A study commissioned by ECTA, the European Competitive Telecommunications Association, reveals that high fixed costs will limit the availability of super fast broadband to many European homes and rural businesses.
France has the best prospect of a fiber roll-out, with viability to 25 per cent of households. The study, conducted by WIK, also shows that the economics simply do not stack up for competitive operators to duplicate costly infrastructure on a wide scale and that access to fiber is a win-win scenario as it improves the business case for all providers, to the ultimate benefit of consumers.
The timing of the study is critical as the European Commission will shortly release its proposals for a Recommendation on the regulation of next generation networks access whilst the European Parliament just voted on the Commission’s proposals for the Review of the EU Telecoms Framework, signaling its views on the same issues.
ECTA believes the outcome will be crucial in determining the performance and position of incumbents and competitive operators in fixed telecoms across Europe.
Read more…
Meanwhile, the incumbent operators, assembled in the ETNO, say that the EC Recommendation should primarily focus on how to encourage all operators to invest in new networks. Simply extending current access rules defined for legacy copper-based networks to new high speed networks will not accelerate risky investment in the new access networks, ETNO says.
In June, ECTA warned that the business case of rolling out next generation fiber networks across Europe favors Europe’s incumbent operators.
Also interesting: ETNO published a report last week that confirms overall investment has slowed down in the EU telecoms sector.
(Source: INTUG)
Sunday, December 4, 2011
Copper Switch-off Strategy Essential for Achieving European Broadband Targets, Study
High charges for copper telephone networks are deterring the roll-out of fiber across Europe, according to a study commissioned by the European Competitive Telecommunications Association (ECTA).
By allowing incumbents to reap high profits from their legacy assets without the need to invest in replacing the lines, current pricing structures for telecoms are likely to delay the move to 100Mbit/s broadband speeds, a target set by the European Commission in its EU2020 strategy in March last year.
Currently, on average European regulators set the wholesale charge to rent the incumbent’s copper lines at EUR8.55 per month. However, this charge is usually based on the cost of building a brand new copper network, which no-one would do today. Such costs can be double the amount it actually cost to install the lines decades ago.
The study, conducted by WIK, suggests that, due to the high profits that the current access charges allow, copper charges could need to be cut substantially to make it more profitable for incumbents to renew their networks towards fiber. Incumbents have been pressing for higher copper access charges across Europe, but model results show that this would lead to disincentives for fiber investment.
Another key finding is that it is nearly never profitable to run copper and fiber networks side by side. The authors therefore recommend that incumbents should be allowed to switch off their copper networks and transfer all customers onto the new fast networks as soon as they build fiber networks which are effectively open and allow fair competition.
WIK calculates – for a representative European country – that cost-based charges for the new fiber network should not be set more than a few euros higher than the current copper access charges in Europe. This would provide incumbents with a fair return on their investments whilst ensuring that competition flourishes and retail prices are affordable for ordinary consumers.
Ingo Vogelsang, one of the authors of the study, said,
The European Commission has announced that it will be issuing guidance on how regulators calculate wholesale charges. The study suggests that “forward looking” methods to calculate charges remain appropriate for growing markets such as fiber but are no longer the relevant benchmark for declining markets such as copper. Instead, regulators should set a cap on charges, but also make sure that the prices do not allow a margin squeeze.
Key conclusions of the study are as follows:
By allowing incumbents to reap high profits from their legacy assets without the need to invest in replacing the lines, current pricing structures for telecoms are likely to delay the move to 100Mbit/s broadband speeds, a target set by the European Commission in its EU2020 strategy in March last year.
Currently, on average European regulators set the wholesale charge to rent the incumbent’s copper lines at EUR8.55 per month. However, this charge is usually based on the cost of building a brand new copper network, which no-one would do today. Such costs can be double the amount it actually cost to install the lines decades ago.
The study, conducted by WIK, suggests that, due to the high profits that the current access charges allow, copper charges could need to be cut substantially to make it more profitable for incumbents to renew their networks towards fiber. Incumbents have been pressing for higher copper access charges across Europe, but model results show that this would lead to disincentives for fiber investment.
Another key finding is that it is nearly never profitable to run copper and fiber networks side by side. The authors therefore recommend that incumbents should be allowed to switch off their copper networks and transfer all customers onto the new fast networks as soon as they build fiber networks which are effectively open and allow fair competition.
WIK calculates – for a representative European country – that cost-based charges for the new fiber network should not be set more than a few euros higher than the current copper access charges in Europe. This would provide incumbents with a fair return on their investments whilst ensuring that competition flourishes and retail prices are affordable for ordinary consumers.
Ingo Vogelsang, one of the authors of the study, said,
“Commercial decisions about network investments are driven by profit considerations. Incumbents will only invest in fiber if this is more profitable than staying with copper. If regulators signal that copper access prices will be cut, but that incumbents can switch the copper off if they invest in open fiber, that should provide the incentives we need to kick-start the move to high-speed broadband. Consumers will receive faster and better services quickly and at little additional cost.”Because the business case for fiber depends on transferring all the copper customers onto fiber, the study also concludes that an alternative operator investing in a separate fiber network would face very high hurdles to make the economics work, and would need special advantages in the areas they cover to enable it to outplay the incumbent.
