Europe’s Digital Economy Needs a New Foundation

By David Dean

Two topics head the agenda of this week’s European Council meeting: (1) digital economy, innovation, and services and (2) growth, competitiveness, and jobs. While each is a separate item for discussion in Brussels, outside the meeting hall the two are increasingly intertwined. Europe’s digital economy is growing at 10 percent a year—significantly faster than the economy as a whole—and already accounts for almost 5 percent of GDP, or nearly €600 billion.

Europe is hardly homogenous, of course. The U.K.’s Internet economy (€175 billion) represents close to 10 percent of GDP, led by a strong e-commerce sector. Denmark and Estonia have nurtured vibrant digital sectors, including e-government capabilities that are among the world’s most sophisticated. In Sweden, the first country in Europe to develop a comprehensive broadband policy, consumers have driven digital-economy growth to almost 8 percent of GDP, and the country has built a significant competitive advantage in digital services and platforms. But most of Europe’s economies lag in digital development.

Europe’s digital health requires many things, but without infrastructure investment, rapid digital growth won’t happen. By 2014, investments in mobile infrastructure equipment will have fallen 67 percent since 2004 as current levels of investment in long-term evolution (LTE) technologies have not matched the heavy spending on 3G networks. In fact, European LTE spending, on a per-subscriber basis, is half that of the United States and of Japan. No surprise, then, that LTE accounted for less than 1 percent of mobile connections in Europe at year-end 2012, compared with 11 percent in the U.S. and 28 percent for South Korea. The situation is not much better for fiber access.

Around the world, many countries have been able to reap the benefits of becoming unified digital markets. Thanks to single bodies overseeing spectrum management, consolidated telecommunications industries, and a willingness to invest in infrastructure, the United States and China, for example, enjoy healthy and growing telecom and digital-services sectors as well as thriving entrepreneurship, resulting in widespread job creation. The extent to which Europe can follow suit and form its own single digital market is central to the future of European competitiveness and wealth creation.

The depth of the challenge is compounded by its complexity. Infrastructure spending has multiple constraints in Europe, including the ability of telecom operators to generate sufficient returns and monetize mobile data usage. An inefficient and fragmented system of spectrum allocation undermines the delivery of high-quality mobile communications, not to mention the growth of mobile connectivity generally. The development of a vibrant digital-services sector through energetic entrepreneurial start-up activity lags because of issues related to talent, funding, and demand. This constitutes a barrier to creating jobs and adopting digital services. A disjointed approach to telecom regulation further heightens uncertainty and discourages investment.

Current debate over Europe’s digital future is often focused on describing the problem rather than on addressing the root causes and developing comprehensive solutions. That future depends on policies that spur investment and encourage growth. Fixing the current hodgepodge of outdated regulation is a start, but it is akin to putting a fresh coat of paint on worn-out timbers when what is really needed is to design a new house.

The European Council and others with a stake in Europe’s digital economy should look to models of what the future could look like and then ask how to get there. Most experts agree, for example, that spectrum allocation, utilization, and sharing are much more productively addressed on a pan-European basis while recognizing that substantial national concerns—including those related to difficult issues such as defense and revenue from spectrum auctions—must be taken into account.

Separate regulation of the telecom, media, and technology sectors makes less and less sense in an age of ever-greater convergence. What are the possibilities for developing unified regulatory models that could span sector boundaries or national borders—or both? Would a single European regulator potentially be more effective than 28 separate authorities, many of which are underresourced and overstretched?

Industry players need to have the courage to rethink their business models as well. For example, anachronistic pricing that constrains data use should be abandoned in favor of encouraging consumers to pay more to assuage their hunger for digital communication.

The stakes are high. Other major economies have already achieved conditions conducive to infrastructure investment and rapid growth in digital services, both for consumers and for businesses. The companies that are driving the development of a worldwide digital economy—from to Facebook, and Google to Tencent—are one result. Unless it transforms its approach, Europe gives its companies little chance to compete with such leaders, and the vision of the Digital Agenda for Europe, meant to boost the economy and “enable Europe’s citizens and businesses to get the most out of digital technologies,” will be at risk.