Europe's Way to the High Speed Internet: Why Effective Network Competition is the Freeway to the Future

SPEECH/08/355 Viviane Reding Member of the European Commission responsible for Information Society and Media Europe's Way to the High Speed Internet: Why Effective Network Competition is the Freeway to the Future ECTA Annual Conference Brussels, 25 June 2008

Main Messages of Commissioner Reding's speech: The technological and economic developments paving the way for high-speed broadband networks have the potential to increase competition to the benefit of consumers. But they can also lead to new bottlenecks and re-monopolisation of end user markets. A key element in my vision for Next Generation Access regulation is to ensure that all parties, entrants or incumbents have sufficient incentives to move in these markets. Regulatory restraint as a carte blanche for incumbents to re-monopolise markets where the buds of competition are flourishing is not a policy option if we want competitive markets. It is very important that the conditions to invest exist and regulatory certainty is one of those conditions. Today, the regulatory landscape in Europe is unfortunately heavily fragmented in this respect. Regulatory guidance by the Commission is therefore required and appropriate in order to foster investments and maintain competition between infrastructure networks and service providers in the broadband area. In the forthcoming Commission Recommendation on Next Generation Access, the Commission intends to ensure consistency of regulatory approaches by establishing three principles of NGA regulation for the next 5 years: 1. First of all, access regulation which has been imposed in the past on dominant network operators will be continued, extended and if necessary reinforced also in case of a switch by the dominant player to a next generation network. Technological change should not, in itself, lead to a change of the regulatory rules in place. 2. Secondly, we want to encourage investment into next generation access networks by a stable and predictable regulatory environment. We are stili discussing the final details of this in the Commission, but I believe that the best way for encouraging long-term investment is to establish a priori a number of principles that national regulators should take into account when regulating access prices with regard to next generation access networks. In my personal view, these should include a risk premium of around 15 %. 3. Thirdly, we must manage the transition from the system of measures applicable to SMP operators [= operators with significant market power] to tomorrow's next generation access measures. We have to recognise that the "ladder of investment" that has brought us to unbundled local loops will in the future have to adapt to the different end-to-end network architecture. Alternative operators will increasingly be given an incentive to roll out their own infrastructure closer to the customer. Or, where this is not feasible, will have to go back to bitstream remedies. In order to manage this transition in a predictable fashion for both SMP operators and alternative network operators, regulators must impose transparency obligations on SMP operators so that they cannot use these 'informational asymmetries' to thwart or delay alternative infrastructure investments or to destroy the competitive potential of alternative players. 2

Ladies and Gentlemen, Let me start by saying that competition has served Europe well to date, delivering the best results for European consumers and business. Every indicator demonstrates that the greater the level of competition in a market, the greater the performance of that market in terms of prices and usage. So, I am glad to have this opportunity to address you here today to discuss issues which are central to the development of the European telecoms markets and which have the potential to impact significantly on the level of competition in the market. The current state of play in Europe's telecoms markets In Europe the ICT sector represents around 5-6% of GDP and in the period 1995-2004 drove approximately one fifth of overall productivity growth, thanks to technological progress and its competitive dynamics. The telecoms sector alone contributed 12% of the whole productivity increase. The telecoms sector is the biggest single component of the ICT sector in Europe, representing almost 44% of its total value and an estimated market value of almost 300 billion. Although the drivers of growth are currently shifting to software and IT services, a robust and competitive telecoms industry continues to be a vital factor to ensure the economic competitiveness of the EU. Today, 36% of European households are using broadband 1, and countries like Finland, Denmark and The Netherlands are world leaders in broadband penetration. More than half of Europeans are regular Internet users and 80% of those use broadband. New usages like social networking are driving higher bandwidth requirements as well as the development of new applications and services for citizens and business. The next decade will be crucial for the migration to high capacity access networks, with mobile usage and machine-to-machine communications on the rise which are needed to drive new applications and business models. Need for Speed Telecoms markets are characterised by different, even though increasingly convergent structures within the EU. In all Member States there are multiple networks delivering voice and data services using fixed, mobile and satellite technologies. Within Member States there are often multiple fixed networks which are or could potentially compete with each other depending on their state of development. Technological change has meant that these networks can now deliver the whole range of services in direct competition. These developments have the ability to change market structure and dynamics in a relatively short period, for example mobile communications, the rise of the internet and convergence through IP have all caused industry upheavals in the last ten years or so. It is clear to me that we are on the cusp of another major industry upheaval. However the market evolves or whatever services consumers ultimately consume, the need for very high bandwidth in both directions is evolving. Next generation communication networks will allow more efficient provision of multiple services over the same infrastructure. Content is becoming a more important factor, with the development of services such as IP-TV and mobile TV. Convergence will allow market players to differentiate offers and to move towards more bundled products. A new EU survey 2 shows that 29% of EU households subscribed to at least one bundled service and that the most frequently purchased service package is a 'double play' offer of fixed voice telephony and internet. 1 e-communications Household Survey (June 2008), Special Eurobarometer, European Commission 2 e-communications Household Survey (June 2008), Special Eurobarometer, European Commission. 3

