European Telecommunication Regulation - Effects on Telecommunication Providers

The European Telecom Regulatory system is a two-stage system where the European Parliament jointly with the European Commission (EC) and the member states determines the common regulatory system to be implemented to national laws. Against this common regulatory background, the EC also intervenes if it suspects a particular national or international market not to be in line with common EU guidelines. Most prominent examples of interventions are international mobile roaming (2006), mobile network sharing agreements in the UK and Germany (both in 2003) and the abuse-ofdominance decision against Telefonica in 2007. The EC controls mainly three alternative instruments to intervene on national and international market situations: First, the EC could intervenes on issues present in multiple EU markets or affecting multiple member states at the same time addressing national governments and national regulatory authorities (NRAs) (the internationalmobile-roaming example). Second, if an existing national regulatory approach favors one company over its competitors the EC addresses the national regulatory practice (the mobile-network-sharing examples). Finally, the EC also intervenes on individual companies. In contrast to the others, this last type is a direct intervention in companies’ market practices (the abuse-of-dominance example). In this paper I compare the market outcomes of the three types of EC interventions. As regulatory adjustments try to accomplish a long-term change in the market situation in the direction of more competition one can hardly disentangle the impact of a particular regulatory change from other driving market forces. As one cannot evaluate the outcomes of regulation employing standard econometric IO methodologies, I use an event study approach which measures the direct impact of a regulatory announcement on the change in a company's stock prices. In doing so, I find significantly positive effects of the first two types of interventions (addressing multiple member states and individual governments) which show that EC interventions improve individual market situations. On the other hand, directly addressing companies has a negative impact on the affected companies (as expected) but has no significant positive impact on competitors in the same market. While stock price volatilities are not significantly affected by the first two types of interventions, the company-addressing type results in significantly lower volatilities which means a more directed reaction across shareholders. These findings let us draw key conclusions for telecom regulation in the EU: First, EC interventions actually drive markets to a state of more competition and compensates for an a priori inferior position of new entrants. Second, comparing the individual approaches the second and the third type of interventions are (partially) substitutable. In particular, the comparison of stock price volatilities after announcements shows that the national implementation step in line with the second type introduces additional uncertainty about the final outcome as national governments and regulators adjust EC interventions to the national situation. Thus, if both types of interventions are feasible to reach a desirable adjustment in the market situation directly addressing a company results reduces uncertainty of market participants which is of particular interest in markets with complex infrastructure investments.

Veith, Tobias (2010), European Telecommunication Regulation - Effects on Telecommunication Providers, ZEW Discussion Paper No. 10-088, Mannheim.