Month: January 2013

The Google/Orange Internet deal: much ado about nothing?

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Today there was lot of agitation on the press because of an alleged deal between Google and Orange, whereby the former would pay for the Internet traffic conveyed over the network of the latter. Some press is claiming that this is a revolution for the Internet, other fear that this will be the end of net neutrality. However, certain and clear details of the deal are scarce.

I suspect there might be is a misrepresentation and also an overestimation of the events. apparently, the source of the information is Orange, which for some reasons would like to present the event has an historical achievement.

However, as far as I understood, Google and Orange may have signed just a direct peering agreement, i.e. an agreement for the mutual exchange of Internet traffic. Such agreements do not normally provides for payment, when the exchanged Internet traffic is balanced, while a payment may be due when there is an unbalance. This is a simple matter of commercial negotiation. The reasons for Google and Orange in closing such an agreement may be that direct peering will facilitate the customers’ experience of Orange’s subscribers when accessing Google’s services. In other words, no specific quality service will be provided, however the access to Google services is expected to improve because of the traffic being directly routed between the 2 operators, instead of transiting via more complex international network connections.

This is my understanding of the deal. There is no substantial news, because peering agreements are ultra-normal in this area, and payments are subject to customary negotiations. I do not see any prejudice for net neutrality, as far as the traffic will not be differentiated.  Unless the deal contains spectacular secret clauses, nothing more to report. Sorry!

European consumers are concerned about Kroes’ plans on broadband

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Today  (January 10, 2013) the European Consumers organization BEUC sent a letter to Neelie Kroes warning the European Commissioner for the Digital Agenda about the potential negative impact of her proposed reform on the broadband market.

BEUC refers to the draft Recommendation on non-discrimination and costing methodologies announced by Commissioner Kroes in July 2012 and published in December. According to Kroes, such a reform would be necessary to boost investments in the broadband market in order to achieve the targets of the Digital Agenda. In practice, the new framework would grant ex-monopolist companies (such Deutsche Telekom, Telefonica ecc.) very high revenues from telecom networks, while making more difficult for alternative operators to get access to the same networks to sell competing services. Because of this unbalanced treatment, ex-monopolists are strongly supporting such a reform, while alternative operators fear that the plans of Kroes will kill competition and lead the entire market back to re-monopolization.

BEUC claims that high access prices in the market will result in higher prices for consumers without, in any case, any potential benefit in terms of broadband deployment and migration to high-quality connection services at reasonable prices. According to BEUC, there is no certainty that the paramount cash-flow guaranteed by the Kroes reform to the advantage of ex-monopolists will results in investments. Fact is, in the absence of durable competition, ex-monopolists could be induced to divert that money to dividends payments and other non-productive purposes, while continuing to use the old-fashioned telephony copper networks. While not focusing specifically on competition issues, BEUC recognises that “…the objectives set in the EU Digital Agenda can only be achieved if telecoms markets are effectively regulated”.

It is worth-noting that BEUC is a very prudent organization and such kind of strong, direct letters are normally very rare. This initiative is a clear sign that consumers organizations are seriously concerned about the pro-incumbents approach surprisingly taken by the Dutsch politician since July 2012. Similar concerns are feared by the Italian Consumers Association Altroconsumo.

Here the text of the BEUC letter:

DRAFT RECOMMENDATION ON NON-DISCRIMINATION OBLIGATIONS AND COSTING METHODOLOGIES RELATED TO THE ACCESS TO ELECTRONIC COMMUNICATIONS NETWORKS

Letter sent to Vice-President of the European Commission Neelie Kroes

L2013_003/MGO/MST/rs – 10 January 2013

 

Ms Neelie Kroes, Vice-President, European Commission, BERL 10/226, 1040 Brussels

Ref.: L2013_003/MGO/MST/rs 10 January 2013

RE: Draft Recommendation on non-discrimination obligations and costing methodologies related to the access to electronic communications networks.

