• The European Commission has published a report, written by Mario Draghi, focused on the European Union’s competitiveness
• The report makes a broad range of recommendations, including important ones for the telecom and digital infrastructure and services sectors
• Draghi recommends a new approach to regional regulations that will encourage network operator consolidation, enable ‘fair share’ payments to telcos by big tech firms, introduce harmonised spectrum licensing and enable a single-market approach to the use of network APIs and the deployment of sovereign cloud platforms
• The impact of the AI era is also addressed with a number of recommendations
• Vodafone calls for the EC to act on Draghi’s recommendations, but not everyone’s as enthusiastic

With a new European Commission (EC) term under way, albeit still under the presidency of Ursula von der Layen, new policy recommendations can now be assessed and a new report into the competitiveness of the European Union will be music to the ears of the region’s major telcos, as it recommends pro-market consolidation policies and the introduction of so-called fair share financial contributions from the big tech firms to telco capex budgets. 

Europe’s telcos, and indeed the region’s major vendors, have long been lobbying and agitating for a relaxation of merger and acquisition (M&A) regulations (among others) that would enable easier market consolidation: That, in turn, would enable telcos to reap the economies of scale they claim to so badly need to be able to remain solvent – the latest call came only last week from Vodafone along with Ericsson and Nokia. 

And for the past two years, many of the regional telcos have been pushing for fair share contributions towards network investment costs by the large traffic generators (LTGs), such as Amazon, Apple, Google and Netflix, whose video and data traffic-heavy services put a strain on telco network capacity without (currently) providing any direct compensation. It’s a contentious issue, as a TelecomTV industry survey highlighted earlier this year – see ‘Fair share’ debate splits the industry – survey.  

In April, the telcos were offered some hope when a report on the development of a single market for Europe – ‘Much more than a market – Speed, Security, Solidarity’, written by the former prime minister of Italy, Enrico Letta – tackled the issue of telco sector consolidation. Letta noted that the region’s digital services sector is rather lacking and that M&A rules enabling the formation of much larger pan-European service providers would be beneficial.

Now a new report entitled The future of European competitiveness, written by Mario Draghi whose CV includes stints as Italian prime minister and president of the European Central Bank, will once again raise hopes among Europe’s telcos that regulatory (and some fiscal) relief may be in the offing. 

Many of the headlines about Draghi’s report, which includes about 170 recommendations, focus on his call for “a minimum annual additional investment of €750bn to €800bn” in the EU in order to meet its objectives. 

But more importantly for the TelecomTV community, those recommendations include ones specific to the telecom sector as well as others more broadly focused on the digital infrastructure and services sector, with a particular take on how to be competitive in the AI era. 

Here are those relevant recommendations in full – it’s a lot to read but it’s worthwhile checking out the breadth of the suggestions, the ways in which they are interconnected and the high-level reasoning. It’s interesting to note that Draghi does not use the phrase ‘fair share’ in his report, referring instead to “commercial investment sharing”. Nor does he use the term large traffic generators (LTGs) to describe the companies that generate large volumes of video and data, but instead calls them ‘very large online platforms’ (let’s hope we don’t now see a lot of documents referring to the VLOPs…). You will find a few comments from Vodafone following the transcript of the recommendations: 

“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.”

“It is also proposed to harmonise EU-wide spectrum licensing rules and processes and to orchestrate EU-wide auction design features to help create scale.”

“To ensure that EU players remain at the forefront of new technological developments, it is recommended to establish an EU-level body with public-private participation to develop homogenous technical standards for the deployment of network APIs and edge computing, as was the case for roaming in the 1990s.” 

“To increase the capacity of EU operators to invest in these technologies, it is recommended to support commercial investment sharing between network owners and Very Large Online Platforms that use EU data networks to a massive extent but do not contribute to financing them.”

“The EU has a unique opportunity to lower the cost of AI deployment by increasing computational capacity and making available its network of high-performance computers. Since the launch of the Euro-HPC Joint Undertaking in 2018, the EU has created a large public infrastructure for computing capacity located across six Member States, which is one-of-a-kind globally. Three of its supercomputers are in the top ten worldwide and the launch of two exascale computers is planned. While so far this capacity has been mostly used for scientific research, the Commission is progressively opening it to AI start-ups, SMEs and the broader AI community. The report recommends building on this initiative by significantly increasing the computing capacity dedicated to the training and algorithmic development of AI models in HPC centres. At the same time, the EU should finance the expansion of Euro-HPC to additional cloud and storage capabilities to support AI training in multiple locations. A “federated AI model” should be developed based on cooperation between public and private infrastructures to provide AI training power and cloud services to increase the EU’s competitive scale. To help finance the additional resources invested in the network, it is recommended to create an EU-wide framework allowing public sector “computing capital” to be provided to innovative SMEs in exchange for financial returns. For example, public HPC facilities or research centres could offer free computing capacity in exchange for equity options, royalties or dividends to be reinvested in capacity and maintenance.”

