Broadband – Banda larga

What the end of Renzi government means for the Italian digital and ultra-broadband sector

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The resignation of Matteo Renzi following the defeat at the Constitutional Referendum of December 4th, 2016, creates the question as how Italy will ever fill the gap with other developed nations in the matter of digital services and ultra-broadband networks.

Whether you like him or not, there is no doubt that Matteo Renzi has been the first Italian premier showing a concrete interest vis-à-vis Internet and digital infrastructures, putting them at the core of the governmental policy. Before him, Italian governments have been merely dealing with television and broadcasting regulation, while the development of the digital sector was never a priority. The only serious concern of previous governments in the area of telecoms was the ownership of Telecom Italia, whether the company will become a subsidiary of whom. But no Italian premier ever took action or made pressure to force Telecom Italia to invest in high-speed networks. As a result, the traditional Italian telephony company has been relying, longer than other European incumbents, on the old-fashioned and depreciated copper telephony network rather than installing new fibers networks in massive way. No need for that.

With Matteo Renzi, the situation changed dramatically. It might be for a matter of age or personal experiences, the former mayor of Florence never liked very much Telecom Italia and its bills. Renzi launched an ambitious ultra-broadband plan to fill the gap in the vaste provincial and rural areas of Italy (the European Commission cleared the plan last June). Telecom Italia was offered to benefit of that plan and also to buy Metroweb, a company (controlled by Cassa Depositi e Prestiti) installing and offering ultra-broadband networks in big Italian cities. However, government and Telecom Italia did not find a common agreement on important conditions: while Renzi was aiming at strongly modernizing and re-shaping the Italian telecom market, Telecom Italia preferred to keep alive the copper network as much as possible and did not want to hear about structural separation of its network (a possible outcome when combining its network assets with Metroweb). Telecom Italia was probably thinking to be winning at the very end, thanks to the traditional instability and weakness of Italian governments, but it was wrong.

The stallo situation was “sparigliata” (broken) by the entry into the market of Enel, the Italian energy utility which launched a plan for ultra-broadband investments and offered to buy Metroweb. In the meanwhile, the Italian government granted a State-owned company, Infratel, the task to install ultra-broadband networks in rural areas. The emergence of new network operators changed dramatically the landscape: Telecom Italia ended up with “melina” and started to seriously invest in fibers.

Beside that, Renzi’s governments has been strongly intervening in the digital sector with various legislations in the matter of net neutrality, online platforms, sharing economy; they finally appointed as Digitalist Chief Diego Piacentini, a seconded senior executive of Amazon, to coordinate and make progress the digital agenda in Italy. The choice of Matteo Renzi’s about Diego Piacentini was challenged by someone because of potential conflicts of interests: nevertheless, no one could object the professional level of the Chief Digitalis and the need to coordinate the various Italian agencies competent for digital.

One would wonder whether the above was just a transitory acceleration and now Italy will fall back into traditional inertia. The main winner of the Constitutional Referendum, the 5-Stars Movement, has been traditionally relying on the Internet rather then other medias. However, despite some individual positions, it is not clear whether this political party has a concrete and coherent industrial policy for ultra-broadband and the digital sector in general. Irrespective whether they will become a force of government, the 5-Stars Movement and its leader, the comedian Beppe Grillo, should start to think about and say something to the people.

Studies say that (actual) broadband download speeds in Europe are considerably higher than in US

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The European Commission published 3 studies in the area of broadband performance revealing very interesting data about how different degrees of competition may influence this market. The data comparison between EU and US is remarkable.

The study concerned Broadband SpeedsBroadband Prices and Broadband Coverage. A comprehensive analysis can be found in the press release of the European Commission.

