Broadband in Europe: How Brussels Can Wire the Information Society

Broadband in Europe: How Brussels Can Wire the Information Society

Broadband in Europe: How Brussels Can Wire the Information Society Dan Maldoom DotEcon Limited Richard A D Marsden DotEcon Limited J Gregory Sidak Georgetown University Law Center and American Enterprise Institute Hal J Singer Criterion Economics

Library of Congress Cataloging-in-Publication Data A C.I.P. Catalogue record for this book is available from the Library of Congress. Broadband in Europe : how Brussels can wire the information society / Dan Maldoom... [et al.]. p. cm. Includes bibliographical references and index. ISBN-10: 0-387-25386-6 (alk. paper) e-isbn-10: 0-387-25387-4 ISBN-13: 978-0387-25386-2 e-isbn-13: 978-0387-25387-9 1. Telecommunication Europe. 2. Broadband communication systems Europe. 3. Information networks Europe. 4. Information society Europe. I. Maldoom, Dan. HE8084.B76 2005 384.094 dc22 2005042643 C 2005 Springer Science+Business Media, Inc. All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, Inc., 233 Spring Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now know or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. Printed in the United States of America. 9 8 7 6 5 4 3 2 1 SPIN 11325147 springeronline.com

Contents Tables and figures Preface vii xi 1 Introduction 1 2 Broadband and why it matters 3 2.1 What is broadband? 3 2.2 The importance of broadband to the EU economy 8 2.3 Broadband delivery technologies 11 3 Competition in broadband markets 25 3.1 Facilities-based and access-based competition 25 3.2 The current state of broadband competition 36 3.3 Summary of country case studies 53 4 New entry and market outlook 57 4.1 Entrant choices 57 4.2 Entrant case studies 67 4.3 The future evolution of broadband competition 70 5 Analysis of competition in broadband markets 79 5.1 Defining the market 79 5.2 The desirability of facilities-based competition 96 5.3 Access to networks 102 5.4 What drives penetration? 110 6 Appropriate policies for broadband regulation 121 6.1 Overview of the regulatory regime in the EU 121 6.2 Potential flaws in the existing regime 124 6.3 Subsidies and USO requirements 133 6.4 Appropriate policy for broadband 136 6.5 The role of the European Commission 141

vi Contents 7 Conclusion 143 Annex I: Country case studies 151 A. Germany 151 B. Netherlands 154 C. Ireland 157 D. South Korea 161 E. Sweden 165 F. United Kingdom 169 G. United States 170 Annex II: Entrant case studies 175 A. Bredbandsbolaget in Sweden 175 B. e.biscom (FastWeb) in Italy 178 C. HanseNet in Germany 181 D. ONO in Spain 182 E. UPC (chello) in nine European countries 187 F. U.S. CLECs 191 Annex III: A brief introduction to market definition 197 Glossary 199 References 203 Academic publication 203 Regulator and government material 205 Industry surveys, news reports and corporate material 209 Index 215

Tables and figures Table 1: Broadband forecasts for Western Europe 8 Table 2: Relative strengths and weaknesses of broadband delivery platforms 13 Table 3: Examples of alternative broadband platforms in Western Europe (end-2002) 41 Table 4: Access prices for full LLU and line sharing (euros) 44 Table 5: Availabillty of resale and bitstream access in selected European countries, 2003 45 Table 6: Take-up of wholesale and LLU access offers for DSL broadband across EU states, June 2004 46 Table 7: Monthly subscription rates for selected broadband products of incumbent DSL and cable operators in EU countries, July 2003 47 Table 8: Monthly subscription rates for selected broadband products using alternative plarforms, July 2003 51 Table 9: Alternative scenarios that could boost broadband market development 75 Table 10: Alternative scenarios that could impede broadband market development 76 Table 11: DSL and cable coverage in selected EU states and the United States, end-2002 90 Table 12: Rank correlations between DSL/Broadband penetration and measures of access take-up, end-2002 116 Table 13: Selected Swedish broadband packages by speed and price 168 Table 14: Relative broadband prices for selected OECD countries 171 Table 15: Top ten U.S. broadband subscribers, end-q1 2003 174 Table 16: FastWeb subscription packages 180 Figure 1: Generic broadband value chain 26

viii Tables and figures Figure 2: Access services and the broadband value chain 32 Figure 3: Different categories of competition in broadband 34 Figure 4: Broadband platform subscribers in the EU 15 37 Figure 5: Broadband platform subscribers in the United States 37 Figure 6: Broadband subs per 1,000 households, end-2002 38 Figure 7: Broadband subs per 1,000 households, end-june 2004 39 Figure 8: Cable TV penetration and share of broadband, end-2002 40 Figure 9: DSL connections by type of provider, EU15 June 2004 43 Figure 10: DSL connections by type of provider, EU15 March 2003 43 Figure 11: UK monthly suvscription charges for broadband access from leading UK providers (excluding VAT) 50 Figure 12: Broadband penetration & platform competition, end-2002 111 Figure 13: Platform competition and new broadband additions, Jan-Jun 2003 113 Figure 14: Broadband penetration and non-incubement DSL access, end-2002 114 Figure 15: Broadband penetration against bitstream & resale take-up, end-2002 115 Figure 16: Broadband penetration and LLU / line sharing, end-2002 115 Figure 17: Broadband penetration and facilities-based competition (including LLU and line sharing), July 2004 118 Figure 18: Take-up of LLU / line sharing versus bitstream / resale 119 Figure 19: German broadband subscribers Q4 2000 to Q4 2002 152 Figure 20: Dutch Broadband subscribers, Q4 2000 Q4 2002 156 Figure 21: DSL adoption curve and take-up in Ireland 161 Figure 22: Broadband internet access users by platform, end-2002 163 Figure 23: Swedish Broadband subscribers, Q4 2000 Q4 2002 167

