EU Reignites Idea of Higher Copper Broadband ISP Prices to Fund Fibre Optic

The European Commission (EC) has braced the telecoms market for the imminent introduction of new rules to correct for the current “regulatory mess” that is allegedly “hurting” investment in the rollout of next generation superfast broadband networks and leaving consumers “stuck in the internet slow lane“.

Europe’s primary Digital Agenda goal is to ensure that superfast broadband (30Mbps+) services are made available to 100% of European households by 2020 (including in the UK); with 50% also gaining access to speeds of 100Mbps+. But in order to do that Europe believes that new rules are needed to encourage investment and make the new services more attractive to consumers.

As a result the EC’s Vice President, Neelie Kroes, has been busy fleshing out some new ideas and the first draft was published in July 2012 (here). The final proposal is expected to be published shortly and, perhaps due to the loss of €8bn worth of infrastructure investment in February 2013 (here), it could now end up having an even more dramatic effect on the price you pay for broadband.

Neelie Kroes, EC Vice President, said:

“Today’s guidance to regulators just doesn’t give businesses – old or new – the certainty they need to make investments. It’s time to change. The sector needs more certainty to help it invest and grow. I want citizens to start enjoying the benefits of faster, next generation broadband networks

In the absence of public funding to support better broadband, it’s vital that all companies have a stable and consistent system. That is how we can maximise investment and the infrastructure competition that encourages investment.

In our forthcoming legislative package we will be formalising a tighter set of the principles for encouraging investment. These principles were first outlined in July 2012. Now, after a year of intense collaboration with regulators we have refined them, and reached agreement. We are determined to deliver stable copper prices and fibre regulation that reflects market reality.”

Precise details about what will be included in the final proposal are not yet known but Kroes does outline two primary approaches, specifically the regulation of prices for superfast Next Generation Access (NGA) networks and a rebalancing of how older / standard copper broadband (e.g. ADSL) services are regulated and priced.

At present ISPs like TalkTalk and Sky Broadband effectively rent access to existing copper networks from incumbent companies (i.e. BT) through a process known as Local Loop Unbundling (LLU), which allows them to install their own kit inside BT’s telephone exchanges. This has proven to be hugely effective and created a market with plenty of variety and cheaper services.

Is Cheap Standard Broadband Bad?

However Kroes warned that this sort of LLU approach can sometimes “lead to negative consequences” and she uses the example of how cheaper copper broadband “makes it harder for copper network owners to generate the income needed to invest in [NGA] networks, and reduces the incentive for ‘alternative operators’ to move from renting a network to building their own Next Generation network“.

Apparently the fee to access these copper networks varies greatly from country to country (from €4 to €14 per month, per line/subscriber) and this is said to result in “unpredictable and unstable access products” (the context for that specific point isn’t clear) that “negatively affects” NGA investment, which Kroes statement then goes on to describe as being “unjustifiable in a single telecoms market“.

The suggestion appears to be that telecoms regulation could be adjusted in a way that might make copper broadband more expensive and thus encourage consumers to adopt NGA and boost investment, which sounds a bit like trying to put Aladdin’s Genie back into his bottle (at least it might if applied to the United Kingdom).

Curiously the original July 2012 proposal appeared to abandon this idea by leaving it up to national regulators (e.g. Ofcom), with Kroes saying, “The evidence shows that lowering those prices will not induce greater investment in very fast broadband” and investment in fibre services was “progressing relatively well in some Member States where copper prices are around or above the EU average“. But of course all that came before EU budget cuts wiped out €8bn worth of potential investment.

Similarly a November 2012 study by consultancy firm Ventura Team and finance group Portland Advisors also proposed that NGA investment could be boosted through the use of “strategic pricing to ensure that regulated wholesale prices for copper access reflect its long term higher costs and charge a sufficient premium to drive technological migration in retail markets” (here).

At this stage it’s too early to know whether this is really a U-turn on a highly controversial part of Kroes original proposal. Never the less the idea of artificially raising the price of standard / copper broadband would almost certainly anger LLU ISPs and send shudders down the spines of consumers, many of whom are feeling the pinch from a harsh economic climate. It would be especially damaging to the large number of jobless people and those on lower incomes.

Elsewhere the EC also said it “believes that, in certain circumstances, it is possible to avoid over-regulation and encourage investment by giving investors in fibre networks the possibility to experiment with access charges. The goal would be increased investor confidence about the potential for return on their investments in infrastructure.” This too was an aspect that the EC originally envisaged as being left up to national regulators, although its approach now seems to have changed.

By comparison many third party ISPs would argue that they need more control and price flexibility over NGA services, not less, in order to encourage uptake. But the EC suggests that this might only serve to stifle investment in the underlying infrastructure. In fairness we think that the original idea of leaving this up to national regulators was perhaps the best one since every market is different and a one-size-fits-all approach might not have the desired effect.

As it stands Europe claims that between €100 billion and €270 billion is needed to roll-out “high-speed internet” across the EU and the EC still firmly believes that a 10% increase in broadband take-up triggers up to 1% in GDP growth. That’s a powerful incentive for change but at the same time we need to be very careful about how these proposals are balanced.

A blanket EU-wide policy won’t necessarily work for every single market and there’s no guarantee that raising the price of copper would actually result in a faster NGA deployment. Perhaps this is the risk with trying to force a Single Telecoms Market approach for everything.