The European Commission has announced that it will be issuing guidance on how regulators calculate wholesale charges. The study suggests that “forward looking” methods to calculate charges remain appropriate for growing markets such as fiber but are no longer the relevant benchmark for declining markets such as copper. Instead, regulators should set a cap on charges, but also make sure that the prices do not allow a margin squeeze.
Key conclusions of the study are as follows:
- In the study’s basic scenario fiber wholesale costs are estimated at EUR11.65 per month in a representative European country, if the incumbent can make use of available ducts (“Brownfield”). If wholesale charges are set at this level, customers would pay EUR36 on average for faster fiber-based services – only a little more than they pay today for standard broadband. However, incumbents would not invest in fiber at these charges unless copper prices are drastically cut – to around EUR4 per month.
- In a Greenfield scenario where no ducts can be reused the costs are estimated at EUR13.92 per month. If wholesale charges are set at Greenfield cost then customers would pay about EUR38 per month for fiber based service. In this scenario copper access charges at EUR6 or below would induce fiber investment.
- At the current European national average copper access charge of EUR8.55, incumbents are unlikely to invest at a large scale because a fiber wholesale access charge of EUR19.49 (significantly above the cost-based rate) would be needed to make fiber more profitable for an incumbent than continue their existing copper networks. At these high wholesale rates for fiber, customers would pay on average EUR42 for their telecoms services, significantly more than they pay today. Competition and consumer welfare would be reduced.
- It is not cost-effective to run fiber and copper in parallel. This situation is possible only with copper and fiber access charges that are so high that they generate monopoly profits for both networks and keep entrants virtually out. This would lead to high retail prices, low competition and low consumer surplus. A forced migration strategy from copper to fiber is therefore economically rational and desirable from a welfare perspective.
- To avoid a “rate shock” whereby customers face a large gap between the charges for the copper network and fiber network, regulators could “signal” that they will bring down copper charges sharply, but allow the incumbent to switch-off the copper network and transfer customers swiftly if they install open fiber networks. This strategy is likely to lead to investment before copper charges actually come down. Customers would pay only a little more than today for telecoms services, but immediately benefit from the higher fiber capacities provided in a competitive market.
- An investor other than the incumbent would require special cost savings or other advantages in order to out-compete the copper incumbent and may face the threat of the incumbent preempting its investment thereby rendering it unprofitable. The model shows that only with very high access charges would it be viable for an independent investor to install fiber alongside the existing copper network in large parts of the country. Viability at lower access charges is assured only in cases with special advantages in certain cities.
- The study does not recommend that regulators continue setting copper charges on a forward-looking basis at a time when copper is no longer the modern technology. If regulators continue to pursue this approach, copper charges are likely to rise, increasing retail prices for telecoms, undermining competition and thereby weakening incentives for incumbents to invest in fiber. Instead, regulators should set a cap on copper wholesale charges at the last relevant price before volumes started to decline, and carry out a margin squeeze test to identify the appropriate level.
- While the numerical results stem from representative country data and parameters of the WIK models, the main conclusions are independent of these particular numerical results and only relate to the relative rankings and orders of magnitudes conveyed by the results.
- Despite a high degree of harmonization between European price control methods in principle, costing methodologies in detail however, vary significantly. As a consequence the range of ULL prices is rather large in Europe (EUR6 – 16 per month). The majority of regulators have not yet adjusted their approaches to value copper as a legacy technology. Some regulators have even increased, or proposed to increase copper charges at a time when such an approach is questionable.
Telco CFOs call for structurally separate netcos to operate Europe’s fibre networks
Commission and regulators should focus on making the economics work for fibre roll-out and avoid political deals with dominant firms, companies stress
30 March 2011, Brussels: Chief Financial and Operating Officers from leading telecoms competitors met today with the European Commission and major banks to exchange views about the conditions needed to allow investment in ultra-fast fibre networks, at a roundtable event organised by ECTA.
The roundtable comes at a critical time as the Commission explores ways to deliver the challenging “Digital Agenda” target of 50% of consumers using 100Mbit/s by 2020.
CXOs highlighted that a “utility” model in which a single fibre is installed which is open to competition would best limit costs and risks of investing in fibre. Fastweb and Wind presented Italian proposals in which telcos jointly invest in a structurally separate “netco”. Fastweb CTO explained: “Only the set-up of a FiberCo - separate from the operators providing downstream services - in charge of rolling out and managing the infrastructures and providing wholesale services to third parties - guarantees a return on investment while safeguarding competition”. Several countries have experimented with models in which telcos co-invest with local authorities or specialists in infrastructure.
