6. The Challenge for Europe: Crafting a Digital Renaissance
There is widespread recognition that the EU’s digital health needs attention. Unfortunately, much of the discussion tends to focus on treating the symptoms – removing roaming charges, for example – rather than addressing the root causes of the EU’s digital malaise. Europe has gone from digital leader to laggard in less than a decade. It has fallen behind in ultra-fast mobile and fixed-internet connectivity as well as in developing and manufacturing the technologies that run today’s systems and equipment. European consumers may pay less for digital connectivity, but they are missing out on many of the advanced services and experiences that are available on next-generation networks elsewhere. Moreover, perhaps partly as a result of the economic crisis, much of Europe seems to have adopted a form of old-world anxiety over digital technology. The European Commission’s Digital Agenda and proposed digital single market are far from being realized. Few expect the next Google, Alibaba or Facebook to emerge from the EU.
Europe is hardly homogenous, of course, and different countries are in very different stages of digital development. The UK’s internet economy represents close to 10% of GDP, led by a strong e-commerce sector. Denmark and Estonia have nurtured vibrant online sectors, including e-government capabilities that are among the world’s most sophisticated. In Sweden, consumers have driven digital-economy growth to almost 8% of GDP, and the country has built a significant competitive advantage in digital services and platforms. But, truth be told, most of Europe’s economies lag.23
Europe’s digital health requires many things, but without infrastructure investment, it is difficult to see rapid digital growth taking off. By 2014, investments in mobile infrastructure equipment will have fallen 67% since 2004, as current levels of investment in LTE technologies have not matched the heavy spending on 3G networks.24 (See Figure 10.)
Figure 10: Investment in Mobile Infrastructure Equipment Has Dropped Significantly in Western Europe
Note: Includes investments into base station and core infrastructure equipment; actuals until 2012, forecasts thereafter
Source: Gartner, IE Market Research, BCG analysis
In fact, European spending, on a per-subscriber basis, is half that of the United States and of Japan. No surprise, then, that LTE accounted for only about 2% of mobile connections in Europe at year-end 2013, compared with approximately 20% in the US and 50% in South Korea and the sidebar, “LTE Leadership in South Korea”.2526 (See Figure 11.)
The depth of the challenge is compounded by its complexity. Infrastructure spending has multiple constraints in Europe, including the ability of telecom operators to monetize mobile data use and generate sufficient returns. The inefficient and fragmented system of spectrum allocation undermines the delivery of high-quality mobile communications, not to mention the growth of mobile connectivity generally. Much of the continent is trapped in a downward “less for less spiral” with EU operators struggling both to justify investments in next generation LTE infrastructure and to convince consumers to upgrade to LTE data plans. Despite many operators subsidizing smartphones to encourage LTE, in many countries between 25% and 40% of smartphone users do not purchase data plans from their carriers.27
The development of a vibrant digital-services sector, including widespread entrepreneurial start-up activity, lags for a variety of reasons, among them labour law inflexibility, high taxes and bureaucratic red tape. In the World Economic Forum’s most recent ranking of red tape, or the burden of government regulation, the UK ranked 45th and Germany 56th, and five European countries placed between 125th and 146th, in the survey of 148 nations.28 Only one of the top 25 internet companies by market capitalization is based in Europe.29 Venture capital investments in Europe represent 0.03% of GDP, compared with 0.17% of GDP in the US and 0.36% in Israel.30
This lack of competitive vigour constitutes a barrier to adopting digital services, attracting international investment and creating jobs. Among other factors, simple attitudes towards technology and entrepreneurship need to change. Fear of disrupting existing paradigms needs to be replaced by the sense of opportunity that such creative destruction represents.
Europe needs to take steps in four areas to transform its approach and achieve the EU’s Digital Agenda for Europe. These include addressing the market environment, refining industry models, adjusting the regulatory framework, and taking affirmative steps to promote development of a more energetic digital economy.
European policies and regulations have long pushed for low-cost mobile access plans – and they have largely succeeded. Europeans often pay less per subscription for digital connectivity than consumers elsewhere. But low cost comes at a cost – significant impediments in some cases to the ability of telecom companies to make necessary investments in improving quality and service. As a result, European consumers and businesses often experience slower, less reliable connections, leading to less use, less value for consumers, and lower economic growth. They often pay more than others on a per-megabyte of data basis. (See Figure 12.)
Figure 12: European Operators Have Had Difficulty Monetizing Mobile Data
1. EU-15 plus Switzerland and Norway Note: Actuals until 2012, forecasts thereafter Source: Ovum, Ericsson, BCG analysis
There are exceptions, of course. In the Nordic countries, mobile broadband penetration is quite high (including both 3G and LTE). Sweden’s mobile broadband penetration of 85% is one of the highest in the world, and other Nordic nations are in the 75% to 80% range, roughly in line with the US and well above the Western Europe average of about 67%.31 Sweden was the first country to launch LTE in 2009, and it currently has the world’s fastest LTE network.32 LTE penetration (around 10% for the Nordic nations33) is well above that of most of Europe, but still trails the US, Japan and South Korea by substantial margins. Despite this penetration lag, data use and pricing is very healthy. The average customer in Sweden and Finland uses more data than customers in the US – twice as much in the case of Sweden.34 Swedish and Finnish customers also pay about half as much per megabyte (or less) as consumers in the US.35
Europe also needs to allow more consolidation among operators, especially in mobile. There are 100 operators in Europe, compared to five in the US and three in China. US providers have an average of about 84 million subscribers each; the average in large European countries is between 15 million and 30 million.36 Allowing operators to exit unprofitable markets can also help drive necessary consolidation.
