Since they were liberalised, telecoms markets have been characterised by rapid technological change. This change is set to continue: in the mobile sector, operators will soon start introducing fifth-generation mobile technology (5G); in the fixed sector, companies continue to roll out fibre networks, although universal coverage of ultra-fast “full fibre” networks is still a very long way off.
The European Commission (EC) has set ambitious targets for the deployment of these next-generation networks, which will require investment of €500bn in the European Union (EU) alone. Earlier broadband goals set by the EU have been missed by some margin. In this article, we explore why this has been the case and explain the policy tools through which the EU intends to speed up investment to achieve these targets.
The telecoms lottery
As early as 2000, the EC set objectives for a ubiquitous broadband network across Europe as part of its Lisbon Agenda. In 2010, the EC developed a new set of targets for both broadband take-up and coverage. However, some of these goals will be missed . Undeterred, the EC unveiled a fresh series of ambitious targets, including fixed download speeds of 100 Mbps for all European households and uninterrupted 5G wireless broadband coverage for all urban areas by the end of 2025. The EC’s message is clear - we believe very high-speed broadband is a necessity not a luxury.
Progress in making the transition to next-generation networks has varied widely in Europe. The roll-out of fibre, measured by the coverage of fibre-to-the-premises (FTTP), ranges from near 0% in Greece to 89% of households in Portugal – even though both have comparable levels of population and GDP per capita.
FTTP household penetration and GDP per capita:
Source: Frontier analysis. FTTP household penetration, GDP per capita sourced from EC and Eurostat. Data relates to 2017. Linear line of best fit included.
Mobile coverage is more uniform, however, as seen in Figure 2, differences in 4G speeds are also widespread and not closely linked to GDP per capita.
4G speed and GDP per capita:
Frontier analysis. GDP per capita sourced from Eurostat, 4G speeds sourced from OpenSignal. Data relates to 2017. Linear line of best fit included.
Ensuring sufficient investment
As noted above, meeting the EC’s broadband targets will call for significant capital expenditure. In liberalised markets, this will largely require incentivising investors to provide the funds for commercial operators to make this investment. There are reasons why firms may invest less than what policymakers consider to be socially desirable, including:
- There are positive externalities associated with telecoms infrastructure, i.e. benefits that accrue to a wider group than those using telecoms services, but operators will not take these into account in their investment decisions – this is an issue for both fixed and mobile networks.
- The regulatory regime may not generate sufficient incentives for innovation, for example by allowing incumbents to raise barriers to investment by competitors or by regulating prices in a way which does not provide an adequate return for operators who innovate – this is likely to be more of a concern for fixed networks, given that mobile networks face limited regulation.
- There is a complex relationship between competition and investment. However, the general consensus seems to be that too little competitive pressure can result in sub-optimal levels of investment – again likely more of a concern for fixed networks.
- Because investment returns are uncertain, there may be an option value for an operator in delaying capital spending even if the projects are expected to be profitable – again this is more of a concern for fixed networks as competition in mobile networks increases the costs of delay.
We explore each of these issues in turn.
Telecoms infrastructure is vital to economic growth. Improvements in communications can boost productivity by improving the ease of doing business and can help attract foreign direct investment by increasing a country’s international competitiveness.
Telecoms also catalyses social change on a vast scale, usually for the better. Cave et al. (2019) acknowledge the “numerous predictions that almost every act of consumption and production – in both the private and public sector, as well as of social intercourse – will be transformed by the new cluster of information and communication general purpose technologies”. The EC and national governments are keen to prevent a digital divide from opening up, by ensuring that all people have access to high-quality broadband infrastructure.
When operators make their investment decisions, they will focus on the profitability of the projects and will not factor in the wider benefits of next-generation networks. Therefore, absent any intervention, the sums invested are likely to be below the socially desirable level.
The regulatory regime to date
Until recently, the telecoms regulatory regime in the EU has focused on liberalisation and competition, rather than achieving specific levels of investment. In other words, connectivity targets have been set, but they have not been an explicit part of the regulatory framework.