“The EU should promote cross-industry coordination and data sharing to accelerate the integration of AI into European industry. Developing AI verticals hinges on industrial players working together with AI researchers and the private sector to enable problem definition across different sectors. For instance, discovering whether an innovative product can be developed by a factory using an AI-powered digital twin requires replication of the factory, its robots, processes and the overlay of an AI algorithm.”

“To facilitate this cooperation, EU companies should be encouraged to participate in an “AI Vertical Priorities Plan”. The aim of this plan would be to accelerate AI development across the ten strategic sectors where EU business models will benefit most from rapid AI introduction (automotives, advanced manufacturing and robotics, energy, telecoms, agriculture, aerospace, defence, environmental forecasting, pharma and healthcare). Companies that participate in the plan would benefit from EU funding for model development and a specific set of exemptions regarding competition and AI experimentation. In particular, to overcome the EU’s lack of large data sets, model training should be fed with data freely contributed by multiple EU companies within a certain sector. It should be supported within open-source frameworks, safeguarded from antitrust enforcement by competition authorities. Experimentation should be encouraged via the opening up, EU-wide coordination and harmonisation of national “AI Sandbox regimes” to companies participating in the plan. These experimental “sandboxes” would enable regular assessments of regulatory hindrances deriving from EU or national legislation and provide feedback from private companies and research centres to regulators.”

“Given the dominance of US providers, the EU must find a middle way between promoting its domestic cloud industry and ensuring access to the technologies it needs. It is too late for the EU to try and develop systematic challengers to the major US cloud providers: the investment needs involved are too large and would divert resources away from sectors and companies where the EU’s innovative prospects are better. However, for reasons of European sovereignty, the EU should ensure that it has a competitive domestic industry that can meet the demand for ‘sovereign cloud’ solutions. To achieve this goal, the report recommends adopting EU-wide data security policies for collaboration between EU and non-EU cloud providers, allowing access to US hyperscalers’ latest cloud technologies while preserving encryption, security and ring-fenced services for trusted EU providers. At the same time, the EU should legislate mandatory standards for public sector procurement, thereby levelling the playing field for EU companies against larger non-EU players. Outside of ‘sovereign’ market segments, it is recommended to negotiate a low barrier ‘digital transatlantic marketplace’, guaranteeing supply chain security and trade opportunities for EU and US tech companies on fair and equal conditions. To make these opportunities equally attractive beyond large tech companies, SMEs on both sides of the Atlantic should benefit from the same easing of regulatory burdens for small companies that is proposed above.”

“Strategic dependencies also extend to critical technologies for the digitalisation of Europe’s economy. The EU relies on foreign countries for over 80% of digital products, services, infrastructure and intellectual property. Dependencies are particularly acute, however, for semiconductors owing to the structure of the industry, which is dominated by a small number of large players. The US has specialised in chips design, Korea, Taiwan and China in chips manufacturing, and Japan and some EU Member States in key materials and equipment – optics, chemistry and machinery. Europe has little domestic capacity in many parts of the supply chain. For example, the EU currently has no foundry producing below 22 nm process nodes and relies on Asia for 75% to 90% of wafer fabrication capacity (as does the US). Europe has become dependent on non-EU countries for chips design, packaging and assembly as well. Dependencies are also acute for other advanced tech. The EU’s AI industry relies on hardware produced largely by one US-based company for the most advanced processors. Similarly, Europe’s dependence on cloud services developed and run by US companies is massive. For quantum computing platforms, the EU suffers from six critical dependencies across 17 key technologies, components and materials. China and the US hold technological leadership in most of these critical elements.” 

“In the telecoms sector, Europe is less dependent on foreign technology: top EU vendors are well positioned in the global supply of telecoms equipment. However, it will be important that dependencies do not increase, especially on high-risk suppliers that could compromise the security of EU networks and citizens’ data. Currently, 14 Member States have no restrictions on high-risk suppliers in place.”

