Report[long]: The new entrants/OLO's view of LLU from the recent Brussels hearing

Dangger

The new entrants view of local loop unbudling (LLU) in Europe.

This is rough report from IrelandOffline's trip to Brussels covering the view for the OLO's. Towards the end I've stuck in direct comments from the speakers. I'll tidy it up soon!

LLU Hearing – 8th of July 2002 Brussels

Contents:
Introduction
CEO Groupe Cegetel, Frank Esser, France
COO QSC AG, Gerd Eickers, Germany
CEO Wind Telecomunicazioni, Tommaso Pompei, Italy
CEO Arcor, Mr Stober, Germany
Cable and Wireless, Mr. Wallace, UK



Introduction:

The overall tone of the hearing was bleak with the new entrants giving evidence in each of their markets as to tactics employed by incumbents making it impossible in some cases for them to compete against them.

Only 900,000 lines have been unbundled across the EU, 200,000 of them in the last 5 months. There is a 100% difference in the monthly unbundling fees charged with a charge of €8 in Denmark against a €16 charge in the UK. The once off fee has a 400% difference across the EU with a charge of €20 in Spain and €80 in Italy.

New entrants in 15 states have reported excessive pricing by the incumbents. 10 new entrants within the EU market have reported that the margin between retail and cost simply does not permit them to compete. Excessive upfront prices combined with monthly fees are creating a squeeze.

Slow unbundling is cumbersome and expensive for new entrants and the incumbents as well. Overall the message from the OLO’s was that the challenge is to neutralize dominance and promote innovation. All incumbents must be forced to treat all operators the same by means of intrusive regulation. Light touch has proven to be useless, with all operators being equally disadvantaged. The OLO’s all agree that local loop stripping is the only way to go, it would mean that regulatory withdrawl would become a realistic goal.

The new entrants:

Frank Esser, CEO Groupe Cegetel, France

There is still an absence of competition 18 months after the French NRA’s (L’Autorité de régulation des télécommunications - ART) decree for LLU. Only 116 sites for collocation have been delivered by France Telecom, and only

600 lines have been unbundled. Out of the 20 operators which carried out experiment on LLU in December 2000, only 2 are really investing in LLU - and at a very slow pace. In the mean time France Telecom is building anew monopoly. They have deployed over 500,000 DSL lines and installed ADSL equipment in over 2000 sites.

There are 3 Options for the OLO’s from France Telecom (FT):

Option 1 (Local Loop Unbundling):

Access offer for operators to copper line: full unbundling or line sharing.

New entrants must install their ADSL equipments in a collocation room

New entrant can control all the parameters to define its various services.



Option 3 (Bitstream access):

ADSL access and collect offer for operators. FT delivers traffic of ADSL lines to 41 points of its network in France.

Provides the same ADSL coverage area as what FT offers with its retail offers.

Key to compete with FT on the ISP market, especially on the residential market;



Option 5

FT delivers on one point to the ISP the IP traffic of its ADSL customers.



ART has shown tariff squeezes between all options, making investments by competitive carriers impossible.

New entrants cannot compete with FT on wholesale market to ISP._ FT offer is €35.9 month/line, and new entrants can not do better than €45.2 month/line.

There are several outstanding issues still:

Option 1: The current FT Reference Offer for LLU comes very late (18 months of regulatory struggle), although it complies - at last - with ART decisions.

The collocation process is still discriminatory for the main cities ==> important barrier to enter the market



FT has deployed ADSL equipment in about 2000 sites ==> new entrant can not match this coverage area in the short term, through LLU.

Option 3: this bitstream service is the only solution to rapidly develop competition for ADSL on the residential market. It offers the same coverage as FT with only few access points (only 41 points of access compare to the 2000 sites in option 1). But:

current Option 3 tariffs doesn.t leave enough economical room to new entrant to compete with FT offers to ISP (Option 5)

Option 3 tariffs must be adjusted to allow the development of investments and competition on the ADSL market. This is an urgent matter, since FT is monopolising the market.



Gerd Eickers, COO QSC AG, Germany

No competition means no innovation. LLU delivers scale economies of the local loop to competitors. LLU allows competition in the access network infrastructure, meaning more innovative products and an enhanced and sustainable choice for consumers. It also allows sustainable competition on wholesale markets.

On the outset, conditions look good in Germany. There are a high number of unbundled lines from a European perspective, and LLU has been fully implemented in legal framework. However a closer inspection reveals the presence of a long term price squeeze (over voice and DSL) which has resulted in the reduction of competitors. The German NRA RegTP is not able to counter effectively DTAG ‘s strategy for raising competitors cost, for example non-recurring charges for co-location. RegTP’s decision on July 1st 2002 on a standard LLU contract was too late and not strong enough from a competitors perspective.

QSC AG then proposed two possible solutions. Calling one “The second best solution”, and the other “The courageous approach”. Both of the solutions were presented in terms of how they could remedy price squeeze, delay and cost creation.

