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Funding 5G: incentives matter

13 May, 2022

Recent discussions in Europe about how to meet 5G targets have focused on whether Tech players should contribute to network investment, with some suggestion this could present an alternative to consolidation in the sector. But incentives for investment are not just a question of revenues. Where there are synergies in network deployment, allowing mobile mergers could help encourage faster roll-out at lower overall cost regardless of how roll-out is funded.

Recent 5G discussions have focused on funding - not incentives

Mobile operators across Europe have long emphasised the potential importance of consolidation in the sector to facilitate roll-out of next generation technology. Many have been buoyed by suggestions that the regulatory climate has become more favourable towards telecoms mergers. The General Court's annulment of the Commission's decision to block the Hutchison/O2 merger in the UK is seen by many as raising the bar considerably on the evidence that would be needed to block any future mobile mergers. The Commission’s ambitious targets for 5G roll-out have also led to speculation that it might be more supportive of consolidation if that would help achieve those targets.

Recent remarks by Margrethe Vestager may cast doubt on that view.[1] When asked whether telecoms mergers should be allowed to enable investment, she expressed concerns that mobile mergers may lead to increases in consumer prices at a time of serious economic pressure on households. While not challenging arguments that operators will need more money for 5G, Vestager suggested that this might be funded by an infrastructure contribution from the major tech players – one of several recent indications that the Commission is exploring this as a possibility.

Transfers don't affect incentives - but mergers can

But the question of how to meet 5G roll-out goals goes beyond one of funding alone. Ensuring operators have the right incentives to invest is also essential to meeting this ambition.

Economic theory suggests lump sum transfers (of the kind that may be envisaged for Tech companies to pay to network operators) will not affect investment incentives where the recipient is free to use the money how it wishes. By contrast, consolidation has the potential to enhance investment incentives in a way that need not imply a trade-off with prices: because of the synergies in network deployment that consolidation can help unlock.

Where such synergies exist, the lower costs of network deployment could help drive roll-out, enabling 5G targets to be reached sooner and more cheaply. Merger synergies will also tend to reduce prices, where there is sufficient ongoing competitive intensity to ensure cost reductions are passed through to consumers. The changes in investment incentives may also go beyond the merger parties if rivals feel they need to increase their investment in response. Moreover, not all investment is created equal: where there are synergies between the merger parties, allowing consolidation may also result in higher network quality for a given overall level of investment.

Network sharing may be able to unlock some of these benefits but is likely, in practice, to be a second-best answer. For example, it may be difficult to reach agreement if operators have very different strategies for 5G roll-out, and incentives to invest are weakened when the competitive benefits of enhanced network performance must be shared with a rival.

Old arguments, new context

These arguments are not new. However, in a dynamic market expecting considerable further change in the competitive landscape and underlying technology, they deserve a fresh hearing. Any proposed transaction would of course require an in-depth analysis of possible synergies as well as other deal-specific factors, including the likely competitive effects. But in the context of the debate on funding 5G investment, it is important to remember that incentives go well beyond the ability to finance deployment.

Where merger synergies exist, allowing consolidation could help roll-out goals to be achieved faster and at lower cost to society. If those savings are lost, the additional costs will ultimately be recovered from consumers and citizens, however any roll-out is funded.

Author

Katie Curry is a Partner at Flint. She has 20 years of experience in competition and regulation, and has previously held senior roles at Ofcom as well as the OFT and UK Competition Commission (now part of the CMA).  To find out more about how Flint can help you navigate the risks and opportunities of these developments, please get in touch.


[1] See, for example, MLex | Tech companies may be asked for ‘fair contribution’ to building EU telecom infrastructure.

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