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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I just re-read this recent post from the Google Public Policy Blog, and I still think it’s a lot of pie-in-the-sky nonsense. It really feels as though whoever wrote it either doesn’t know enough about the subject or has dumbed it down for readers to the extent that it makes no sense. Although the example cited is apparently real, the model described is far more complicated than it at first seems, and the chances of it being implemented on any large scale are virtually zero.

When I first saw the headline, “What if you could own your broadband connection?” I assumed that it was going to be about Google’s plans for wireless services – a little late perhaps given that they failed to secure any licences in the 700MHz auction, but it would have been interesting as an academic exercise. But no, it turns out they’re talking about fiber connections:

It may sound strange, and it’s certainly not what we’re used to. Today we have a “carrier-centered” model; phone and cable companies spend billions to build, operate, and own the “last-mile” connection — the copper, cable, or fiber wires that come into your house. Individual consumers then pay for particular services, like phone service or Internet access.

In turn, we tend to think about broadband deployment in carrier-centric ways. If we want to see super-fast fiber connections rolled out to consumers, the main question appears to be whether carriers have appropriate incentives to invest.

But there’s no law of nature that says this is the only possible model. Many businesses, governments, universities, and other entities already own their own fiber connections, rather than leasing access to lines. It may also be possible to find ways for consumers to purchase their own last-mile strands of fiber.

Here, as anywhere, there would be certain advantages that come with ownership over renting. No one necessarily needs to own skis or a car, but many of us do. If you owned your own fiber, you’d be able to connect it to a service provider of your own choosing. Over time, you might save money, and it could make your house more valuable to have a fiber “tail.”

I think the examples used are disingenuous – fiber cables owned by businesses or universities are often for private networks, whereas the whole point of a broadband connection is connecting to the public Internet. Even where Internet access is “owned” by someone other than the carrier, that makes no sense until you put equipment at both ends which allows the cable to be more than just a piece of hardware. And you need a carrier willing to both connect to the business end and to provide you with the appropriate equipment at your end to make that cable work. And of course, the cable itself just connects you to the carrier, which still connects you to the Internet, so they still own the vital connection even if you own the piece of string between your place and theirs. You therefore have no more real ownership over the key piece of the puzzle than you do today.

Then there are all the technical issues involved with maintaining and fixing such a cable. Even if you can get a service provider to hook you up to the Internet, you still own the last mile, and would be responsible for fixing it if something went wrong. Your service goes out – how do you figure out where it’s broken? If it’s someone digging up the road, how do they know who to notify before they do so? And how do you exercise any authority over them to get them to fix it quickly? What if something else goes wrong? Who’s going to fix it for you? Certainly not the local service provider you’ve deliberately bypassed…

I could go on and on – only three commenters have bothered so far on the post itself, so it seems most people haven’t taken it too seriously. But this feels like another one of those occasions on which someone has over-simplified a complex situation in a way that says, “now why in the world do we do this the way we do? Look how easy it would be to do it differently – and better! More freedom! More control for customers!” and so on. It’s also a favorite tool of politicians selling quick fixes to intractable problems usually caused by other politicians…

Ironically, I think there’s a lot more potential for the kind of model the Google blogger is talking about in the wireless sphere. There, no cables are necessary so ownership is a non-issue. It really is about simply having the right hardware at your end and a provider willing to hook you up at the other. With multiple wireless providers being able to serve the same area without digging up the streets there’s potential for real competition with none of the hassles associated with a wired local access network. You’re still going to need a service provider to hook you up unless you’re willing to become an Internet node in your own right. But there is at least the potential for greater competition and more choices for consumers.

Google, of course, merely participated in the 700MHz to try to force the existing carriers to create this kind of model, backing out of the bidding themselves when they thought they’d achieved their aims (possibly erroneously). Perhaps if they’d stayed in they’d have been able to make this kind of model a reality.

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