EC Officials Now Telecom Policy Must Take Service Provider Profit into Account

In theory, it is possible to create regulatory frameworks that simultaneously promote both competition and expedited investment in next generation networks. In practice, almost any set of policies will be criticized, and often sharply, by some contestants whose business interests the framework does not help.

One recent difference in thinking is noteworthy. U.S. regulators, working to implement the Telecommunications Act of 1996, which intended to promote competition in the U.S. telecom market, initially crafted a set of rules very similar to European Community rules, namely widespread and mandatory wholesale access, at steep discounts.

Though it never is formally said, the test of any new “pro-competition” policy in a legacy telecom market is to cause former incumbent market share to fall. If you think about key performance indicators, that is the key KPI.

A policy “works” when the incumbent loses substantial market share.

But there was a key difference between the U.S. set of facts on the ground and the equivalent EC set of facts. In most EC nations, there was but one facilities-based dominant supplier.

In the U.S. market, there were two broadband providers--the telco and the cable TV operator. Eventually, to spur faster investment, not just competition, U.S. regulators decided to rely on facilities-based competition, not mandatory wholesale access, especially for new optical fiber facilities.

Non-facilities-based competitors were not happy about the change, as the switch in policy favored the cable TV companies, who had facilities in place.

But some would say the switch to an emphasis on “facilities-based competition” has succeeded, as per-capita investment in U.S. access networks has been substantially higher than in the EC region; about twice as high, by some estimates.

It now appears that a decisive change in thinking has happened. EC authorities are worried about lagging investment in next generation networks, and are prepared to take steps to promote investment, not just competition.

The other change is that cable TV operators have begun to create a new facilities-based competitor to the former telco incumbents in many EC nations, creating a feasible foundation for facilities-based competition.

The larger point is that policies matter. Both competition and investment in next generation networks are important. EC regulators now are thinking about how to promote investment, not just promote competition.

That remains a valid framework in the U.S. market as well. In principle, policymakers are right to think about policies that encourage innovation and investment in Internet-delivered apps and services.

But a primary charge for U.S. telecom policy officials is precisely what EC officials now see as important: promoting robust investment and sustainable competition for Internet and other access services.

At some point, policies will have to be evaluated not only for their pro-competition impact, but also from the impact on sustainable and high rates of investment in core access networks. As the EC experience illustrates, one cannot indefinitely favor “competition” without at some point being faced with the challenge of negative incentives to invest.

If you have followed European telecommunications market for any time, you might well agree that a major shift in regulatory thinking has happened in the European Community, which for decades has been more concerned about promoting competition than promoting investment in next generation networks.

Specifically, regulators have encouraged affordable wholesale access to the former-monopoly telecom networks, in a variety of ways. It is hard to argue with the results.

Incumbent market share across the EU-27 in 2010 was 38 percent. In other words, competitors had gained 62 percent share of the fixed network market.

But that degree of competition has come at a price. The EU is in danger of failing to make its announced goal of 30 Mbps by 2020, a target that originally was set before the launch of Google Fiber, which has changed market dynamics and investment in the U.S. market, for example.

So regulators should ease up on IT and telecommunications companies to allow them to compete with rivals around the world, said Guenther Oettinger, new European Union digital economy commissioner.

"So far, we have ensured that consumers benefit from the liberalization of telecoms markets,” Oettinger said.  From now on our actions must be more geared more toward allowing companies to make fair profits."

That represents a huge change in thinking. The main point is not that the EU has decided to take a “North American” or “U.S.” approach. Instead, the big shift is the recognition that promoting competition and promoting investment can become rivalrous and mutually-exclusive goals.

The way competition is promoted can lead to greater investment, or less investment. As the former incumbents have argued for years, mandating wholesale access at rates favorable to wholesale customers--while effectively promoting competition--has created disincentives for investment in upgraded next generation networks.

Though the financial cost and risk is borne by the firm building the networks, wholesale customers can reap the advantages without any capital investment in the core network, at all, though they might face the requirement, or have the option, of investing in some access network elements.

The shift to thinking about policies to incentivize investment in access networks is a huge shift in thinking.