| Broadband for business
OECD TISP, 3-4 June 2002 |
Thank you very much Mr Chairman for the opportunity to speak to the Working Party on Telecommunications and Information Services (TISP) of the OECD.
My thanks also to our hosts for arranging the meeting and for their hospitality.
My congratulations to the Secretariat for a very interesting and informative
paper on Broadband Access for Business [DSTI/ICCP/TISP(2002)3].
International Telecommunications Users Group
INTUG brings together the interests of national associations of telecommunications users and of multi-national corporations. We are the ones who pay the bills of the telcos.
We have existed for more than a quarter of a century, arguing for lower
prices, better quality and more innovative services.
Introduction
Broadband local access is of considerable importance to users, both businesses and consumers. It is the most important forward-looking issue for us. Issues concerning mobile telecommunications are about remedying the mistakes of the past, albeit the very recent past and severe mistakes.
Broadband access can open up a wide range of services. It is the "last mile" link to competitive suppliers on the core networks.
Even for SMEs, the baseline Internet access seems to be 8M bps.
For the teleworker, that baseline is good quality ADSL with IPSec
While, for the consumer it needs to be affordable always-on high bandwidth access.
When more consumers have access to broadband it will support new services which business would like to provide. The aim of business is to use those services which customers nominate as their preferences. However, the customers have first to experience broadband before it can become a preference. In some countries that remains a very uncertain hope.
Delay in broadband means delay for businesses in developing services. Multi-national corporations can and do develop services first in countries with broadband. However, the option of going elsewhere is not open to SMEs. They cannot easily relocate to South Korea.
The provision of high speed access for business must be accelerated and broadened. While, on the core networks we seem to have a glut of reasonably priced transmission capacity, in some cases at petabits per second, we continue to see bottlenecks in local access.
We need to see much greater competition in the last or first "mile".
We continue to see very strong geographic effects. Despite claims that "distance is dead", this is far from true in broadband. We need to work harder to understand the geography of broadband deployment.
The applications to run over the networks are the subject of considerable market analysis. Some of it is rather fanciful speculation, especially in respect to wireless 2.5G and 3G. For today, we do not need to consider whether multi-national corporations will select MPLS VPNs or IP VPNs, we need only to know that they will need massively more bandwidth. Quality of Service (QoS) is also very important, whether in bandwidth, latency, 24/7 availability and so on. These are embodied in Service Level Agreements (SLAs).
In many cases the advances in broadband have allowed incumbent operators
to get a disproportionate and dominant share of the market.
Infrastructure competition
In many OECD member states two vital steps have been taken to open up broadband access. The first has been the separation of ownership of cable television networks from telephone companies. The second is the unbundling of the local loop.
The European Commission acted under Article 90 (now Article 86) to force incumbent telecommunications operators to divest their cable television interests. This has proved to be extremely important, since it created the basis for competition in broadband in many member states. However, the process is not yet complete.
Some countries, including several OECD member states, have still not made this move, though it is fundamental to broadband market development. For example, one of the steps required in Australia is the removal of the incumbent operator from the cable television business to get more competition into that market.
In New Zealand, the effect of the Kiwi Share in stifling demand for residential DSL. The Kiwi Share demands a Universal Service Obligation that Telecom New Zealand offer "free" dial-up Internet access including rural areas. This is subsidised by the urban areas. It means that in rural areas, unsubsidised DSL has to compete against subsidised dial-up, unquestionably slowing uptake of DSL. This is compounded by the high price of DSL.
In some countries cable operators have been slow to enter the market for cable modem services or have declined to do so. Some have not addressed the business market. Assuming that regulatory obstacles are not impeding them from moving into the broadband Internet access, then something has gone badly wrong. It presents an immediate challenge to policy makers, since we need these players competing on the market.
The second policy area has been the titanic struggle to unbundle the local loop. It represents one of the most important means to open up competition in local access for a variety of technologies and services. Without this, many countries would not have seen the beginning of competition and market growth. There are few OECD countries which have not done this, one being New Zealand where the government review needs to be brought forward immediately.
