European telecom operators have long argued that systematic under-remuneration of capital limits their ability to sustain the strategic investments Europe needs to close its productivity gap with the US. This claim features prominently in the Draghi Report on European competitiveness.
A study published on VoxEU in January 2026 by five economists from the European Commission’s Directorate-General for Competition, including its Chief Economist, Emanuele Tarantino, challenges this claim. Over the last decade, the authors report, the sector’s return on capital employed (ROCE) has, on average, exceeded its cost of capital (WACC). They take this to mean that, overall, the sector has generated returns above what its investors require, rather than falling short of remunerating their capital.
The study lands just as the European Commission revises its Merger Guidelines, at the core of which lies the question of how much weight scale, innovation, investment and resilience should carry as pro-competitive factors in merger review. One reading follows naturally: that concerns about the sector’s ability to fund the next cycle of network investments are unwarranted, and that sector consolidation is unnecessary to sustain the strategic investment needed.
In a forthcoming article in Concurrences, RBB economists Miguel de la Mano
Miguel de la ManoPartner, Paul Hutchinson
Paul HutchinsonPartner, Valerio Sodano
Valerio SodanoPrincipal and David Henriques
David HenriquesSenior Associate contend that, whilst informative, the study does not speak to the question that matters for the merger-policy debate.
An aggregate comparison of historical accounting returns, they argue, provides limited guidance on whether a different market structure or a particular transaction would improve future investment outcomes (for instance, through scale effects or financial synergies) for three reasons.
First, telecom operators would rationally have avoided investments they did not expect to be profitable, so it is unsurprising that an ex-post analysis finds the investments that did materialise were not unprofitable. This tells us nothing about whether "enough" has been invested, or whether higher investment levels are associated with more concentrated markets. A more informative approach would examine observable investment outcomes (coverage, speeds, 5G penetration) and whether these vary systematically with market structure; international comparisons suggest that they do.
Second, the study’s metric is backward-looking, while the merger-policy question is forward-looking. The next investment cycle is expected to present a less favourable risk-return profile than the last decade: the required commitments are larger in scale, have longer payback periods, and face greater demand uncertainty.
Third, by aggregating returns across operators and national markets, the study’s metric masks the operator-level variation that actually determines whether a given merger would lead to greater investment. This is illustrated by the Vodafone/Three case, where the sector-wide average obscured divergent financial positions among operators in the market.
Finally, the authors argue that, even taken at face value, the study’s own data support a more cautious reading than the authors offer: a narrow, declining ROCE-WACC spread, alongside persistently high dividend payouts, is at least as consistent with expected returns on future investment falling short of the hurdle rate needed to justify new capital commitments.
Article forthcoming in Concurrences Review.
Read the full article here.
