Will Europe Regulate Over the Top Services on the Mobile Internet?

by on March 19, 2013 · 1 comment

At Mobile World Congress in Barcelona last month, I was surprised that nobody had access to 4G mobile Internet services. How could Barcelona, the second largest city in Spain and host to the “world’s premier mobile industry event,” lack access to 4G? In the opening day keynote session, Vittorio Colao, Vodafone’s CEO, said Europe has only 6% of the world’s LTE connections, and Telefónica’s CEO, César Alierta, said only 17% of European mobile subscribers have smartphones. European mobile operators agreed they are lagging the world in 4G deployment and penetration due to existing price regulations that discourage new infrastructure investments.

Europe now stands at a crossroads: Does it adopt the modern, investment-based approach toward wireless markets that made the US the world’s 4G leader, or does it further increase regulation and impose new obligations on “over the top” (e.g., Skype) services? Our history with the regulation of rural telephone companies demonstrates the perils of the second option. Yet European mobile operators appear ready to embrace new regulations as a means to enhance their business and create a “balanced relationship” with “US companies” that provide over the top (OTT) services.

Declining revenues in Europe are driving their choice. In Q4 2012, Vodafone’s European year-over-year revenue declined an average -7.6%. Telefónica’s Q4 2012 European revenue declined -6.5% as its primary source of revenue shifted from Europe to Latin America. Deutsche Telekom’s Q4 European revenue declined -4.0%, and Orange’s year-end revenue declined -5.7% in France and -1.7% overall.

Operators attribute these declines to price regulation and competition from unregulated OTT services. In Europe, operators kept “local” calling rates relatively low by relying predominantly on higher mobile termination (e.g., payments received from another mobile operator or a wired telephone company to complete a call) and roaming rates to generate revenue. This approach worked successfully until 2009, when the European Commission (EC) decided to regulate mobile Internet termination and roaming rates. European Mobile operators now struggle to replace the lost revenue resulting from this mandated price regulation.

EC regulations may have reduced prices, but they have also discouraged 4G development in Europe. Price regulations limit potential returns on investment in 4G infrastructure, yet they do not apply to OTT providers, whose business models can take full advantage of any additional capacity mobile operators create. Rene Obermann, Deutsche Telekom’s CEO, described the benefits of asymmetrical regulation for OTT services this way: “You invest – We take the profit.”

For years European mobile operators asked the EC to stop regulating their prices. After the EC extended its pricing regulations last year, mobile operators floated a new approach: if they could not succeed in getting freed from government price controls, then why not level the playing field by pursuing similar regulations for OTT services?

At Mobile World Congress, Alierta explained it this way, “New monopolies are hurting consumers,” yet are “entirely unrestrained by regulators.” He cited Google and Apple as monopolies Europe must “break” to “ensure those who risk investment can reap the benefits.” Similarly, Colao urged the EC to adopt rules that don’t discriminate against mobile operators, and Obermann claimed the European regulatory paradigm favoring OTT companies is “unsustainable in the long run.”

Their frustration is understandable; however, I expect European mobile operators may regret giving up on the investment-based approach. The US experience indicates that EC regulatory protection would render Europe’s mobile providers forever reliant on price regulated termination charges. In exchange for the short-term benefits of protectionist policies, they would sacrifice their long-term ability to innovate and thrive in the era of the mobile Internet.

In the US, we have witnessed first-hand the negative consequences of regulatory protection. America’s rural carriers have traditionally relied on a similar scheme of regulated “terminating access” charges for support. These charges were intended to provide predictable revenues to a stable telephone monopoly, but have proven ill suited to markets with new cable and mobile competitors. Today US regulators struggle to keep the antiquated telephone network on life support in competitive markets while the survival of rural carriers dependent on price regulated revenues hangs in the balance. The US experience illustrates the dangers of protectionist regulation: It works only so long as the government agrees with you and creative destruction is held at bay.

Europe can learn from our experiences with the dying, price regulated telephone market and thriving, lightly regulated mobile market. The free market is the best way for European mobile operators to grow and for European governments to achieve their 4G goals. The question is whether European mobile operators will survive until the EC realizes it.

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