Tables and figures ix Figure 24: UK Broadband subscribers, Q4 2000 Q4 2002 171 Figure 25: Broadband lines (millions) in the United States 172 Figure 26: Bredbandsbolaget Fibre homes passed and subscribers 177 Figure 27: ONO cable homes passed & selected subscriber numbers 186 Figure 28: UPC Western European homes passed (000s/% upgraded) 188 Figure 29: UPC cable homes passed and subscribers for eight countries 189

Preface Broadband is a key enabler of the information society, increasing productivity and competitiveness across all sectors of the economy. Unlike traditional narrowband connections, broadband provides high speed, always-on connections to the Internet and supports innovative content and services. Direct consumer welfare gains from mass-market adoption of broadband across the EU could easily reach 50 billion euros or more per annum. This is quite apart from the more profound societal shifts that ubiquitous broadband could bring. It may allow the individual to distribute content and ideas independent of traditional media and bring together communities of interest without regard to borders. Public policy for broadband will have a big impact on whether and how quickly these benefits are realised. Getting policy right could bring large benefits for consumers, firms and the economy at large; getting policy wrong risks stifling both the rollout of broadband and new innovative services, and thus the realisation of the EU s e-europe vision. In this book, we focus on the residential market for broadband access in EU countries, analysing the current and prospective level of competition and drawing implications for public policy. A key aim is to understand better the relative importance of facilities-based and access-based provision in fostering competition and promoting take-up of broadband services. To date, regulatory policy in EU countries has tended to carry over the approach of traditional voice telephony regulation, with its emphasis on wholesale access to incumbent networks, rather than encouraging facilities-based competition between providers with their own end-to-end infrastructure. However, broadband provision is not a natural monopoly; effective platform competition is already possible. In many areas of Europe, consumers already have a choice between alternative providers using DSL and cable platforms. New platforms using fibre-to-the-home have been built in Sweden and Italy. Wireless technologies that could dramatically change the marketplace (such as 3G, WiFi and various broadband wireless services) are also being launched. There are encouraging signs that full facilities-based competition can be a reality for broadband. However, a clear message through this book is that commercial organisations respond to the incentives that regulatory systems place in front of them; every care must be taken to ensure that incentives set by public policy encourage efficient rather than distorted outcomes.

xii Preface Whilst there have recently been some encouraging noises from regulators about the importance of promoting facilities-based competition, it takes time and patience to achieve such goals. Tough access regulation can always generate competition in the short-run, but this is not the deep and lasting competition over the whole value chain that only infrastructure-based competition can bring. It requires a far-sighted regulator to hold out for these long-terms benefits. How competitive are European broadband markets? What factors explain the wide variation in broadband take-up across EU member states? What is the relative role of facilities and access-based entry in promoting broadband takeup? Does the availability of regulated access products increase or diminish incentives for infrastructure investment? What policies could the EU and member state governments adopt to further development of broadband over the next decade? These are the questions that we attempt to answer, drawing on evidence and analysis of Western European markets, and lessons from the experiences of other countries, such as the United States and South Korea. This book was originally conceived as a research project by DotEcon Limited and Criterion Economics, two independent consultancy firms that are specialists in applying economics to telecommunications and other network industries. The authors of this book Dan Maldoom, Richard Marsden, J. Gregory Sidak and Hal Singer work for DotEcon and Criterion. The initial project was funded by the Brussels Round Table, a forum for leading European telecommunication operators and equipment manufacturers. A report was completed in September 2003, and its findings were presented at the Brussels Round Table on the Future of the European Telecommunications Industry with BRT member CEOs and EU Information Society Commissioner Erkki Liikanen. The members of the BRT at the time were: Alcatel, BT, Deutsche Telekom, Ericsson, France Telecom, Siemens, Telefnica de Espaa and Telecom Italia. This book is based on the report that was released in October 2003. It was updated by the authors in late 2004, taking into account a number of new developments in European markets over the last 12 months. The authors are grateful for the assistance of colleagues at DotEcon and Criterion for research and helpful comments in finalising both the original report and this draft. In particular, we would like to thank Christian Koboldt, John Gunnigan, Roger Salsas, Tamara Linnhoff, Justyna Majcher, Vesna Milenkovic, Robert Crandall and Brian O Dea. We would also like to express our gratitude to members of the BRT Working Group in identifying information sources for the original report and providing expert comments on drafts of the original report. However, we wish to emphasise that BRT members have not

Preface xiii had any role in commenting on this revised book. Further, this book is the work of the authors, and does not necessarily represent the views of any other party. Dan Maldoom Richard Marsden J. Gregory Sidak Hal Singer April 2005