I struggled to find a good title for this post and eventually settled on that rather bland one, but what this is really about is the fact that telecoms competition centers on the core network in Europe and the access network in the US, and that this is a result of the very different regulatory approaches over the last 15 years or so.

In Europe, a level playing field based on regulated access to the incumbent’s network

European regulation has focused on regulated access to a single incumbent infrastructure with the goal of creating a level playing field for competitors such that they can provide services on equal terms with the incumbents’ own retail arm. This started with carrier selection and pre-selection in the voice world, and extended to local loop unbundling and bitstream access in the broadband world, finally to be followed by wholesale line rental back in the voice world. All of this – if regulated at the proper price – means a competitor can offer voice and broadband services at essentially the same cost as the incumbent without building out much infrastructure of its own at all.

In the US, a botched attempt at incentives to invest…

In the US, meanwhile, the model was set up somewhat clumsily (it didn’t help that the 1996 Telecoms Act was conceived when the Internet was a marginal force and implemented when it was clear it would be a major disruptive factor in the telecoms market). Broadband wouldn’t become widespread for several more years but would become the major thrust of regulation under the ‘96 Act. The regulation, as applied, essentially created a variety of ways for competitors to access the handful of incumbent networks in different parts of the US at regulated rates. Resale (which has equivalents in only some European countries), UNE-P (which is roughly analogous to bitstream access in Europe) and UNE-L (analogous to LLU) provided competitors with a ladder of options which they could make use of as they built out their own infrastructure. Resale would be the first rung on the ladder, and as the competitor won enough business on that basis they’d build out more infrastructure and start using UNE-P. Once that was successful they’d move on to UNE-L, having built out more infrastructure. It was like the European system with appropriate incentives.

…followed by inter-modal competition

It was a great theory, but the pricing was botched such that there were perverse incentives and many competitors got stuck on rung 1 or rung 2 rather than moving to UNE-L. Many competitors’ business models were also based on those fabulous Internet economics and thus went belly up when that bubble burst. Over time, the regulatory emphasis in the US shifted towards what is known as inter-modal competition – essentially relying on competition between competing infrastructures rather than regulated competition over a single infrastructure. The UNE-P rug was pulled out from underneath the few remaining services-based competitors, who now had to negotiate rates commercially, typically resulting in higher prices. But in most markets a cable operator and an incumbent telco duke it out for supremacy.

The resulting competitive environments are very different

The results of these two regulatory approaches couldn’t be more different. In Europe, competitors have largely had to compete on price and on the various bundles they can create around their offerings. Broadband speeds are typically in the single digit Megabits per second, with a high ratio of downstream to upstream speeds. It’s cheap, but bandwidth caps abound. Increasingly, it’s likely that competitive differentiation will have to shift to the core of the network, which is where the clever stuff will happen. Whether it’s IMS or some other technology, the key battle ground is not the access network, which is shared by all the major competitors in most countries.

In the US, meanwhile, the competition in broadband is all about the speeds. Verizon and AT&T’s fiber rollouts have enabled broadband speeds which lit a fire under the cable operators they compete against, who have returned in kind with higher speeds of their own. I live in an area where Verizon has recently made available a 25Mbit/s down, 15Mbit/s up broadband service for $65 a month (less as part of a bundled package). Cablevision, the local cable company, offers lower speeds, but they’re still much better than what most are seeing in the UK. There are no bandwidth caps (Time Warner Cable, the only company to really push in this direction, was scared off by the backlash), and there’s very little competition on anything other than speed. The access network is the source of differentiation in the US broadband market, and that’s unlikely to change. It’s only possible because there are two competing infrastructures, which itself is only possible because of the existing cable TV networks that predated the broadband market by many years.

Implications for future market development

What’s interesting is what this means for future market development. In Europe, alternative operators will continue to have to fight tooth and nail for whatever little differentiation they can find through service, bundling with other offerings, and core network enhancements that somehow improve performance or offer better integration with other services. All while being squeezed on margin because these things are all a tough sell when the basics are the same. In the US, meanwhile, we’ll see a speed race between the two sets of companies – less intense in AT&T territory (and even less so in Qwest territory) – but there nonetheless. I’d argue that this will benefit customers more because there will be real differentiation between the two on speed and constant upward movement in the maximum speeds, making possible more services. I don’t like the chances of the many alternative broadband providers in Europe, while the series of effective duopolies in the US looks likely to be a lot healthier.

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