Dear Vice-President,

I write on behalf of The European Consumer Organisation (BEUC) to express our concerns regarding the approach put forward by your services with respect to the draft Recommendation on non-discrimination obligations and costing methodologies related to the access to electronic communications networks.

The draft Recommendation will set a common cost methodology for the wholesale prices to be paid by alternative operators to incumbents in order to get access to telecom networks. According to this draft which has been submitted to the Body of European Regulators for Electronic Communications for its opinion, the average monthly rental access price of the full unbundled copper local loop in the EU should be set between €8 and €10.

In our opinion, keeping high price of wholesale access to copper networks is contrary to the interests of consumers. In addition, the draft Recommendation provides neither the guarantee nor the real incentive for incumbents to invest in ultra-fast broadband networks. BEUC is therefore highly concerned that the approach chosen by your services will result only in high prices for European consumers without providing them with a high-quality connection at a reasonable price.

We are also concerned that your services have not taken into account the views expressed by consumer organisations1 in the context of the public consultation that was launched in 2011 in preparation of the Recommendation. In our view, cost methodologies have to be integrated in a program that aims to promote innovation and creates incentives for operators to invest in the Next Generation Access networks. It is crystal clear that the objectives set in the EU Digital Agenda can only be achieved if telecoms markets are effectively regulated, the right approach of setting the wholesale costs is chosen and the investments in ultra-fast broadband networks are safeguarded.

If adopted in its current form, BEUC fears that the EU will fail in delivering ultra-fast broadband access to its citizens. Therefore, BEUC suggests the final Recommendation includes a clear requirement for the operators to invest in the Next Generation Access networks. At the same time, this guarantee must be accompanied by a proper monitoring by National Regulatory Authorities.

Given the significantly divergent approach chosen by your services, we urge you to thoroughly assess its impact on retail markets to ensure that benefits in terms of choice, affordable price and quality of telecommunications service are delivered to European consumers. In this respect, BEUC truly believes the involvement of all stakeholders is crucial and will only benefit the final Recommendation.

Yours sincerely,

Monique Goyens

Director General

The big bluff of the big pan-Europe network

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According to rumours gathered and published by the Financial Times, the representatives of the biggest ex-monopolist telcos (Orange, Telefonica, Deutsche Telekom, Telecom Italia ecc) met with Joaquìn Almunia, European Commissioner for Competition, suggesting the idea that the creation of a centralised telco newco would resolve investments and competition problems in Europe.

It is worth-noting that the main scope of the meeting (hold on November 28, 2012 by the way) was different: the big telcos have been asking Almunia to ratify, or at least not to oppose, the envisaged regulatory reform announced by commissioner Kroes last July and published in December.  The ex-monopolist are strongly supporting such a reform, while alternative operators and consumers fear, by contrast, that such a reform will kill competition in the market and lead to re-monopolization. Fact is, the Kroes reform presents many potential conflicts with basic competition principles (such as the mandatory subsidy from copper networks to fibres networks, at exclusive advantage of ex-monopolists), therefore it will be interesting to see what Almunia and his officers will have to say about.

Apart from above, it is surprising to see that the big European telcos consider market fragmentation as a big problem for their business. This position is astonishing because, in the reality, the business of European ex-monopolists is based on country fragmentation. Let’s try to understand why.

Firstly, there is no rule impeding European telcos to open a business in whatever of the 27 European country and compete. However, at least in the fixed sector, this does not happen for the ex-monopolists, which prefer to stay home and enjoying domestic monopolistic profits. Eventually, they can buy another ex-monopolist abroad (like Telefonica in Czech, Orange in Poland, Deutsche Telekom in Hungary and Greece). However, such a move does not bring competition or consolidation, because the 2 incumbents continue to run separately the distinct businesses. Did the Greek consumers see any difference in the market when OTE was bought by Deutsche Telekom? Or did Italians get any benefits when Telefonica bought a stake in Telecom Italia?

