Europe at a disadvantage on AI infrastructure, but it is tackling the sector’s critical issues

In Europe, the risk is that it may find itself at a disadvantage just as artificial intelligence becomes a decisive factor in economic growth and geopolitical competitiveness.

by Marco Mencini, Head of Research Plenisfer Investments SGR

The full unfolding of the potential of Artificial Intelligence is inextricably linked to the availability of network infrastructure capable of delivering low latency, operational continuity and the ability to manage increasingly complex data flows, essential requirements from automated manufacturing to digital healthcare, and on to smart mobility. In this context, telecommunications networks represent one of the most important strategic infrastructures for the economic competitiveness of national systems.

Europe continues to suffer from excessive market fragmentation, a legacy of a competitive model that over the past two decades has favoured price compression at the expense of operators’ profitability and their ability to sustain long-term infrastructure investments. The international comparison, on the other hand, makes the stakes clear. In the United States, a market with a more limited number of operators, the sector has benefited from greater investment capacity thanks to better monetisation of growing demand for advanced digital services, while in China, strong state presence and a concentrated industrial structure have made it possible to carry out infrastructure investments on a large scale, albeit in a context of lower average prices.

In Europe, then, the risk is of being left at a disadvantage precisely when artificial intelligence becomes a decisive factor in economic growth and geopolitical competitiveness. However, some signs of change are emerging. In particular, the approval of the Digital Networks Act (DNA) on 21 January represents the first organic attempt at European level to address the sector’s industrial critical issues in a structural way and to recognise digital networks as a strategic infrastructure for economic competitiveness, security and the development of artificial intelligence.

In addition, the debate on sector consolidation has taken a significant step forward. In several European markets there is a greater openness, including at regulatory level, to merger transactions that reduce the number of operators, in the awareness that a more rational industrial structure is a necessary condition to support the investments required by the digital transition. More and more often, consolidation is seen as a process of “market repair”, needed to rebuild profitability conditions consistent with the strongly capital-intensive nature of the sector. At the same time, the trend towards separating network infrastructure from services has strengthened. The entry of specialised investors and capital with a long-term horizon has favoured the development of models in which networks are valued as stand-alone infrastructure assets, capable of generating stable returns over long periods.

After a long phase marked by particularly intensive investments, in several European markets the network-building cycle is gradually entering a more mature stage. The spread of next-generation infrastructure (fibre and 5G) is allowing a gradual normalisation of capex levels, improving cash-flow visibility and the sector’s financial sustainability. According to the European Commission, around 40% of the European Union’s electricity distribution networks are now more than 40 years old, highlighting a significant need for infrastructure modernisation: more than 580 billion euros in investments in transmission and distribution infrastructure will be required by 2030. And according to some estimates (Source: Agency for the Cooperation of Energy Regulators; EIB – European Investment Bank), total requirements could exceed one trillion euros in the long term.

Telecommunications and energy therefore share a common challenge: adapting critical infrastructures to structurally growing demand in a context of rapid technological change. Without modern power grids, the energy transition cannot be achieved; without resilient, high-performance digital networks, the artificial intelligence economy risks running into similar bottlenecks. In this context, artificial intelligence introduces a new variable into the sector’s risk-return profile, acting as a catalyst for demand for advanced network infrastructure, reinforcing the strategic centrality of assets and making even more evident the unsustainability of models based exclusively on price competition. If adequately supported by an evolution in the regulatory framework, this transformation could translate into greater competitive discipline and, over time, a structural improvement in returns on invested capital.

Implications for investors - For investment portfolios, the European telecom sector can no longer be interpreted in a uniform way. Value creation will likely be concentrated in specific segments: on the one hand, high-quality infrastructure assets, such as fibre networks, towers, backbone and wholesale platforms, which offer cash-flow visibility and more stable return profiles; on the other, those integrated operators that will be able to benefit from economies of scale, reduced competitive pressure and greater ability to monetise value-added services aimed at the corporate segment.

These characteristics largely overlap with those of electricity infrastructure. From an asset allocation perspective, telecommunications and energy can therefore be seen as components of a broader infrastructure allocation, characterised by long investment horizons, high barriers to entry and relatively stable cash flows, often regulated or contract-based. The convergence between the digital transition and the energy transition strengthens the role of infrastructure as a strategic asset class, potentially capable of offering diversification and protection in volatile scenarios.

In conclusion, the high capital intensity, the need for continuous technological investments and uncertainty over the timing and manner of consolidation call for a prudent and selective approach. In the absence of a clear change of regulatory pace, the risk is that growing traffic demand will continue to translate into higher costs rather than higher margins, with limited benefits for shareholders. From a long-term perspective, however, we believe that the European telecommunications sector is gradually regaining relevance within diversified portfolios. Not only as a defensive sector or a source of dividend income, but as a strategic exposure to essential infrastructure for the economy of artificial intelligence. The combination of compressed valuations, potential industrial catalysts and the growing systemic importance of networks could, over time, create the conditions for a selective re-rating of the sector, to the benefit of investors with a patient and disciplined time horizon.

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