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In Italy, a monopoly to rule the telecommunications market is in the works

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The Italian telecom market might become much less competitive in the near future with the creation of a new monopoly, if a controversial plan to create a national broadband operator goes through, one that would see Telecom Italia (TIM) merging with Open Fiber, one of its only rivals on the broadband market. For his part, TIM CEO Luigi Gubitosi is extraordinarily upbeat about the prospects and is expecting the project to come to pass soon. Even so, these expectations could be immature, given that resistance against the merger is growing, writes Colin Stevens.

On the surface, however, Gubitosi has good reason to be optimistic at the moment. The Italian government is more than enthusiastic about the deal, having been the driving force behind it since 2018. Then, in August this year, Rome approved the proposed ownership plan for the post-merger company that was drawn up by state-owned investment bank Cassa Depositi e Prestiti (CDP). According to press reports, CDP is the main proponent and guarantor of the plan that would see the emergence of AccessCo, a unified national broadband network to dominate the market.

The details are still being negotiated behind closed doors by the would-be partners, a group that also includes the Italian energy giant Enel, which controls around 50% of the Open Fiber stock, with the other half in the hands of CDP. In this scenario, TIM would eventually take majority ownership of the unified network, which the government hopes will accelerate Italy’s sluggish development of Internet infrastructure – an issue that has plagued the country for years.

Like other Southern-European countries, Italy is on the wrong side of the digital divide that cuts across Europe, lagging well behind Northern and even Eastern Europe in terms of both access and speed. The government’s reasoning is that the sheer scale of the new national provider will permit it to make massive investments in FTTx technology that the sector desperately needs. While Telecom Italia will be in charge of the proposed company, the authorities promise to put in place a system of regulations and multiple shareholders to keep them in check. 

The case against monopolies

But while the Italian government might see the merger as the silver bullet to improve the country’s Internet access, others are not so convinced. Angelo Cardani, at the time president of AGCOM, the regulator for the Italian communication market, in 2019 slammed the merger as a “backward step” for the industry, warning that the lack of competition will do more to stifle innovation and progress than promote it.

Cardani made his standpoint clear, but only weeks later his mandate as the head of AGCOM ended and the new president, Giacomo Lasorella, has been conspicuously silent on the matter. Lasorella is seen as an associate of Luigi Di Maio, a popular politician who previously served as leader of the anti-establishment Five Star Movement which currently forms half of Italy’s coalition government. 

Nevertheless, Cardani’s warning that the merger would create the opposite outcome of what Rome hopes to achieve is nothing to sneeze at. Over the last two decades, few industries have proven the beneficial effects of competition more than telecommunications. The countries routinely ranked among the best in terms of Internet access and quality are almost without exception countries with robust competition in their telecom markets. 

In the US, the geographical divisions between companies have created a pseudo-monopoly in which less than a third of the population has a choice of Internet provider. This has caused the US to drop out of the top 10 in recent years and is now trailing Hungary and Thailand thanks to broadband speeds that were unimpressive even 15 years ago. While Italy’s size and geography aren’t quite comparable to those of the USA, a monopoly would still create second class netizens in the country’s remote and mountainous regions, where improving the infrastructure of users who have no other choice is hardly a priority. 

Match point antitrust rules?

However, the biggest hurdle in AccessCo’s creation is undoubtedly antirust watchdogs. The European Union’s antitrust arm is known for routinely opposing such disruptive mergers, particularly in the tech and telecom industry. And despite current deliberations being held in private, the message conveyed through unofficial channels strongly indicates that it will do so again in this case. According to unnamed officials, the Commission’s view on the matter is that the merger would evidently create a monopoly and reverse two decades of deregulation. Since Italian antitrust rules closely mirror EU ones, there is little reason to expect a different outcome should the case come before the national authority.

The confidential revelations wiped 7.4% off Telecom Italia’s shares, and despite Italian Finance Minister Roberto Gualtieri’s hasty assurances that he has “no awareness of a potential EU veto”, Brussels’ decision seems already predetermined. In its 'Connectivity for a European Gigabit Society' policy, the Commission has previously recommended the exact opposite of what the AccessCo merger proposes, encouraging the strategy of “unbundling” to be extended in the broadband industry and proposing measures to foster the development of genuinely competitive wholesale broadband markets. It stands to reason that the Commission is highly unlikely to renege on these principles, or grant an exception to Telecom Italia. 

Right reasons, wrong execution

The following months will prove crucial for the future of Italy’s telecoms market – and digital future. The country is right to make better internet a priority, and yet is taking the wrong approach. Even if an agreement is met by all the partners in the merger and even if the new AGCOM council gives its blessing, the European Union is still more likely than not to oppose AccessCo’s creation. The Italian competition authority would be wise to join the EU as well. As it stands now, the most important people in Italy’ telecom industry are working hard on a bad plan the only redeeming factor of which is that it’s probably doomed to failure from the start.