I took the liberty to extract some selected conclusion concerning the comparison between the EU and US market, as well the performance of new entrants vs incumbent operators:

Speeds
The actual download speeds attained in Europe for any given technology (in particular cable) were considerably higher than those measured in the USA:
– xDSL services averaged 8.27Mbps in Europe and 7.67Mbps in the US
– Cable services averaged 66.57Mbps in Europe and 25.48Mbps in the US
– FTTx services averaged 53.09Mbps in Europe and 41.35Mbps in the US

Prices
The least expensive offers per country (in the EU) are, in around 80% of cases, provided by new entrants which, however, are generally not available to all customers, because they have lower coverage than the incumbents.
When taking a closer look at the countries (in the EU) where a new entrant offer is the least expensive one, the incumbent’s offer with the lowest price is on average between around 20% and 35% more expensive than the least expensive offer overall, and the relative difference is the highest for Standalone offer.
The EU28 is less expensive than the US for broadband above 12Mbps. For 30-100 and 100+ Mbps, trends are very similar for all types of offers – the EU28 average of least expensive offers is in all cases substantially lower than the least expensive offer prices in Canada and the USA:
– For the 30-100 Mbps range, prices in the EU28 are between 4 and 14% higher than in Japan and between 25 and 54% more expensive compared to South Korea. They are however between 36 and 51% cheaper than in Canada and between 21 and 38% cheaper than in the USA.
– For 100+ Mbps, the difference with Japan and South Korea is larger (minimally 33% and up to 74%). On the contrary, EU28 prices are between 23 and 43% cheaper than in Canada and between 13 and 34% cheaper than in the USA.

The European Commission stops easy consolidation in the telecom markets

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The European Commission has started a Phase II investigation regarding an envisaged concentration in the Spanish telecommunications market, regarding the acquisition of Jazztel (a pure fixed operator) by Orange (a Spanish subsidiary of the French incumbent delivering both fixed and mobile services). The decision to open the investigation has been published via a PR.

This case it quite interesting because it is the first time that the competitions offices of the European Commission raise doubts about a merger between altnets in a fixed market. Normally concerns have been raised frequently only in the mobile market (although deals have been finally authorized with remedies) or in the fixed market, when the merger concerned the incumbent (like in the Nordic markets). So far, a pure merge between fixed alternative operators did not encounter any particular issue (for instance, some fixed operators have been bought by Vodafone, recently in Germany).

Why DG COMP is taking now a different views?

Firstly, the Spanish fixed market is highly concentrated, with few independent ISPs competing amongst them and with the incumbent. Spain is similar to France and Portugal, where similar level of market consolidation already exist, but less to Italy, Germany and UK, where there are still plenty of operators (especially in the UK). Thus, a national merger in a high concentrated market creates a competition alert for the European Commission.

Secondly, the Spanish market is driven by triple/quadruple play offers. Therefore, the reduction of competition resulting from the merger may not be compensated by potential new entrants, unless the latter may also compete on the mobile side. This is however unlikely, since the number of mobile operators is limited by frequency scarcity, and there is no effective obligation to grant MVNO access to competitors.

How could it end up?

It is difficult to believe that the European Commission will ban the proposed merger, one should however wonder which remedy could be proposed to let the operation to go through. There might be various hypothesis:

– a MVNO access obligation on the merged entity (such as happened in the latest mobile mergers in Germany, ireland and Austria)

– a light fixed access obligation on the merged entity (this would be a leading case, then)

– a request to the Spanish telecom regulator CMT to promptly review market regulation, with possible outcome resulting in regulation over incumbent Telefonica (or other operators operators, if a collective dominance is found).

Whatever will be the result, the signal launched by the offices of DG COMP is clear: against the political mantra whereby the European telecom sector needs consolidation – at all cost – to increase margins and profits, the antitrust supervisor reminds that competition and consumer interest cannot be affected at all. This is not a change of view by the side of DG COMP, which also with Almunia was reluctant to authorize national mergers (instead of cross-borders ones), although they did it at the end. The new Competition chief, the Danish Vestager, seems to say that the time of political compromises is ended and that competition is not a matter to be driven by politicians.

Broadband rural development: the “déjà vu” from the European Commission

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While people are still speculating about what will be the approach of the new European Commission to boost investments in broadband, Mr. Oettinger – the (German) commissioner for the Digital Agenda – launched a provocative proposal via his blog: in order to boost investments in rural areas, one should limit consumers’ choice by restricting the possibility to switch to another operators (lock-in) and/or exempting investing operators from regulation. According to Oettinger “wouldn’t it be better to have the option of broadband with a longer contract, than not to have broadband at all?”.

For sure, this declaration will shake the debate in Brussels well before to see the concrete proposals tabled by the new Junker Commission. Truly speaking, Oettinger’s proposal only addresses rural areas where objective reasons (small density, wide territory) for investment actually exist; however it is clear that many operators (Deutsche Telekom in primis) will soon flag this idea as a general solution for the BB market.

