Beware blind alleys on the Superhighway

The European Commission issued a short 'memo' late last week that was admirable in a number of ways, i.e.

• Its straightforward aim is to promote European investment in superfast networks.
• Its language is clear and non-technical, as evidenced by the blunt title: “Regulatory mess hurting broadband investment”
• Its policy prescriptions are correspondingly simple:
• To create consistent copper unbundling opportunities – and prices – across the EU.
• To harmonise the regulation of fibre networks (while maintaining flexibility in charging models) 

The mantra throughout the document is ‘predictability and consistency’.  In Neelie Kroes’ words, “It’s vital that all companies have a stable and consistent system. That is how we can maximise investment and the infrastructure competition that encourages investment.”  

Well, up to a point.  I can see that levelling unbundling prices – currently ranging across the EU from €4 to €14 per month – might just persuade the likes of Sky or TalkTalk to venture into Europe, and more consistency in fibre regulation would certainly do no harm, but where I slightly part company with Neelie is the presumption that the two broadband markets can be structurally linked, i.e. 

“If the [copper unbundling] price is too low this…reduces the incentive for ‘alternative operators’ to move from renting a network to building their own Next Generation network. This is a frequent problem today”. 

‘Frequent’?  Really?  How likely is it that a broadband operator will migrate from renting copper to building fibre?  No examples spring to mind and, intuitively, it’s hard to imagine a developer of FTTP having much interest in a copper solution (other than the incumbent, of course).  Even at the theoretical level, arguments that might link the two markets – such as the ‘ladder of investment hypothesis’ -have largely been discredited by economists in recent years.  For example: 

“The “ladder of investment” theory argues that it is good to promote intra-platform competition as a stepping stone for new entrants to induce them to invest. Our study shows there is no support for this theory, and that to the contrary intra-platform competition may even give adverse investment incentives. (Bouckaert et al). 

“Academics have not been very gentle with the ladder of investment approach, not only because the theory itself lacks logical fundamentals but also because empirical evidences tend not to support it” (Jund et al). 

Overall, there’s a lot to be welcomed in the memo’s intentions and regulatory objectives, particularly the recognition that the long pay-back times of broadband investment call for predictable prices and revenue streams.  But it would be a pity if the Commission came to rely too heavily on copper pricing as a determinant of new network investment.