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Despite talk of digital sovereignty, Europe sleepwalks into Chinese dominance on drones

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In her State of the European Union speech, European Commission President Ursula von der Leyen delivered a clear-eyed assessment of the European Union’s position within the global digital economy. Alongside predictions of a European “digital decade” shaped by initiatives such as GaiaX, von der Leyen admitted Europe had lost the race on defining the parameters of personalized data, leaving Europeans “dependent on others”, writes Louis Auge.

Despite that straightforward admission, the question remains whether European leaders are willing to mount a consistent defence of their citizens’ data privacy, even as they accept reliance on American and Chinese firms. When it comes to challenging American social media or e-commerce giants like Google, Facebook, and Amazon, Europe has no problem seeing itself as the global regulator.

In facing China, however, the European position often seems weaker, with governments only acting to curb the influence of Chinese technology suppliers such as Huawei under intense US pressure. Indeed, in one key area with serious implications for several economic sectors Commission President von der Leyen cited in her speech – unmanned aerial vehicles, otherwise known as drones – Europe is allowing a single Chinese firm, DJI, to corner the market practically unopposed.

A trend accelerated by the pandemic

Shenzhen Dajiang Innovation Technologies Co. (DJI) is the unquestioned leader of a global drone market predicted to skyrocket to $42.8 billion in 2025; by 2018, DJI already controlled 70% of the market in consumer drones. In Europe, DJI has long been the unmanned aerial vehicle (UAV) supplier of choice for military and civilian government clients. The French military uses “commercial off-the-shelf DJI drones” in combat zones like the Sahel, while British police forces uses DJI drones to search for missing persons and manage major events.

The pandemic kicked that trend into high gear. In European cities including Nice and Brussels, DJI drones equipped with loudspeakers admonished citizens about confinement measures and monitored social distancing. DJI representatives have even tried to convince European governments to use their drones to take body temperatures or transport COVID-19 test samples.

This rapid expansion in the use of DJI drones runs counter to decisions being taken by key allies. In the United States, the Departments of Defense (the Pentagon) and the Interior have banned the use of DJI’s drones in their operations, driven by concerns over data security first uncovered by the US Navy in 2017. In the time since, multiple analyses have identified similar flaws in DJI systems.

In May, River Loop Security analyzed DJI’s Mimo app and found the software not only failed to adhere to basic data security protocols, but also that it sent sensitive data “to servers behind the Great Firewall of China.” Another cybersecurity firm, Synacktiv, released an analysis of DJI’s mobile DJI GO 4 application in July, finding the company’s Android software “makes use of the similar anti-analysis techniques as malware,” in addition to forcibly installing updates or software while circumventing Google’s safeguards. Synacktiv’s results were confirmed by GRIMM, which concluded DJI or Weibo (whose software development kit transmitted user data to servers in China) had “created an effective targeting system” for attackers – or the Chinese government, as US officials fear – to exploit.

To address the potential threat, the Pentagon’s Defense Innovation Unit (DIU) has introduced a small Unmanned Aircraft Systems (sUAS) initiative to procure drones from trusted American and allied manufacturers; France’s Parrot is the only European (and, indeed, non-American) firm currently included. Last week, the Department of the Interior announced it would resume purchasing drones through the DIU sUAS program.

DJI’s security flaws have also sparked concern in Australia. In a consultation paper released last month, the Australian transport and infrastructure department flagged weaknesses in Australia’s defenses against “the malicious use of drones,” finding UAVs could potentially be used to attack the country’s infrastructure or other sensitive targets, or otherwise for purposes of “image and signals gathering” and other types of reconnaissance by hostile actors.

In Europe, on the other hand, neither the European Data Protection Board (EDPB), the German Federal Commissioner for Data Protection and Freedom of Information (BfDI), nor the French National Commission on Informatics and Liberty (CNIL) have taken public action on the potential dangers represented by DJI, even after the company’s products were found forcibly installing software and transferring European user data to Chinese servers without allowing consumers to control or object to those actions. Instead, the use of DJI drones by European military and police forces may appear to offer consumers a tacit endorsement of their security.

Despite an opaque ownership structure, links to Chinese state abound

Suspicions of DJI’s motives are not helped by the opacity of its ownership structure. DJI Company Limited, the holding company for the firm via the Hong Kong-based iFlight Technology Co., is based in the British Virgin Islands, which does not disclose shareholders. DJI’s fundraising rounds nonetheless point to a preponderance of Chinese capital, as well as linkages with China’s most prominent administrative bodies.

In September 2015, for example, New Horizon Capital – cofounded by Wen Yunsong, son of former premier Wen Jiabao – invested $300 million in DJI. That same month, New China Life Insurance, partly owned by China’s State Council, also invested in the firm. In 2018, DJI may have raised up to $1 billion ahead of a supposed public listing, although the identify of those investors remains a mystery.

DJI’s leadership structure also points to links with China’s military establishment. Co-founder Li Zexiang has studied or taught at a number of universities linked to the military, including the Harbin Institute of Technology – one of the 'Seven Sons of National Defence' controlled by China’s Ministry of Industry and Information Technology – as well as the National University of Defense Technology (NUDT), directly supervised by the Central Military Commission (CMC). Another executive, Zhu Xiaorui, served as DJI’s head of research and development up until 2013 – and now teaches at the Harbin University of Technology.