The most surprising aspect of this declaration is that Oettinger consider his idea to be a”fresh” one, as he ignored the last 5 years of regulatory debate in the EU. Just to remind, during the Kroes’ mandate (2010-2014, RIP) the European Commission embraced the mantra that competition could be a little sacrificed in exchange of more investments. This mantra was reflected in a deregulatory agenda with took place via the new Relevant Market Recommendation, the new NGA recommendation, the Connected Continent proposal and so on. While Kroes’ proposals shaked a lot the regulatory and conference debates in Brussels, the real market was basically indifferent, since broadband penetration and investements in Europe remained quite stable. There were lot of fibers announcements (so-called fibers to the press release) but less in practice, and depending on the country. The main effect of Kroes’ policy was to migrate the investments from FTTH to FTTC (i.e. shortening the fiber deployment to the streets cabinets, rather then up to house-holdings), because many operators, mostly incumbents, found more convenient to invest less in fibers and continue to exploit the monopolistic profits of the last mile made of copper. That’s BB Kroes’ heritage in peanuts.

The reason why this deregulatory solution could work in rural areas is still not clear. Oettinger says that it worked in the energy sector, where in facts similar proposals were made for very depressed areas in emerging countries. Maybe he referred to some zones of Germany, where some local municipalities are providing electricity in small territories. We do not know exactly, since his post provides for little explanations about. Oettinger says that “in some limited cases, for new pipelines, companies can be exempted from the requirement to provide competitors with access to pipelines. This is only given if they can convince the EU Commission that without that exemption the investment would not have been made”.

In any case, broadband is a bit different from energy. Most rural areas in the EU are considered niches markets and are frequently covered by small, alternative operators of any kind, with different business models: fixed, wireless, satellites, privates, municipalities, dark fibers providers, ecc. There is no clear evidence that regulation may be The Obstacle for operators, especially incumbents, to invest. It seems more a problem of margins: a big operator like Deutsche Telekom, with 235.000 employes and related costs, needs to concentrate on rich areas. A small flexible operator may have the costs structure to try the venture in niche areas, and the same for municipalities which also have to pursue a public objective. The main players, by contrast, prefer to stay in metropolitan/high density areas for obvious reasons, irrespective of regulation.

The lesson coming from US confirms this scenario: the main US operators, such as AT&T and Verizon, have massively invested in areas where they had to counter the competitive presence of the cable operators (Comcast and TW) providing Internet access. Outside of these areas very little was made, including rural areas, despite the fact that broadband access is fully deregulated in US.

This proposal would therefore not change too much in European rural areas, however it will be welcomed by European incumbents as a first step to enhance deregulation and remonopolization of BB markets in general. Oettinger seems aware of this and tries to avoid too rapid conclusions: “The needs of a dense city with rich competition may be different to those of an unserved rural area“. Thus, It will mainly depend on the concept and ambit of “rural areas”. Somebody in Brussels will soon argue that Tiergarten as well as Villa Borghese should be regarded as rural areas – at the end, there is lot of green there.

A final comment: Oettinger seems to say that an expensive, maybe crap, and not changeable BB may be better than no BB at all. It could be. However, there might be better solutions, like using public funds, financing pure network infrastructures with access to any service providers, leaving to citizens the property of their last miles, ecc ecc. The debate is open.

Telecoms investments in the EU: the controversial data of the European Commission

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The European Commission published a Report on the telecommunications market in the EU, providing both economic and regulatory information with regard to the each Member States as well as to the EU in its entirety.

The report show strong discrepancies within the EU, especially with regard to BB penetration and NGA roll-out. However, the overall feeling of the Commission seems  positive: “… investment in the field starts to grow again, data traffic is growing quickly, together with an increase in VoIP calls“.