Users' behaviour over the Internet has been changing over the years. The two-way communication feature of the Internet has expanded to a larger user group in what is called web 2.0". The future is heading for a bigger take-up of the participation based web, while new forms such as the semantic web, with a better data structure, or the 3 dimensional web, as we know it from Second Life, are expected to increase their footprint. Businesses are implementing similar ways of interacting. Enterprise software for content, collaboration and communication based on the Internet, which can be used for both intra and inter organisational communication, is expected to grow worldwide at a rate of 14% in 2006-2011 3. In the same way that users are playing a greater role through web 2.0 applications, enterprises are using these applications to obtain direct input from employees, customers or other stakeholders. Enterprise 2.0, the business equivalent of web 2.0, may be about to follow the rapid rise of social networking sites. The Role of Competition in the Telecoms Market All these technological and economic developments have the potential to increase competition to the benefit of consumers. But they can also lead to new bottlenecks and re-monopolisation of end user markets. Declining consumer prices are one of the benefits of this increased competition, in both the mobile and broadband markets. Operators in many EU Member States have increasingly been making triple play services available, which are expected to shift the consumer market further towards broadband connections. But we need to ensure that there is enough effective, sustainable competition for triple play. Most of the leading Member States in broadband penetration have traditionally been characterised by competition between alternative platforms (cable, DSL, partly wireless), which allows consumers to choose between different modes of access. At the same time, a gradual move from service-based competition to infrastructure-based competition can be observed in many countries. The current EU rules are based on the view that, by also giving competitors access to the networks of dominant operators, new market entrants will start generating revenue, thereby climbing up the first step of a "ladder of investment". And this will allow them in due course to roll out their own infrastructure and to become less dependent on other player's facilities. This will lead to more infrastructure-based competition over time which is to be welcomed as a more resilient and independent way to compete. The EU Telecoms Reform We are currently in the middle of a legislative procedure on the reform of the EU's regulatory framework for the telecoms markets. The Commission's reform proposals have been made with Next Generation Networks in our mind. However, we did not need to propose a major overhaul of the Framework to cater for these networks. Already in 2002, the EU's Framework was made open and technologically neutral so as to deal with new technological deployments. Let me go further. The move to Next Generation Access Networks does certainly not change the logic when assessing the need for regulation in order to ensure effective competition. The rationale underpinning the Commission's approach has been the following: if telephony and broadband are the basic products sought by end users, then whether they are delivered over metallic or fibre loops is largely irrelevant to the analysis because the framework is based on the principle of technological neutrality. In the Commission's view, it would be a fatal mistake to deviate from the pro-competitive approach of the current framework. 3 Source: Gartner Dataquest Market Databook, September 2007 Update. 4

If third party access is a prerequisite for functioning competition, we of course have to ask ourselves, when applying the current regulatory framework, how competitors benefiting from current access obligations will secure adequate access and a level playing field in the future, without jeopardizing incentives to invest for any market players. What is relevant when considering whether to intervene on a certain telecoms market, is the state of competition on that market. Unless there is a competitive access market, access regulation can be expected to continue irrespective of the underlying technology. What is different with Next Generation Access? One feature of Next Generation Access Networks (NGA) which does not apply to current networks, is that for the most part they do not yet exist. The trade off between build and buy still exists: access prices must be set so as to ensure sufficient access competition whilst simultaneously ensuring that the incentive to invest in alternative infrastructure is not undermined. However the context is now different with next generation networks. On the one hand, substantially more investment is needed, on the other, there is an increased danger for re-creating even stronger dominant positions now in an NGA context. This is why long-term legal certainty is required for investors, whether for incumbents or new entrants. We all need to ensure that these new access networks get built and that the rules and conditions which would allow this are in place. One of the first observations I would make is that incumbents are not the primary investors in FTTH in Europe to date. Currently they are in third place, coming after both alternative operators and municipalities. Earlier this year, the Fibre to the Home Council commissioned research which showed that there were slightly more than 1 million FTTH subscribers in Europe with nearly 5 million homes passed. Taken together, alternative operators alone accounted for 470,000 FTTH subscribers or almost 50% of the total 4. This may change in the future, or maybe not. A key element in my vision for NGA regulation is to ensure that all parties, entrants or incumbents have sufficient incentives to move in these markets. One question that needs to be answered is whether the move to one or other form of NGA will make competitive investment and multiple competing networks more or less likely. The changed technology means that there is at least a greater possibility to share the passive infrastructures to roll out parallel, competing networks on a scale not seen before. This is a step up from completely relying on the incumbent's infrastructure. The correct regulatory approach, I believe, can facilitate a race to invest in areas of high population density. We cannot predict with absolute certainty what the extent of future possible infrastructure competition will be but with some exceptions, access networks are likely to continue to exhibit, at the appropriate level, the same economies of scale in the future which led to bottlenecks in the past. The implication of this is that there will be areas where there will be only the incumbent operator. It is certain that where there is insufficient access competition there will be access regulation, also in an NGA environment. At the same time, what the form of that regulation is and how network owners are remunerated is important for ensuring that the networks get built in the first instance. 4 http://www.idate.org/pages/download.php?id=468&rub=news_telech&nom=407 FTTH.pdf 5