There are few exceptions to the above: Orange (in Slovakia, Belgium, UK and Spain) and Telefonica (in Germany, but next to sell and leave). It is worth-noting that such “off shore” operations are legacies of the 2000 scenario, when most of the ex-monopolists tried expanding abroad relying on the expectations promised by the Internet bubble. However, in the last 10 years this trend was dramatically reversed: ex-monopolists have been selling everything abroad and concentrating in their domestic market. I really do not remember the last time when an ex-monopolist entered a foreign market and disturbed the local incumbent, it was lot of time ago.

The reasons for this domestic-centric approach are both competitive and regulatory: for an ex-monopolist, it is easier to play as a dominant operator at home or abroad (if it succeed in buying another incumbent), while it is a risky business if it tries to enter a new market and compete with another incumbent. Fact is, competing abroad would require the construction of a new network or negotiating access with a local incumbent, and the ex-monopolists prefer to remain on the safe side.

To sum up, the European fragmentation allows ex-monopolists to carry on a territorial cartel which otherwise would be normally prohibited by antitrust law.

The situation is similar, but more tricky, in the mobile sector. Unlike the fixed sector, the grant of 4-5 national licences encouraged mobile operators to move abroad. However, the European fragmentation remains the same, and the evidence of that is shown by the international roaming business.  Many international operators (Orange, Telefonica, Deutsche Telekom, ecc.) present in various countries could eliminate roaming tariffs and offer services with a unique pan-European tariff, since their customers would remain on the same network. However, such operators continue to charge roaming tariffs, and they justify such fees on the excuse that their customers is abroad (but on the same network, nevertheless!). This means that the European fragmentation is not a problem. By contrast, the European fragmentation is the business.

This said, why bringing the bluff up to Almunia? The main reason is political: if Almunia gives the green light to the incumbents-welcomed-Kroes-reform, then they could offer something in exchange (but just a sign: there is no reason to lose the benefits of the European fragmentation). In addition, ex-monopolists would like to have free-hands when the Kroes reform will become operational and various smaller operators will be forced to leave the market. Incumbents would like to buy such operators and reinforce national consolidation, possibly without suffering the antitrust control they faced in Austria and Switzerland. It is doubtful that Almunia will help them on this, however they will try. Finally, the envisaged network-newco will not change, in any case, the competitive scenario, because in each country consumers will continue to face the same monopolistic network. A Belgian consumer, for instance, will get Internet from Belgacom at certain conditions, and when moving to France will have to subscribe from Orange at different conditions. The fact that the 2 networks may be controlled by the same newco will not change the consumer perspective and experience. This is what ex-monopolists like: to pretend to change everything, while making sure the nothing changes.

UPDATE January 10, 2013: The porte-parole of Almunia officially denied that the project of European network was discussed at the meeting of November 28, 2012. Considering the price increase of the listed telcos’ shares following the FT article, I believe that the stock exchange authorities should investigate ……

UPDATE January 16, 2013: the CEO of Orange, Stéphane Richard, has officially denied the existence of a plan for a European network, confirming that the news published by FT were not grounded

Slovenia reinforces net neutrality principles

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The Slovenian Parliament has approved an innovative legislative framework on net neutrality which is going to shake the debate in Europe. The Slovenian law, adopted on December 20 and published in the Official Journal on December 31, confirms the open and neutral character of the Internet and prohibits discrimination of Internet traffic on the basis of the services provided through it. The concrete impact of the new rules, which in some parts appear a bit vague, will strongly depend on the implementation by the local regulator APEK. In any case, the first-sight impression is that the Slovenian Parliament is gone further than the corresponding provisions of the European Regulatory Framework (such as article 8(4)g of Directive 2002/21, for instance). The key-norm seems to be article 203 of the Slovenian law, pursuant to which (to my understanding) ISPs will be prevented from restricting, delaying or slowing Internet traffic except in the case they have to solve congestions, preserve security or address spam. In other words, differentiation of quality of Internet traffic should be prohibit if it is an instrument to discriminate Internet services for pure commercial reasons.