The Commission remarks a decline of revenues in the period 2010-2012 (from 327 to 323 billion). The report does not specifically analyze the background for such trend. However, it seems to me that the revenue’s decline is due to a combination of factors: on one side, it is the result of previous regulatory decisions (price decrease for mobile termination and international roaming, in particular), on the other it is caused by market trends as substitution of traditional cash-machine services such as voice and SMS by corresponding free Internet services (VOIP, chats, ecc). The emergence of Internet mobile access has not compensated yet the value destroyed by the OTT concurrence.  One could argue whether such figures are positive or not for the telecom industry: for sure, this is the sign that the time for the easy-money is gone and telecom operators must now face a fierce competition. The new reality is particularly hard for historical incumbents and dominant mobile operators which for ages have relied on high margin services such as PSTN voice and sms. La festa è finita. The consumers seem to be the winner of this trend, because the decrease of revenue of telecom operators basically means that the price of many basic communications services has fallen (in some cases to zero).

More controversial are the data about the investments. In the last years the Commission repeatedly maintained that telecom investments in the EU were slowing down, and this failure justified a radical regulatory change announced by Commissioner Neelie Kroes in July 2012. Despite of that, the data of the current telecom report show that investments in the sector have been stably growing (in the period 2010-2012) from 38 to 42 billions. The fact that European BB market was healthier than expected had been confirmed also by the European Parliament as well as by Berec in its critics to the Connected Continent proposal of Commissioner Kroes.

If the above is not challenged, one would wonder on which basis the European Commission in 2012 changed radically its regulatory agenda, since the main problem to fix – the huge lack of investments – did not exist.

To remind the facts, in July 2012 Commissioner Kroes announced that she intended to “stabilize” the cost of the traditional telephone networks (the ones based on copper and builded over 50 years ago with money of tax payers during the monopoly era) in order to secure cash-flow to incumbents and provide them with sufficient money to invest in new fibers networks. At the same time, the higher costs of the traditional copper network had incentivized new altnets to desist accessing that network while building new ones. In other words, the stabilization (namely: increase)  of the copper network price would have somehow encouraged both incumbents and altnets to invest in new fiber networks.

The strategy of the Commission was however challenged by many: first, with copper networks become even more rentable, incumbents would have stopped or slow down investments in fibers, in order to avoid cannibalization of the copper profits. Secondly, the matter is quite tricky with Altnets, since the equation “build or buy” is too simplistic. The increase of copper price would have probably helped some fiber deployers, but many Altnets would have been unable to make the with because too expensive.

In truth, Kroes’ move in 2012 had nothing to do with investments, it was rather aimed at securing cash-flow for historical incumbent operators, with the scope to protect them from the financial crisis and from extra-Europena take-over. The lack of investments claim was just an excuse to justify a dramatic regulatory overturn which, at the end, just helped big telecom operators to surf and survive the financial storm.

Broadband deployment in Europe: better than expected

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Many have worried that the European Union is falling catastrophically behind a number of competitors (including Japan, South Korea, and the United States) in terms of deployment and adoption of broadband and high-speed access infrastructures. In July 2012 this assumption has lead in the European Commission, deeply lobbied by ETNO (the trade-association representing the incumbents such as Deutsche Telekom, Orange, Telefonica ecc.) to deregulate the Regulatory Framework of 2009 . At the end, after overwhelming critics by governments, national regulators and stakeholders as well as lots of internal controversies, a simple recommendation was adopted in September 2013.

The same presumption that Europe may fall behind the rest of the world urged Commissioner Kroes to launch the so-called Single Market Regulation, de facto another implicit review of the 2009 Regulatory Framework. Also this initiative is encountering oppositions and reservations at various levels (governments, regulators and stakeholders) which will likely extend the time of discussion and approval (if any).

This catastrophic view derives also from the presumption that the targets of the European Digital Agenda (universal coverage of basic broadband by 2013, and universal coverage of 30 Mbps and 50% take-up of 100 Mbps broadband by 2020) could not be achieved.

Now: a study commissioned by the European Parliament (on the initiative of the dynamic policy advisory team lead by Fabrizio Porrino and Mariusz Maciejewski) suggests that the above concerns were somewhat over-blown and that the picture is not as dark as Commissioner Kroes fears. Since the European Parliament will have to intervene on the Single Market Regulation proposal, no doubt that this study and the data herein reported will shake a debate.

