Big Telcos Aren’t Necessarily Better: A Case Study of EU versus US Market Concentration

Joanna J. Bryson, Helena Malikova, Lisa Garbe and David Backovsky
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Joanna J. Bryson: Hertie School

No m42uh, SocArXiv from Center for Open Science

Abstract: Telecommunications companies (telcos) provide infrastructure essential to the delivery of digital content. The competitiveness of European Union businesses is presently seen as critically dependent on expansion of next-generation communication technologies. Yet, EU telcos are displaying returns on capital that disappoint private investors, leading in some cases to depressed share prices, and potentially making them vulnerable to takeovers bids by financial investors. Given their essential role, the prospect of EU telcos falling into mostly foreign-owned, fiercely profit-maximizing, and/or cost-cutting investors is unappealing for policy makers, at both the national and the European level. One solution suggested by the telcos themselves is that they be allowed to consolidate. Economic theory does not provide a clear answer to how such concentration might affect investment in infrastructure. In this paper, we provide a comparative empirical analysis of the relationship between market concentration and investment in infrastructure in the telco sector. First, we compare investment rates in infrastructure by major telco companies in both the EU and the more concentrated US market. We find more value being returned to customers in the form of infrastructure investment in the less-concentrated EU market. Second, we compare telcos' profitability with that of other corporations involved in the information or ``eye-ball'' value chain. We find operating profits of telcos on both sides of the Atlantic are broadly in line with other companies of the value chain, with the notable exception of the highly concentrated digital ad exchange business. This evidence suggests that lack of incentives rather than lack of ability explains the larger portion of profits invested into infrastructure in the EU compared to the US. Rather than allowing market concentration, which could raise consumer prices and lower infrastructure investment incentives, EU regulators might consider other fund-raising mechanisms, such as redistributing profits from digital ad exchanges.

Date: 2023-01-14
New Economics Papers: this item is included in nep-com, nep-eec, nep-ict and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:osf:socarx:m42uh

DOI: 10.31219/osf.io/m42uh

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