ViewLadies and gentlemen,
I’m going to have to admit to a degree of humility on the question of Net neutrality. My two colleagues at this roundtable are certainly more qualified than me on this essentially North American issue. I will, however, endeavour to explore the extent to which the current EU regulatory framework has achieved its objectives, and how it needs to be adapted to respond to the challenges created by very high-speed network rollouts. My hope is that this will constitute a new stage in the development of an electronic communications market that is at once innovative, competitive and beneficial to consumers.
Implementing the new community framework: initial assessment.
The Act of 9 July 2004 brought deep-seated changes to the legal framework that governed France’s electronic communications sector. From a legislative standpoint, it marked the final stage of the transposition into French Law of the six EU directives adopted over the course of 2002, grouped together under the name, “Telecoms Package”. The process was completed by a series of decrees for application, and the transposition process was completed in mid-2005.
In addition to the improvements to the Authority’s powers to resolve disputes and impose sanctions, the principal changes brought about were as follows:
- First principle: the freedom to create networks and provide electronic communications services:
Switching from a system of individual operator authorisations to one of declaration, under a framework of general authorisations.
- Second principle: technological neutrality, or the implementation of an identical legal system for all electronic communications networks:
As a result of this principle, the legislator enacted a clear separation of the functions of economic and competition regulation of all networks (including cable and broadcasting networks), for which ARCEP is responsible, and regulation of media content services to “protect public freedoms”, for which CSA is responsible.
- Third principle: convergence with competition law.
Here, I would like to go into a little more detail since this is the point that has the greatest impact on the business of regulation. Under the old framework, SMP operator regulation possessed a somewhat automatic and systematic dimension. This list of markets to be analysed by the regulator was strictly defined and confined by law: any operator with a 25% share of one of these markets was deemed as having significant market power, and so subject to a set of obligations, also defined by the law.
Now, thanks to the Act of 9 July 2004, the methods and concepts to be applied by the regulator are explicitly those of common competition law. It is also up to the regulator to define the contours of a market and decide whether it is relevant for sector-specific regulation; to identify which player, or players, enjoy significant power in that market, and to prove it. To achieve this, ARCEP conducts a detailed analysis of the market, a process that involves, in order, a public consultation, obtaining the opinion of the Competition Council, then notification of the European Commission. The Commission has the power to veto the market definition if it is not part of the predefined list, and the designation of SMP operator, notably to achieve harmonisation across Europe. In addition, as part of its market analysis the regulator must specify remedies, in other words the obligations that it plans to impose on SMP players. Here, from among the obligations listed in the Act, the regulator must choose those which are the most appropriate to the competition problems identified in the market in question, and to ensure that they are proportionate to the regulatory objectives.
This logic involves a shift in the regulation’s focus to wholesale markets. On the one hand, the NRA has the power to develop new regulatory tools for wholesale markets and, on the other, once these tools are in place and proven to be working properly, retail market regulation becomes less pressing, lighter, and may even disappear altogether. So the regulation evolves: if competition increases, the list of remedies gets shorter. If the market becomes fully competitive, sector-specific regulation is lifted and common competition law takes its place, and responsibility for its application falls to the Competition Council. It is therefore only natural that the regulation governing a given market will vary over time and in scope, depending on national regulatory authorities’ assessment of it.
The framework adopted in 2004 is clearly more flexible, and enables the regulator to adapt regulation to actual competition conditions in a given market or, if appropriate, to lift it. There is no doubt that this approach to regulation is beneficial to all of the players involved and, ultimately, to the consumer.
Even a quick look at broadband market regulation reveals the undeniable advantages of this new framework.
If, under the old framework, the Authority did not have full power to act, the new one gives it the power to streamline, and to make regulations governing broadband more efficient and incentive-based. The Authority concentrated its efforts on wholesale markets – the retail market being unregulated – by adopting a series of decisions in May 2005, which concluded on the relevance of unbundling markets, of broadband access offers delivered at the regional level and on France Telecom’s power in these markets. Furthermore, in July 2005, the Authority defined the relevant wholesale market for broadband delivered at the national level, for a transitional one-year period – a market in which France Telecom also enjoys significant power.
