EU moves to spur investment in future Internet networks

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The Commission yesterday (18 September) put forward a set of proposals aimed at accelerating the transition towards a new generation of high-speed, high-definition Internet services streamed through optical fibre networks. But its plans to stimulate competition in the sector immediately came under fire.

Following strong pressure from the industry (EURACTIV 04/07/08) coupled recently with calls from the European Parliament (EURACTIV 25/04/08), the Commission yesterday (18 September) finally unveiled proposals to spur investment in Next Generation Access Networks (NGANs) over the next few years.

It is expected that roughly €20 billion will be invested to replace copper lines over the next three years. 

But Brussels fears the new infrastructure will be dominated by a limited number of big players and, to boost competition in the sector, it wants to allow small operators to have access to the networks owned by dominant actors. In return, competitors interested in using the networks would pay a premium to investors, thereby rewarding them for the risks they take. 

Information Society Commissioner Viviane Reding had originally announced in June that this risk premium would be set at 15% (EURACTIV 26/06/08). But following criticism from the main telecoms operators, the figure was left out of the Commission’s proposal. Instead, the document says that rates of return should be calculated on the basis of the average cost of capital for telecom operators, between 8% and 12% in recent years. But an official from the Comission’s competition service indicated that “the premium should be higher than 12%”.

On top of the risk premium, the Commission is proposing a pricing methodology for calculating the fees that will have to be paid for the new services. But this suggestion has angered a range of critics. The European Regulators Group (ERG), which brings together national telecom authorities, immediately labelled the pricing proposal “overly prescriptive”, stating that it “risks hurting the sector”. The main operators opposed the suggestion as well, while new entrants welcomed it but asked for the premium to be kept as low as possible.

Brussels is also pushing for more infrastructure competition in a direct plea to small companies to deploy their own networks. But smaller actors insist that direct access to incumbents’ fibre networks is essential and infrastructure competition would simply drive many of them out of the market. According to a study published this week by ECTA (the European Competitive Telecommunications Association), which groups smaller operators, NGANs represent big business for incumbent operators, which “currently control 80-90% of all fixed telecom access lines”. In such conditions, guaranteeing access to smaller operators is a must, it argues.

Incumbent operators, on the other hand, are angered by the Commission’s plans to force them to share their new networks with their rivals. According to the main industry lobby ETNO (the European Telecommunications Networks Operators Association), multiple access obligations will act as a hurdle to the financial and technical stability of the networks. The organisation yesterday warned that investment in the telecoms sector already slowed significantly in 2007, falling from 2.3% in 2006 to 1.7%, according to figures provided by Idate. ETNO Director Michael Bartholomew blames this drop on “regulatory pressure” from Brussels.

The Commission proposals have been put to public consultation. The process will last until mid-November. The EU executive has promised to adopt a formal recommendation in 2009.

Positions

EU Competition Commissioner Neelie Kroes said: "The deployment of new fibre-networks will shape the competitive conditions of the future. We need an appropriate framework to give European companies fair access to the new networks. We want national rules that will not only encourage the necessary substantial investment in fiber investment but also strengthen broadband competition."

Viviane Reding, the EU's information society commissionercommented: "We want to reduce the scope for divergences of regulatory approaches across Europe, in the interest of legal certainty. We propose in particular that project-specific risk premiums should be applied, so that competition can flourish while those who invest are rewarded in line with the risks they have incurred."

The idea of pricing rewards has been strongly criticised by the body of national regulators (ERG): "The members of the ERG are unanimous in opposing the excessively prescriptive nature of the recommendation," said ERG Chairman Daniel Pataki. "NGA deployment is at a very early stage and it is clearly not suited for the approach being advocated by the Commission. From our point of view, the current Commission approach actually goes against best regulatory practice and risks hurting the sector. We are concerned that such proposals, if implemented, are capable of impeding investment, innovation and competition, which would in the end penalise consumers, the industry and European competitiveness".

The main operators, represented in Brussels by ETNO (the European Telecommunications Networks Operators Association), echoed these sentiments by warning that the pricing methodology proposed "puts the long term maintenance and upgrading of networks at risk".

New entrant operators, such as Tiscali or Tele 2, represented by ECTA (the European Competitive Telecommunications Association) welcomed the idea of rewarding projects with premiums instead of sharing risks as proposed by ETNO. "Incumbents are proposing that entrants with substantially smaller revenues and cash flows effectively fund their investments without benefiting from ownership. It sets extremely high barriers to entry," said Innocenzo Genna, ECTA's chairman.

They questioned the concept of repaying risks itself. "We do wonder however if the riskiness of fibre investments has been overplayed. Some fibre investments may be risky, but in some cases fibre access roll-out could actually save incumbents money through operational efficiencies compared with running a copper-based network today," reads a statement by ECTA published yesterday.

Background

Optical fibres are considered to be the future of communication networks, or so-called Next Generation Access Networks (NGANs). The idea is that they would replace the current copper networks that were originally laid down for telephone calls only but are now being over-stretched by a range of new data-hungry services offered through the Internet, such as High Definition television.

Optical fibres allow faster and wider transmission of data and are therefore slowly being deployed across the EU.

But for the moment, they only cover a marginal share of national markets. According to figures provided by the consulting firm Idate, there are around a million subscribers in Europe in 2008, compared to three million in the US and several million in the most developed Asian countries like Japan and South Korea. 

But investment in Europe is also currently low. To upgrade EU networks, at least €300 billion of investment will be necessary, according to estimates by consulting firm McKinsey.

Timeline

  • Mid-Nov. 2008: Deadline for comments on the Commission proposals under the public consultation procedure.
  • 2009: Commission due to adopt a formal recommendation.

Further Reading

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