The Commission's forthcoming NGA Recommendation The key to encouraging investment in the industries where regulation may have an important impact is to have a stable and predictable regulatory environment. Investment decisions on the telecoms markets are often finely balanced and some incumbents often claim that investment will be only accelerated if regulation is restrained or even suspended. I believe that access regulation must be balanced and predictable and above all appropriate to the competitive environment. Regulatory restraint as a carte blanche for incumbents to re-monopolise markets where the buds of competition are flourishing is not a policy option if we want competitive markets. I have said it again and again, in network-based economies, effective competition does not prevent, but drives, investment. I am very much aware of the importance of maintaining the incentives for all operators, be they mobile, cable, incumbent telecoms or alternative operators, to invest in new infrastructures. Efficient investment in infrastructures is a key objective of the current regulatory framework for electronic communications, and of the Commission's reform proposals of 13 November last year. It is also a major EU policy objective to boost broadband and accelerate the transition towards an open and competitive digital economy in Europe. Competition leads to innovation and infrastructure rollout. The next step in fixed network evolution is clearly the rollout of fibre deeper in the access network. Next Generation Access investment represents an opportunity for further infrastructure competition. It is very important that the conditions to invest exist and regulatory certainty is one of those conditions. Today, the regulatory landscape in Europe is unfortunately heavily fragmented in this respect. At one end of the spectrum, one national telecoms regulator 5 has stated that NGA investments have no additional risk attached to them compared to any other investment and so should get the same return on investment, whilst at the other end of the spectrum, we have a national telecoms regulator 6 seeking to reward investment with a kind of partial "regulatory holiday" on NGA where the investor can effectively set its own rate of return. If we consider duct access, some national regulators 7 are proposing very tightly defined processes much as has evolved for LLU whilst others 8 are proposing a very loosely defined obligation to give access. This evolving matrix of different proposed interventions on NGA creates huge uncertainty, especially in the vast majority of Member States where the national regulator has not yet pronounced itself. It is regrettable that so far, the European Regulators' Group has not managed to agree on a consistent approach that would allow for fair competition on Europe's single market as far as next generation networks are concerned. I therefore believe that as part of the transition to next generation access networks, and improvements in the type of broadband services offered to end-users, regulatory guidance is appropriate in order to foster investments and maintain competition between infrastructure networks and service providers in the broadband area. The Commission is prepared to give such guidance by means of a Recommendation under the existing Framework Directive that will be submitted to public consultation before the summer and hopefully trigger a lively debate. 5 Ireland 6 Germany 7 France and Portugal 8 Spain and the Netherlands 6

In this Recommendation, the Commission intends to ensure consistency of regulatory approaches by establishing three principles of NGA regulation for the next 5 years: First of all, access regulation which has been imposed in the past on dominant network operators will be continued, extended and if necessary reinforced also in case of a switch by the dominant player to a next generation network. Technological change should not, in itself, lead to a change of the regulatory rules in place. Secondly, we want to encourage investment into next generation access networks by a stable and predictable regulatory environment. We are stili discussing the final details of this in the Commission, but I believe that the best way for encouraging long-term investment is to establish a priori a number of principles that national regulators should take into account when regulating access prices with regard to next generation access networks. In my personal view, these should include a risk premium of around 15 %. Thirdly, we must manage the transition from the system of measures applicable to SMP operators to tomorrow's next generation access measures. We have to recognise that the "ladder of investment" that has brought us to unbundled local loops will in the future have to adapt to the different end-to-end network architecture. Alternative operators will increasingly be given an incentive to roll out their own infrastructure closer to the customer. Or, where this is not feasible, will have to go back to bitstream remedies. In order to manage this transition in a predictable fashion for both SMP operators and alternative network operators, regulators must impose transparency obligations on SMP operators so that they cannot use these 'informational asymmetries' to thwart or delay alternative infrastructure investments or to destroy the competitive potential of alternative players. All operators in the market both incumbents and new entrants need to understand in what regulatory context they will make their investments. It is exactly this kind of legal certainty which the Commission aims to give in the Recommendation that we plan to adopt in its final form in autumn, taking into account the comments received in the public consultation. I would like to encourage you all to participate very actively in this public debate which will have a decisive impact on the final text which the Commission will adopt. Conclusions Let me conclude by saying that a competitive race to invest is the best way to ensure timely investment in next generation networks. I believe such a race to invest can happen even where there is currently only one infrastructure so long as adequate access is given to passive infrastructures. But I also believe that the geographic reach of competing infrastructures is likely to be limited and so access regulation in other forms will need to continue in this case. Competitive operators have served Europe well in the past and a vibrant, competitive market is what Europe needs if it is to continue to prosper and deliver on its promise. Thank you for your attention. 7