With regard to basic fixed broadband, European deployment is close to universal (with however some gaps in newer Member States in the east). According to the most recent data (ITU), the top-ten countries are all located in Europe (except South Korea). The only non-European entrants into the top twenty rankings are Canada (12°), Hong Kong (China) (16°) and the US (20°). In terms of access speeds European citizens enjoy better performances than their US counterparts with both xDSL Internet (36% faster than in the US) and other technologies (such as cable and FTTx). In terms of prices, according to OECD, fixed broadband tariff ranges in the three largest European markets (Germany, France and UK) are lower than in the US.

In other words, Europe is doing quite well regarding basic broadband, although discrepancies between Members States are not negligeable.

Also in the mobile broadband the situation is not so dark, since the increase rate of the European market is spectacular. However, actual deployment and take-up of fast 4G mobile data services in Europe is still behind those in Japan, South Korea, and the US. Remarkably, the European Digital Agenda does not specifically address mobile broadband in terms of objectives and targets to be achieved.

The situation is more intrigued for fibre-based ultra-fast broadband and LTE, where a deficit effectively occurs. However, according to the study this deficit must be seen in a context: “Bandwidth is not just a question of the nominal speed of the link. Actual bandwidth available to customers in Japan and South Korea is far less than the speed of the access link. Available bandwidth is actually lower in the US than in many EU Member States”. Fact is, the data reported in the study show that the correspondence between broadband access speeds, actual speed delivered, and data usage reflects a complex scenario. For instance, data usage in Japan is actually less than that in the UK, while data usage in the US is very high (largely due to video), even though delivered bandwidth is actually lower than in a number of European countries.

The study explores in depth numerous theories put forward by commercial parties and experts in support of one or another policy measures in the matter of broadband deployment and make some final recommendations:

a) there is scope for cautious optimism on Europe’s progress on broadband against other countries. Evolutionary rather than revolutionary approaches should suffice in maintaining Europe’s competitiveness. There is no need for a radical overhaul of European policy.

b) The existing European targets for universal coverage are appropriate, but would benefit from further clarification and refinement. Upload speeds, the ability to use real-time applications, and the ability to access applications of the user’s choice deserve attention.

c) Policymakers should also consider setting specific targets in relation specifically to mobile broadband in order to foster the availability of services at any time and from anywhere.

d) A policy framework that is technologically neutral to the maximum feasible degree should continue to be preferred.

Berec shakes the Commission again and rules in favour of cheaper prices for telecoms

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Berec, the European agency grouping the national telecom regulators, has rejected the serious doubts expressed by the European Commission vis-à-vis the decision of Italian regulator AGCOM to decrease the price of access to the copper network (ULL and bistream) of the incumbent Telecom Italia.

It is a second time in the recent period that Berec takes a strong dissenting opinion against the European Commission on a fundamental matter like network access: few week ago a similar negative position had been expressed also with regard to a similar case in Austria, where the national regulator, likewise AGCOM in Italy, had decided to lower network prices.

The divergences of opinion between the 2 authorities regarding the modality and the criteria to fix prices for network access is becoming a fundamental matter of policy debate. The national regulators have openly contested the scope of Commissioner Kroes, responsible for the Digital Agenda, to “centralize” such decisions and impose the price from Brussels (although within a specific  band, i.e. 8/10 Euro/m in the case of ULL) . Commissioner Kroes tried to formalize this major step into a recommendation (announced since July 2012) which would have radically altered the 2009 Framework under various aspects (discrimination remedies; copper prices; NGA development). However, the reform found strong oppositions from the side of regulators and alternative operators, and also some cold approach by governments. Kroes’ recommendation was been finally approved on September 11, 2013, however the final text has been radically watered down with respect to the initial proposal. Fact is, the pretention to impose mandatory prices, and in general to restrict the discretionary powers of regulators, has been finally dismissed.

As regards the Italian case: regulator AGCOM will be now sufficiently confident to defend its decision and eventually to negotiate an amicable solution with the Commission from a strength position. In any case, art. 7a of the Framework Directive (Directive 2002/21/EC) empowers national regulators to disregard the position of the Commission, provided that a reasoned justification is provided. This happened recently twice with German regulator Bnetz, which decided not to obey the Commission’s instruction in a couple of cases of termination prices.

The divergences between Berec and European Commission on specific national cases like Italy and Austria run in parallel with another fundamental matter of conflict, i.e. the Single Market proposal, which national regulators have criticized with a surprising strong statement few days after the announcement by Commissioner Kroes, on September 11, 2013.