Competition or Investment: Choose One

Many European internet service provider leaders claim the business model is unsustainable, as profits are too low, scale is suboptimal and costs are stubbornly high. Some might note that European policymakers have, for decades, prioritized competition over investment. 

If policymakers decry low investment in advanced facilities, their own policies are partly to blame, as competition leads to lower retail prices, which creates disincentives for further investment. 

U.S. policymakers took the same path in the early days of access network competition, in the wake of the Telecommunications Act of 1996, which opened the local loop to full competition for the first time. The primary early strategy was generous wholesale discounts of around 30 percent, plus the ability to buy a fully-provisioned wholesale service.

That led to a quick expansion of retail competition, lead by AT&T and MCI, at that time, the two big firms that were not already in the local access business.

But policymakers reversed course after several years, as the massive reliance on wholesale mechanisms reduced incentives for investment in new facilities. 

In other words, policymakers always must make a choice: do they want more competition or more investment? “Choose one” is the unfortunate realm of choice. 

European service providers have been complaining for decades that government policies intended to support competition have worked to the detriment of creating a climate conducive to capital investment. 

That now is said to apply both to 5G and advanced mobile networks as well as fiber-to-home facilities. 

But there are other issues as well. The European internet access business has a “very low” return on capital employed. Telefonica CEO Jose María Alvarez-Pallete says European ISPs have rates of return “barely beating cost of capital.”

But that also is shaped by competition policy, which has resisted consolidation. “The average European mobile operator covers five million people, where the average U.S. operator covers 107 million people,” says  Alvarez-Pallete. 

That is not to say that the benefits of competition cannot be obtained when the number of contestants is quite low. In the U.S. market, robust competition exists with about two main contestants in fixed networks and three main contestants in mobile markets. 

That might be the best expected outcome long term. But European ISPs say policymakers must essentially reverse course. 

Competition or investment: choose one.