The European Commission (COM) has championed the liberalisation of Europe’s telecom markets and (tried to) open up the networks for competition as early as 1998. EU rules implemented over the years allowed market entrants to provide consumers with narrow- as well as broadband services.
Unsurprisingly, incumbent operators were not too happy: Deutsche Telekom and the other former state monopolists were told to “unbundle” its legacy access infrastructure – by renting out parts of its network infrastructure to newcomers charging them a dodgily calculated “cost-based” fee. Also, new operators were allowed to collocate their infrastructure at switching offices.
Now, the Commission, through its PR-driven Digital Agenda, adopted in 2010, aims at promoting ultra-fast fibre-based internet connectivity in Europe. Via to-be-built next generation access (NGA) networks Europeans will be guaranteed internet access with speeds above 30 Mbit/s by 2020 (50 per cent of which above 100 Mbit/s), says the Commission. A rather ambitious and largely political goal. And a dangerous one, too.
EU copper policy
In order to achieve this goal, COM set out to precipitate the transition from today’s incumbent-owned networks, based on old-school copper cables, to NGA networks. While the old EU regulatory framework has worked pretty well in granting market entrants access to the copper networks, for instance through unbundling the local loops or mandated shared access, it was less successful in spurring investment in a much-needed faster broadband infrastructure. Fibre-based broadband deployments seriously lags behind in a number of European states. A recent study shows that a mere 70 per cent of German households enjoyed access to 30 Mbit/s (or above) broadband connections in 2014. Germany has lately made upgrading its internet infrastructure a political priority.
COM’s ill-advised strategy has so far been to regulate the wholesale price for access to the copper networks. The former state monopolists, aka the owners of the copper networks, are allowed to keep or even increase the fee they charge its competitors in the coming ten years. According to COM’s logic, the incumbent operators would then invest the additional profit into the deployment of NGAs. What a gamble.
Bruegel, maybe Brussels’ most common-good-oriented policy think tank, says that it is pretty obvious that the old “market access” regulation has indeed succeeded in lowering consumer prices, but has actually reduced total industry investment in fibre-based NGA infrastructure. That is mainly due to the incentives given to new operators to opt for low-cost investments such as resale and bitstream access. Actual investments in the physical fibre-based infrastructure are less attractive or even impossible to make for small operators. And the big ones earn enough renting out their main distribution points for the next ten years. In the end, no one invests.
Thus, Bruegel concludes: “In general, NGA investments ‘cannibalise’ economic profits from first-generation broadband services provided via legacy infrastructure, which might thus reduce profitability and the incentive to invest in NGA infrastructure.”
Political motives over economic imperatives
The main problem with COM’s wholesale price approach is that it reflects political motives rather than economic imperatives. Whether Deutsche Telekom and other big players will ever invest money earned from charging smaller operators into fibre-based infrastructure depends on a variety of factors and is more than doubtful. Because the old copper framework has not triggered sufficient NGA investments, Brussels intervenes in telecom markets on a large scale, even by the EU standards.
In fact, Brussels’ overly ambitious political broadband coverage target might have caused another problem. Since the upgrade to fibre technology is taking for ages, big operators are pressuring national regulators to allow alternative measures to reach the 2020 goals. Recently, Deutsche Telekom has asked its regulator, the Bundesnetzagentur, for allowance to make use of “vectoring” technology between its central offices and the respective household – an exemption to the rule of mandated access to the incumbent’s distribution points. Vectoring is a transmission method that allows increasing broadband width via traditional copper cables. If vectoring technology was adopted at central offices close to the end user, Telekom’s competitors would be shut out from physical access to the copper wire of the local loop.
Telekom argued it would thus be able to provide speeds up to 100 Mbit/s, especially in rural areas – a smart move, since it is widely regarded as the biggest political (and market) failure that broadband internet has not reached great parts of rural Germany (where its countless “hidden champions” are located). Smaller internet providers and internet activists, however, view vectoring as yet another try to re-monopolise the internet provider market. Telekom would offer vectoring-enhanced internet access while binding local customers to their services.
Competition needed in the EU internet market
Almost a common trait, COM focuses exclusively on the supply-side when asking why there is not enough investment in Europe’s fibre-based infrastructure. However, operators are reluctant to invest in fibre optics due to various reasons – many of them unaffected by regulation.
Instead, COM should acknowledge its failure in spurring enough cross-border competition in Europe’s broadband markets and take it from there. The fact that fibre investments have been significantly higher (by former state monopolists and smaller operators alike) where pressure from competition and consumer demands is higher, should be the primary lesson taken from older regulatory approaches.
At the same time, the Commission should re-think its largely politically motivated broadband coverage goals (30 Mbit/s bandwidth for everyone by 2020). Eurocrats are good at cranking out random policy targets that sound good in speeches (the most famous example being the economically imprudent debt ceilings of the Stability and Growth Pact), but less skilful in outlining how to actually meet them. A randomly chosen coverage target might do more harm than good when national regulators are pressured to allow competition killers such as vectoring.
Although it may sound like a policy recommendation from a text book published in the 1970s by the University of Chicago, good old cross-border competition in telecom markets might be the only bullet-proof option for a digitally connected continent.