Only after these two developments can we turn to Ethernet To The Home (ETTH) and Wireless Local Loop (WLL). To date, these have been disappointing. Only in a few geographic markets have they made significant contributions. We look forward to increased contributions in the the coming quarters.
Italy is an interesting example where the non-discriminatory use of
ducts belonging to the incumbent is pushing forward the deployment of ETTH/ETTB.
It is a policy with benefits to telecommunications users and also to road
users.
The geography of competition
There are very different experiences of broadband access in different geographies:
Unbundling the local loop
The unbundling policy seems to have kick-started the broadband market in a significant number of countries. The number of customers is rising rapidly, though it varies greatly.
Belgium appears to be in danger of overtaking the USA in broadband teledensity, perhaps by the end of this year. This is despite having an incumbent operator that is generally seen as lacklustre, though unburdened by debt, and which many would consider to be a dinosaur. Fear of competition through unbundling enforced by the European Union seems to have effected the change in the behaviour of Belgacom. The present advertising campaigns suggest prices of around €30 to €40 per month, perhaps with a free ADSL modem for self-installation.
However, there is real competition only in Brussels and in Flanders. One half of the country, Wallonia, has cable operators who seem unaware of the market opportunities presented by broadband Internet access. Opportunities that the incumbent has moved rapidly to close off.
Belgacom has flooded the market to ensure that its market share is very high. Dislodging it from that position will be a real problem for rivals and also for policy-makers if effective competition is to be achieved.
In general the tactics deployed by incumbent operators in Europe have been those of a classic military campaign executed with a view to delaying competitors or ultimately excluding them from the market. The incumbent operators have created substantial delays, obstacles and traps.
The incumbent operators were extraordinarily slow in producing their Reference Interconnection Offers (RIOs). These have then been subjected to painstaking negotiations with NRAs, followed by appeals and challenges. This has all been intended to generate a sense of uncertainty and ineffectiveness around unbundling.
Japan appears to be an exception where NTT was quick to offer a RIO and did so at what appears to be an amazingly attractive price.
The incumbents have ensnarled NRAs and NCAs is complicated disputes over abuse of dominance and price squeezes. It may take years to resolve them. We can see the contrast between that process and the desire of member states to move rapidly up the OECD broadband league table.
Meanwhile, the incumbent operators were extremely fast in offering their retail DSL services. They exploited their first mover advantage. They also leveraged their market power to the maximum effect.
The result is that many potential competitors have been driven from the market and that consequently customers face a lack of choice in offerings. Sometimes where there seems to be a choice it is in the form of the resale of the wholesale offering of the incumbent operator.
There is very limited competition in the market for broadband local access and the incumbent operators have achieved dominance and market shares that can only be described as extremely disappointing. It presents a serious policy problem to break that dominance. It will be a major issue in the European Commission's Eighth Report on Regulatory Implementation.
There is a long-standing pattern of discrimination by incumbent operators against market entrants. This is seen not just in the local loop but in other services. It is found not only in Europe but, with rare exceptions, all around the world.
In the USA we have seen a slightly different but more frustrating problem
of politico-regulatory trench warfare. Both sides, incumbent telcos and
cable operators are heavily engaged with the Congress, the Department of
Commerce and with the Federal Communications Commission. More effort seems
to go into lobbying than into getting customers. Everyone promises broadband
to the barn, on their own terms. Meanwhile, the USA is being overtaken
by other countries which is attributed to lack of demand for broadband
services.
Financial markets
The ending of the dot.com bubble and the accompanying collapse of interest in telecommunications has had a massive effect on the sector. Investors believe, for good reason, that all forecasts in telecommunications are inflated or works of creative fiction.
No investor trusts companies in the telecommunications sector. There are no operators whose balance sheets can be read with confidence. There are none which do not have at least a hint of the troubles caused by the wild excesses of the dot.com boom. Either there is debt on the scale of a third world country or assets acquired from other operators at grossly inflated prices. Every telecommunications operator has now to be seen as at risk of going into bankruptcy.
It is especially frustrating that, just as viable regulations for the unbundling of the local loop and the licensing of the Wireless Local Loop became operational in many countries, the potential market entrants found that their sources of funding had dried up.
