EU Dangles 15% "Risk Premium" to Solve Stalemate over Sharing New High-Speed Networks.

The EU has unveiled a new proposal for telcos to charge a 15% "risk premium" to recoup the cost of rolling out a new high-speed broadband network. In a speech at the annual conference of the European Competitive Telecommunications Association (ECTA) yesterday, EU Information Society Commissioner Viviane Reding said those who build a new network should be allowed to charge a fair risk premium—on top of standard access fees—for competitors which want to use someone else's infrastructure. Reding lamented the lack of a uniform regulatory approach among all the 27 European countries, arguing that such a move will bring predictability to the relationship between network owners and those who rent capacity. "Today, the regulatory landscape in Europe is unfortunately heavily fragmented in this respect," Reding said. "Regulatory guidance by the commission is therefore required and appropriate in order to foster investments and maintain competition between infrastructure networks and service providers in the broadband area."

Reding noted that she was seeking a middle ground in the dilemma. Although some regulators favour a "regulatory holiday", others see no risk in building a new network and would want to impose rules similar to those governing sharing copper infrastructure. The commissioner will publish the draft guidelines on access for competitors to next-generation networks in early July and if adopted by the EU Commission later this year, the rules will cover the next five years.

For Global Insight's coverage of the ongoing evolution of the EU's new telecoms regulatory framework, see Europe: 26 September 2007: EU Commissioners Split on Functional SeparationAlternative Telco Heads Urge Tighter EU Telecoms RegulationEU Outlines Plans for "Super" Regulator; Europe: 16 July 2007: Alternative Telco Heads Urge Tighter EU Telecoms RegulationEU Outlines Plans for "Super" Regulator; 1 June 2007: EU Outlines Plans for "Super" Regulator and 29 March 2007: EU Renews Call for Telecoms Network Separation; 22 March 2007: The EU's New Regulatory Framework; Benefits, Opportunities and Risks for Telcos; and 14 December 2006: Incumbent European Telcos Take Swipe at New EU Rules.

Outlook and Implications

• Overly Generous? The idea of a 15% risk premium appears, on surface, overly generous to network owners. For a start, telcos who build out a new high-speed network do so as a matter of inevitability rather than to get a competitive edge. Continued growth in bandwidth-hungry services means that the existing copper infrastructure will hardly be sufficient to handle future growth in network traffic. Accordingly, the greater risk lies in not rolling out the network, rather than doing so. Big telcos want to fend off their rivals for as long as they can so as to gain a competitive advantage and Reding may have inadvertently conspired to aid them. With retail broadband prices almost at rock bottom, smaller telcos struggling to make a profit at the current wholesale rate would suffer even more with the extra 15% premium—invariably creating the regulatory holiday that the big telcos have always demanded.
• The Moral Inconsistency: Through this entire hullabaloo about how to fund the roll-out of a new high-speed broadband network and the debate about the regulatory actions required, the EU, and some national regulators, has closed their eyes to the moral inconsistency of their actions. Regardless of any remedies enshrined in anti-trust laws, the fundamental logic—and the spirit of the law—which compelled former incumbent telcos to share their network was that those networks were built with public money. As such, the newly privatised companies had little excuse, whether in law or otherwise, to reject demands to share their networks with new entrants. However, with the new proposed high-speed networks, the case is completely different. The big telcos have little moral obligation to share an infrastructure which has been funded privately. Indeed, fears about the re-emergence of monopolies may as well be dealt with by existing anti-trust rules or some form of post-ante regulation rather than the ex-ante regulatory approach favoured by the authorities (see Germany: 18 December 2006: EU Regulators Collide with German Government Over Deutsche Telekom's VDSL Network).
• Determining their Own Destiny: Although the EU may have come up with a headline-grabbing proposal for new entrants into the market, the reality on ground is that market forces have almost taken control of the situation. Firstly, pervasive consolidation has, and will continue, to reduce the pool of smaller telcos interested in renting capacity from the big players. For those still left in the market, they are swiftly moving to keep their destiny in their hands. Iliad and Neuf Cegetel in France, Arcor in Germany and FastWeb in Italy are examples of alternative telcos who have committed to the roll-out of their own high-speed networks. The proposed 15% risk premium may even be enough to convince those still undecided to wade into the network roll-out business. To accelerate their network roll-outs, the alternative telcos are also entering into agreements with the former incumbents to share civil infrastructure and resources. Going forward, Global Insight believes the future picture is shaping up to be that of multiple high-speed networks, with commercially negotiated partnerships and a clear regulatory process to share things like cable ducts in sewers and buildings (see Italy: 26 June 2008: Telecom Italia, FastWeb to Build Italy's Next-Generation Broadband Network, France: 22 April 2008: Chaos over Sharing French FTTH Networksand Germany: 15 November 2007: Vodafone's Arcor Unit to Build German Nationwide VDSL Network).

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