The EU first noted that "to fully seize the growth and job potential of the digital, knowledge-based economy, businesses and citizens must have access to inexpensive, world-class communications infrastructure and a wide range of services". It then seized on unbundling (meaning, opening up to competitive ownership) of the local loop as the means to achieve this. It also defined the local loop specifically as the physical twisted metallic pair circuit in the PSTN – a key asset of incumbent telcos who, having been totally or partially privatised by their governments, now have their own shareholders to satisfy.

Finally, it combined this unbundling process with the introduction of a tricky new technology which at the time was unproven in high volumes – DSL (Digital Subscriber Line). This requires terminating equipment at local exchanges (needing space) and at the user’s location, tuning of the line and, not insignificantly, a new network overlay connected to all local exchanges served. It is up to national regulators to implement this policy.

It is difficult to conceive of a situation more guaranteed to generate conflict.

So, how’s it going?

Telcos doing OK – but for who?

One measure has been provided by ECTA (European Competitive Telecomms Association) in the form of a scorecard (www.ectaweb.org). This shows that all countries have now started installing DSL but to date, apart from Germany, have DSL installed on considerably less than 1% of their total installed base of local loop lines. Further, DSL instals attributable to competitors are minimal at best. Germany’s figures are higher at 1.94% of total lines being DSL, but actually look suspect as competitor lines are shown to outnumber Deutsche Telekom (DT) lines by two to one. RegTP, the German regulator, has also been particularly aggressive with DT in this area. In general, therefore, one can say that telcos have so far managed to start introducing DSL whilst holding up competitors from taking their lines. In other words they’re doing OK by their shareholders.

BT in the UK has been particularly picked on of late. Partly because, for a variety of good reasons at the time, it started installing DSL later than others and is now falling behind in its own installation programme. Mainly, though, for holding up competitors. Yet BT has been wholly owned by its shareholders for more than a decade and has so far been given scant incentive (other than unremitting vilification by press and politicians) to act against their interests.

It is also worth noting that the situation in the US, which the EU looks to as the prime example of a fast-developing digital economy, is not all that different (apart from the high penetration of cable TV lines). Only about 2% of local telephone lines have DSL and most of those are telco lines. Indeed, the competitors are all going bust. This low penetration is in spite of competitive pressures to catch up on the growth of cable modem installations, which is much higher and gaining high speed Internet market share quickly. It is also in spite of initiatives like DSL Lite from PC vendors.

Ways and means

What they do have in the US, though, and what really got the momentum going in the first place was unmetered Internet access. This is now beginning to be introduced in some European countries as FRIACO – now referred to in the UK as ST FRIACO for Single Tandem FRIACO - but it has not been adopted yet at a European level. One wonders why not. It is much easier to implement, forces telcos to get IP traffic off their public switched networks as quickly as possible and offers a clear route to a competitive IP services market available through all telephone lines nationally. What it does not offer is high speed, but then high speed using ADSL is distance limited and cannot be applied everywhere in any case.

A more radical solution, a stage two perhaps, is for the telco to be re-structured so that it is not forced to act against its shareholder interests. A typical solution would be for all local lines to become the responsibility of a network company, which is subject to tight regulation. The rest of the telco then concentrates on service provision and competing in the market like any other service provider – unregulated. It buys network services from the network company in exactly the same way as any other service provider. It would then be up to the network company to install new technologies quickly in the national interest, and distribute the connections according to regulatory requirements together with its own commercial needs.

Sounds far-fetched, perhaps. Telcos would never go for that.

In fact BT has already recommended this, and is seeking to set up Netco to achieve this as part of its recent restructure. So far, UK regulator Oftel has refused to even consider it, suspecting perhaps that BT is trying to pull a fast one. It is also in some political hot water at present and has been told by a Parliamentary committee of politicians to "get tough" with BT. One wonders if this is an entirely constructive approach given the issues involved.

Twice as nice

This approach throughout Europe would provide a fast interim solution that can be applied nationally (FRIACO). Stage two would then be a choice: either restructure or install DSL at a fast rate whilst ensuring that resulting prices are competitive. The second alternative implies heavy, ongoing regulation but does not actually require unbundling to work effectively.

One is left asking probably the most basic question – is local loop unbundling really the best answer to the problem?

© e-principles 2001

Robin Duke-Woolley

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