There is no such thing as free innovation. Why wise regulation matters.

One thing is for sure: as mobile phone users we will continue to crave with great appetite innovative and ever more data-hungry applications. This requires infrastructure rollout and technology able to keep up with the increased data volumes that are to be handled; hence it entails large capex investment by the operators. Such investments would secure the implied future-proofing R&D expenditures from infrastructure suppliers, at least if their profitability allows for it…. This in turn will not be possible unless the operators are profitable to such an extent that deters them from price-pressurizing their suppliers unduly hard. Many factors impact operators’ ability to make due profits, but a decisive one, which is not really under their control, is regulation. Therefore it is worth elaborating briefly on the bearing regulation can have on operator cost and revenue structure and to shed some light on the impact on profitability for the infrastructure vendor sector.
Simply speaking, operators have two variables they can work with to maximize profits: boosting revenues and curbing costs.

Boosting revenues depends largely on their ability to make consumers pay for the amount of data they actually consume. To a large extent, this requires a market structure void of excess competition and price warfare. Only a reasonable level of competition will allow operators to introduce price plans where data consumption and revenue per user grow in a correlated manner. In the past regulators in most European countries have favoured to license spectrum to an incremental number of operators. In France for example this recently led to a price war, which seemingly results in a detriment of infrastructure advancement. Earmarking spectrum for new entrant bidders is in many markets not an apt approach of licensing auctions as it may cause wild bidding for the remainder of the operators, as can be observed recently in the Czech Republic (though the regulator should be credited for suspending their 4G auction gone wild preventing “winner´s curse” at last).

When it comes to curbing costs then, the network is still by far any operator’s single biggest cost factor. Which brings us back to network sharing as one of the largest levers for reducing costs. A small or spread-out population poses an ever so bigger need to curb network costs. Sweden as an example has been a forerunner with network sharing dating back to 2001. Recently, French regulators apparently have come to understand that downward price spirals drain the sector of its potential to invest, and they have finally opened up the perspective of network sharing (at least for passive components, such as masts). So although hesitance is still there, as suggested by the regulator´s recorded intention to “maintaining competition in network infrastructure” there is still hope for soundness. Cooperation is what is needed to improve network infrastructure. Split spend on network means more operator profits and less price pressure on infrastructure vendors and thus an increased potential of R&D investment into future network technology. And, one should not forget what is probably the final cure for many markets – Consolidation (see Northstream prediction # 2 for 2013).

Advanced LTE and 5G do require unthrottled R&D spend to be brought about. Therefore, do not waver now, brave regulators, but follow through with setting the new course. Make wise rules for the sake of full-fledged network sharing on the infrastructure side, license spectrum prudently for reasonable competition in the market and take advice on what is the right number of operators in your market – there is no sacred universal number. Both will enable solid operator profits allowing for sustainable infrastructure vendor profits giving rise to technological advance. At stake is the innovation, which we as mobile phone customers want to enjoy even tomorrow.

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