Broadband Proliferation in Europe: Bring on the Competition

Most Europeans who want broadband can’t get it. According to Lars Godell, an analyst with Forrester Research and author of a recent study entitled "European Broadband Takes Off," less than 8 percent of European households had ADSL or cable Internet coverage last year, and only 0.2 percent of European households were actually using it. Even where coverage exists, high prices and weak content deter consumers from signing up.

"To date, broadband has been unavailable, unaffordable, and uninteresting to Europe's masses - but change will come fast," explains Godell.

The main hope for mass broadband access in Europe lies with Asymmetric Digital Subscriber Line (ADSL) technology, as it enables telephone companies to deploy a multimedia broadband distribution system on their existing copper twisted-pair wire. Thus far, the rollout of ADSL by Europe’s telcos has been less than hasty. According to Gary Mesch, vice chairman of the European Competitive Telecommunications Association (ECTA), incumbent telcos will only roll out ADSL when there is a compelling competitive reason to do so. "Looking at Western Europe, you find the telco incumbents offer DSL only in the areas where cable TV is able to offer digital high-speed Internet access via cable TV," he argues.

Forrester’s Godell concurs: "Why does telco Belgacom plan to cover 75 percent of homes with ADSL by the end of 2000? Because 95 percent of Belgians have coax cable drops, giving them over to cable access unless Belgacom moves now."

The solution to telco inertia over ADSL could be legislative. The European Commission (EC) has already recommended that unbundled access to incumbent operators' local loops be allowed by December 31, 2000. This July, in an attempt to boost e-commerce and as part of its ongoing telecom liberalization program, the EC asked incumbent operators to provide information on local loop access to find out whether (and under what conditions) they allow their competitors access to the local loop. The purpose of the inquiry was "to detect any abuses of a dominant position."

"Competition will radically expand coverage as cablecos and telcos battle it out. Forrester expects access prices to sink below Euro30 per month in 10 of 17 European countries by year-end 2002," Godell says. As a result, Forrester reports, broadband Internet penetration will increase to 18 percent Europe-wide, or 27 million subscribers, by 2005.

The European Commission Moves Things Along

By definition, the "local loop" is the final mile of cable linking telephone users to the telco’s exchange. Without unbundling, competing companies who want to provide telecom services to customers must rent the local lines from the former telco monopoly operators. Unbundling the local loop would allow competing operators to install DSL equipment in local exchanges to provide high-speed information services to end-users. While telcos have paid lip service to the EC plans, there have been complaints that the telcos have also been obstructive. The latest EC move is an attempt to move the process along.

"The opening up of telecommunications to competition has meant substantially lower prices, better service, and a wider choice for customers, whether businesses or consumers," said Mario Monti, the Commissioner for Competition at the EC. "However, experience has also shown that we must remain vigilant. Just as the Commission has been the driving force behind liberalization, it must now see to it that the law is fully enforced, so as to ensure that there is effective competition."

To this end, the EC is now taking its inquiry a stage further by sending new requests for information to operators. "Sometimes the mere fact of launching an inquiry is sufficient to prompt operators to come into line with the competition rules," said Monti. "If they do not, I will not hesitate to recommend formal proceedings against operators who abuse their dominant position or who have concluded harmful agreements with one another."

According to the EC, without effective unbundling, the local loop remains the least competitive segment of the telecommunications networks in Europe. Control of this network by the incumbent telecommunications operators has enabled them (despite the liberalization of voice telephony since January 1998), to retain market shares often approaching 100 percent on subscriber access services and local communications.

"[Incumbent telcos] have had the technology for five years to provide low-cost DSL links, and they haven’t deployed it because they have had no financial incentives to do it," argues ECTA’s Mesch. "The spur is opening up their networks and allowing other people to come in with fast, innovative services using the latest technology, and it is going to take the guts right out of their high-profit leased lines, which they are offering to the market at exorbitant rates."

Bottleneck in the UK

Whether or not the EC will be able to back up its words with real measures is open to question. In the UK, for example, the regulator OFTEL has allowed incumbent British Telecom until July 2001 to fully open its local loop to competitors. BT has already announced its ADSL service and will have a head start on any competition.

"The political deadlines may be in place, but the legal framework to support it is not. It’s like saying that it is against the law to speed, but if someone catches you there are no penalties," complains ECTA’s Mesch. "We won't be satisfied until a full structure is in place to support penalties, processes, complaints, deadlines and QOS issues."

If the local loop can be cut, the consensus is that ADSL will boom. Recent figures from market research firm Frost & Sullivan estimate that the European ADSL equipment market was worth $45.1 million in 1999. Unbundling of the local loop should propel total sales to $1.41 billion by 2006.

Dean Sadler, head of future development at PlusNet, the UK's fifth largest ISP, believes unbundling the local loop in Europe will enhance competitive pressures on the pricing models currently available. "This pressure will result in lower prices for both residential and business customers. As business customers adopt broadband services en masse, the penetration of decent media-rich content will bring about an explosive growth in consumer activity. Hence, unbundling is a pre-cursor to mass broadband acceptance," he explains.

Component Supply Problems

Another setback with ADSL proliferation could be a lack of hardware. According to Frost & Sullivan analyst Donald Tait, the five leading manufacturers of DSL equipment are estimated to account for approximately 80 percent of the market. There are already reports of supply shortages of ADSL components and the supply situation could get worse if ADSL takes off.

"The challenge for Alcatel in aggressively growing shipments in the ADSL market has become one of supply, not demand," says Pearse Flynn, president of Alcatel's carrier networking group. "Our order book is huge, and our efforts are shifting so that we can manage our supply chain for the benefit of our many ADSL customers worldwide, in the face of an industry-wide components shortage."

The Other Side of the Coin

The outlook for an unbundled Europe seems optimistic from many angles. But the transition won't always be easy. According to Mike Ribeiro, regional sales director, EMEA for Com21, a supplier of system solutions for the broadband access market, unbundling could retard the penetration of broadband in the short term.

"In the long term, unbundling of the local loop in Europe will mean cheaper broadband access for customers," Ribeiro says. "However, in the shorter term--particularly in less mature markets--it may prove essential for control to be maintained by one company in order to provide the impetus to continue developments and advances in the market. In this sense, it is also possible to argue that in some circumstances, unbundling the local loop could actually act as a barrier to deeper penetration of broadband services for private residences, and that broadband technology might actually arrive later in the market as a result."

In general terms, Ribeiro says, slow adoption is causing a bottleneck for streaming companies that are pushing their applications. "This situation is causing some frustration on the part of the streaming companies, who are ready to push ahead with offering their new technology to the carriers," he added.