Virus Forces Europe to Confront Its Creaking Internet Problems

Massimiliano Capitanio

Source: Massimiliano Capitanio

Shortly after coronavirus forced Italian Prime Minister Giuseppe Conte to lock down the country, lawmaker Massimiliano Capitanio took an unusual call at his office in Rome.

It was an appeal for help from a hospital at the epicenter of the outbreak in northern Italy. Its administrators direly needed faster internet connections and computers to deal with the flood of patients. Capitanio — who sits on parliament’s telecommunications committee — called the country’s phone companies to help out.

To Capitanio, the pandemic was a wake-up call to fix Italy’s creaking internet. Now Conte has stepped in with a plan to kick-start investment by merging the country’s two biggest landline networks.

“Some families still don’t own a computer,” said Capitanio. “The government has been forced to step in and tackle this social emergency.”

Europe’s internet infrastructure is riddled with gaps and bottlenecks, exposed over the past seven months by surging hospital admissions to the rise of home working and explosion of e-commerce. Governments are now deciding how to intervene, after predicting the introduction of faster networks could lead to an annual benefit of 113 billion euros ($133 billion).

In Italy, the state investment vehicle Cassa Depositi e Prestiti SpA is expected to obtain a significant stake in a unified national network and give former monopoly Telecom Italia SpA confidence to speed up a roll-out of faster fiber-optic connections by removing rival Open Fiber SpA.

The plan tears up a guiding principle of the European project that more competition leads to better services. It’s part of a new pattern of engagement with industry that suggests Europe is watering down its anti-monopoly principles in response to China’s state-led expansion and Donald Trump’s America First agenda.

Building more robust infrastructure would stimulate stricken economies and spur the growth of new industries. The U.K. risks losing 173 billion pounds ($223 billion) over the next decade if it falls behind on 5G, according to think tank the Centre for Policy Studies.

Global Rollout

Lower prices may mean lower network investment from Europe’s telcos

Source: ETNO/Analysys Mason

“More fiber-rich networks would have been better when something like Covid comes along,” said Chris Watson, head of TMT at law firm CMS. “Stuff like Zoom and Teams calls falling off is an issue in the new world that we’re going into.”

The problem is, telecom companies aren’t ready to step up. Beset by low profitability and an exodus of investors, they’re struggling to fund even current rates of network investment, allowing southeast Asian nations and the U.S. to pull ahead in the broadband speed race.

So governments are starting to rethink whether consumers are best served by price wars and caps on investment returns that erode the profits companies need to invest in better services.

In Spain, the industry’s growing influence was on show last month when the Madrid government said it wanted to tax all companies that operate telecom services — eroding an advantage that Facebook Inc.’s Whatsapp and other so-called over-the-top services hold over the region’s phone companies. Spain’s phone firms also stand to gain from the government’s post-Covid “digital agenda” that includes 20 billion euros of state support for infrastructure.

Key Speakers At Santander Telco Conference

Jose Maria Alvarez-Pallete

Photographer: Antonio Heredia/Bloomberg

This is happening as the government, almost by chance, is getting an indirect stake in local phone giant Telefonica SA under a merger of two local banks. Prime Minister Pedro Sanchez has struck up a close working relationship with Telefonica Chairman Jose Maria Alvarez-Pallete, giving the company an opportunity to help shape policy, according to a person familiar with the matter.

French President Emmanuel Macron intervened personally to ensure the country deploys fifth-generation wireless networks, in the face of a growing backlash from consumers and opposition politicians over health and environmental concerns.

Three weeks ago, the European Commission issued a policy proposal urging national governments to reduce the red tape that’s making it slower and costlier to roll out fiber and 5G. The suggestions included simplifying mast construction permits and investment incentives, and carried a tone of haste that is unusual for the commission. Britain’s government is also looking at reforming planning laws that are slowing its 5G roll-out.

“The pandemic has increased both our sense of urgency and the common awareness that partnerships bring you further than just regulatory confrontation,” said Lise Fuhr, director general of European phone industry lobby ETNO.

The change of tack is yet to improve the industry’s fortunes. Infrastructure funds are piling in to help fund network rollouts, but that’s depressing returns on the investments, further reducing the incentive for phone companies like BT Group Plc and Deutsche Telekom to spend. European telecom share prices are near their lowest in almost two decades.

Executives say their companies would rise to the challenge if they were allowed to merge. Europe needs five or six telecom companies to create a level playing field, said one French telecom operator executive, not the 100 or so it currently has. However, this would require governments to abandon their fondness for “national champions” in strategic industries.

“There is no need for government intervention,” said German lawmaker Hansjoerg Durz. Unlike most of its neighbors, Germany has one of the few truly global telecom players in Deutsche Telekom.

Spanish government officials have become more receptive to the idea of a merger that would reduce the number of telecom operators in the country, said a person with knowledge of recent discussions between industry and government.

Orange CEO Stephane Richard isn’t holding his breath. Europe is still “fundamentally consumer-driven,” he said in an interview, and when mergers do happen, the remedies demanded by regulators usually destroy the benefits.

— With assistance by Daniele Lepido, Natalia Drozdiak, Helene Fouquet, and Birgit Jennen

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