The market structure of the mobile sector, with a number of networks competing during a period of rapid growth and innovation, has limited the need for detailed regulation. Competition between networks has delivered good outcomes in terms of service improvements and lower prices, with regulation required only at the margin. 
Fixed networks were rolled out under monopoly conditions with near universal availability in western Europe at the time of liberalisation. Regulators initially focused on trying to promote competition for part of the supply chain, by requiring fixed incumbents to offer various wholesale products (“access-based” regulation). When policymakers first started promoting access-based regulation, the idea was that this would eventually become a stepping-stone for competition to flourish across all or most of the supply chain (“infrastructure-based” competition). The intention was that by giving new entrants access to the fixed incumbents’ infrastructure, they would have the opportunity to gradually build up a customer base and accumulate experience, before having to incur the high costs of rolling out an end-to-end network.
A core element of promoting access-based competition and protecting end-users during liberalisation has been the use of charge controls to set ceilings on the prices for access to incumbents’ networks. In general, charge controls are better at improving static efficiencies (i.e. reducing margins and providing incentives for operators to lower the costs of existing technologies), rather than promoting dynamic efficiencies (i.e. increasing investment in innovative technologies). This is because it is difficult to design charge controls which spur innovation, either because incumbents have an incentive to maintain existing networks as a cash cow or because the returns from investing in new networks do not fully reflect the risks involved. The use of charge controls worked better in a world where innovation could occur in the competitive part of the market, which was the case with earlier broadband technologies.
However, next-generation fibre networks require significantly more investment. This posed a problem for regulators, as their existing framework was not geared to promoting innovation leading to high levels of capital spending in underlying infrastructure. The EC did attempt to adapt its regulatory approach for next-generation networks by allowing national regulators to remove charge controls under certain circumstances. However, the evidence to date suggests that such a change may not have been sufficient to achieve the desired investment in next-generation networks – at least not across a broad range of EU countries.
Keeping fixed incumbents on their toes
Absent competitive pressure, fixed incumbents may not have a strong incentive to plough money into next-generation networks. This is because they will be unlikely to lose many subscribers if they fail to make such investments, which may instead mainly cannibalise their existing sales. However, the investment case may look very different when the fixed incumbents face competitive pressure from, say, a cable provider or another fibre operator. Under such circumstances, the fixed incumbent may lose a significant proportion of their subscriber base if they fail to invest in next-generation networks in a timely manner. As a BEREC report concluded:
“A number of studies show that a main factor driving NGA deployment is infrastructure competition”
The above findings help explain why policymakers tend to aim for infrastructure-based competition where feasible, typically in more densely populated areas.
What’s the rush?
In some cases, an operator may choose to hold fire even if an investment is expected to offer positive returns. The decision of when to invest often arises when an operator faces uncertainty. This dilemma is captured by option theory - in choosing to go ahead with a project today, a company forgoes any new information that might affect the desirability and timing of its investment. The alternative is to wait and see until there is greater clarity on future market developments.  
When it comes to next-generation networks, operators may decide that the wait-and-see approach is the best option because of uncertainty on a number of fronts:
- Demand – the willingness of end-users to pay for improved services and new use cases can be unclear. 5G and ultra-fast fibre broadband networks open up a whole new set of services (e.g. the internet of things) that in some cases do not even exist yet. This can make it very difficult to forecast demand for them.
- Costs – although the costs of next-generation networks are increasingly well understood, some uncertainty is inevitable.
- Technology – which technology will prove to be the best investment? Some may be cheaper right now but could turn out to be less future-proof. This is especially an issue in fixed, where operators could invest in technologies such as G.Fast instead of FTTP. The predicament is less acute in mobile, where standards are set by global bodies.
- Regulation – operators may find it difficult to predict how stringent future regulation will be.
- Competition – operators may be unsure of how much competition they will face, which may determine whether an investment is profitable.
If a firm postpones an investment, it may become clearer with time how much consumers are willing to pay for improved services and new use cases. The operator may then be better able to determine what quality of network to roll out, how extensive it should be and whether it even makes sense to invest at all. A simplified example is set out in the decision tree in Figure 3, where demand for the new network could turn out to be either high or low. Even though investing today yields a positive expected return (€3m), holding off on the decision has an even higher expected payoff (€5m) and so would be the preferred choice.