There seems to be very little that can be done about this, other than to make the conditions for market entry as reasonable and equitable as possible.
We know that the financial markets over-reacted, but it will take a little longer before they believe stories of the El Dorado from telecommunications operators.
We need to see realistic, perhaps boring, business plans in which operators
provide services that customers want.
Competition law
It is of considerable importance to develop our understanding of the application of competition law to telecommunications, since we shall have to rely on it more in the future. It is especially important to understand the limitations of competition law in order to determine those areas and issues where more traditional regulation may continue to be necessary.
I spend too much of my time on international mobile roaming and on fixed-to-mobile call termination, both of which are dealt with under this umbrella.
In the European Union INTUG has strongly supported the sector inquiry into telecommunications under Regulation 17/62. One arm of this has been to examine local access, while a second has been into leased lines.
Arguably the toughest issues to be considered are those of price squeeze and predatory pricing.
It is not easy for users to argue for increased prices, but that may well be necessary to ensure competitive markets. In the long run competitive markets should ensure lower prices. That may require short term price increases, where it eliminates a price squeeze.
The report by consultants to the European Commission identified widespread practices of fixed incumbent operators operating a price squeeze on new entrants. They have endeavoured to maximize the price of their wholesale service and simultaneously minimize the retail prices for the downstream service. A second problem exists between the pricing of retail xDSL services and wholesale unbundled loops.
There is a serious risk that artificially low prices will discourage investment and that some market players are actively seeking that outcome.
INTUG supports further action to eliminate price squeezes from the telecommunications market.
Some of us have been making half joking suggestions that the next issue
of Communications Outlook should include measures such as the number
of lawyers per 100 telephone lines or percentage spend on regulatory affairs.
Naming & shaming
In October 2001 the OECD published a very useful analysis of the broadband market. It was followed by the first workshop last December in Paris and now the Broadband for Business report and the Workshop tomorrow and Wednesday. Similar discussions have been taking place at the ITU, APECTEL and CITEL. Many countries are aspiring to move very quickly.
The benefits of accurate data in this policy debate are difficult to overestimate.
In the near future we will have to disaggregate the data to show more clearly, the different types of broadband. It is not going to be easy to get these definitions correct.
Some countries are looking to develop services on fixed broadband networks with a view to later delivery on wireless broadband. This seems a very sensible alternative to jumping directly to 3G, especially for firms with no experience of making revenue from services. We will have to work out measures to show data customers over 2G, 2.5G and 3G.
When I have told audiences in the USA or in Europe that South Korea is the world leader, I get strange reactions. However, it has had a salutory effect.
Competiton between nations appears to work.
Nonetheless, some countries seem either to be shameless or be unaware that this is a sprint and not a game of golf.
I found it disturbing to hear the Australian minister, Senator Alston, say last March that he did not mind if Australia was twelfth or fourteenth in the OECD rankings. Even then it was obvious that several countries had succeeded in shaking off that sort of complacency and had begun to move ahead. The most recent data suggests that Australia has dropped half a dozen places, with a real risk of further slippage. There are non-OECD countries which are also ahead of it. With the exception of the extreme rural areas, the outback, Australia is hardly the most difficult country to wire up. The newly appointed BAG (Broadband Action Group) will have its work cut out to develop new policies in a time frame that allows Australia to catch up and so to create the economic opportunities for Australian businesses.
The European Commission through the Seventh (and soon the Eighth) Report, the ONP Committee and the Council of Ministers has maintained a regular and substantial flow of information on the implementation of the Regulation on Unbundled Access to the Local Loop. This seems to instill a competitive spirit amongst the European Union member states.
However, the position of the United Kingdom suggests that something has gone wrong. By March of this year it had unbundled only around two hundred local loops out of more than twenty-eight million belonging to British Telecom. Yet the European Commission has proposed to take no action. This seems to suggest that mere enforcement of the European Regulation and the public naming and shaming of countries is insufficient.
The recent UK surge in broadband seems to come exclusively from BT at the wholesale level. While it begins to move the UK in the correct direction in the table, it does not appear to be setting the basis for sustainable competition.
