Executive summary
This paper analyses one of the most significant structural tensions in the European digital economy: the growing gap between the telecommunications sector’s high investment needs and its actual capacity to finance them in an environment of intense price competition. The central argument is that the gap cannot be explained solely by technological or demand factors but is largely due to a persistent regulatory asymmetry between the ease of entry and the difficulty of exiting from the market, resulting from the interaction between sectoral regulation and the application of merger controls in the EU.
The analysis argues that European competition policy has for decades prioritised the reduction of barriers to entry without developing an equivalent framework to allow for an orderly and efficient exit in capital-intensive sectors. This asymmetry has weakened the effective contestability of telecommunications markets, understood not as the number of operators present, but as the existence of credible threats of entry and exit without prohibitive costs. In a sector characterised by indivisible assets, high fixed costs and long investment cycles, the practical impossibility of exiting the market through intra-market consolidation erodes the incentives to invest, even when entry is widely facilitated.
From an analytical point of view, the paper is based on the theory of contestable markets and shows that, in telecommunications, the dimension of exit is particularly critical. European evidence indicates that the application of the effective competition test in merger control has relied predominantly on static and short-term effects, especially on prices, while the dynamic benefits associated with investment, innovation, network quality and financial sustainability are assessed secondarily and under extraordinarily demanding evidentiary standards. The asymmetry has been reinforced by recent case law, which extends the European Commission’s discretion to block intra-market consolidation operations even in the absence of the creation or strengthening of a dominant position.
The paper documents how this logic has translated into a decision-making practice aimed at artificially preserving the previous morphology of markets, in particular the implicit rule of maintaining four mobile operators with their own networks, through the systematic imposition of structural remedies. The ex post experience in several Member States (Austria, Germany, Ireland and Spain) shows that these remedies, designed to replace exit with regulated entry, have had limited success in generating sustainable infrastructure-based competition and, in some cases, have favoured opportunistic strategies rather than long-term investment.
In contrast to this European pattern, the paper analyses a set of comparative experiences (the US, Brazil, India and Taiwan) in which a more dynamic approach to merger control, focused on investment, coverage and quality objectives, has coexisted with substantial improvements in network performance, the deployment of advanced technologies and, in many cases, without systematic adverse effects on consumer welfare. These experiences suggest that consolidation is not inherently anti-competitive and that, in network industries, it can be a necessary mechanism for efficient adjustment when accompanied by appropriate regulatory governance.
This diagnosis takes on particular strategic relevance in the current European context. The persistent decline in average revenue per user, investment that is systematically lower than in other advanced economies, and a return on capital that is structurally below its cost are jeopardising the sector’s ability to sustain the deployment of infrastructure that is critical for the EU’s digitalisation, resilience and strategic autonomy . In this context, a competition framework that effectively blocks orderly market exit risks perpetuating excessive fragmentation and chronic underinvestment.
In light of the ongoing review of the Horizontal Merger Guidelines, the paper proposes a reorientation of merger control towards a genuinely dynamic approach. This involves operationally integrating investment, innovation and quality parameters into the effective competition test; balancing the evidentiary treatment of risks and efficiencies; redesigning remedies to focus on verifiable competitive outcomes rather than the artificial preservation of structures; and substantially strengthening ex post monitoring of the commitments made. The aim is not to facilitate consolidation per se, but to ensure that, when it does occur, it contributes to creating economically sustainable and competitively efficient market structures capable of supporting the investment that the European digital economy needs in the medium and long terms.
Image: A central view of the Berlaymont Building, Brussels. Photo: © European Union, 2024.