These links between DJI’s leadership and China’s military would seem to explain DJI’s prominent role in Beijing’s repression of ethnic minority groups. In December 2017, DJI signed a strategic partnership agreement with the Bureau of Public Security of the Autonomous Region of Xinjiang, outfitting Chinese police units in Xinjiang with drones but also developing specialized software to facilitate missions for the “preservation of social stability.” DJI’s complicity in the campaign of “cultural genocide” against the Uighur population of Xinjiang burst into the headlines last year, when a leaked video – shot by a police-controlled DJI drone – documented a mass transfer of interned Uighurs. The company has also signed agreements with authorities in Tibet.

An inevitable crisis?

While DJI has gone to considerable efforts to counteract the findings of Western governments and researchers, even commissioning a study from consultancy FTI that promotes the security of its new “Local Data Mode” while sidestepping existing flaws, the monopolistic control of this emerging sector by a single firm with links to China’s security establishment and direct involvement in systemic human rights abuses could quickly become a problem for regulators in Brussels and the European capitals.

Given how prevalent drones have become across the wider economy, the security of the data they capture and transmit is a question European leaders will have to address – even if they prefer to ignore it.

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Aviation Strategy for Europe

Boeing subsidy case: World Trade Organization confirms EU right to retaliate against $4 billion of US imports

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The World Trade Organization (WTO) has allowed the EU to raise tariffs up to $4 billion worth of imports from the US as a countermeasure for illegal subsides to the American aircraft maker, Boeing. The decision builds upon the WTO's earlier findings recognizing the US subsidies to Boeing as illegal under the WTO law.

An Economy that Works for People Executive Vice President and Trade Commissioner Valdis Dombrovskis (pictured) said: “This long-awaited decision allows the European Union to impose tariffs on American products entering Europe. I would much prefer not to do so - additional duties are not in the economic interest of either side, particularly as we strive to recover from the COVID-19 recession. I have been engaging with my American counterpart, Ambassador Lighthizer, and it is my hope that the US will now drop the tariffs imposed on EU exports last year. This would generate positive momentum both economically and politically, and help us to find common ground in other key areas. The EU will continue to vigorously pursue this outcome. If it does not happen, we will be forced to exercise our rights and impose similar tariffs. While we are fully prepared for this possibility, we will do so reluctantly.”

In October last year, following a similar WTO decision in a parallel case on Airbus subsidies, the US imposed retaliatory duties that affect EU exports worth $7.5bn. These duties are still in place today, despite the decisive steps taken by France and Spain in July this year to follow suit Germany and the UK in ensuring that they fully comply with an earlier WTO decision on subsidies to Airbus.

Under the current economic circumstances, it is in the mutual interest of the EU and the US to discontinue damaging tariffs that unnecessarily burden our industrial and agricultural sectors.

The EU has made specific proposals to reach a negotiated outcome to the long running transatlantic civil aircraft disputes, the longest in the history of the WTO. It remains open to work with the US to agree a fair and balanced settlement, as well as on future disciplines for subsidies in the civil aircraft sector.

While engaging with the US, the European Commission is also taking appropriate steps and involving EU member states so that it can use its retaliation rights in case there is no prospect of bringing the dispute to a mutually beneficial solution. This contingency planning includes finalizing the list of products that would become subject to EU additional tariffs.

Background

In March 2019, the Appellate Body, the highest WTO instance, confirmed that the U.S. had not taken appropriate action to comply with WTO rules on subsidies, despite the previous rulings. Instead, it continued its illegal support of its aircraft manufacturer Boeing to the detriment of Airbus, the European aerospace industry and its many workers. In its ruling, the Appellate Body:

  • Confirmed the Washington State tax programme continues to be a central part of the S. unlawful subsidization of Boeing;
  • found that a number of ongoing instruments, including certain NASA and U.S. Department of Defence procurement contracts constitute subsidies that may cause economic harm to Airbus, and;
  • confirmed that Boeing continues to benefit from an illegal U.S. tax concession that supports exports (the Foreign Sales Corporation and Extraterritorial Income Exclusion).

The decision confirming the EU right to retaliate stems directly from that previous decision.

In a parallel case on Airbus, the WTO allowed the United States in October 2019 to take countermeasures against European exports worth up to $7.5bn. This award was based on an Appellate Body decision of 2018 that had found that the EU and its Member States had not fully complied with the previous WTO rulings with regard to Repayable Launch Investment for the A350 and A380 programmes. The US imposed these additional tariffs on 18 October 2019. The EU member states concerned have taken in the meantime all necessary steps to ensure full compliance.

More information

WTO Appellate Body ruling on US subsidies to Boeing

Public consultation on preliminary list of products in the Boeing case

Preliminary list of products

History of Boeing case

History of Airbus case

 

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