Decision tree of an operator’s option to invest:
Source: Frontier, illustrative
Given the time needed to roll out networks, postponing investment could lead to a lengthy delay in the availability of new services, even when demand for them is assured. For example, a roll out of full fibre networks in the UK is expected to take over a decade.
Recent changes to the regulatory regime
The underlying EC regulatory framework has remained broadly unchanged since 2002. However, a new framework, the ‘Electronic Communications Code’, has been agreed, which includes an explicit “connectivity” objective aimed at boosting investment in ultrafast networks. As the EC puts it, “the sector needs to contribute to meeting increasing user demand and socio-economic development needs arising from the increase in data communication.”
Accordingly, many of the new regulatory tools that the EC has introduced are designed to spur investment - “regulation adapted to the risks and challenges of deploying substantially new networks, with rewards for early movers”. [emphasis added]
The EC has introduced provisions to facilitate co-investment, which it believes may allow operators to “deploy ultrafast networks beyond their traditional geographic reach” by sharing costs and risks and/or by guaranteeing a certain level of demand. By making network roll-out more attractive for alternative operators, co-investment may increase the likelihood of the fixed incumbent facing infrastructure-based competition. This could in turn increase investment levels for both the co-investing parties and the fixed incumbent.
Co-investment can take a variety of forms including joint ventures, reciprocal access and long-term contracts. It has already been used in the roll-out of fibre-to-the-home in Portugal, Spain and France.
Network-sharing is already widespread in the mobile sector, where efficiency savings from reducing duplication are significant and the potential drop in competitive pressure is limited due to intense competition in the retail market.
Duct and pole access
The EC has placed more emphasis on access to ducts and poles in its new code. This is to give “priority to remedies favouring competitive infrastructure deployment wherever feasible”.
The EC hopes that effective duct and pole access will accelerate investment by lowering the cost for alternative operators to roll out their own networks while still giving them significant scope to differentiate their broadband services. Lowering barriers to entry may also increase pressure on the fixed incumbent to invest swiftly to stave off competition.
More predictability and legal certainty to support investment
The EC’s code aims to provide a more predictable investment environment for fixed operators by:
- Having longer charge controls (increased from three to five years); and
- Providing more clarity on when regulation can be removed.
Any measures which create a more predictable investment environment should help reduce the option value of postponing capital expenditure. Removing regulation should also help incentivise investment, as there will be no cap on the maximum returns that can be made from investments.
In addition, the ECC code includes a number of measures to help stimulate investment in the mobile sector by:
- Recommending that spectrum licences have a minimum life of 25 years in order to reduce the uncertainty faced by operators – this should provide operators with more time to recover the costs of network investments;
- Proposing new rules for the renewal of existing licences to give operators greater certainty – again, this should give them more time to recoup network investments;
- Including a ‘use-it-or-lose-it’ mechanism for spectrum rights, thereby restricting an operator’s ability to postpone investments;
- Stipulating further provisions that should help support a swifter assignment of spectrum, which member states have hitherto assigned on very different timetables.
Policymakers can also increase investment by offering operators public subsidies. They will aim to provide aid only in areas where commercial roll-out is unviable, so subsidies may be viewed rather as a last resort once other policy tools have been exhausted. The justification for public subsidies is to reflect the positive externalities associated with broadband infrastructure.
To date, the level of public aid has varied considerably across Europe. As illustrated below, France has granted the most generous subsidies for telecoms infrastructure over the last 15 years, amounting to €215 per person. In the future, every country is likely to need to provide public subsidies if the EC’s ambitious roll-out objectives are to be achieved.
Public subsidies (state aid) for telecoms infrastructure provided over the last 15 years:
Source: Frontier analysis. Data from "State Aid for Broadband Infrastructure in Europe: Assessment and Policy Recommendations". Centre on Regulation in Europe. November 2018. Page 81.
