Telecom industry faces shakeup as EU tackles regulatory ‘Catch-22’

9 September 2015. By Magnus Franklin.

Telecom operators in Europe could face a fundamental revision of rules that have governed their industry since the 1990s, as EU officials seek ways to break a “Catch-22” that inhibits investments in networks, MLex has learned.

European Commission officials looking to update the legislation are weighing a two-tier regulatory system. One set of light rules would cover conurbations, where competing networks operate. Another, more prescriptive regime would apply to rural regions where only one operator is now viable.

The revamp might also attempt to level the playing field between traditional telecom operators and web-based competitors such as Skype by focusing on “raw” connectivity.

The goal of this overhaul would be to break an economic dynamic that keeps operators from building competing networks, says an internal commission memo seen by MLex.

“We need to consider means to break the ‘Catch-22’ ” in areas where parallel infrastructure doesn’t exist, says the memo by Robert Madelin, the former director general of the commission’s telecom department.

— ‘Little pressure’ —

The catch is that former phone monopolies such as Deutsche Telekom and Orange have little incentive to upgrade subscriber lines in the countryside, where profitability is low and the risk of competing investments is small.

If alternative operators try to connect directly to rural customers, incumbents can torpedo the move by ramping up their own investments, at lower cost, by building on existing networks in those regions.

“The incumbent is under little pressure to invest, but can destroy the business case of any alternative investor by strategically overbuilding them if they dare enter the market,” says the memo from Madelin, written to EU digital economy chief Günther Oettinger, who is leading the review.

Madelin was succeeded on Sept. 1 by his deputy, Roberto Viola, amid a broader reshuffle of top commission posts.

— Game changer —

The new two-tier system could undermine the business models of incumbents and upstarts alike.

Alternative operators that have grown by piggybacking on wholesale access to the old monopolies’ networks could be forced to build their own. Incumbents that now enjoy a stranglehold on rural markets could, for their part, suffer from proposals to grant competitors privileged public concessions in exchange for investing in the latest broadband technology.

The possible overhaul crystallizes two main regulatory themes in recent years. For starters, it appears to acknowledge the failure of the “ladder of investment” put in place when the industry was liberalized in the 1990s. That model assumed that new competitors would eventually end up operating full-blown parallel networks — be it for basic phone services or what EU officials then called “the information superhighway.”

The new regulatory model would simplify rules in areas where parallel networks have emerged, notably cable networks plus municipal networks established by public authorities. In these places, today’s complex web of regulation and price controls could be trimmed and made more homogeneous across the EU.

“We should seek to ensure, in such competitive areas, that returns on the most future-proof networks . . . are superior to those from other, more incremental network upgrades,” Madelin’s memo says. This alludes to the commission’s preference for investments in fiber-optic cable stretching all the way to subscribers’ homes, rather than technologies using old copper lines.

The profitability shift could happen “by adapting the terms of access regulation for such very high-capacity networks,” the memo says, suggesting more favorable regulatory treatment for superfast networks.

This model would be a blow to some of Europe’s largest operators, including Deutsche Telekom, BT and Telecom Italia, which have placed their bets on incremental upgrades. It would make a good fit for the likes of Orange, KPN and TeliaSonera, which have focused on building fiber connections running straight to households.

— Monopoly concessions —

To overcome the investment drought in rural regions, public authorities could be handed an additional tool — special licenses for network operators willing to invest in fast connections in exchange for a monopoly.

This would involve “concession-like advantages for the party that first builds out a network of a certain quality in a given ‘challenge area’,” the memo says.

The commission is also looking at how the law could be adapted to ensure a “wider, more equitable funding base for broadband universal service,” a reference to an EU promise that all citizens should have affordable access to basic communication services.

Restructuring telecom regulation — as envisaged in the note — would bring uncertainty to incumbents whose grip on subscribers outside cities remains tight under the current rules. But rival network builders might see opportunities in rural areas.

In urban areas, operators already relying on access to incumbents are set to face the biggest uncertainty from this deregulation, as many have tailored their businesses to match a very specific type of wholesale service.

— Sector regulation —

Another major element of the review is a “leveling of the playing field” for electronic communications.

Telecom operators have groused about the harm they suffer from web-based companies providing services that replace traditional telecom money spinners such as telephony or texting.

Under Madelin’s blueprint, the new rules would draw a line between “raw” connectivity and more refined services, including telephony.

The review will consider “one by one the case for withdrawal of different aspects of sector-specific regulation of those other services, such as voice telephony,” the memo says. New rules to protect citizens from eavesdropping, abusive marketing and other bad behavior would apply to traditional operators and Internet newcomers alike.

Officials expect to open a public consultation on the framework overhaul this Thursday, Sept. 10, initiating a process that is expected to produce a legislative draft in mid-2016.

Interested parties will have until early November to comment.