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Beating the band-width bottleneck

 

Herbert Ungerer

The Networked Economy

 

14/05/1998

Paris

 

 

Convergence is driving infrastructure provision but it is also defining the future bottlenecks.

The band-width explosion can happen, the technologies are there and band-with requirements in the Internet alone are doubling every 3-4 months. But whether the band-width explosion will happen, will entirely depend on the competitive conditions.

The full telecom liberalisation in Europe on 1st January 1998 has re-distributed the cards. The issue now is if we will have a level playing field.

By end February, at the time when the most recent implementation report on market liberalisation was published by the Commission :

Ÿ More than 500 local loop licences had been allocated in the European Union. The Member States leading the list were the UK (173), the Netherlands (129 - mainly cable) ; Finland (51), Sweden (32), Germany (58).

This is, of course, a moving target, with a number of licences allocated since. It means that since 1st January 1998 only Greece, Ireland, Luxembourg, and Portugal are still left with full network monopolies.

Ÿ However, one must also clearly see that in most Member States far more than 90% of the market remain with the incumbent. While 1st January 1998 has lifted regulatory restrictions and Member States have initiated the licensing process, the problem of market structure remains.

Let me make three main points :

  1. The major short term question will be how to create real competition in the local loop.

    We have changed regulations, but we have not taken radical steps for changing market structures. Divesting cable from telecoms will be one necessary route towards this goal in most European countries. This is the aim of the EU Cable Review which we have undertaken. It could be the single most important measure to make the band-width explosion happen in Europe. Radically increasing frequency allocation to mobile and broad-band wireless may a route in others.
  2. Major cross-roads are ahead which will set the investment climate for the sector. A decisive question will be our approach in Europe to regulation and pricing.

    Two radically different approaches have been followed in infrastructure investment in Europe.

) The fixed networks have generally grown in an environment set by price regulation and now Open Network Provision at cost-oriented prices. Price regulation will always tend towards allowing conservative margins only, be it via price caps or via full-scale rate of return regulation.

) Mobile networks in Europe, as they have developed over the last few years  - with the development now further accelerated with the current wave of DCS1800 licences mandated by EU Directives  - have developed essentially in an unregulated environment. This has led to high margins but also to high investment rates.

The decisive issue will be which model will prevail as fixed and mobile converge  -, now for voice, and ultimately for wider bands.

) Less regulation will mean higher margins and this will mean higher investments, but we will also then depend on market pressure to bring prices down, in order to bring full benefit to the consumer. This will require more competition.

) Extension of regulating prices in order to ensure cost orientation  - such as under ONP and derived regulation  - will mean more reliance on existing operators and networks and their investment cycles for driving network development.

On the one hand, enforcing cost-orientation under ONP rules has now given Europe local interconnection rates in the range of 1 Eurocent per minute, some of the lowest of the world. It has substantially facilitated competitive entry in the wake of full liberalisation on 1st January 1998 and has led to immediate consumer benefit.

But we now must be careful that we may not find ourselves at some time in the future sitting between all chairs. New entrants may no longer have enough incentive to invest and may be looking for the regulator to get them cheap entry. Incumbents may no longer develop networks at the speed we need  - because they have to give access away at what they may perceive as unattractive returns for their own new shareholders  - and this at a time when a quantum jump in network development is required.

On the other hand, the much less regulated mobile approach has led to high prices in a number of cases, with rates charged by mobile operators in Europe for terminating fixed calls to the networks in ranges 10 to 30 times higher than the interconnection rates charged for terminating calls in fixed networks under the new EU best practice regime based on the ONP Recommendation of January. As has been announced, this is why we are now investigating under EU Competition Rules this matter across Europe. If prices will not come down, I believe the sector risks that the regulators will step in.

I hope that the solution to the problem will not be excessive regulation, but stepping up competitive pressure. Our success in this approach will be decisive for the innovation and investment capacity of the sector in Europe, as it moves towards multi-media and UMTS.

  1. Finally, let me turn now to a third major issue How to allow integration  - media / telecoms or mobile / fixed in a situation where competition in these markets is clearly still insufficient. We have liberalised to allow innovation. Convergence can now not mean the creation of new super-monopolies  - and this danger is very real. It is the immediate question underlying most current competition cases in the area.

The Internet puts all concepts for the sector to test  - not in its current form, even if can already deeply revolutionise most of current services and distribution sectors  - e-commerce is the case in point.

Even more so in a future form. Imagine an Internet with 100 times current performance / cost levels in throughput and speed to the final user. Telephone would become a by-product with a few cents per minute only even for trans-Atlantic traffic. Nearly un-limited distribution capability for television or other video products from distributed video servers via the Internet may become available.

Such possibilities may seem remote at current Internet performance and use, but there are some indications : cable access to the Internet, Internet telephony, high performance video streaming techniques and the new satellite systems entering the market place. Also, do not forget that the computer sector doubles now its performance / cost ratio according to some every six months or so.

If this carries over to the Internet, we would be faced with such a situation in three to four years from now, unlikely as it may sound.

Such a development will require major investments, particularly in the local loop. A major issue will be how to keep competition open and new investment forthcoming, as actors try to position themselves for the control of the system. The sector will have to go through a radical transformation of its concepts and of its revenue base. Current actors will see their market position fundamentally challenged  - and they will try to maintain their position by controlling the gates.

The innovation capacity of the sector  - and its attractiveness for investment  - will therefore depend on our ability to maintain competitive conditions into the new world of convergence and the Internet. Convergence of markets must mean more actors and investors  - and not less. This will determine how far and how quickly the band-width bottleneck can be beaten.

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