Whilst the CXOs were optimistic that there is a business case for fibre if traffic is collected on one network, a key concern raised by the companies was that incumbents, whose participation is essential in any fibre roll-out strategy, lack the financial incentive to invest because in many cases they have been able to charge much higher rates for their legacy networks than it cost them to provide it. “Incumbents have had a real windfall from their legacy assets,” said Tom Ruhan, Chairman of ECTA, “but now is the time to wean them from relying forever on the networks they inherited from the days of public ownership. The Commission should make clear that the era of supernormal profits for copper is over – it is time for incumbents to work with others and invest for the future.”
Companies also agreed that once an open fibre network is in place, customers should be migrated as quickly as possible to limit costs and ensure consumers benefit immediately from the additional capacity fibre has available.
Ruhan continued: “We have an opportunity to encourage new open models in which fibre networks are run separately from retail broadband services. However, to change the business model, regulators must use all the tools at their disposal and resist the temptation to make political deals with incumbents in exchange for empty promises on fibre investment. History has shown time and again that relaxing competition rules does not benefit consumers or increase investment. Incumbents will invest in fibre on their own or in a consortium if the business case stacks up and is more profitable than sweating their old network. Policy-makers can stimulate investment through their approach to regulating wholesale charges, they can encourage consumers to take-up fibre through strategies to “switch-off” copper and they can promote efficient business models through financial instruments.”
Vice-President Kroes has asked CEOs from across the industry to advise her on the steps that are needed to drive fibre roll-out across Europe. Conclusions are expected on 13 July. “We trust this event provided some useful input on the financial aspects of fibre investment decisions and consumer behaviour,” said Tom Ruhan, “and that these issues can be considered in the wider CEO forum.”
(SOURCE: INTUG)
(SOURCE: INTUG)
ECTA calls on Commission’s Vice-President Kroes to end unfair subsidies for incumbent telcos
“Consumers and competitors should not have to pay excessive charges to dominant firms that are not investing in Europe”, says ECTA Chairman Tom Ruhan
(Brussels, 28 November 2011): CEOs of major telecoms competitors have called on Commission Vice-President Neelie Kroes to put an end to excessive charges for historic telephone networks, which they say amount to a subsidy for dominant firms. In a meeting with the Commissioner for the Digital Agenda, CEOs emphasised that there was no justification for paying more than the real cost of copper networks, when incumbents are failing to invest in new high speed infrastructure. An April 2011 study by consulting group WIK, found that the level of wholesale charges in some countries could be as much as double the amount that it actually cost incumbent operators to build the networks decades ago.
Tom Ruhan, Chairman of ECTA, said “despite the extra profits made from excessive copper pricing by incumbent operators, investments in the roll out of ultra fast fibre networks in Europe are not taking place. European consumers and competitors should not have to pay excessive prices to dominant operators for them to distribute high dividends to their shareholders and invest outside of Europe. European competitiveness will be further undermined as a result”.
The Commission is engaging in a major consultation exercise on how telecoms charges should be set across Europe. One of their proposals is that higher copper charges could be permitted if incumbents commit to building modern fibre networks, which are capable of offering much higher speeds.
Tom Ruhan continued: “If dominant firms are permitted to subsidize the investment on fibre networks by allowing them to keep making – or even increase – the excessive profits on their legacy networks, then these subsidies must be shared for the benefit of all, and not only for the benefit of dominant firms. It must be made clear that dominant operators that receive excess profits from their legacy networks paid by their customers should pay the money back by reducing charges on high speed fibre networks. Alternatively, the money could be channelled into a fund available for other potential investors in open fibre networks.”
(Source: INTUG)
(Brussels, 28 November 2011): CEOs of major telecoms competitors have called on Commission Vice-President Neelie Kroes to put an end to excessive charges for historic telephone networks, which they say amount to a subsidy for dominant firms. In a meeting with the Commissioner for the Digital Agenda, CEOs emphasised that there was no justification for paying more than the real cost of copper networks, when incumbents are failing to invest in new high speed infrastructure. An April 2011 study by consulting group WIK, found that the level of wholesale charges in some countries could be as much as double the amount that it actually cost incumbent operators to build the networks decades ago.
Tom Ruhan, Chairman of ECTA, said “despite the extra profits made from excessive copper pricing by incumbent operators, investments in the roll out of ultra fast fibre networks in Europe are not taking place. European consumers and competitors should not have to pay excessive prices to dominant operators for them to distribute high dividends to their shareholders and invest outside of Europe. European competitiveness will be further undermined as a result”.
The Commission is engaging in a major consultation exercise on how telecoms charges should be set across Europe. One of their proposals is that higher copper charges could be permitted if incumbents commit to building modern fibre networks, which are capable of offering much higher speeds.
Tom Ruhan continued: “If dominant firms are permitted to subsidize the investment on fibre networks by allowing them to keep making – or even increase – the excessive profits on their legacy networks, then these subsidies must be shared for the benefit of all, and not only for the benefit of dominant firms. It must be made clear that dominant operators that receive excess profits from their legacy networks paid by their customers should pay the money back by reducing charges on high speed fibre networks. Alternatively, the money could be channelled into a fund available for other potential investors in open fibre networks.”
(Source: INTUG)
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