Internet Shifts Into High Gear
Old monopolies and regulators are blocking the e-commerce
fast lane
By WILLIAM BOSTON
It's rush hour on Europe's Infobahn -- and the roads are clogged. No
wonder. Just take a look at local phone networks, which are still largely
controlled by the same big companies that used to have monopolies on all
phone services. While competition has opened up long-distance services,
the local networks are still largely protected. New players want to roll out
high-speed Internet, interactive TV and other services that require local
phone access. But they're running into gridlock. Politicians and regulators
in many countries still protect the old monopolies, which resist opening
their networks to newcomers. That's stalling Europe's move into the
e-commerce fast lane.
Looking for Europe's broadband revolution?
Just fire up your Web browser and point it at a
company called PrimaCom AG. The German
cable-TV operator lists on its Web site all 47
buildings in a Leipzig neighborhood that can subscribe to its cable-modem
service with fast Internet, 50 TV channels, interactive TV and
video-on-demand.
Sound great? Alas, Germany's other 34 million German households will
just have to wait. With few exceptions, this broadband revolution is not
being televised.
A couple of years ago, Europe opened long-distance phone markets to
competition with a lot of fanfare. In many countries, consumers and
politicians alike were stunned by the outcome: sharply lower prices and
greatly improved service. Europeans were also hugely successful in
ensuring competition in mobile phones, outpacing the U.S. in developing
digital wireless networks.
But when it comes to local phone service and mass marketing broadband
access to the Internet, the old monopolies are still hogging the pipe and
threatening to stall Europe's move into the e-commerce fast lane. Big
players on the Continent like France Telecom SA and Deutsche Telekom
AG still control as much as 98% of the local phone networks, while in the
U.K., where local-access competition has existed for nearly eight years,
British Telecommunications PLC still controls 80% of the local phone
network.
The problem is not technology. Instead, it's public policy that in many
countries still protects the old monopolies. Or regulators are just too slow
to enable a host of new rivals to the old phone monopolies to use a broad
range of technologies to reach the customer. Regulators in places like
Britain, France and Italy seem to be waiting to open the floodgates of
competition in local phone networks until their respective incumbents can
get ready.
Add the continued high cost for businesses to lease high-speed
communications lines in corporate networks to offer competing services
and a pattern emerges: Europe's telecommunications liberalization in 1998
is still a largely unfulfilled promise. The upshot: while nearly three million
American homes subscribe to broadband services, the number is less than
half a million in Europe and the gap is widening.
'Not Very Impressive'
"Europe is 18 to 24 months behind the U.S. in broadband deployment,"
says Lars Godell, European telecommunications analyst for Forrester
Research. "At the end of 1999 there were some 400,000 broadband
households in Europe. Not very impressive."
Nevertheless, new operators are eager to transform broadband into a
mass market. Over the past few years newcomers in Europe like
MCIWorldCom Inc., Colt Telecom PLC, Global Telesystems Inc.,
KPNQwest NV and others built pan-European fiber-optic networks to
bring broadband to big companies. And companies like NTL Ltd. in
Britain and United Pan-European Communications NV in the Netherlands
have transformed cable-television networks into high-speed multimedia
channels that offer phone service, Internet and TV.
Broadband services are being offered today largely using four types of
technology: a direct fiber-optic link; cable television; Digital Subscriber
Line, or DSL, service over ordinary phone lines, and fixed-wireless, often
called wireless local loop.
Only large businesses can afford a direct fiber-optic link, so millions of
small and medium-sized businesses in Europe are counting on other
broadband technologies. Cable TV is big in residential markets, but
networks are scarce in Europe and it cannot provide the level of quality or
security needed for businesses.
Basics of Broadband
DSL (Digital Subscriber Line): Uses the basic copper phone line to create a
dedicated always-on connection.
Advantages
Copper phone lines are available almost everywhere
Interactivity
Secure always-on connection because it is a dedicated line
Disadvantages
Customer equipment costs are high
Customer must be close to local telephone exchange
Quality of copper network varies and is subject to interference,
which affects quality
Renting copper line from incumbent is a continuing operational cost
CABLE MODEMS: Always-on connection over cable TV networks.