Price is one critical component of competition, but only one. European policy-makers need to adopt a broader view that extends beyond price to include quantity and quality of service over time as key determinants of consumer welfare.
Data consumption in Europe lags other markets. Data per megabyte in Europe is priced 20% higher than in the US, and consumption is less than half the US rate. European data revenues are growing about one third as quickly.37 (See Figure 12.)
CSPs need to adapt a new mindset towards data. The experience of markets such as the US and Sweden suggests that lower per-megabyte prices may encourage consumers to consume more data to satisfy their hunger for digital communication, potentially leading to higher overall revenue per user. Adopting new mobile data pricing plans that encourage data use, for example through linear pricing (plans that price data consumption in a fair, roughly linear manner – 4GBs cost no more than twice as much as 2GBs, for example), elimination of throttling, easy plan upgrades and family plans, can generate new sources of revenue. As Sweden’s Spotify and TeliaSonera have shown, partnerships between operators and digital service players also can lead to new demand for data – and new sources of revenue for both.
In recent months, several operators have started to pursue “packaged offerings” or “quadruple plays” that combine voice and fixed broadband offerings in addition to fixed voice and TV. For example, Liberty Global recently announced plans to roll out a pan-European MVNO service. Vodafone has agreed to acquire Spanish cable operator Ono with a similar idea in mind. These strategies have the potential to reduce costs for operators and prices for consumers, as well as impact competitive dynamics. In Portugal, the partial deregulation of fibre access, combined with a concerted approach to drive a quadruple-play package, has led to the resurgence of Portugal Telecom (PT). According to Bernstein Research, consumers are more willing to adopt such bundles from fixed-line incumbents. PT has priced its package to gain wireless share and reduce churn, both fixed and mobile. The company has reported revenue increases of about 10% and customer cost savings of almost 20%.38
As discussed in Chapter 5, Europe needs to rethink its regulatory frameworks, in particular the scope, approach and level of engagement of regulatory initiatives. Other big economies – the United States and China, for example – enjoy healthy and growing telecom and digital-services sectors as well as thriving entrepreneurship, resulting in widespread job creation. One reason is that these are true single digital markets: data and services flow freely within the market. They also have single bodies overseeing spectrum management, consolidated telecommunications industries (the US has experienced multiple waves of telecommunications consolidation since the break-up of the AT&T monopoly in 1985) that are lightly regulated by international standards, and they share a willingness to invest in infrastructure. The extent to which Europe can follow suit and form its own single digital market is central to the future of European competitiveness and wealth creation.
Towards a Digital Single Market?
A committee of the European Parliament, for example, has observed, “gaps and differences in EU member states’ laws governing online trading or inconsistent enforcement of rules, as well as inadequate digital infrastructure, are preventing EU firms and citizens from reaping the full benefits of the digital single market and causing the EU to fall behind the global competition.”39 Without a market where digital goods and services can travel freely across borders – just as physical goods already do – Europe will never achieve its full potential for a digital economy. A single digital market (and one that is allowed to flourish without undue regulatory intervention) would also encourage greater entrepreneurship in digital services, as the opportunity size and potential for scale for European start-ups would be greatly enhanced.
Other major economies have already achieved conditions conducive to infrastructure investment and rapid growth in digital services, both for consumers and for businesses. The companies that are driving the development of a worldwide digital economy – from Alibaba to Facebook, and Google to Tencent – are one result. Unless it transforms its approach, Europe gives its companies little chance to compete with such leaders. A new European Commission will take the reins this autumn. It has the opportunity to drive the Digital Agenda and vision of a digital single market forward and “enable Europe’s citizens and businesses to get the most out of digital technologies”.40
Sidebar: LTE Leadership in South Korea
While next generation wireless technologies have struggled to gain a foothold in Europe, other countries are moving ahead. South Korea, for example, has seen far faster adoption of LTE technology than any other country in the world. Its first LTE network was launched in 2011; already more than half of all mobile connections are on LTE.
The impact on revenue has been significant. LTE users generate average revenues per unit (ARPUs) that are almost 1.5 times higher than non-LTE users. Three major carriers are starting to see ARPUs increase after years of decline.
This growth has not come without cost. To facilitate LTE rollout, carriers increased capital expenditures by two to five percentage points of revenue, funding both network equipment deployment and LTE handset subsidies.
South Korean carriers are already starting to roll out LTE Advanced networks. Current networks support speeds of up to 150 Mbps, but this is expected to reach at least 300 Mbps later this year.41