“For strategic industries, the EU should pursue a coordinated EU strategy to bolster domestic production capacity and to protect key network infrastructures. While EU ownership of large foundries may be unrealistic at this stage owing to the required investment levels, Europe should maximise its joint efforts to strengthen innovation in semiconductors and its presence in the most advanced chips segments. The report recommends launching a common strategy based around four elements. First, funding for innovation and the establishment of testing labs near existing centres of excellence. Second, providing grants or R&D tax incentives for “fabless” companies active in chips design and foundries in selected strategic segments. Third, supporting the innovation potential of mainstream chips. Fourth, coordinating EU efforts in back-end 3D advanced packaging, advanced materials and finishing processes. Total investments in industrial deployment of around EUR 100 billion have been announced in the EU since the proposal for a European Chips Act, mostly supported by Member States under State aid control. However, there is a risk that a fragmented approach leads to weak coordination of priorities and demand requirements, lack of scale for domestic producers, and in turn less ability to invest in more innovative semiconductor segments. It is therefore proposed to create a centralised EU budgetary allocation dedicated to semiconductors supported by a new ‘fast-track’ IPCEI [Important Projects of Common Interest]. Use of this tool would entail co-financing from the EU budget and shorter approval times for semiconductor projects.”

“For telecoms, it is recommended to strengthen security considerations in technology sourcing by favouring the use of EU trusted vendors for spectrum assignment in all future tenders, and by promoting EU-based telecoms equipment providers as strategic in trade negotiations.”

That’s a lot to take in but it covers a lot of ground and, of course, these are recommendations. Now the EC machinery has to consider them and decide what action (if any) to take and that process will not be swift – in fact, any actions that may be regarded as remedial might in fact be introduced too late for some of the telecom sector companies that are already feeling the pinch and needing to take cost-cutting and divestment actions. 

Vodafone, which has been one of the more vocal telcos calling for regulatory relief over the years, had this to say about Draghi’s report. 

“This is the third report – following the commission’s whitepaper in February, and Enrico Letta’s in April – sounding the alarm over the state of technology, modern connectivity and digitalisation in Europe,” noted Joakim Reiter, Vodafone Group’s chief external and corporate affairs officer in an email. “Draghi rightly identifies the lack of scale in telecoms, outdated competition policy, poor spectrum allocations and persistent imbalances in digital ecosystems as key reasons for Europe falling behind. This sends a clear signal: Action is urgently needed. The responsibility now lies with the commission to transform the regulatory framework for telecoms, and for the incoming commissioner to deliver the new EU Telecoms Act set out in today’s report.”

But not all telcos are so enthusiastic. The European Competitive Telecommunications Association (ECTA), which represents the region’s alternative Tier 2/Tier 3 network operators, described the report as “one-sided…  supporting explicitly and exclusively the vested interest of a few large incumbents and the objectives pursued by powerful lobby groups by proposing a recipe that, by its very nature, cannot unleash innovation and investment.”

Luc Hindryckx, ECTA’s director general, noted in this announcement: “We fear that the Draghi report is based on a flawed evaluation of the European model and therefore entails the risk of coming at a high price for consumers, enterprises and public administrations and, furthermore, risks putting the EU’s competitiveness in the digital realm in jeopardy. Reducing competition always comes with a high price and does not foster innovation or investments. Let’s not forget that the so-called big tech companies are not the fruit of incumbents and all started from zero.” 

And here’s what EC president Ursula von der Leyen had to say about Draghi’s report, highlighting three big picture takeaways. 

“First, to be competitive, we need to master the clean and digital transition. We set the basis for this, as you know, the clean and digital transition, in my first mandate. Now it is time to see it through. We must support our industry to go through decarbonisation through innovation and turn this into a competitive advantage. This is why we need to act on all the principal levers that are at our disposal: Bringing down energy prices; mobilising public and private investment; improving the business environment and cutting unnecessary red tape.

“Second, we totally agree that we need more skills because technologies are only as good as the people designing, producing and, of course, operating them. We need to step up investment in skills and we need to bring more people into the job market, equipped with the skills that are needed for the clean and digital transition.

”Finally, let us not forget that to be competitive, we need to be resilient. We have gone through multiple shocks over the past years, and we have been working on building more robust industrial value chains, especially when it comes to security of supply. Key concepts here are access to critical raw materials and to essential components, strong energy and digital grids, just to name a few. But it is certainly not the end of the road.”

Let’s see what the next five years, the duration of the new EC term, brings for the telecom sector. 

- Ray Le Maistre, Editorial Director, TelecomTV