Advantages
Modems are easy to install and are less expensive than DSL
equipment
Already exists in many homes
Disadvantages
Bandwidth is shared by all users on the local node, like a party
phone line, which can cause congestion and poor service quality
Lack of privacy
Not available in many places in Europe
FIXED RADIO ACCESS (Wireless Local Loop): Uses wireless frequency to
establish a permanent broadband connection to an area. A typical base station
can "see" 5,000 homes and is therefore an alternative to DSL.
Advantage
Independent of incumbent network
Disadvantages
Customer equipment costs are high
Few European governments have awarded frequencies
That's why industry analysts give DSL and wireless local-loop technology
the best chances in Europe. DSL transforms basic copper phone lines into
a high-speed network. Unlike cable, where multiple subscribers share a
local node, each DSL subscriber has a dedicated high-speed line, ensuring
quality of service. But DSL also suffers from quality restraints and
bandwidth limitations.
High Costs of Wireless
Some telecommunications experts predict technology advances will
improve DSL. Others predict the introduction of wireless services will
bring the costs of fixed-wireless down. Fixed-wireless operators install a
base station that can connect up to 5,000 homes with a wireless
broadband link. Few European countries have issued wireless local-loop
licenses and the costs to the customer for equipment are prohibitive.
Today, most residential broadband access in Europe is via cable-TV
networks. That's also the way things are working out in the U.S. But while
cable-TV networks are abundant in the U.S., it's a different story in
Europe. Only in the U.K., the Netherlands and Germany do cable-TV
networks come anywhere close to offering the kind of penetration into
local neighborhoods comparable to telephone networks. In the
Netherlands nearly 90% of the population subscribes to cable TV; in
Germany it's just under 70%.
As a result, analysts expect broadband access using DSL and wireless
networks to overtake cable TV as the main broadband access route by the
end of next year at the latest. But if newcomers are to get an even chance
to enter the broadband market, regulators will have to move faster than
they have in many countries to open local phone networks to competition.
Unless a new phone company can access the local phone network of the
incumbent, it has little chance to offer competing broadband services. Of
the big four telecommunications markets in Europe, only Germany has
allowed so-called unbundling of local phone networks -- letting rival
carriers lease the bare copper phone line to a customer -- since 1998.
Few Obstacles in Germany
New operators that are now beginning to roll out broadband networks
have discovered that there are few obstacles in Germany, where the
government has allowed unbundled access to local phone networks and
has issued wireless local-loop licenses. In France and the U.K., unbundling
won't take place until next year. France has issued wireless licenses, but
the U.K. is still considering them. Italy is getting ready to unbundle, but
plans to set a fee for renting the local phone line that is higher than the basic
monthly charge residential customers pay. That means new operators
would not be able to offer a competitive service. As a result, they're
investing where there's an open market and waiting for the rest of Europe
to follow.
"It's really a case of economics," says Brian Thompson, chief executive
officer of Global Telesystems, a U.S. carrier that has created a
pan-European network. "We would have been more involved in several
countries. We'd like to be in France doing DSL today and we'd like direct
access in the U.K. But in both cases the government hasn't pushed the
local loop. We think there's a justification economically for doing DSL in
Germany."
The regulatory environment across Europe is not uniform. Italy, France and
Britain have been slow to let rivals tap into their incumbent carriers' local
phone networks. In Germany, meanwhile, nearly 70 companies are lining
up to offer high-speed DSL services using Deutsche Telekom's basic
copper network in the so-called "last mile" that connects a customer's
phone line to the local exchange. Instead of unbundling, BT is running a
pilot project in which it allows competitors to resell its DSL service. While
some analysts say this is potentially a large market, operators say there
aren't sufficient margins and it makes them too dependent on BT. In
Germany, regulators are trying to encourage investment in alternative
networks and therefore don't require Deutsche Telekom to resell DSL.
That limits competition to those companies prepared to invest in a new
network.