Depending on how it deploys its own network, an alternative operator will choose between one of these two different offers. So an operator with high network capillarity will be able to connect to the France Telecom network in proximity to subscribers, and so taking advantage of the local loop unbundling offer. In areas where its network is less extensive, it will be able to connect to France Telecom’s infrastructure at the regional level.
It is the Authority’s view that developing unbundling must be a priority. It is the type of wholesale offer that best enables the development of lasting competition, and the highest degree of technical and economic independence from France Telecom for client operators. As competition grows over time, thanks to unbundling, prices will drop and stay down, and we will see a rise in innovation that is beneficial to consumers.
As to how this goal affects the obligations incumbent on France Telecom, there will be greater regulation on the upper end of the broadband market value chain (in other words in the unbundling market), and increasingly lighter obligation towards the retail market end of things which, in and of itself, is not regulated.
France Telecom is subject to several obligations in the unbundling and regional offers markets: to provide access, to be transparent, to publish a reference offer, to be non-discriminatory, to perform separate accounting and full cost and tariff-related obligations accounting. Regarding this last point, the Authority was able notably to impose cost-oriented pricing for unbundling and for regional offers, to the ensure that the latter did not create a prize squeeze on unbundling. The goal of this obligation is twofold: to guarantee that regional offers constitute a geographical complement to unbundling, without competing with it in those areas where unbundling is more cost-effective. More specifically, regional offer tariffs must be:
- attractive enough to constitute a relevant wholesale offer in non-unbundled zones, allowing operators to create a nationwide retail service;
- and provide an incentive for alternative operators to deploy networks.
The implementation of this revised regulation, combined with the constructive attitude of the regulated incumbent, France Telecom and all of the market’s players, have contributed to broadband’s remarkable success in France and the very dynamic and innovative nature of the retail market. The country’s broadband subscriber base is growing swiftly (+40.5% in one year), reaching a total 11.1 million at the end of the second quarter of 2006. DSL, which accounts for 10.5 million of these connections, is the chief driving force behind this growth.
And so we come to the issue of very high-speed, an issue that we now better understand thanks to the report produced by IDATE, at the government’s request.
Very high-speed is one of the sector’s new challenges.
A veritable technological disruption, the advent of very high-speed and the deployment of optical fibre networks to the subscriber constitute a major stake for France, and for Europe as a whole, in terms of competitiveness, and the development of the knowledge-based economy. The growing availability of triple play bundles (Internet, voice over IP and TV) has whet consumers’ appetite for multimedia content. Ever-increasing file exchange needs, the growing ubiquity of broadband and asynchronous consumption modes (downloading, video on demand) are making fibre-based networks’ development inevitable in the medium and long term.
As it stands, France is not lagging behind and operators are expected to begin rollouts in the short to medium term, in both business parks and high density residential zones. One vendor has already announced that it would be launching its first offers in the first half of 2007. But, with the exception of certain isolated cases – such as the city of Paris whose sewer network, which is open to visitors, helps cut the cost of deploying a very high-speed network significantly – the economic equation appears to be a difficult one: on the one hand, massive investments are needed to develop a new very high-speed network, and on the other is the issue of added revenues that would enable a return on these network investments.
To lower these entry barriers for all the players, and ease the technological transition, public authorities, and local authorities in particular, will need to take action. The goal of this action must be to encourage investments that are relevant to the different situations, notably by examining whether or not market forces alone are enough in terms of coverage and level of competition.
The challenge of deployment costs: how to lower the entry barriers?
To enable fair and lasting competition, only facilities-based competition is capable of ensuring the expected long-term benefits of competition in terms of lower prices and greater innovation. Unlike broadband, very high-speed offers all players an unprecedented opportunity to position themselves across the value chain.
