EU drops a broadband bombshell

ft.com | EU drops a broadband bombshell | By Sarah Laitner in Brussels and Philip Stafford in London | Published: August 30 2007 01:46 | Last updated: August 30 2007 01:46

Britain is sometimes embroiled in bruising battles in Brussels. But it finds
itself singled out by the European Union's telecoms chief as a model pupil in
the drive to boost broadband competition.

Viviane Reding, the EU media commissioner, this week cited the decision to
split the networks and services division of BT of the UK as a potential
template for other former state-run telecoms operators.

Her suggestion goes to the heart of a debate on how to spur investment in new
ultra-fast broadband networks to meet European business and consumer hunger
for bandwidth.

EU broadband subscriptions have risen sharply since 2002. Nearly three in 10
households use the service and prices have fallen faster than the global
average. So why suggest splitting companies such as Deutsche Telekom or
Telefónica?

In the British case, BT agreed in 2005 with national regulator Ofcom to create
an independent unit responsible for giving rivals access to its networks. The
division, which BT still owns, is obliged to treat competitors on the same
basis as its own services.

The split came after Ofcom felt competition was weak and that the UK was
trailing the rest of the EU in broadband adoption. Now, Ofcom says this
"functional separation" is a reason behind a doubling of maximum broadband
speeds in the UK. Rivals to BT say British broadband subscriptions are
approaching the levels of the world-leading Nordic countries.

Many younger telecoms operators in the EU relish the prospect of
change. ­Stefano Parisi, the chief executive of Fastweb of Italy, says: "We
fully support Ms Reding's position. More transparency and investment is
needed."

Still, EU officials insist that such a forced administrative division of
operators would be a last resort if all other attempts to overcome a company's
dominant market position had failed. Nevertheless, a number of question marks
remain.

First, would a forced split of big operators hinder spending on new ultra-fast
broadband networks? Critics say that it could reduce incentives for companies
to build infrastructure.

For example, Ms Reding is embroiled in a court case with Berlin over its
decision to stop rivals from selling services on Deutsche Telekom's ?3bn
($4bn, £2bn) new broadband infrastructure, amid a spat over how big operators
guarantee a decent return on investments.

Second, a soon-to-be published European Commission study concedes that the
experience of the UK model is "still rather limited".

A third concern is that market conditions vary widely across the EU. While the
Italian watchdog is considering splitting Telecom Italia, the paper reveals
that French and Dutch regulators question whether "functional separation"
would work on their markets.

Big telecoms operators have hit out at Ms Reding's suggestion. Etno, their
lobby group, says: "Consumer prices are consistently falling and markets are
increasingly competitive. Mandatory functional separation would entail a
costly and lengthy reorganisation of major European companies, which is
irreversible."

Will this stop Ms Reding, as she seeks to push through the biggest overhaul of
the rules governing the EU's ?289bn-a-year telecoms rulebook?

The limelight-loving Luxembourger was behind a contentious law to slash the
cost of international mobile phone use, a move that enraged big operators.

Now, she must convince her fellow 26 commissioners that her approach is right,
before formally launching her plan. EU countries and the European parliament
must also back it.

No stranger to controversy, Ms Reding has a remarkably consistent method. The
former journalist and ex-member of the European parliament is seen by some in
the industry to use a "bomb-dropping" technique. First, she outlines
outlandish ideas then waits for the air to clear before returning to the table
to get a deal.

The coming months will reveal what effect her approach has on the EU's leading
telecoms groups.

Editorial Comment: Broadband battles