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International Issue: January 2005
Growth strategies
In search of level playing fields
Regulatory certainty is required for a successful ISP marketplace
by Ken Wieland
It is a truth that appears to be universally acknowledged in telecom: regulatory certainty encourages investment, investment leads to innovation. With innovation you then have the basis for an evolving and — hopefully — prosperously competitive marketplace.
Unfortunately, in many European ISP markets, this is not happening. A lack of DSL wholesale competition — due to an absence of local loop unbundling (LLU) — means that ISPs are choking each other on price for the same product in their scramble to win broadband market share. “Assuming that no-one has got much of an appetite for building out alternative access networks, broadband access — without LLU — will be ‘any colour so long as it’s black’,” warns Paul Brisby from Tower House Consulting, who acts as a strategic advisor to ISPs. “Innovation is the child of competition and without competition the market could become moribund.”
The reason why LLU is so vital to a vibrant ISP marketplace is that competitors have the opportunity to distinguish their retail and wholesale products from the incumbent through having their own equipment installed in the local exchange. But if the prices set by the incumbent are too high for the LLU components — such as rent for co-location space or connection and migration fees — then potential competitors will not see a business case for entering the market as local loop unbundlers.
To encourage wholesale DSL innovation, the regulator will need to play a pro-active role in terms of setting the component prices and to give assurances that the processes surrounding LLU (the time it takes the incumbent to hand over lines to its competitors, for example) will be clearly laid down and adhered to. In other words, to give some sort of regulatory uncertainty.
In early 2004, Ofcom — the UK’s regulatory body — said it would review LLU pricing, which prompted a voluntary price reduction from BT. This stimulated for the first time serious interest in LLU by a range of BT competitors, the most visible move coming from Cable & Wireless, which purchased Bulldog Communications. (Bulldog was the only major player in the UK attempting LLU for wholesale purposes up until that time although it didn’t get very far. As Table 1 shows, the UK did not even have enough unbundled lines to register a one per cent LLU penetration as of end June 2004.)
Ofcom is now in the process of reviewing the costs of maintaining BT’s copper assets with a schedule to publish line-rental pricing proposals this spring. It has also appointed an independent ‘Telecom Adjudicator’ to make sure that the operational and transactional processes between BT Wholesale and BT Retail extend to BT Retail’s competitors.
Telefonica UK, which currently retails BT’s DataStream product to ISPs, intends to trial LLU in some of BT’s local exchanges this year as a consequence of the shift in regulation. “LLU allows much greater service differentiation; we will not need to rely on the BT product development process,” says James Waterworth, Telefonica UK’s regulatory and government affairs manager. “Moreover, DataStream is a data-only service whereas a fully unbundled line allows the capture of both voice and data services. That offers the chance of developing innovative service and pricing packages. It’s definitely going to shake up the voice market.”
Telefonica UK doesn’t reveal how many DataStream lines it currently resells or the number of unbundled lines it is aiming for this year. However, Waterworth says that if a LLU wholesaler is to have competitive scale and scope in the UK it must have around one million users by 2008.
Regulatory dilemmas
While these regulatory developments are generally welcomed by competitors, there is understandably some unease among European incumbents about how pro-active the regulator should be. After all, they too need some regulatory certainty if they are to have the incentive to invest in their own networks. This will not happen, of course, if the regulator continually scrutinises their costs and adjusts their wholesale prices.
“We are committed to LLU,” says Tim Parsons, regulatory advisor within the BT Group, “but is it right that the role of the regulator should be to set wholesale prices, which is tantamount to prejudging business models? The market really needs to decide what the successful business models will be. Lower prices are good for some but not necessarily for others.”
Parsons does recognise, however, that regulators face a ‘huge dilemma’ in terms of how to navigate successfully between allowing market forces on the one hand and making sure that the conditions are put in place to enable a successful, competitive market. The laissez-faire approach is clearly not an option for the regulator when confronted with an ex-monopoly holder still dominating the market.
“There is a balancing act between allowing the market to set the prices and allowing some measure of certainty so as to encourage new players to come into the market,” says Andrew Heaney, competition policy director (broadband) with Ofcom.
There will also be the challenge of making sure that the unbundlers don’t simply just cherry-pick those local exchanges with the highest density of users. This trend, if unchecked, could result in a ‘digital divide’ within national boundaries.
Jonny Mulligan, spokesperson for the UK Internet Federation (UKIF), believes that closer cooperation between alternate LLU wholesalers and smaller ISPs can help to avoid this outcome. “LLU wholesalers may re-consider going to some local exchanges if they knew there was going to be a range of potential resellers targeting that market. One thing is for sure, for innovation to happen in this market you need the smaller ISPs.”
Beyond regulation
Aside from operating on level fields, ISPs aspire to keep costs down, reduce churn and achieve market differentiation. Westell, a US-based vendor that has traditionally sold broadband access modems to Tier 1 operators — and which is now extending its operations in Europe — reckons it can help. To grow its own business, Westell says it has pumped ‘millions of US dollars’ into diversifying its product portfolio. The result is EnVoy, a remote service management system, and its Home Hub unit (smaller than a PC, looks a bit like a standard phone, but with a screen large enough to make web browsing and applications such as videoconferencing easy to use; it can also wirelessly connect to a set-top box to display video).
“The reason why we developed EnVoy was because even with USB modems, DSL is still not plug and play,” says David McKeigue, managing director of Westell’s operations in the UK and Europe. “We’ve got research saying that seven out of ten broadband customers have to ring up the call centre to sort out some problem or other, which obviously puts ISPs’ costs up. And the problem of customer support is going to get worse if ISPs try to offer triple play services that require routers installed on the customers premise. A USB modem has only got eight parameters but a router has over 500.”
The way EnVoy works is that it allows the ISP to remotely configure settings on the customer’s DSL-connected modem/PC and, theoretically, resolve set-up problems a lot more quickly (and cheaply) then sending out an engineer or investing in more extensive call centre operations to deal with customer queries. “Modems are often sent back to the operator with no fault resolution and so support costs can mount up very quickly,” continues McKeigue. “Trials with US operators using EnVoy have shown that the average duration of call to the call centre drops from 20 minutes to six minutes.”
As a vendor promoting a DSL service management product, it’s in Westell’s interests to say that ISPs are not there yet with plug and play. But it’s not a lone voice. “The failure rate is still too high for broadband installations,” says Telefonica UK’s Waterworth. “There is a danger that the industry damages the perception that people have of the service.”
For Westell’s Home Hub, McKeigue argues that this is a way for ISPs to extend broadband penetration beyond PC users (or alternatively as a communal device that is complementary to the PC). It can also be used as a means to prevent churn, adds McKeigue, in that operators who have the Hub in their armoury can dangle it as carrot to customers contemplating a move to another service provider. (Whether or not there is a business case for operators to offer the Hub for free is far from certain, since Westell — obviously — will want to get paid per unit, albeit at a price not specified by the vendor.) “In our discussions with one US operator, which we expect to ship 500,000 units to this year, they could see the business case for the Hub purely on the basis of churn prevention,” says McKeigue.
Westell also expects to start shipping the Hub to Europe this spring, although McKeigue wouldn’t name the ISP in question other than describing it as a Tier 1 operator in France. Wanadoo, then, looks the most likely candidate.
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