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Co-investment in FTTH Between Telecoms Operators Drives Very High Connectivity Networks Roll-Out, Adoption And Competition

Current access regulation derives from the idea that opening telecom markets to competition requires not only eliminating legal entry barriers, but also mandating access to the physical infrastructure of former monopolies at least until competitive alternatives emerge. The risk is that the former prevents the latter to happen, that an easy access to existing infrastructure reduces the incentives of competitors to build alternative networks.

Empirical analysis tends to prove that access obligation encourages investment in assets which complement the regulated infrastructure on which access is mandated, but deters investment on assets which are substitutes to this regulated infrastructure. To balance these opposite effects, National Regulatory Authorities (NRAs) use the so-called “ladder of investment” approach to manage the physical frontier of access obligations in function of the gradual physical extension over time of alternative infrastructures.

The ladder of investment theory addresses investment incentives of alternative operators but not those of incumbents. This was not a concern for regulators before 2010 because demand for broadband could be served using the legacy copper infrastructure of the incumbent.

From 2010, it became clear that in the one hand, the existing copper infrastructure could not support the growing demand for data traffic and for speed and in the other hand that Europe was lagging behind other regions of the world for investment in broadband connectivity. Since then, how regulation can articulate incumbent and alternative investment incentives in new access networks is the core of the access regulatory debate, which can be synthetized as follows:

Where there is a business case for effective infrastructure competition, deregulation can take place. But where effective infrastructure competition is not sustainable, public authorities face a dilemma:

  • In the one hand, mandating access to fiber investment would deter investment of the access provider (which would derive no competitive benefit from its investment) and from access seekers (which are better-off not investing themselves). Setting high access prices does not solve the problem because finding the right price premium is close to squaring the circle: if fiber access price were high, so would fiber retail prices and fiber services would not attract customers using cheap copper access. Low fiber access price would also be unsatisfactory, as access seekers would benefit from the infrastructure without bearing its cost, the access provider receiving a competitive disadvantage as a result of its investment.
  • In the other hand, in the absence of effective infrastructure competition, absence of access obligations would do consumer harm due to lack of competition.

Between those two extremes, pure access or no access, intermediate solutions exist. They are based on the principle of risk-sharing, by which access seekers are required to share their part of the investment risk to gain access to the new infrastructure. Co-investment is the simplest form of risk-sharing: operators share the cost of the upstream investment, and receive in exchange long term rights on the new infrastructure to compete downstream. As most of the access price is fixed, variable access prices are low: this favours intense downstream competition on the retail market between co-investors.

Co-investment has been endorsed by the European Commission as a relevant option to conciliate investment and competition. An SMP operator providing appropriately open forms of co-investment on its fiber infrastructure would be exempt from other forms of access obligations.

This idea was hotly questioned by NRAs and alternative operators. Because of these critics, additional requirements were imposed to the access provider proposing co-investment in the final version of article 76 of the Code, which however survived the legislative process.

The principle of co-investment is supported by economic analysis. The article ”Cooperative Investment, Access, and Uncertainty” published by Bourreau et al. in the 2018 in the International Journal of Industrial Organisation, compares market outcomes of three regulatory regimes that may be imposed on an SMP operator: co-investment regime, standard access or both co-investment and standard access regimes. The paper concludes that for investment, for social welfare and for consumer welfare, the regime of pure co-investment dominates both regimes including access, in particular when demand is uncertain.

In the field, co-investment has been successfully used for the roll-out of FTTH infrastructure in Portugal, Spain and France. In Portugal and Spain, it is mainly market driven, NRAs encouraging and sometimes using the threat of regulation to force operators into developing co-investment arrangements. In France, co-investment schemes have been largely administrated by the French National Regulatory Authority.

These theoretical and empirical findings show that for FTTH, co-investment is good, both for investment and for competition. Therefore, the European Commission was right in proposing co-investment as an alternative to mandatory access and NRAs should follow this line in their implementation of the Telecom Code.

 

Marc Lebourges, Orange, Competition Law Blog

Marc Lebourges is in charge of European and Economic issues within Orange Corporate Regulatory Affairs since 2005.

He has made all his career in Orange, starting as a researcher in operation research and network optimisation in the eighties, before moving in 1994 to strategic and regulatory analysis at the time of the liberalisation of telecommunications markets and of the emergence of Internet.

He has also been marketing director of Orange wholesale products between 2001 and 2005 before joining his current position.

He has published numerous academic and policy articles, first in network modelling, notably publishing a seminal work on the use of stochastic geometry for telecommunications network modelling, then on telecommunications regulation and economics.

He is a graduate in Telecommunications Engineering from the Ecole National Supérieure des Télécommunications in Paris and holds a PhD in computer science from the Paris University Pierre et Marie Curie.

The views expressed in this paper are those of the author and may not under any circumstances be regarded as those of Orange.

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