Decommissioning the copper access network: An economic incentive for incumbents

February 13, 2013

in The Blog

The development of next-generation broadband access is an integral component of the telecommunications policy at the national and European level. The European Commission and the national regulators focus their efforts primarily in developing market conditions that encourage the private initiative and the collaboration among competitors.

These plans aim at the right direction. Collaboration (aka co-investment) in a market that exhibits strong characteristics of natural monopoly and special funding mechanisms, considering the instability of global financial markets, is a necessity in the European access market. In addition, the European Commission plans to increase the wholesale price of LLU (practically this means that the cost accounting tools for the copper plant will change) to provide extra incentive for alternative operators to deploy their own fiber access infrastructure. This makes sense.  However, an important issue with these plans is whether do incumbents fit in and where.

The epicenter of the European regulation in the last decade was the establishment of a regulatory regime that promoted xDSL as the technology of preference via (strongly debated) rules for unbundling the incumbent’s access networks. LLU (and bistream to a lesser extent) gives the incentive to alternative operators to select the cost-effective and much easier option of renting infrastructure instead of rolling out their own access networks. The vast majority of alternative operators today have committed enormous investments to leverage on the LLU provisions. The few exceptions come primarily from Eastern European countries where LLU is not available (or was made available relatively late). In these countries, FTTH/B became the technology of preference for alternative operators.

Incumbents have long sought for significant increases in the LLU prices and eventually their wish seems to materialize. However, this may be a threat in disguise for two reasons:

First, When an alternative operator builds its own infrastructure its customers will be transferred from the copper LLU service to the new fiber network. This would mean that the wholesale revenue of the incumbent will fall. If we factor in the possibility of synergies and collaboration between alternative operators, incumbent’s wholesale revenue will likely fall dramatically with no compensation from the retail market. Until today, the competition between alternative operators left the incumbents indifferent of the outcome – regardless of who is providing the retail service the retailer pays the LLU fee to the incumbent. At the best case scenario, if they won the customer they’d improve their top line, so they’d be better off.

Second, incumbents have a profound operational disadvantage when considering an FTTH rollout. When an incumbent’s FTTH/B network becomes available in an area, the incumbent has to maintain its copper network for its wholesale business. This means that they will have to maintain two networks instead of one. In the general case, incumbents that deploy VDSL continue to maintain their copper infrastructure in the backhaul due to their regulatory obligation towards their competitors. So, whether or not fiber is available to a neighborhood’s outdoor cabinet, the copper to the CO remains there, and must be supported and maintained. This would make it highly unlikely to see incumbents collaborating to a significant scale with any of their competitors to build FTTH.

The policy measures currently under consideration seem somewhat skewed towards alternative operators as they don’t improve the investment incentives for incumbents. Regulation should acknowledge the capacity of incumbents to drive the change and provide the grounds for them to be a part of it. Would the decommissioning of the copper access network be an option after the deployment of an FTTH network? Incumbents would be given a powerful incentive to roll out FTTH as it would realistically improve their cost baseline and the FTTH business case overall.

 

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  • http://twitter.com/Contemporante Contemporante

    Just a few questions?

    - Wholesale revenue will first rise as a result of higher LLU rates. Then challengers may be incentivised to build their own networks. After that, the wholesale income of the incumbent will fall. But to what level will it fall? Higher or lower than where it is today? And what is the ‘right’ level anyway?
    - Higher LLU rates may put challengers out of business, because it will kill their cash flows. As a result, they will not start building their own FTTx networks. Will the window between now and the collapse of their cash flows be long enough to allow challengers to roll out FTTx themselves?- At KPN, wholesale external revenue at the NetCo in 12Q4 was just EUR 139m. That was just 9% of the Dutch activities. Do you think they really care about this revenue stream?- Where is the concept of creating a national shared infrastructure in your theory?

  • http://www.broadbandprime.com Costas Troulos

    You are very right on both points. I plan to write my view on the alternative operators business in a following post. This one essentially addresses the  disadvantage in terms of operations for the incumbent who deploys FTTC and beyond and is forced to keep and maintain copper whatsoever. Copper maintenance in saturated areas (e.g. dense residential areas in central locations) can be very costly. It is old, sits next to numberless other utility networks, and is prone to failures. 

    A national infrastructure (that could well be another post but this option has been, probably extensively, covered in various occasions in this blog) would benefit greatly from the collaboration with the incumbent, so again, in my view, with a transparent policy on decommissioning the copper (among other provisions), the business case of an NBN would improve (an associated issue is what type of services would be provided: dark fiber, lambda, VLAN or bitstream?) – The question at this point however is whether alternative operators would want that (but answering this would be a spoiler for the next post!)

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