Policy Failure ?

UE I've been musing about policy a lot these last few weeks.

I sense a shift in the way European institutions in particular are looking at the issue of policy and FTTH deployment incentives.

In North America, there's a clear trope that says that the only policy that will spur on FTTH investment is a guaranteed regulatory holiday. It seems to me to be a somewhat inverted view but it goes something like this: Verizon was given a regulatory holiday on FTTH, Verizon invested in FTTH hence Regularory Holidays drive FTTH deployment.

Of course, it's at the very least a shortcut. Verizon's incentive didn't come from the regulatory holiday. Verizon demanded a regulatory holiday for its FTTH plans, but the incentive was there already: they wanted to go after the cable-owned market of TV distribution. In other words, Verizon didn't invest in fiber because of the regulatory holiday, they invested in fiber because they had a solid business plan to do so (long-term though it may be). Once they had decided that this is what they wanted to do, they turned to the FCC and said "I'll only do this if you give me a regulatory holiday".

It's a classic confusion of causes and effects, but unfortunately, it has subsconsciously affected regulators and policy makers the world over. In Europe in particular, even though complete regulatory holidays remained unpalatable, there has been an unspoken view that since incumbents were the only ones with the financial capacity to invest in FTTH, they needed to be "given a break". Two examples:

  • The French regulator didn't impose any form of open access, passive or active to incumbent France Telecom (or indeed any of the other FTTH-deploying operators) except for the in-building network sharing, and even that only came to be because Landlords pressured for it.
  • The Spanish regulator gave an explicit regulatory holiday to Telefonica on any service delivering more than 30Mb/s under the pretence that since the market didn't exist yet, it didn't need to be competitive.

It's interesting to compare the effects of these two decisions: in France, deployment is happening (albeit slowly), in Spain it's not (with some minor exceptions). If the regulatory conditions were such an incentive, then surely that wouldn't be the case ?

The fact is that the regulatory conditions in France have very little bearing on France Telecom's decision to deploy. France Telecom decided to deploy for competitive reasons (just like Verizon) and then lobbied for favourable regulatory conditions (just like Verizon) and obtained them (just like Verizon). In Spain, Telefonica has neither competitive pressure nor new addressable market incentive to deploy, hence it's lack of enthusiasm no matter how favourable the regulatory conditions.

But if there is no cause and effect between regulatory conditions and investment incentive, isn't it time for regulators to reconsider their position? Admittedly, since 2008 there's been a lot of pressure from the governments and the markets to be nice to incumbents. As illustrated in France by the "suicide wave", incumbents are dinosaur structures that are struggling with transformation. When the economic situation is booming, they stay afloat, but when things go sour, they suffer more than others. Governments in Europe have acted to try and protect their incumbents.

The fact is though that the favourable regulatory conditions in Europe for incumbents have not spurred on FTTx investment. In the few countries where FTTx is being deployed, the causes are a combination of competitive pressure and government money. The policy track taken, it seems to me, has largely failed.

I see an illustration of a growing awareness of this failure at EU level in the State Aid conditions that were published late last year. These conditions gave more leeway to public authorities in investing in next-generation infrastructure when private operators aren't. Why? Because local authorities can represent a form of competition to operators. It's an incentive shift. My understanding of it is "We gave you a good deal, you didn't take it, now we'll give your potential competitors a good deal."

My guess is it's not going far enough yet. I'm involved with a few local governments looking into this and believe me, the hurdles to a simple deployment are staggering. If local governments are to be encouraged to look into filling the market gap themselves, the Commission needs to do a number of things:

  • They need to define Next-Generation Access more stringently. The commission understandably wants to steer clear of technology choices, but imposing minimal upload and download rates for the access line should be a minimum, and these should be significantly higher than what ADSL2+ offers. Incidentally, there should also be some thought devoted to the differences between what vendors promise and what technologies deliver…
  • They need to define coverage more accurately. Coverage (existing or planned) is only based on service provider declarations, usually at a high level of geographic aggregation. Business and residential coverage are also not distinguished even though needs are evidently different.
  • The need to be explicit as to the information that a service provider needs to present to prove deployment plans. The burden of proof is on them, but what exactly is expected of a service provider?

Interestingly, I'm told (because I haven't read it myself yet) that the FCC Broadband Plan includes a recommendation that a Federal law allow municipalities in the US to invest in fiber infrastructure even if State law forbids it. This would have to pass through Congress, so is by no means a guarantee, but it's recognition from the US regulator at least that some form of competitive play is the only thing that spurs on investment in networks…