|Issue:||Europe I 2002|
|Topic:||The Future of Central and Eastern Europe’s Last Mile:Local Loop Unbundling and What it Means for Broadband Adoption|
|Organisation:||Europe, the Middle East and Africa|
To ensure competition between incumbent exchange operators and newly created competitive local exchange operators, European Union regulators have pressed for the unbundling of last mile local loop access. Unfortunately, research indicates that despite the regulators’ efforts, incumbents still control 99% of all access lines and 97% of the digital subscriber lines needed for broadband access. The EU, trying to stimulate fully competitive market in Eastern Europe and the CIS, clearly needs to re-think its model and look for more creative solutions.
Does last – mile competition really matter for broadband penetration? This question is no doubt on the minds of telecom regulators in Central and Eastern Europe (CEE), as the European Commission (EC) presses regulators to liberalize along Western European guidelines. The answer, however, judging by the past year’s developments in Western Europe, is thus far negative. More than a year into local loop unbundling (LLU) – the EC-mandated process whereby incumbent fixed operators open up exchanges and make their copper access lines available to competing operators – incumbents still control over 99% of all access lines and an estimated 97% of Western Europe’s digital subscriber line (DSL) market in terms of accounts. Despite the absence of real competition in the local loop – or just as likely, because of it – several West European incumbents have launched aggressive DSL penetration strategies, with the result that the DSL subscriber base exploded from fewer than 1 millon at the end of 2000 to over 4 million at year end 2001. At the same time, last-mile competitors held at bay by unbundling delays and financing restrictions, and competing broadband technologies delivered by alternative operators, such as cable modems and fixed-wireless access, have not kept pace. The result is decidedly not what the EC or Europe’s national regulatory authorities intended. Nevertheless, incumbent Telco’s’ dominance of the last mile is as imposing as ever; the industry’s financial upheaval over the past 18 months has served only to weaken and remove competitors and tighten the incumbents’ lock. For fixed line Telcos and regulators in CEE, the results of the unbundling process in Western Europe provide useful lessons. The European Union (EU) requires a clear commitment to LLU on the part of hopeful entrants – Poland, Hungary, the Czech Republic, Slovakia, Estonia and Slovenia form the front legion – and have offered guidelines for implementation. Yet successful implementation models in Western Europe’s major markets, resulting in an expansion of competition in the last mile, are to date non-existent. CEE governments and regulators may be forgiven for doubting the usefulness of the LLU process and seeking alternative models of last-mile competition. And CEE incumbents will be buoyed by the success of their Western European counterparts in cementing their lock on the local loop and cornering asymmetric digital subscriber line (ADSL) markets. If the incumbents have it all sewn up in Western Europe and look likely to do the same in CEE, what is left for alternative operators? Clearly, the EC and governments and regulators in both halves of Europe need to think creatively to figure out how to institutionalise challenges to the Telco’s fixed line dominance (that is, beyond the real threat of mobile substitution). More aggressive regulator pressure on elements of unbundling, such as line sharing, and the re-issuance of fixed wireless access (FWA) licences at better terms and more propitious times will help. Wanted: Successful Unbundling Models for CEE Regulators For the CEE countries seeking EU accession, the challenge of local loop unbundling is coming to the fore. LLU is among the EU acquis – the body of rights, obligations, legal precepts and political-economic guidelines underlying the EU – to which applicants must demonstrate adherence. Until recently, the issue has taken a back seat to the more pressing challenges of overall telecom market liberalization. Now that several CEE markets have crossed that threshold, LLU is emerging as the next sizable competition-related challenge. (See Exhibit 1 for a description of the various types of LLU open to EU, and by extension CEE, regulators.) Currently, only a few CEE governments and regulators have addressed LLU in telecom legislation (see Exhibit 2). Slovenia and Hungary are the two countries of the region where new telecommunications laws envision the implementation of unbundling. In Hungary, the new Telecommunications Act envisions LLU, yet the process has some catches. The act calls for incumbent operator Matav to begin unbundling a particular portion of a local loop for another operator only when the latter produces a signed contract with a customer for service on this loop. Such a procedure is bound to create delays in service launches for CLECs, and few business customers will look kindly at waiting weeks – or months, as has sometimes been the case in Western Europe – from signing of the contract to the time they begin receiving service. Pricing and procedural steps for unbundling access lines have yet to be determined. In November 2001, HIF, Hungary’s Communications Regulatory Authority rejected Matav’s proposal outlining its plans to provide competitors with access to its networks. The incumbent resubmitted a new plan at the end of December and is still being reviewed by the regulator. In the Czech Republic, the Tele-communication Law of 2000 does not establish an obligation or set a timetable for LLU provision. The law, however, will be revised in May 2002 and is likely to address this issue. In Slovenia, the Telecommunication Act passed in April 2001 established the framework for LLU, which would begin this year. Before then, the Telecommunications and Broadcasting Agency of the Republic of Slovenia (ATR) needs to issue two additional decrees establishing the conditions of unbundling, which it plans to do in spring. Even in countries that have passed new telecom legislation and fully opened basic service markets (the Czech Republic and Slovenia from January 2001, Estonia and Hungary from January 2002), regulators and alternative carriers are preoccupied with other measures designed to ensure local loop competition: Carrier and network selection and number portability In the Czech Republic, for example, carrier pre-selection and call-by-call network selection will be allowed from July 2002, and number portability will be introduced in 2003. In Hungary, both pre-selection and call-by-call were introduced at the very beginning of liberalization. Interconnection – the bane of every CLEC’s existence Incumbents are under no pressure to offer favourable conditions to the newcomers, and it takes months for CLECs to sign interconnection agreements with incumbents. In most agreements with incumbents. In most CEE markets, the regulator has to address unresolved disputes. Several inter-connection agreements in the Czech Republic have finally been signed in this way, nine months after the market was liberalised. Clearly, governments and regulators in the region’s EU hopefuls have much to achieve in the area of competition before seriously tackling the messy business of the opening of exchanges and physical transfer of access lines to competitors. While the EC itself has provided clear guidelines on how the process should be implemented, the sorry experience of most West European regulators to date leaves few successful models for CEE regulators to emulate. Copper Will Remain King, With the DSL Difference Government hopes for introducing last-mile competition in the short and medium term rest on the promise of alternative access technologies. x DSL services have been on offer in several CEE countries since 2000, but take-up has been modest everywhere. And, as in Western Europe, where there has been success, mainly incumbents are achieving this. In the view of Pyramid Research, affordability issues will prevent rapid DSL take-up in the short run, particularly among residential customers, but adoption should gain momentum beginning in about 2003 as more of the region’s incumbents devise more aggressive marketing and pricing strategies. Ultimately, business and residential customers will turn to DSL as the principal broadband access technology (see Exhibit 3 for Pyramid’s broadband adoption projections). Conclusion Clearly, for the next five years, cable Internet and high-performance DSL services (e.g. synchronous DSL) are where the challenges to incumbent last-mile dominance will emanate. Entry barriers to the cable industry are enormous, leaving high-performance DSL delivered to the business segment as the broadest area of opportunity for new service provider entrants. Broadband access aspirants should also remain attuned to dark-horse access technologies for niche opportunities, such as mesh radio, two-way satellite, and fixed broadband wireless access in the form, for example, of LMDS (local multipoint distribution service). Exhibit 3 xDSL will rule the roost: broadband adoption forecasts in CEE to 2007.