Regulators geared for access overhaul: European and US governments are ramping up their broadband drive, but some say profit incentives still need to be set - News Analysis: Broadband Policy

The European Commission and the United States Federal Communications Commission are making drastic policy changes in an effort to spur ailing broadband development. But global economics research institutes are demanding more, saying that competitive service providers and incumbents need stronger price incentives to push broadband services into the market.

Last month, the European Commissioner in Brussels unveiled plans for an overarching broadband strategy--although it made no pledges to bring broadband to all of Europe's 376 million citizens.

Indeed, the Commission's ambitions for a networked economy seem to have faded since the days of the Bangemann report of 1994, which envisaged a European broadband infrastructure.

"We shouldn't build a road because people might want to drive a car," said information society commissioner Erkki Liikanen, speaking separately to CWI. "We need to be realistic. If people don't want [broadband], they don't want it."

But the Federal Communications Commission (FCC) in Washington, D.C. has sent the biggest shockwave through the worldwide industry, with broadband policy changes that could do away altogether with incumbents' local loop unbundling requirements, first set out in the 1996 Telecommunications Act and supposedly a keystone of competition since.

Policy changes overdue

Analysts say these policy shifts are long overdue because telecoms regulation doesn't account for future data or Internet services.

"Regulation hasn't failed, but regulators have failed to look at the future market," said Eric Paulak, vice president for Internet service provider and infrastructure markets at Gartner Group, based in Stockholm, which is advising the European Commission on broadband policy. "The problem with [current] regulation is that it was designed to promote voice competition."

In Europe, the European Commission plans to present a broadband strategy to Europe's heads of state at the Barcelona Summit in March. This new strategy will insist that competition is the driving force for broadband.

"Germany is broadband's success story [in Europe], but they have not created a competitive market," said Liikanen.

Global think tanks like McKinsey & Company and the Adam Smith Institute say more specific policy changes are needed.

Chicago-based McKinsey believes European regulators should alleviate the pressure on operators for low local call prices so that they can earn enough to fund their broadband rollouts.

In a new paper, the consulting firm urged European regulators to explore increasing the local interconnection rates, as well as relaxing or removing price caps.

Internet gets own rules in US

In the United States, however, the FCC's notice of proposed rulemaking (NPRM) earlier this month tentatively concludes that wireline Internet access services should be regulated as information services.

This could mean that an incumbent's broadband network may not have to be opened to competitors. It basically takes Internet access services out of the framework of the 1996 Telecommunications Act and puts them into a less regulated framework.

European operators say they would welcome a similar policy shift in their region.

"Local loop unbundling is not a solution to create broadband development," said Michael Bartholomew, director of the European Telecommunications Network Operators' Association (ETNO), which represents mainly incumbent operators. "It's a misguided notion."

But a new study by the European Competitive Telecoms Association (ECTA) shows that local loop unbundling (LLU) in some countries, like Denmark and Germany, has helped push broadband penetration (see table).

The FCC's NPRM had not been published yet at press time, and Washington-based legal experts were making educated guesses on the proposal's impact.

Competitors say this marks the end of local loop unbundling and competition, while incumbents say the policy will free them to invest in broadband. But some observers believe the NPRM won't really do that much to deregulate broadband.

"The classification will have littie impact. The FCC is trying to create parity between cable [operators] and telcos," said John Garvey, telecoms analyst at Regulatory Research Associates, based in Washington, D.C.

"The FCC is looking hard at what regulations they can get rid of to [help] get broadband deployed quickly," he said.

In Brussels, the basic elements of the new eEurope Action Plan 2005 will include competition, content, e-government and security.

The Commission wants to ensure there is effective competition among different broadband plat forms, including telecoms, cable TV, fixed wireless access, satellite and third-generation (3G) mobile, as well as digital TV.

The Commission will also stress the importance of stimulating broadband through public sector initiatives, such as e-government, e-health and e-learning.

"Unless there is a comprehensive approach, we'll be taking little baby steps [in broadband] on a European basis," said Gartner's Paulak. "This is much bigger than promoting broadband access."

According to Paulak, broadband policy should bring in ideas about tax regulation as well as clarifying cross-subsidization rules. It should either not be permitted, or allowed and specified, so that consumers know what they're paying for.

A government issue or not?

In the United Kingdom, the Adam Smith Institute says the key to so-called Broadband Britain is for national operator BT to lower its wholesale prices and give competitors a better deal than they give to their own retail division.

"You're not going to get broadband in any real way when the regulatory environment calls for competition but not profitability," said Matthew Young, project director at the Adam Smith Institute. "You've got to require BT to change its pricing structure."

