At Least We are Not Europe

Europe Simulator

Europe Simulator (Photo credit: wigu)

In this country the FCC has undertaken various policy initiatives to promote broadband. However, except for some universal service funding that will bring broadband for the first time to tribal areas and very rural places, these initiatives come with no federal money. And so the real broadband policy in the country is to wait for the private sector to build the infrastructure. The FCC may make proclamations about creating gigabit cities, but it’s completely up to the private sector to make it happen.

And we all know how that is working out. We have a checkerboard of broadband coverage. At one end of the spectrum are the fiber networks – Google and a few others bringing gigabit fiber, Verizon with FiOS, and many smaller communities with fiber built by municipalities or independent telephone companies. In the middle most metropolitan areas are served by decently fast cable modem service and ADSL2 DSL. And then there are a lot of smaller cities and rural communities where the DSL and the cable modems are a generation or more old and which deliver far less bandwidth than advertised. And we have many rural areas still with no broadband.

But what we have, by and large, is still better than what has been happening in Europe. And this is because our regulatory policy for last-mile connectivity is mostly hands-off while the European markets are heavily regulated. After the European Union was formed the European regulators went for a solution that promoted low prices. They have required that all large networks be unbundled for the benefit of multiple service providers. This has turned out to be a short-term boon for consumers because it has brought down prices in every market where multiple providers are competing.

But there is a big catch and the European policy is not going to work out well in the long-run. Over the last five years the per capita spending on new telecom infrastructure in Europe is less than half of what it is in the US, and this is directly due to the unbundling policy. Network owners have no particular incentive to build new networks or upgrade existing ones because it brings their competitors the same advantages they get.

In the long-run, Europe is going to fall far behind everybody else in fiber deployment because nobody wants to invest in fiber to connect to homes and businesses. There have been several major fiber initiatives in recent years in Europe, but these have largely been driven by large cities who are spending the money on the fiber infrastructure, much as is happening with some cities here. But the normal kinds of companies that ought to be investing in last-mile fiber in Europe, the cable companies and the telcos, are not doing so.

We tried something similar here for a few years. When the Telecommunications Act of 1996 was enacted, one of the major provisions was that the RBOCs (Bell companies) had to unbundle their networks, much as is being done in Europe. This was to spur competition by allowing new competitors to get a start in the business without having to invest in a new network. And this brought short-term benefits to consumers for a while. Companies were leasing RBOC unbundled loops and providing voice and data (DSL at the time) to businesses and residences all over the country.

But the FCC didn’t go the whole way like they did in Europe or else they would have also unbundled the large cable networks in this country. The unbundled telecom network business plans broke apart after cable modem service began winning the bandwidth war. And of course, there was the telecom crash that killed the larger new competitors. There are still a few companies out there pursuing this unbundled business model, but for the most part it didn’t work. And the reason it didn’t work is that it is a form of arbitrage. The business plan only worked because federal regulators made the RBOCs unbundle their networks and then state regulators set the prices for the network elements low to spur competition. But the services the competitors were able to offer were no better than what the RBOCs could offer on the same networks.

It’s always been clear to me that you can’t build a solid business on arbitrage. A smart provider can take advantage of temporarily low prices to make a quick profit when they find arbitrage, but they must be ready to ditch the business and run when the regulatory rules that created the opportunity change.

And Europe is currently engaged in one gigantic arbitrage situation. There are multiple service providers who are benefitting by low network costs, but with no burden to make capital investments. Customers there are winning today due to the lower prices due to competition. But in the long run nobody wins. The same rules that are making prices low today are ensuring that nobody makes any serious investment in building new fiber networks. So the competitors will fight it out on older networks until one day when the arbitrage opportunity dies, the competitors will all vanish like the wind. We know it will happen because it happened here. The CLECs in this country had tens of millions of customers, and they disappeared from the market and stranded those customers in a very short period of time.

The only policy that is really going to benefit consumers here, or in Europe, is one that fosters the building of state-of-the-art networks. The commercial providers have not stepped up nearly enough in this country and there is still not a lot of fiber built to residences. But in Europe it’s even worse. So, as much as I read about people criticizing the broadband policies in the US, I have to remind myself – at least we are not Europe.

2 thoughts on “At Least We are Not Europe

  1. Wow. Saying “But what we have, by and large, is still better than what has been happening in Europe” is just flat wrong. There are very few countries in Europe where broadband is not much cheaper and much faster than the US. Unbundling has also led to much lower mobile costs in the EU (data roaming is another story but that is also being dealt with).

    There are good and bad, right and wrong ways to do unbundling. In the US unbundling completely failed because, while it was enacted into law those laws were never enforced and were simply flouted by the incumbents.

    Don’t confuse poor execution with poor strategy. Treating networks as public infrastructure like electricity, water and sidewalks will lead to the best outcomes. Remember that the existing incumbent networks were build with massive public benefits (franchises, rights-of-way, etc).

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  2. You are right. Prices are far cheaper than here. And where the networks are good they are very good. But where they are not so good, they are not getting upgraded. My point was that the regulators there went for the short-term solution which is to promote low consumer prices rather than for any policy that would promote upgrading the networks over time to get faster or to upgrade to fiber.

    In the long run, the regulators have put the network owners in a position where they have no incentive to spend big capital on the networks. And so the networks in Europe are not going to get better. The Telco networks in Europe are following the same strategy as AT&T and Qwest here and forcing ADSL2 over aging copper. The day is going to come when that copper is going to be too old to work, both here and there.

    I agree with you that one of the best strategies is to treat networks as public infrastructure. But even then there has to be a plan to generate enough money to keep those public networks upgraded. The European networks were largely built when the telecom companies there were state-owned monopolies. But they have since largely gone public and now those networks are going to require private returns to justify private investment to improve them.

    And you are totally right about wireless. Our wireless policies in this country are dreadful and the profits made by the big wireless companies here are ridiculous. But that all comes from selling the spectrum here to make a quick buck for the FCC rather than keep it as public spectrum and have some say in the way wireless is deployed and sold.

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