EU fibre optic networks strategy

An upcoming European Commission decision will define what sort of fibre networks we get at home. E&T investigates.

The EU may be donating just a billion euros in direct aid towards fibre-optic networks - carved off the huge common agricultural budget - but the regulatory power that it wields could release tens of billions more euros in private investment. However, there is a hold-up. A ferocious struggle is underway over the future of European telecoms - and perhaps of the European economy as well.

Fibre-optic networks - which will extend the capabilities of the Internet connections we use at home - are at the heart of the battle. In the wake of the financial crisis, these networks are supposed to accelerate Europe's economic recovery: vital, says European telecoms commissioner Viviane Reding, for kick-starting jobs, promoting innovation and streamlining business.

But two constellations of national operators are at odds over whether they will be able to have these networks to themselves, or be expected to offer access to each other's developing infrastructure.

Harnessing innovation

The battle is drawn between competition-savvy British incumbent BT and a group of smaller non-incumbent operators on one side, and continental incumbents such as Telefonica, Deutsche Telekom and Belgacom on the other.

The first group says you won't get innovation in fibre-optic services without competition.No one knows how to exploit the potential of fibre-optic networks, or what the key applications will be, so these networks need all the innovation they can get. That's why BT and the smaller service providers want to open up their own networks, and get access to those of their competitors, right from the start.

However, building such networks is a big and risky investment. In return for their investment, the mainland European incumbents want monopoly rights over the networks.

BT has a second argument against monopolies. It says its global customers will face all sorts of difficulties if, for example, an office in Berlin using Deutsche Telekom's proprietary services is incompatible with an office in Spain that has to use Telefonica's proprietary services. BT wants to offer services in all the member states, getting rid of compatibility issues for its multinational customers.

At the moment there is a deadlock in the halls of power. Both BT's and Deutsche Telekom's respective umbrella lobby groups are on tenterhooks to see what recommendation the Commission makes.

The EU's executive body is taking the highly unusual step of drafting a third recommendation (one is the norm), having already issued two draft recommendations, each of which proved unsatisfactory to one or both lobbies. The first offered regulatory holidays, during which operators had a guaranteed right to set access prices. We can assume the incumbents wouldn't have set bargain basement prices to encourage rivals on to their networks.

The second draft recommendation, published on 12 June, managed to offend both lobbies. While pushing the principle of open, cost-based access to networks for outside competitors, favouring the position of BT and the small operators, it appeared to say that incumbents could avoid this provision through a joint venture with one other firm, chosen by the incumbent. Lobbyists for the open-access group said this would not enable real competition at all. "You could just stitch up a deal with the firm and that would be an excuse to foreclose serious competitors," said one.

The Commission is now having a third go, due for publication at the end of the year, after a public consultation period that closes at the end of July.

Which side will the Commission favour?

On the face of it, one of the European Commission's main roles is to create a level playing field in the single market. Reding told a meeting of telecoms executives in June that she had spent years fighting for effective competition in the telecoms sector and that - with echoes of Margaret Thatcher - she was "not for turning" now. "The last thing we need is new monopolies," she said, and "all the artificial scarcity of services that could go with it".

On the other hand, Ilsa Godlovitch, the director of regulatory affairs for ECTA, a new-entrant lobby group favouring competition, said that the German government has put a lot of pressure on the Commission to write a draft favourable to Deutsche Telekom. The German government owns 35 per cent of the firm, and persuaded the Commission that there were a lot of "job losses at stake if its investments were opened to competition".

"I am really not confident things will go our way at all," she says. "There are dark pressures at play."

Innocenzo Gemma, ECTA's president, adds that, "in recent months, the president of the Commission, José Manuel Barroso, met three times with incumbents". Germany is the EU's most powerful country; Barroso's reappointment as Commission president is not guaranteed.

Regulatory decision

Beyond Brussels, many countries and companies are anxiously awaiting the decision.

Charles Butterworth, chief executive officer of Vodafone Ireland, said: "The regulatory framework in both fixed and mobile is massively important in terms of giving industry the inducement to invest."

In the meantime, some countries are already developing at least partial fibre networks. Europe remains far behind Asia and America. Nearly eight million Japanese have a fibre-optic line at home that is as much as 30 times as fast as the typical DSL copper line. The figure in Europe, with four times the population, is about one million, half of those in ever-innovative Sweden.

What the Japanese have is fibre-to-the-home networks, with glass fibres connecting directly to the source network. This is expensive to install, but offers speeds of up to 100Mbit/s. Fibre-to-the-home is the future gold standard; and apart from the aforementioned Swedes, there are very few European countries with high-speed networks at all.

One exception is Germany, with its hybrid VDSL2 networks, in which connections from the exchange to the street cabinet are made on glass fibre, while the remaining kilometre or so to the home runs on copper lines. Deutsche Telekom has launched these networks, offering speeds of up to 50Mbit/s, in Germany's top 50 cities.

BT is launching its first high-speed fibre network in Muswell Hill in July, part of a £1.5bn investment which Olivia Garfield, the company's head of policy, admits is a "leap of faith". After a trial in Ebbsfleet last year, the Muswell Hill project represents BT's first attempt to go live. A gradual roll-out to other areas should follow. BT will use fibre-to-the-cabinet, as in Germany, with up to 40Mbit/s download speeds carried the last kilometre on copper. New housing estates, promises BT, will have fibre-to-the home installed. The government's recent Digital Britain report proposed a 50p a month tax on all UK fixed-line rentals, to help bring this network to otherwise uneconomic regions.

How useful will these networks be? The important truth is that no one knows quite what businesses, services and experiences faster networks will make possible. Once, 56kbit/s connections were thought sufficient; now universal access to at least 2Mbit/s broadband links has become a government priority. Information and communications technology develops so quickly that the change it enables is unpredictable.

This may seem like just another Brussels wrangle, but the debate about open versus closed networks could also be seen as a debate about the future of European innovation and the European economy.

The pro-competition lobby says that open networks create the conditions for innovations that drive economic growth. The question, one analyst said, is how to overcome the opposition and ensure the Commission chooses the right option.

Many American chief executives lament the difficulty of making good returns these days. A recent survey by Deloitte found that the return on assets at US companies has fallen steadily since 1965, from about 4 per cent to 1 per cent today. Customers get better deals, but shareholders and less-skilled workers do badly.

The problem is that economic liberalisation and the rapid improvement in the digital infrastructure has made it much easier to enter markets and compete with the incumbents, increasing the rate at which they are overtaken by younger competitors. If this is what broadband did to Wall Street, imagine what much faster networks would do to European capitalism - for better and worse.

For incumbents, there are two choices: the kind of protectionism that usually evolves into a prolonged struggle against the inevitable; and openness, in which companies make a decision to compete vigorously in the new economic landscape.

Apple's current record profits, despite the recession, show that, while technology allows upstarts to compete more strongly, incumbents with strong brands and intellectual property can exploit them in novel ways by working with partners and rivals. Europe can prosper too, if its strongest brands understand how they can exploit their strengths. BT, at least, has already got the message.

At a time when other countries are injecting billions into their economies to accelerate the roll-out of communications technologies such as broadband and fast wireless networks, the Commission's recommendation about how Europe's fibre networks should be run is critical. Let's hope it makes the right one.

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