One of the more unfortunate reforms of late-Thatcherism was to
separate the newly-privatised UK railway companies from responsibility
for building or maintaining track. The measure theoretically aimed at
encouraging competition. But it had unintended consequences, still
largely unresolved.
This has not discouraged Viviane Reding, Commissioner for the
Information Society and Media, from proposing to deploy what she herself
calls "the nuclear weapon" of breaking up former telecoms monopolies
throughout the EU. She wants to give national regulators the power to
split these into two distinct entities as was done voluntarily by BT in
the UK, under pressure from Ofcom.
One new authority would be responsible for managing network
infrastructure, and the other for retail services. This reform could
seriously disrupt investment in an area which is plainly crucial to the
wider European economy.
When monopolies were abolished more than a decade ago operators had to
lease parts of their networks to new entrants to the market. This
enabled the latter to provide telephone and Internet services without
the need to replicate the full infrastructure. There was however little
incentive for the former monopolists to provide competitors with
services of the same quality as the incumbents use themselves.
Regulators tried various methods to break the logjam, including quality
control of wholesale services. In most countries where such measures
have been imposed judiciously, they have provided for the emergence of
alternative operators sufficiently dynamic to invest in setting up their
own networks and to compete directly with the former monopolies. One
such example is that of Free in France.
Some legislators like Viviane Reding believe we should go further to
prevent discrimination from former monopolies. The weakness of the "functional
separation" model she now proposes is that creating fully separate
divisions will in practice discourage investment in infrastructure,
notably in the fibre-optic network which is set progressively to replace
copper in connecting homes to telephone switches.
The deployment of “fibre to the home” (FTTH) is not something that
happens automatically. No operator will invest until the sales prospects
in a given area are promising enough to make the investment profitable
in the longer term. But creating a new artificial structure in charge of
the network inevitably breaks off coordination between investment
decisions and marketing imperatives for retail services.
What are the incentives for this new entity, such as Openreach in the UK,
to make these colossal investments when it will have to share them with
everyone? Conversely, the new entrants see less need to invest in their
own network – as Free did in France to compete with France Telecom – if
they can always rely on the investments made by the network operator.
The record so far is disturbing, though hardly surprising. The
deployment of FTTH in the UK is lagging behind several countries such as
France, Germany, the US and Japan.
Disregard market logic and the long delays associated with a bureaucracy
are inevitable.
Moreover proposing a new monopolistic entity runs directly counter to
the arguments used to justify opening telecoms up to competition in the
first place. This will also postpone indefinitely replacing sectoral
regulation with general competition law, a principle at the heart of the
European framework.
Hundreds of billions of euros will be invested in European telecoms over
the next few years. Members of the European Parliament voting on the
Reding proposals in July should consider whether her “nuclear option”
does not risk inflicting serious damage on a booming but brittle, and
economically crucial, market.
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