In the mobile sector, spectrum licences tend to sell at a discount if they come with coverage obligations, which can be regarded as an implicit form of public subsidy. Coverage obligations can help accelerate investments, as they typically require a given level of network roll-out by a specific date.
Rapid technological change in the telecoms market means there is still much to be gained - 5G and ultra-fast fibre networks promise to bring greater productivity and growth through faster services and new applications. To realise these benefits, EU policymakers are placing greater emphasis on investment by addressing some of the factors that may lead to sub-optimal levels of capital spending, such as failing to account for positive externalities, over-regulation, a lack of competition and an option value from delaying investments. For regulators who are increasingly concerned about more vulnerable consumers, the key challenge will be to ensure that operators have sufficient incentives to invest while still protecting end-users from undue market power.
 By 2013, to bring basic broadband (up to 30 Megabits per second, Mbps) to all Europeans; by 2020, to provide all Europeans with fast broadband (over 30 Mbps); and by 2020, to ensure take-up by 50 % or more of European households of ultra-fast broadband (over 100 Mbps).
 “In terms of the three targets, while nearly all Member States achieved the basic broadband coverage target by 2013, this will most likely not be the case for the 2020 target for fast broadband. Rural areas remain problematic in most Member States: by mid-2017 14 had coverage in rural areas of less than 50 %. For the third target, take-up of ultra fast broadband, only 15 % of households had subscribed to internet connections at this speed by mid-2017, against a target of 50 % by 2020.”http://publications.europa.eu/webpub/eca/special-reports/broadband-12-2018/en/
 Fibre roll-out, speed and coverage of 3G/4G.
 Note that this measure is a catch-all and does not reflect things like mobile coverage and variability of speeds, which are also likely to be important to end-users.
 For example, Qiang et.al. (2009) found that a 10 percentage point increase in fixed broadband penetration increased GDP growth by 1.21 percentage points in developed countries. “Economic Impacts of Broadband.” In Information and Communications for Development. Washington D.C.: World Bank.
 A further issue may be customer inertia, with evidence that customers may not migrate to higher-speed networks even if they would benefit from them.
 For example, there is some evidence that there is an inverted U-shape relationship between competition and investment i.e. more competition is good for investment, but only up to a point - see “Competition and Innovation: an inverted-U Relationship” (Aghion, Bloom, Blundell, Griffith and Howitt 2005).
 “The European Framework for Regulating Telecommunications: A 25-year Appraisal”. Review of Industrial Organisation, 2019, pp. 1 (Cave, Genakos, and Valletti).
 The main exception is mobile termination rates.
 Access to the copper loop allowed competitors to upgrade their copper telephone networks to also offer broadband (ADSL).
 They were still required to impose ex-ante margin tests. “2013 Recommendation on consistent non-discrimination obligations and costing methodologies” (EC)
 “Challenges and drivers of NGA rollout and infrastructure competition” (BEREC 6 October 2016)
 “Investment under Uncertainty”. Princeton University Press, 1994 (Dixit and Pindyck)
 The reason why investing now may be unattractive is that investments involve sunk costs. Put another way, if operators decide to sell investments that turn out to be unsuccessful, they are likely to get back less than they originally put in.
 The higher the benefit from investing early, e.g. due to a first-mover advantage, the less likely it is that postponing investment decisions will be the best outcome. For example, if the €12m in the illustrative example were instead €18m, investing now would be the best choice, all else equal.
 The UK government’s target is to have full fibre coverage in the UK by 2033. “Future telecoms infrastructure review” (DCMS 2018) .
 Under certain circumstances, co-investments may not face any regulation.
 Alternatively, in some cases one of the co-investing parties may be the fixed incumbent.
 For example, the UK has already introduced tougher regulation on ducts and pole access.
 “Where non-discrimination by the SMP operator is assured at wholesale level, and there are significant competitive constraints at retail level, regulated price control, the most intrusive remedy, should not be imposed on SMP operators´ next generation networks.” (http://ec.europa.eu/information_society/newsroom/image/document/2016-52/executive_summary_1_-_access_40993.pdf)
 Areas with low population density may be unviable, as the costs may exceed the potential revenues.