Americans already paid for Europe's 5G, but Europe wants more

Ungrateful, tribal lot, the Europeans. After they had torn one another to bits in the early 1940s, the Americans – who had already sacrificed men in the fight against the baddies – bankrolled Europe's buildout of modern infrastructure, stumping up $13.3 billion via the Marshall Plan in 1948. Britain, the biggest recipient of aid, still likes to think it has a "special relationship" with its former colony, but anti-Americanism is popular. And continental whining about les Américains is rife.

Similar ingratitude is today evident in telecom. Europe's biggest operators, not to mention some of its government officials, regard American technology companies, pejoratively labelled Big Tech, as a bunch of freeloaders. Amazon, Google, Netflix and a few others stuff the saturated fats of their Internet traffic into the telcos' clogged network arteries without handing over so much as a cent in welfare payments, Europeans moan. Yet ordinary Americans have already subsidized Europe's 5G rollout to the tune of billions.

It's not an obvious handout, like the Marshall Plan, but a propping up of European telecom hidden to those outside the industry. The clues are in the impact that spending cuts by giant US operators have had on Ericsson and Nokia, the Nordic vendors collectively responsible for most of Europe's 5G infrastructure.

Ericsson's US revenues, for instance, fell about 22% last year, while its non-US revenues rose a tenth, thanks almost entirely to network sales in India and the licensing of intellectual property. But despite the headline sales dip of just 3%, gross profit, after the deduction of restructuring charges, dropped 8%.

It's a similar story at Nokia. While the Finnish company is not explicit about US performance, it reported a 32% decline in North America sales last year and unchanged sales elsewhere. Overall revenues dropped almost 11%, but Nokia's gross profit was down more than 14%.

In summary, profits at Ericsson and Nokia suffer disproportionately when US operators cut spending. And recent US stinginess has left the Nordic vendors in bad shape. Just this week, Ericsson said it would slash 1,200 jobs in Sweden, about 9% of local headcount, after announcing 8,500 group-wide layoffs around this time last year. Having this decade lost 5G contracts with both AT&T and Verizon, two of the big three US telcos, Nokia aims to cut between 9,000 and 14,000 jobs by the end of 2026.

Transatlantic imbalance

While US operators invest about the same as Europeans do in capital expenditure as a percentage of revenues, US consumers pay steeper rates for telecom services. In 2022, AT&T's capital expenditure was equal to 16% of its revenues. At France's Orange, it was a similar 17%. The difference is that a typical mobile contract customer at AT&T still spends about $50 a month. In France, one of Orange's wealthiest markets, the same type of customer spends less than €19 (US$21).

The implication of this and the dent a US sales decline has put in headline vendor profits is that US operators also pay more. The basic argument advanced by European telcos is that Americans can use the juicier payments they collect from their own customers to fund the purchase of more and better network equipment (seemingly more profitable for Ericsson and Nokia). "Over the last decade, US operators have invested 50% more per capita in mobile networks than those in Western Europe," said Telefónica in 2022. Yet according to reliable estimates, US operators can also face much higher prices.

All this may partly explain why per-employee revenues at both Ericsson and Nokia are much higher in North America than in other regions (although a concentration in domestic markets of research and development and other resources might explain some of the disparity). Even when licensing revenues booked under the US are stripped out, Ericsson's figures last year were about $519,500 (at today's exchange rate) for North America compared with just $215,600 elsewhere. Nokia made $596,400 per North American employee but just $169,900 for each European one.

Of course, the Europeans could not have their four-player mobile markets and discounted prices unless the Americans paid top dollar, because Europe's homegrown vendors would not be commercially viable. It all smacks of a huge cross-subsidy. For that reason, spending cuts by US telcos that imperil Ericsson and Nokia may also be a grave threat to Europe's operators. They lack viable, low-cost alternatives to the Nordic suppliers (although so do the Americans) and are in no position to bear higher prices. Indeed, some European telco executives still seem to think they are being overcharged, despite the signs of a margin squeeze at Ericsson and Nokia.

Unfair share

What's the answer? A sensible, market-based approach might take aim at some of Europe's regulatory shibboleths – the instinctive dislike of any merger that reduces the number of mobile networks in a country from four to three; the government demand for spectrum payments in perpetuity. That sort of thing.

Instead, the focus for some European telco executives is on leeching even more off the Americans. Under their "fair share" proposals, companies blamed for network congestion would have to compensate network owners. And those "large traffic generators," as they are disparagingly described, all happen to be American. Besides propping up Europe's wonky mobile markets via US telco payments to Ericsson and Nokia, American companies and their institutional investors are expected to put money directly into European telco pockets.

Fair share already seemed egregiously unfair, a shifting of blame from the telcos' own Internet-addicted customers and all-you-can-eat tariffs to the very companies that create demand for high-speed networks. Nobody would spend money to use a network devoid of content just as nobody would pay to stare at a blank screen in a cinema. And Europe's telcos have done a bum job of correlating data growth with costs. Thanks to the Americans, those remain much lower than they should.