British and Dutch regulators early on encouraged cable-TV operators to
offer competitive phone services. A few years ago, the Dutch even forced
the local incumbent, KPN NV, to sell its cable-TV operations, giving a big
boost to competition. Had the merger of Scandinavian phone companies
Telia AB and Telenor ASA succeeded, the European Commission would
have forced them to sell their cable-TV assets.
Germany, meanwhile, was very slow to press Deutsche Telekom to sell its
cable-TV network. The sale is taking place this year, but it might not be
another two years before the network is upgraded for delivery of
interactive TV, fast Internet and phone service. And Deutsche Telekom
will remain a minority shareholder, raising doubts over just how potent a
rival the cable operators can ever become.
Slow Times in Italy
In Spain, cable-TV networks are scarce and it isn't possible to tap into the
local phone network of the incumbent, Telefonica SA. But the government
has issued licenses for wireless local-loop services and some operators are
getting ready to offer wireless broadband services. Of the major
telecommunications markets in Europe, Italy seems to be the most
stubborn. It has no cable television, has not issued any wireless local-loop
licenses and is only now beginning to establish a framework for unbundling
local telephone networks.
All this makes it hard for Ron Sommer, the chief
executive of the former German monopoly
Deutsche Telekom, to hide a smug grin when he
talks about competition in Europe. Europe's
largest phone market, Germany was pressured
for years to liberalize. In the end, German
lawmakers created one of the most open
telecommunications markets in the world. Right
from the start of competition in 1998, Deutsche
Telekom was required to allow unbundling, to
allow customers to choose a preferred
long-distance service provider, to bill for rivals
offering so-called call-by-call services, and to allow customers to retain
their phone numbers if they switch to another operator. Such services
make it easier for newcomers to compete. And although required by
European Union law to do so, most EU countries do not require their
former monopolies to make such services available to new carriers.
"We don't have a level playing field," Mr. Sommer says in an interview.
"Why should I have to offer local-loop access to British Telecom and they
don't have to offer it to me? I've never asked to get French regulations in
Germany, but I would like to get German regulations in France. Why isn't
Brussels taking care of these issues?"
In fact, Brussels is beginning to take notice. Hounded by new carriers
eager to get in at the early stages of the broadband wave, the European
Commission is concerned that the bottleneck in local phone networks and
the high price of leased lines to businesses are keeping Europe from
cashing in on the boom in electronic commerce.
The Organization for Economic Cooperation and Development said late
last year that high leased-line prices and the lack of competition in local
networks made it harder for European companies to compete against their
American rivals in B-to-B e-commerce. Although new networks are being
built, the incumbents in Europe still dominate the market for
communications transport, which has kept prices high.
Heeding the call to action, the commission is studying the market for leased
lines and has called on EU governments to at least start full unbundling of
local phone networks by the end of this year. The commission could force
EU members to at least publish a timetable for opening local phone
networks. At the EU's Lisbon summit in February it even got the heads of
European governments talking about the arcane issue of local-loop access.
The summit endorsed the commission's plan.
EU Pushes Liberal Policy
European Information Society Commissioner Erkki Liikanen is pushing EU
governments to take the most liberal policy view in unbundling local
networks. Mr. Liikanen has identified DSL as a key to ensuring the widest
access to broadband services and is pushing for a timetable to unbundle
local phone networks to accelerate the rollout of DSL.
"The product is already in the market. The technology is there," he said in
April. Mr. Liikanen says the commission is pushing to unbundle local
phone networks because cable-TV networks -- the obvious alternative to
high-speed access over phone wires -- isn't available everywhere and is
technically limited.
In many European countries the quality of cable-TV networks is insufficient
to offer broadband services without first investing in a costly upgrade of the
network. Consider what happened in France, where France Telecom's
rivals still only have cable-TV networks to offer broadband in competition
with the former monopoly. Quality of the cable-TV lines is so bad that
Lyonnaise Communications rationed out online time last September and
eventually put a freeze on new customers to its Cybercable service. The
service resumed in March, but is still dogged by a reputation for poor
quality.