The proposed “second best solution” is to gradually improve the application of current legal instruments. With regard to price squeeze, this is an integrated approach to wholesale and resale pricing, and would include mandatory ex-ante retail price control. Covering delay, there would be drastic penalties for violation of quality of service (QoS) and discrimination. Cost creation would be addressed by effective cost-based regulation of all input factors, as far reaching as co-location space and air conditioning.

The “courageous approach” is to have a structurally separated local loop carrier (LoopCo). In relation to price squeeze there would be no incentive for LoopCo and the incumbent retail to cooperate against other operators. There would be no incentive for LoopCo to damage its own business be using delay tactics. There would also be no incentive for LoopCo to competitiveness of alternative infrastructures such as cable WLL or 3G.

Structural Separation creates a “win, win” scenario for competitors,

regulators and incumbents alike. Effective implementation of the second-best solution improves chance for structural separation being accepted by incumbent carriers.



Tommaso Pompei, CEO Wind Telecomunicazioni, Italy

Strategic anti-competitive tactics are being employed by Telecom Italia. They are focusing continuously on the short term, and should instead be focusing on the delivery of services to the customer.

There is also a price squeeze in effect in the market today. The OLO’s face a charge of €24.90 per LLU line when collocation costs and activation fees are included and this excludes the retail costs. Telecom Italia face a charge of €12.10 in comparison.



Renato Soru, CEO Tiscali

The core point here was “No competition without interconnection”

Several reasons were given for the failure of LLU:

Effective replication of the Local Loop_ is not feasible, because of technical and financial obstacles;



Wholesale is the wrong model:_ OLOs are to become mere resellers._ There is a strong dependence on incumbents with regard to tariffs and investment policies;



Barriers to entry in the form of persistent abusive conduct of incumbents both at LLE and wholesale level.



We must learn from the past. Senseless duplication of fibers networks is bringing the whole sector to a very inefficient scenario, creating financial instability for carriers and seriously affecting suppliers, and investor’s interests.

Interconnection is the key. Competition for voice and dial up has been created by means of interconnection, without replicating the local access infrastructure. xDSL is just a technological evolution of the same local access network (same copper pair, same_ switch with upgrading_ for DSL). Interconnection rules (including cost oriented interconnection and non-discrimination) should apply to xDSL, without any difference with regard to voice and dial up.

The local loop represents a natural monopoly due to high infrastructure costs and strong impact of scale economies Interconnection represents the basic principle of liberalization: allowing the use of the incumbent’s access network at cost oriented tariffs, in accordance to transparent and non discriminatory conditions.



Mr Stober, CEO Arcor, Germany

The reason given for LLU failure was that the incumbent has bought time at every opportunity coupled with the fact that the German NRA RegTP is not pushing competition in Germany. The argument was made that LLU is better than interconnect as data not voice is the commodity.

Interconnect only gives the same quality as the incumbent. A 2mb/s line at busy times may go down to 256k/s at peak times. The OLO’s would like to be in a position to offer a guaranteed minimum of 1.5mb/s at all times.

However time is running out, we only have this year left. The final action to take would be to strip them of their network.

Dangger

Mr. Wallace, Cable and Wireless, UK

Cable and Wireless are a U.K. based company providing services in 70 countries, with current annual revenue of around €9 billion. Unusually for the sector they have been around for 130 years . The founder laid the first successful transatlantic telegraph cable in the 19th century.

In Europe, they have recently experienced the local loop unbundling experiment at first hand, it has become increasingly apparent to them that regulatory intervention, as a means of promoting competition in the face of incumbent behavior, is failing. This is especially the case when it comes to preventing dominant players from leveraging market power into emerging markets such as broadband.

The introduction of local loop unbundling in many European jurisdictions has represented a concerted effort on behalf of national regulators to neutralize the incumbents continued dominance of the local access market.

Despite this considerable effort, national regulatory regimes have been unable to deal effectively with incumbents who have, some would argue, entirely rationally sought to discriminate in favor of their own businesses. In protecting their own downstream businesses in this way, other telecoms players have been systematically prevented from competing. The knock on effect of this is of course that consumers will not receive the benefit of product and service innovations and price competition.

Some have argued that there are reasons other than incumbent behavior or ineffective regulation for the lack of progress on unbundling. However several of these can be dismissed.

The argument that there is no viable market for broadband. In the UK BT has been able to deploy broadband facilities and customer numbers are rising weekly - this argument therefore seems unfounded.

Or, perhaps that the competition has been ineffective and lacked the capital to make LLU work.

Around 40 companies actively participated in the UK unbundling process. Admittedly it was never likely that so many operators would have been successful but had competing operators been able to enter the market on a broadly equivalent basis to BT then analysis suggests that the UK market could have supported around 3 or 4 national operators and numerous niche players. And C&W certainly don’t lack capital, the business plan just did not work. This is not therefore a compelling explanation.