Most importantly, pursuant to article 203(5) of the new rules, ISPs should be prevented from charging subscribers with different connectivity prices varying on the basis on the services provided over the Internet. Remarkably, the text of the provision is not completely univoque and will need to be clarified by APEK or by courts. However, if my interpretation is confirmed, this measure may have a strong impact on mobile operators offering Internet access under “data caps” conditions, where traffic usage is priced or exempted depending whether or not the customers use services recommended by the ISP. To make an example, in Germany customers of T-Mobile do not have to pay the connectivity for listening to Spotify, while they have to pay it for competing streaming services. This pricing discrimination allows the mobile ISP to strongly influence the choices of users as to which Internet services to use. Such kind of deals risk to be prohibited in Slovenia from now.

A similar legislation on net neutrality was passed in the Netherlands (while in Belgium the debate goes ahead). Now, with Slovenia joining the club, it is possible that also other EU Members States may think to do the same. Former monopolist telcos (incumbents  operators such as Orange, Deutsch Telekom ecc) and their association ETNO are expected to complain about it. Such operators are strongly lobbying in order to charge Internet service providers such as Google, Facebook ecc. with special connectivity fees (in addition to what the latter pay when peering in the Internet). Commercial negotiations did not give any outcome until now, because it is also in the telco’s interest that their users may have access to popular websites and Internet services. Therefore, telcos have been considering to charge directly the users (like for Skype or VOIP services) or to exempt them  (like for Spotify), with the result to strongly impair the neutrality of the net. The rules passed in Slovenia and the Netherlands will strongly affect such an ambition.

The reason for the former monopolist telcos the make this fight is about the “control” of the value chain in Internet, i.e. how to extract more money from the digital services. However, such economical strategy may have fundamental impact also on competition, innovation and civil rights in general. If telcos were allowed to discriminate technical and economical parameters of the Internet access in order to influence the choices of customers (as to which Internet service to select), then the Net would change radically. Telcos will become “king” in deciding which Internet service will prevail and develop in the web. To make an example, if in 2005 telcos would have decided (by imposing additional charges or making technical discriminations) whether services like Facebook or Skype could go ahead, such services would never be born.

The European Commission seems to be neutral to this respect, however such neutrality hides various floating views on this matter. While in the past there were rumours that commissioner Neelie Kroes would have taken actions against the Dutch legislation on net neutrality, nothing happened in the reality. In her recentest speeches in January 2013, however, she confirmed that the Commission will adopt a recommendation in mid-2013, focussing mainly on transparency and switching, and considering to address fragmentation within the EU. However, it is doubtful whether this approach may bring the European Commissioner for the Digital Agenda to take action against Member states legislating about net neutrality. Kroes prefers to be prudent on a matter which is politically very sensitive, and she does not want to appear unpopular. She already has enough problems with her reform of the network regulation, in relation to which she was accused to favour incumbent operators to the detriment of competition.

The divergences between Almunia and Kroes on broadband competition

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The views of Kroes and Almunia about competition are diverging more and more. While Kroes, the European Commissioner for the Digital Agenda (and for remonopolization, according to many) is clearly sacrificing competition in exchange for the (eventual) investments by incumbents in NGA networks, Almunia is really reluctant to follow this road.  His new guidelines on BB State Aids confirm that competition cannot be sacrificed and that only truly radical investments in next generation access networks (such as FTTH) can be financed by public funds. From Almunia’s point of view, this means that VDSL and other technologies on FTTC cannot be supported by Member States. By contrast, Kroes is putting all her hopes on such technologies, she believes that a simple upgrade of copper networks may be sufficient to show that she is successfully pursuing the targets of the Digital Agenda. See my article on the Huffington Post (in Italian).