Nevertheless, deploying a new nationwide local fibre loop would involve a particularly massive investment of several dozen billion euros, spread out over ten years. The first cost assessments for deploying an FTTH network reveal that the bulk of costs (between 70% and 80%) would be taken up by passive infrastructures, and by civil engineering in particular.
As a result, to enable the different players to enter this market, sharing civil engineering infrastructures and wiring in customer premises will play a crucial role in preventing these massive investments from being an insurmountable barrier to deployment. Public authorities, and local authorities in particular, along with ARCEP, are therefore working to encourage and accompany shared deployments under the best possible conditions.
Local authorities have a central role to play in encouraging operators to share their networks when receiving requests for occupation of their public domain. In practice, this power is difficult to enforce since operators are often reluctant to communicate their networks’ location and level of occupation.
Civil engineering (installing trenches and ducts underground, up to inside customer premises) is the single largest cost item in a fibre network deployment. To give an example: with a density of 20,000 inhabitants/km2, in other words the density of Paris, the cost of infrastructure reconstruction would be roughly €1,000 per subscribing household, with a market share hypothesis of 25% of households. Roughly stated, this cost is inversely proportionate to the square root of the density.
To enable local authorities to adopt an ambitious policy of proprietary management of their subsoil, revising the relevant regulatory framework to increase their managerial powers over the public domain would be a positive step. This increased power would relate in particular to obligations on the operators, such as:
- requiring operators to provide domain occupation maps;
- to provide information on duct availability;
- to install reserve capacity;
- and the ability to oblige operators to share their resources.
The second largest cost item when deploying FTTH networks is indoor wiring in buildings and homes (between €300 and €500 per subscriber). It is unlikely that property owners will allow several operators access, as a result of which a local micro-monopoly structure could emerge (one operator per building), such as is already partially the case in Japan.
A working group was created by the Ministry in charge of Industry and the Ministry of Housing with operator and property management representatives. ARCEP is involved in the work they are doing and is part of this initiative – which is incentive-based at this stage – to encourage pre-equipment in greenfield projects.
We feel that sharing indoor wiring is crucial and, before the end of the year, the Authority will be holding talks on a system for indoor network sharing, with interested operators.
As you have no doubt gathered by now, we are working to create a propitious environment for very high-speed network development by encouraging infrastructure sharing and particularly the reuse, whenever possible, of existing ducts in the local loop. Should these measures prove effective, they will go a long way to preventing the recreation of a monopoly over the local fibre loop, like the one that exists for the local copper loop. We would then enter into the ultimate stage of sector-specific regulation, with the development of alternative fixed local loop infrastructures.
The question of very high-speed rollouts nonetheless goes hand in hand with the question of revenues: without new applications and revenues, there will be no incentive to invest.
The revenue challenge: what applications and what revenues to spur very high-speed deployment?
Most studies on deploying fibre access networks for residential customers underscore the uncertainties surrounding applications proper to very high-speed which are likely to generate additional revenues.
As I had occasion to say at a recent symposium, deploying very high-speed networks is only justified if they support new applications, new service offerings, new access to content. Services geared to making content available (high definition TV, video on demand) and image-related revenues represent, at this stage, the most credible source of income, and so a growth outlet at a time when revenues generated by voice, and by person-to-person communications in general, are shrinking. From an economic standpoint, content-related services will provide one of the main incentives for deploying fibre optic networks on a large scale. On the flipside, rolling out these networks constitutes a new means of distribution, and an additional chance for creators and copyright holders to better monetise their productions. It also offers them the possibility to design new services, and particularly time-shifted ones. It thus constitutes a growth factor for the market, and an opportunity to expand the financing base for creative endeavours in France.
Potential demand amongst households continues to grow. With close to 1.5 million subscribers, TV over DSL is currently pay-TV’s chief driving force. Fibre opens up further prospects: high definition programming, simultaneous broadcast of several channels, virtually instantaneous VoD downloads.
