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Carrots and sticks

Controversial plans for broadband investment

From the Economist Intelligence Unit, October 12 2011

For Neelie Kroes, the European Union telecoms commissioner, a European future without fibre-based broadband is no future at all. As she sees it, the technology will support millions of new jobs, more internet connections, a better quality of life, a €1trn boost in economic activity and an increase in European GDP.

Such is her conviction that "next-generation" broadband over fibre is the way forward—and also the only way to meet Europe's Digital Agenda goal of giving every European access to fast and ultra-fast broadband by 2020—that at the start of this month she announced plans to explore a radical new pricing model she believes will spur the replacement of copper networks with fibre, a move that is expected to cost €270bn.

Speaking in Brussels on October 3rd at the Digital Agenda Summit, organised by the European Telecoms Network Operators' Association and the Financial Times, Ms Kroes said that telecoms companies are "hesitant to commit significant funds to fibre roll-out". As such she was considering forcing incumbent operators, such as BT, France Telecom and Deutsche Telekom, to lower the prices they charge alternative operators for access to their copper networks. Two European Commission public consultations will investigate the issue, the first looking into access for alternative operators to the networks and services of incumbents, and the second at how national regulators calculate the prices alternative operators have to pay for access.

The carrot is that incumbents who commit to investing in fibre networks to replace copper could be exempt from the lower charges. In addition, Ms Kroes is also proposing to allocate EU funding of €9.2bn from 2014, through the "Connecting Europe Facility" proposal now before the Council of Ministers and the European Parliament, to drive fibre investment. But this is expected to be used to encourage roll-out of fibre networks in rural areas and it is not a given it will end up in the hands of traditional operators; groups such as water or electricity companies will also be able to apply for funds to build their own networks.

Ms Kroes's pricing proposals have met with criticism from incumbent operators that believe the proposals are not only wrong-headed but will actively slow the roll-out of fibre networks, rather than boost it, by reducing their overall income. Thanks to the economic downturn, falling revenues from voice calls and uncertainty about what returns they can expect from fibre investment, operators want exactly the opposite to Ms Kroes: a "regulatory holiday" whereby competition rules forcing them to provide network access to rivals at regulated prices are waived completely.

The incumbents are also concerned that Ms Kroes's ideas come only a few months after the chief executives of Vivendi, Deutsche Telekom and Alcatel-Lucent presented to the EU a joint strategy for ensuring faster deployment of high-speed networks, at the request of Ms Kroes herself. The three bosses said that EU broadband targets would be missed unless operators could cut costs and bring in revenues from other sources, such as charging online content providers for delivering material to consumers. Following the Digital Agenda Summit, Jean-Bernard Levy, the head of Vivendi, was quoted as saying that operators had not been expecting another consultation process before the ideas put forward previously had been debated further.

The incumbents' concerns are understandable. Copper forms the mainstay of their business and generates the bulk of their profits. Reduced income in this area will mean reduced funds to invest in other areas. In addition, they are also worried that the artificial reduction of copper prices will make copper-based broadband packages for consumers cheaper—a point that Ms Kroes concedes. And that will make it even harder to convince consumers to upgrade to and pay for expensive fibre-based broadband later. Some criticism can be levelled at the incumbents though: many failed to grasp the importance of developing new services and new revenue streams in order to compete with agile, tech-savvy newcomers, a move that has resulted in stagnating or even declining profits.

But smaller operators that have not inherited monopoly networks are supportive of Ms Kroes's proposals, arguing that access prices to copper networks are too high. Backing them up is the European Competitive Telecommunication Association, a body that supports the regulatory and commercial interests of new entrants. "Network owners in many countries are making excessive profits over their largely depreciated copper infrastructure," says Ilsa Godlovitch, its director. "This means that consumers are paying very high prices and investments in fibre networks are just not happening."

Speaking at the Digital Agenda Summit, Ms Kroes concluded by saying she was determined to deliver the Digital Agenda on time. Yet its cost, scope and the complexity of the regulation surrounding it could mean she is disappointed—unless the incumbents succeed in getting the regulatory holiday they want.