The broadband bottleneck is clearly holding back French Internet
development. Just 9% of the French population surfs the Internet today,
compared with 18% in Germany and 25% in Britain, says U.K.-based
telecommunications consultants Analysys Ltd.
Stockholm's Dark Fiber
In some countries, local governments have taken action to accelerate the
rollout of broadband services. In Milan and Stockholm, municipal
authorities have created a fiber-optic network running through nearly every
street. (See the accompanying article on Italy's experience.) In industry
jargon it's called dark fiber, dark because it is just the plain fiber. An
operator can lease the line and then put optical networking equipment on it
that "lights" the fiber.
Seven years ago the city of Stockholm created
a corporation called AB Stokab, owned 91%
by the city and 9% by the county, to build and
operate fiber-optic networks. Stokab and its
supporters say it's much easier for new
operators and Internet service providers to set
up shop in Stockholm. They don't have to dig
up the streets -- instead they just connect into
Stokab's network and they're up and running.
And prices have come down as a result of
competition. One of the obvious beneficiaries of
the Stokab network is Bredbandsbolaget, a broadband-services company
that relies heavily on it to provide unlimited high-speed Internet access.
There is little hard analysis of how Stokab's open network has contributed
to the explosion of the Internet economy in Stockholm. But there's a
consensus that by making broadband cheap and easily available, the
Stokab team is helping push things along. "They're very important," says
Christer Sturmark, a founder of Cell Ventures AB, a Stockholm
venture-capital firm and start-up incubator. "It is an investment in the
future."
The Swedish parliament seems to agree. It is expected to approve plans
for a public national backbone network and subsidies for regional and local
fiber loops. (It is scheduled to take up the issue in mid-June.)
Regardless of the technology, experience shows that where governments
play an active role in promoting technology and competition, investors rush
in to deploy broadband. Many companies prefer to use a mix of wireless
local loop, DSL and fiber-optic cables run to the premises of a customer,
depending on the cost of installing and operating the network. Therefore,
to help companies create efficient networks that result in quality service at
an affordable cost to consumers, analysts say governments should move
faster to make all roads to Europe's broadband revolution accessible.
"We take an agnostic view when it comes to technology," says Lynn
Forester, co-chairman of FirstMark Communications, a U.S. outfit that has
set up broadband networks to businesses in a number of European cities.
"Our product is broadband. By no other thing are we limited except
regulatory policies."
Benefits of Different Technologies
Access
Network
Alternatives
Maximum
Bandwidth
(Bits per
second, both
ways)
Benefits
Best
Applications
Copper
Today: 2
million, 2004:
26 million,
2008: 155
million
Ubiquity, well
known
technology
Voice, e-mail,
data and video
streaming.
Broadcasting in
2002.
Fiber
Today: 10
billion, 2004: 1
trillion, 2008: 1
quadrillion
Limitless
bandwidth, Best
service levels,
broadcasting
Voice, e-mail,
data, video
Fixed-Wireless
Broadcasting
Today: 50
million
incoming, 25
million outgoing,
2004: 155
million. 2008:
622 million
Overcomes
distance. Quick
network rollout
Voice, e-mail,
data, video
Satellite
Today: 24
incoming, 2008:
24 incoming, 2
outgoing
Easy remote
connections,
Data and video
in 2002
Voice and e-mail,
broadcasting
Source: Forrester Research
Timetable for Unbundling
Country
Availability
Main providers
Percent of fixed
lines expected
to be unbundled
by 2004
Austria
2000
UTA, Telekabel
2%
Denmark
1999
Telia Denmark, Mobilix
0.5%-1%
Finland
1997
HPY, Sonera
1%
France
2001
Cegetel, 9Telecom
2%
Germany
1998
Mannesmann Arcor,
QSC, NetCologne,
FirstTelecom,
KPNQwest
2%
Italy
2001
Wind, Infostrada
3%
Netherlands
1999
Versatel, Telfort
1%
Norway
2000
Enitel, NetCom
0.5%-1%
Spain
2001
Retevision
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