incentivising the adoption of open access, interoperability, and adherence to EU standards through State aid and other competition tools” (Measure 6) deal with applying existing rules about the evaluation of agreements and exercise of market power. Measures 4 “State aid control as a competition tool for efficiency enhancing industrial policies” and 5 “Reform and expand [] Important Projects of Common European Interest” refer to the strategic use of State Aid policies, deploying them in a coordinated manner instead of creating subsidy races.
The perceived necessity and implications of these measures are set out in clear terms for the telecoms sector:
“A key reason for lower rates of investment is Europe’s fragmented market. For example, there are 34 mobile network operator groups in the EU and only a handful in the US or China, in part because the EU and Member States have tended to view mergers in the sector negatively. This fragmentation makes the fixed costs of investing in networks relatively more onerous for EU operators than for continent-scale companies in the US or China. “ (2024a, p. 27)
“Facilitating consolidation in the telecoms sector is needed to deliver higher rates of investment in connectivity […]. The cornerstone initiative is modifying the EU’s stance towards scale and consolidation of telecoms operators to deliver a true Single Market, without sacrificing consumer welfare and quality of service. To encourage consolidation, the report recommends defining telecoms markets at the EU level – as opposed to the Member State level – and increasing the weight of innovation and investment commitments in the EU’s rules for clearing mergers. Country-level ex ante regulation should be reduced in favour of ex post competition enforcement in cases of abuse of dominant position. …” (2024a, p. 31; what follows mentions the important topics of harmonization of spectrum licensing, adoption of pan-EU standards, and investment sharing with Very Large Online Platforms, which we do not have space to discuss here).
These proposals are consistent with the Letta (2024) Report (on which I commented in a previous PromethEUs blog post), in that they agree on consolidation. But it would be wrong to see these proposals as a means to achieve the “sufficient scale to compete with Chinese and American superstar companies” mentioned by Draghi as one of the reasons for the competition policy revamp: As much as Verizon in the US does not compete with China Telecom, so Telefonica does not compete with either: Competition in mobile and fixed telecommunications is local. Competitiveness in international markets only matters where markets are, um, international.
Mobile and fixed networks are local. Any operator who wants to offer services in a certain area either needs to have a network in place or a network usage agreement with someone who does. Consolidation between operators, be it at national or EU level, does not change this basic fact. Thus consolidation in the telecoms sector does not lead to scale gains in the sense that the same network (say, a Belgian one) can serve many more customers (say, in Germany as well).
It is telling that an operator such as Vodafone has thrown in the towel after trying for two decades to build a pan-European presence: It had to realize that under existing conditions there is no strategic value as such in being present in many EU countries, nor has it been able to provide services to final customers that meaningfully leverage its pan-European scale.
Draghi proposes to redefine telecoms markets at the EU instead of the national level. This proposal is not viable in the short run, to start with because if it were put into practice quickly, even the largest operators in the EU would have to be considered competitive minnows, and ex-ante regulation based on Significant Market Power (SMP) would become void at once. On the other hand, the proposal of EU-level market definition makes sense as a last step in a drawn-out process that first removes the obstacles that make cross-country operators optimally treat each country as a separate market. Unfortunately, this may not be possible as long as income disparities between countries remain at the current levels – it makes little sense to charge the same prices in Germany and Portugal – average incomes are a third in the latter country.
One might argue that the necessary gains in scale are achieved precisely if operators in the same country merge: More customers will be served by the same network (at least when the next generation of technology is rolled out, such as Gigabit fibre networks). Here the argument brought forth is that the unavoidable direct loss in competitive intensity will be compensated by a faster and more innovative roll-out (see Measure 1). But the question that should be raised here is whether the same result could be obtained by means which involve fewer negative side effects. Indeed, “Measure 2” about co-deployment goes exactly in this direction. Though the empirical judgement on the risks (potential for collusion) of such agreements is still forthcoming, at least the benefits are clear. Having clear rules at the EU level about the necessary safeguards and unacceptable clauses would make such agreements more attractive and, most importantly, safer and faster to implement.
Measure 8 (reinforce ex-post versus ex-ante regulation) curiously gets the story backwards: It seems to argue for more ex-post enforcement (based on a new obligation on certain companies to report certain information) instead of ex-ante rules, based on the argument that DG Comp is overwhelmed by its new responsibilities. Here it might be useful to remember that the new ex-ante frameworks (DMA, DSA, AI Act, plus the EECC) have been put in place precisely because authorities are not able to follow up on potential violations of competition rules in reasonable time or at all, due to their inherently limited means. What is really being proposed here is that decisions in competition cases (abuses or mergers) are followed by close monitoring, which should increase rather than decrease workload. Also, read in the context of the telecoms sector, this proposal has quite a different meaning from what will easily be read into the above citation, which is a removal of the last remaining “relevant markets” under the EECC in its upcoming revision.
Summing up, the recommendations of the Draghi report for the telecoms sector should have been better thought through: The order and timeline of their implementation are essential, the relative advantages and disadvantages of alternative measures, as well as those of ex-ante versus ex-post interventions, should have received more attention.
References:
Draghi, M. (2024a). The future of European competitiveness: Part A | A competitiveness strategy for Europe, September. https://commission.europa.eu/topics/strengthening-european-competitiveness/eu-competitiveness-looking-ahead_en
Draghi, M. (2024b). The future of European competitiveness: Part B | In-depth analysis and recommendations, September. https://commission.europa.eu/topics/strengthening-european-competitiveness/eu-competitiveness-looking-ahead_en
Letta, E. (2024). Much more than a market: speed, security, solidarity: Empowering the Single Market to deliver a sustainable future and prosperity for all EU Citizens, April. https://www.consilium.europa.eu/media/ny3j24sm/much-more-than-a-market-report-by-enrico-letta.pdf