INTUG believes that it is imperative that this flow of information continues
to allow all participants in the policy process to compare member states
with each other and to leading countries around the world. Needs to extend
beyond the OECD. It needs to be better than annual, given the pace of change.
Leased lines
INTUG has been making observations on the market for leased lines for a quarter of a century. INTUG joined the CCITT in 1979 in order to make representations on leased lines. Since then we have continued to make representations to the ITU and elsewhere on leased lines. Sadly, these can still be considered to be complaints of a very serious nature concerning pricing, provisioning and lack of competition.
The Broadband Access for Business Report uses the prices paid by one of our members, Reuters, rather than the standard published tariffs. For smaller users and that means almost everyone else, the prices would be higher, sometimes by a substantial margin. Also the disparity in charges between Europe and the USA would be even greater.
The wholesale offers of xDSL by incumbents cannot be considered to be long term alternatives to the use of unbundled local loops. It does not provide sufficient certainty for the future of such services. It leaves resellers and end-users dependent on the provisioning of the incumbent and, in particular, they must wait for increases in bandwidth and upgrading to more advanced forms of xDSL.
These essential inputs /(up to the last 50 kilometers) are needed to link customers to long distance data networks. Ex ante regulation of these inputs has been ineffective despite the continued dominance of incumbent telecommunications operators over local access leased lines.
Incumbent operators are discriminating among customers and thereby abusing their dominant position over the local access bottleneck in their respective service areas. As a result, consumers and businesses are being denied the benefits of a competitive telecoms market. The bottleneck control that incumbents currently wield will stifle nascent competition and harm economic growth opportunities.
Evidence of the problem is pervasive. Comparable local access leased line prices vary by as much as 300% and in some countries delivery times are deteriorating while reliability is decreasing.
In December 2000, the European Union's ONP Committee adjusted the upper
limit of the reporting requirement from 2Mbps to 155M bps. Although the
reporting is quite slow, it has revealed quite appalling delays and discrepancies
in the the provisioning of leased lines in member states. However, it is
not clear how this will work under the new legislative package.
Conclusion
INTUG supports the work of the OECD in analysing developments in the deployment of broadband both for business and also for the residential consumer. It is important to conduct this work at the same pace as industry developments. These are happening extremely quickly and we must identify global best practice and mistakes as they happen.
This is certainly not the usual pace of policy formation. However, if countries wish to be exemplars of global best practice, it is necessary to work in Internet time.
It is useful to see examples of successes of WLL, WLAN, other new technologies and policy successes. In particular, we need to have examples of successes in rural and peripheral areas, not the least being the Australian outback and Northern Canada.
Some people talk of a "broadband revolution" which is absurd. It is a much devalued word. Karl Marx would never recognise it as that, nor would Thomas Kuhn.
For the consumer or for the SME it is not a reversible process. You cannot go back. It is an important evolution. It is a step and not a revolution.
The results to date of policies for broadband for business are patchy in terms of:
The resale of services provided by the incumbent operators does not represent best practice. Indeed, it risks those countries which depend on it falling further behind. Alongside re-sale there needs to be competition in the local loop and also from other technologies.
The application of competition law to the telecommunications sector is proving troublesome. We believe that the use of competition law is an important process in the education of all market players and will be a further step towards the normalization of the sector. However, it is proving to be exceedingly slow in individual cases. Competition law may require to be accelerated or turbo-charged to work in step with Internet developments.
The combination of competition and regulation has pushed developments forward. We believe it will be important to maintain the right mix in order to ensure future developments including the roll-out of higher bandwidth and symmetric services. The coverage is going to have to be extended by a variety of incentives, including some elements of support from local, provincial and national governments.
The extremely low level of competition and the reappearance of dominance of the incumbent operators leads to serious concerns about the roll-out of more advanced services, such as VDSL. If there is no competition now, there may be little incentive to make the extra investments necessary to support newer technologies. Countries which have not achieved the sustainable competition to drive these developments may fall behind.
Once we have a reasonable scale of market, then we will find out what
the services and applications are.
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