As it stands, however, the relationship between operators, distributors and rights holders is not up to the challenge:
- content-related ARPU is under €3 per subscriber, per month for DSL operators, whereas households’ total spending on pay-TV, video, music and film is ten times that;
- their VoD catalogue is limited to several hundred films, and often priced higher than the cost of renting a DVD from a shop.
So the current relationship between content publishers and networks will need to change to spur the development of very high-speed, to make it a success for the market’s different players and so, ultimately, for the consumer.
What regulation for very high-speed?
As my final point, I’d like to address the question of new revenues, a critical part of the very high-speed economic equation and which seems to me to be, in a more direct manner perhaps, the object of net neutrality.
I think that, by and large, Europe shares the general principles laid out by the FCC with respect to net neutrality and net freedom: users’ right to access content, to distribute content, to use software and connect to the equipment of their choice. The benefits created by the open nature of the Internet are clear, and largely responsible for the broadband market’s growth. So I have no problem echoing the Commission’s position, which I quote:
“A key concern for the near future will be to ensure that the Internet remains “open”: open from the point of view of service providers wanting to deliver new, innovative services and open from the point of view of consumers wanting to access, create and distribute the services of their choice.”
As broadband networks developed, there was little debate over the question of value sharing between service providers and broadband access operators, with the mainstay of concerns focusing on developing a competitive broadband access market, in a “cultural” context of free or virtually free Internet services. This model, which involves a complete separation of operators’ and content providers’ revenues, proved viable since based on sharing the existing very high quality asset that is the incumbent carrier’s local copper loop, via unbundling. Indeed, open access to a universe of content and services was undoubtedly the main reason for consumers’ appetite for broadband. But it does seem to me that the arrival of very high-speed could well bring into question this principle of revenue separation.
First, the stakes and risks involved in very high-speed network investments – which involve the creation of a new local loop, hence massive investments in infrastructure – would seem to demand, from an economic standpoint, that a share of the revenues earned by service providers go to access providers.
Second, because the content gives the networks their value by providing an incentive for consumers to subscribe, it would seem only fair that electronic communications operators reward this asset by helping to finance the content’s creation, and audiovisual content in particular.
I also think that the best guarantor of consumers’ freedom of choice is lively competition, as is currently the case, not only in the downstream broadband and very high-speed access market, but also lively competition in the upstream content and services market, particularly for audiovisual services. Economic analysis tells us that a monopoly in an upstream market has a good chance of creating a monopoly in downstream markets.
So it is my view that the issue of net neutrality will resolve itself if we maintain healthy competition in access and content markets. At this stage in the game – and I am perhaps being overly optimistic here – it seems to me that the Community framework endows sectoral regulators with the appropriate tools, and that competition authorities have the necessary powers, notably in cases of mergers.
So I have no problem in supporting the moderate position taken by the European Commission in its proposals for revising the European regulatory framework, namely that no alteration to the framework is desirable at this point, and this for two reasons:
1. The Internet’s openness and, as mentioned earlier, the four freedoms that the FCC calls on the industry to preserve, are viewed as governing principles that constitute guidelines for regulators, but which would not be appropriate to carry over into obligations.
2. The current regulatory framework should suffice, thanks to the state of competition it enables, and thanks to the tools that it makes available to regulators, to guarantee an acceptable environment in terms of openness for both users and service providers.
In conclusion, it seems clear that the situation in France is propitious to the deployment of very high-speed, thanks to its dynamic media and very high-speed sectors. But this positive situation will not be enough to guarantee that very high-speed will be a success. A real cooperation between players from the content industry, notably media, and players from the telecom industry is crucial to developing new business models and new, innovative applications and services for this new distribution mode. Should such a cooperation come to pass, it seems inevitable that consumers will come on board, and so ensure the success of very high-speed that will be beneficial to all concerned.