Arcep speaks

"Competition in broadband" : roundtable organised by TISCALI in association with the European Competitive Telecommunications Association (ECTA), 26 September 2003, in Brussels : speech of Paul CHAMPSAUR, Chairman of the French Telecommunication Regulatory Authority

Ladies and Gentlemen,

Broadband competition, and in particular ADSL, got off to a bad start in Europe. The launch of broadband on telecommunication networks was, almost everywhere, the result of initiatives by incumbent operators which enjoyed virtual monopolies in the local loop. This was the case in France which was not different from its neighbours. However, in many countries, national regulators took steps to introduce more competition in the market.

This response was not as fast as market players would have wished, especially firms like Tiscali which were competing with the incumbent operator or its ISP subsidiaries. Indeed, regulators had to learn and to adapt their range of intervention instruments, that we call now "remedies".

We have to take into account the fact that DSL technology is quite recent and that the regulators didn’t have a background of broadband access -network interconnection to draw upon.

In the field of voice telephony, the regulator had been able to draw on several decades of experience before the market was fully opened to competition. Indeed, all the incumbent operators’ networks were interconnected from the outset. Once networks had become stable and the interfaces defined, the regulators focused mainly on tariffs. Tariff control was facilitated by the fact that equipment and device prices were known and relatively stable.

Broadband networks are in the development stage and are based on rapidly changing technology. Regulators therefore face greater difficulty in defining technical requirements for interconnection - for example with the technical procedures for unbundling or for interconnecting IP or ATM networks. At the same time, infrastructure equipment costs dropped sharply. Prices of DSLAMs and modems were divided by a factor of 5 or even 10 over a four year period. By the same token tariffs also changed rapidly, for example a 20 to 30% annual fall in wholesale tariffs.

How do we introduce broadband competition in a situation where technology is continually developing and where there are at least potentially multiple broadband-access facilities (for example: cable , satellite, Wi-Fi, power line carrier, etc.) ?

Let me tell you the French story. I hope it provides a valuable experience when thinking about the implementation of the new European telecom regulatory framework.

ART considered that genuine competition in France could only take place by using existing telecommunication networks and by opening up the incumbent's local loop. Although ART has always seen cable networks as a major alternative infrastructure for the supply of electronic communications services, their low penetration rate and the fragmented market situation in France meant that they could only provide minor competition to France Telecom.

Conversely, this type of infrastructure is more developed in some neighbouring countries. Benelux, UK, Spain showed from an early stage that it could be used to provide efficient broadband access services. In such a situation , the regulator faces a priori a simpler situation and may be less inclined to impose obligations on network operators. It should be noted however that there is then a risk of vertical concentration within national borders. This infrastructure-induced competition weakens ISPs (Internet service providers) which do not have strong ties with cable or telecommunications network operators. Such a situation can jeopardise the emergence of a European industry for broadband Internet access services.

But let me come back to France.

Opening the ADSL market to competition should offer all players in the value chain a fair chance to gain market share.

ART has a clear dual objective : First, to create a situation of durable and effective competition between the various ISPs. Secondly, to give fixed-telephony market operators the opportunity to position themselves in this strongly growing market. To achieve this goal they should not only provide data transport services but also broadband access services. Indeed durable competition in the downstream market, where ISPs and operators do business, can only exist if it is supported by the upstream market, namely the inter-operator wholesale market.

To promote competition, procedures for access to the ADSL market needed to be defined and ART retained three ways, or options in our language, to allow ISPs to establish their ADSL access offers.

In the first offer (known as option 5) France Telecom transports subscribers’ ADSL data to the ISP server. This is in fact resale of the incumbent operator’s offer under the ISP brand. In this situation the ISP fully depends on France Telecom for the supply of access and all collection. Of course, Wanadoo, the first ISP on the French market, being a subsidiary of France Telecom, uses option 5.

With option 3, operators buy a DSL data collection service on the local loop from France Telecom which they can then resell to ISPs as a comprehensive offer including access, data collection and transport.

Finally, in the last option (option 1) France Telecom competitors have access to copper pairs connected to the subscriber. In this case, the local loop can be partially or fully unbundled. With the last two options, ISPs become independent from the incumbent and can differentiate their offers in commercial and technical terms.

It is very important to notice that the two options 3 and 1 are complementary. Option 1 requires much more investment and, reasonably quick profitability if such an investment can only be expected in densely populated areas. Therefore, a natural strategy for an operator entering the market is to combine option 1 in densely populated areas, with option 3 elsewhere and to increase progressively the areas covered with option 1.

The competitive situation will be considered satisfactory once Wanadoo's competitors have sufficient downstream market share to be viable and by the same token, once France Telecom's competitors have sufficient market share in the inter-operator wholesale market.

In this respect, ART can congratulate itself on the large investment projects announced by some of the unbundling operators and the recent interest of Telecom Italia in entering the market.

But until genuine competition is well established, we have to keep our ability to regulate upstream and downstream markets.

Today, the ADSL market in France, which is growing very fast, is certainly one of the most open in Europe. Healthy competition is no longer a very distant hope.

At the end of 2002, France Telecom had 80% market share in the downstream market through its subsidiary Wanadoo and 100% of the transport and access market. Wanadoo’s competitors had no choice but to buy option 5. At the end of 2003 these figures will drop to around 60% for Wanadoo and to 90% and 93% respectively for transport and access. France Telecom's competitors have gained 10% ADSL market share, in value, within less than two years. In comparison, alternative operators have gained 10% share in value in the voice telephony market since 1998.

What are the legal means at the regulator's disposal to foster competition in broadband ?

ART has different means of action for the three access options. Tariff approval, for which responsibility is shared between the regulator and the Minister for Telecommunications, applies to France Telecom end-users or ISP offers (that is option 5).

The European December 2000 regulation, provides ART with significant power for option 1. We have made use in 2002 of this power to modify France Telecom's reference offer which was not compliant with cost-based pricing. We also intend to improve the operational characteristics of unbundling, through service level agreements (SLA).

As far as intermediate transport offers are concerned, that is option 3, ART lacked initially the power to intervene a priori. ART had to wait until the settlement of disputes between operators in order to complete its range of regulatory tools, in particular to link tariffs for option 3 and for option 5.

Such a set up was not easy to establish and the kind of dynamic equilibrium we are looking for is rather delicate.

The new regulatory framework resulting from the transposition of the Telecom package will provide the regulator with more flexibility. The market analyses will allow the regulator to act more selectively and to be more effective when intervention is required.

We hope that this new regulatory framework will allow us to consolidate our present approach of intervening in both downstream markets (unbundling and option3). In the medium term, when the markets will become sufficiently competitive, the regulator’s action in downstream markets will be no longer be necessary and will be abandoned.

Regulation is now entering a new phase and is becoming more in tune with market reality. Even if it is too soon to predict the outcome, you can be assured that ART will continue its action in favour of competition in general and in the broadband market in particular.

Thank you for your attention.

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