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:

1. Break out of the deflationary price spiral and move to pricing models that better reflect the value for the customer
2. Raise the effectiveness of innovation and launch new services that can compete with global champions
3. 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.