The Adam Smith Institute reckons that competitors need to be able to buy from BT at prices that are 15% to 20% lower than what BT's wholesale division charges its own retail division. Also, the London-based Institute believes BT should reduce its wholesale prices across the board by 50%.

"We reckon the effect would [give] competitive operators the opportunity to make a margin from broadband," said Young.

The Adam Smith Institute also believes BT should formally separate its network and service businesses. "If you split BT [into Netco and Servco] we reckon it would increase shareholder value by 20%," said Young. "If you don't split BT, you will lose value."

But he emphasized that this is not a matter for government. "This will be the single biggest strategy decision for [BT chief executive Ben Verwaayen]," said Young.

Political worry about broadband has been reaching a pinnacle, particularly in the U.S.

In fact, a lobby group of about 250 chief and other senior executives from technology companies, called TechNet, has asked the White House to make broadband a national priority.

TechNet wants to have a national goal of delivering 100 Megabits per second to 100 million American homes by 2010.

"The only way to make that happen is if the government subsidizes [broadband]," said Sundi Sundaresh, president and chief executive of Jetstream Communications, based in San Jose, California. "The capital markets will not fund that aggressive of a build out."

Sundaresh said that with telecoms companies typically spending 18% of their revenue per year on building out more network, some estimates indicate it would take 20 years to fiber the entirety of the United States. "A 20-year minimum, short of government intervention," he said.

ECTA Local Loop Unbundling Scorecard, January 2002

               No of    No    MDF sites  % of lines  Number
                MDFs    MDF     where    reachable   of OLOs
                       sites  installed   through    placed
                              equipment     MDFs      colo
                                           opened    orders
                                           to LLU

Austria         1,400             106       n/a        14
Belgium           595    356       66       n/a         1
Denmark         1,200    180      n/a       n/a        21
Finland         5,500    123      100       95%        15
France         12,000    600      100       10%         8
Germany         7,900  1,600    2,000       95%        52
Greece          2,298    128        0       n/a         0
Ireland         1,100    128        1       n/a         1
Italy          11,000  1,050       86       45%        27
Luxembourg         66     50        0       n/a         1
Netherlands     1,300    550      300       n/a         9
Portugal          n/a    177        0       n/a         4
Spain           4,187    927        6        8%         7
Sweden          7,000    250      139       99%        15
UK              5,600  5,600       24       90%         8
Total/Average

                  Total     Incumbent   -of which    -of which
               subscriber   DSL Lines-  retail DSL   wholesale
                  lines                   lines         DSL
                                                       lines
                                                    (bitstream)


Austria          3,846,000    111,500      97,500      14,000
Belgium          4,200,000    210,000     170,000      40,000
Denmark          2,798,000     38,800      38,800
Finland          3,180,000     67,400      66,400       1,000
France          34,000,000    400,000     370,000      30,000
Germany         49,400,000  2,000,000   2,000,000           0
Greece           5,540,000          0
Ireland          1,600,000          0
Italy           25,990,000    376,500     240,600      54,329
Luxembourg         315,000      1,215       1,215           0
Netherlands      9,340,000    116,000     116,000
Portugal         4,190,000      2,000
Spain           20,320,000    375,000     275,000     100,000
Sweden           5,970,000    141,000     113,000      28,000
UK              28,500,000    136,000      86,000      50,000
Total/Average  199,189,000  3,975,415

               OLO fully  of which    Total    CLEC LLU      Cable
               unbundled    CLEC     country   DSL lines   Internet
                 lines      DSL        DSL      as % of    broadband
                           Lines      lines    total DSL  connections



Austria           3,800     1,500     113,000      1%        122,000
Belgium             120       120    -210,000      0%        225,000
Denmark          40,000    30,000      68,800     44%         31,000
Finland             n/a     2,500      69,900      4%         31,000
France              400       400     400,000      0%        169,000
Germany         623,624   100,000   2,100,000      5%            n/a
Greece                0         0           0      0%         10,000
Ireland               0         0           0      0%         52,000
Italy             6,367     2,050     378,550      1%            n/a
Luxembourg            0         0       1,215      0%              0
Netherlands       7,000     5,000     121,000      4%        330,000
Portugal              0         0       2,000      0%         60,000
Spain                10        10     375,000      0%         67,000
Sweden            1,953     1,953     142,953      1%        263,000
UK                  164       164     136,000      0%        196,070
Total/Average   683,438   143,697   4,118,418      3%      1,556,070

n/a: Not available

TNO: Trial numbers only

MDF: Main distribution frames

OLO: Other licensed operators

Source: The ECTA LLU scorecard is produced in association with Cullen

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