It appears then that there is only one rational explanation for the failure of LLU. And that is that the vertically integrated structure of the incumbents means that competitors are invariably disadvantaged when it comes to local access.

In the UK, BT remains dominant in the local loop. Today it still provides over 80% of all access lines. As a vertically integrated operator BT has every incentive to exploit its market power in local access to the benefit of its downstream business. Whilst other UK telecoms providers were still facing a protracted and bureaucratic process for gaining access to BT.s local exchanges BT was already actively deploying DSL in many of its exchanges.

C&W believed that LLU presented a good investment opportunity in the UK when it was initially examined. The reality is that faced with continued delays and BT’s pricing this proved not to be the case. That wasn’t critical for C&W. LLU is just one of a range of potential business opportunities - they can move on to the next one. But for many players the outcome is not so positive. Equally at the macro economic level it’s not good news for national or European Governments. The lack of competitive investment in LLU means that, for now, many consumers are faced with a choice of one broadband supplier. Or where they have choice, whilst they face the prospect of short term price reductions, there is little or no prospect of new and innovative products and services because without competitive pressure in the last mile there is no incentive on incumbents to invest.

Although the LLU exercise was a failure in the UK, I remain positive about the prospects for competition in the UK and Europe more generally. But, and this is a big but, only if the lessons from LLU are learned. So what was learnt?

Firstly there is the painfully persistent problem of discrimination by the incumbents like BT. As a vertically integrated operator that remains dominant in the local access market it always has the temptation and the ability to favour its own business. And dare I say it I might be tempted if C&W were in BT.s position. BT has a duty to its shareholders to maximize its returns and it obviously strives to achieve that within the context of a set of regulatory constraints. I think the crucial lesson from LLU to date is that the existing regulatory framework is simply not up to the job of dealing with the issue of discrimination. The second big issue for me from LLU is the crucial importance of regulation in facilitating and even promoting innovation in the telecoms market. There is a very clear expectation that broadband communications and the digital economy more generally will be a big driver in boosting innovation and productivity in the European economies. Competition will be vital to the emergence of an innovative and vibrant broadband market.

If we want to achieve our broader goal of a thriving European economy, first we need to put in place the regulatory conditions for boosting innovation in the telecoms market. And for me that means we have to find a way of neutralizing the incumbents’ control of the local loop. Because then, and only then, will competition be viable in broadband and new markets more generally. And if you need any more persuading of the importance of innovation then take a look at the new framework directive. National Regulatory Authorities duties will include, :

“encouraging efficient investment in infrastructure, and promoting innovation”

.ensuring that there is no distortion or restriction of competition in the electronic communications sector..


The challenge for regulation is to neutralize dominance and at the same time promote innovation.

One possibility is to go for intensive behavioural regulation. Under this option, there is a need for a substantial rethink about how to control discrimination. The key will be to develop processes that force BT to treat all operators (including its own downstream operations) on an equivalent basis.

The inevitable outcome of this would be more intrusive regulation of incumbent operators. This may improve the situation in terms of discrimination, but it would be far less successful in promoting innovation.

Forcing regulatory processes on BT to control its ability to discriminate can only serve to diminish its ability to innovate. A detailed scrutiny and compliance procedure, enforced by an NRA, would inevitably slow down the speed with which BT can bring a new product to market. Effectively it will mean all operators will be equally disadvantaged. This may not really how we all want to see regulation developing. But we have to be clear, light touch regulation is a non-starter unless we see some other change in the regulatory and market environment.

The second option is the structural separation of the incumbent. Separate out the local loop assets that create the problems in downstream markets. This new LoopCo, under separate ownership, would then view all competing operators as customers, rather than competitors. It would have the incentive to innovate to serve all of its customers’ needs, rather than always having at least one eye on what would benefit its own downstream operations as it does today. LoopCo would obviously need to be regulated tightly, as it would be dominant in the wholesale access market, but not in terms of discrimination. And the considerable upside would be that light touch regulation would be more viable for BT’s residual business. And better still, regulatory withdrawal from these markets really would become a realistic medium-term goal.

It is on the innovation front though, that a separate LoopCo scores so highly. Operators would be able to develop innovative products without having to approach an integrated BT with which it would be simultaneously both a customer and a competitor. When C&W is solely in a customer relationship with LoopCo it is a certainty that it’s ability to innovate will improve.

It is clear that the status quo is not an option if the broader goals for both the European economy and its telecoms markets are to be met. So let’s start by undertaking a rigorous review of national markets, and specifically of course, the access markets, and then implement the necessary regulatory changes.

d0gb0y

thx for the post, damn it looks bleak although the LoopCo idea sounds interestin...it would be like cuttin off £ircom's hands so it can't feed its obese stomach

spongebob

They have longer experience of LLU and Access to BT exchanges (remember Mercury) than any other carrier.

They have been at this since at least 1986 in the UK.

I would listen to their stance above all others.

M

MrPudding

LoopCo(tm) The answer to all our dreams.