Blog Paul de Bijl: The broadband market is currently a competitive market

It was truly a milestone: the draft decision 'market analysis of local internet access', which the Netherlands Authority for Consumers and Markets (ACM) published for public consultation on July 8, concluded that the broadband market is currently a sufficiently competitive market. To a large extent, this has been the result of the swift roll-out of fiber-optic networks, also by independent competitors. What’s more, these independent competitors are open for other providers. As a result, consumers benefit from competitive prices or are able to switch to more-competitive providers.

These findings are connected to a proposal (which was declared binding by ACM) put forward by Dutch telecom providers KPN and Glaspoort, in which they suggested lowering their tariffs for network access. Together, they own the lion’s share of fiber-optic connections in the Netherlands. Their commitment will remain in effect until 2030, and reduces the risk of unreasonable tariffs and conditions when granting competitors access to their networks.

At the moment, it is, on balance, not necessary to stimulate competition with a regulatory regime for network access. However, this may change in the future. It is wise to remain vigilant, also regarding consolidation. It should be noted that, in 2020, the court struck down a 2018 decision by ACM mandating KPN and VodafoneZiggo to grant competitors access. Previously, since the liberalization and privatization in the mid-90s, only KPN had been required to do so.

So the market is very dynamic, resulting in higher internet access speeds and competitive prices. It has been over a quarter of century now since the telecom market was liberalized, which is a good time to take a look back in the history books.

Going back in time*

Traditionally, the Netherlands was in a very good position to see competition between networks come off the ground. Almost every house in the Netherlands had both a telephone line and a cable line, which, in principle, could also be used for voice and internet. If competition had to be viable anywhere, it had to be here. But this was far from a done deal. Boosting investments in new networks is aimed at the future, yet, at the same time, there is also a need for competition and lower prices in the here and now. Access regulation easily addresses the latter, but should preferably be a temporary measure, until competition can do without. The transition towards that end goal has taken quite some time.
How did the market evolve? To answer that question, it helps to distinguish three different eras (following American professor Eli Noam).

Telecom 1.0 (public utility, until 1997)

This was the time of monopolists in public hands, offering analog voice telephony over fixed networks. High costs for rolling out and maintaining networks led to substantial economies of scale. The result of which was a natural monopoly: competition was simply not viable. A desire for more efficiency, innovation, and investments (which was good for ‘dynamic efficiency’) was the impetus for privatization and liberalization. And so this era came to an end.

Telecom 2.0 (1998 – 2007)

A catch-22 situation had thus emerged. How are new entrants without networks of their own able to attract customers? And how can a new entrant without customers or turnover make investments in a network? The answer to those questions could be found in access regulation.

The European regulatory framework for telecom networks and services came into force. In 1998, the Dutch Telecom Act came into effect, which enabled the newly created regulator OPTA (which merged into ACM in 2013) to allow new entrants (without networks of their own) to enter the market through regulated access to KPN's infrastructure. At the same time, they would gradually roll out networks of their own. In that way, the market would evolve from ‘service-based competition’ (new entrants use an existing network to offer services) to 'infrastructure-based competition' (new entrants have networks of their own, and are able to compete without regulated access).

At the time, infrastructure-based competition look feasible within five years or so. Regional cable companies saw opportunities, and two national entrants were ready to go: Enertel (which later became Energis), which was a consortium of energy and cable companies, and Telfort, an alliance between Dutch Railways NS and British Telecom. Both had (through their individual members) long-distance infrastructure for telecoms, and cable companies had granular networks to end-users. The future looked bright for infrastructure-based competition: three nationwide networks (including KPN) with here and there also an independent cable company. The telecom regulator would soon become unnecessary.

However, the promise of large-scale roll-out and a mature market without access regulation didn't materialize yet. The corporate coalitions either changed course to focus on the business market or fell apart, and many cable companies apparently needed more time for attaining competitive positions on the telecom market. Large-scale users in favorable areas were introduced to infrastructure-based competition. Cable companies consolidated, but cable as a whole did not yet exert significant competitive pressure.

Economists and regulators placed their hopes in the ‘ladder of investment', where new entrants make incremental infrastructure investments, thereby gradually detaching themselves from regulated network access. How can this process prevent a catch-22, namely that access regulation stimulates competition on price, but eliminates the need to invest? In 1999, OPTA tried to circumvent this risk by introducing a gradually increasing access tariff (which went up for five years) for 'unbundled access'. However, this was not allowed under the EU requirement of cost orientation, as a result of which the regulated access tariff went down dramatically (and even more than halved). In that way, network access remained very attractive, as opposed to the idea behind the ladder of investment.

Telecom 3.0 (2008 – 2022)

This third era is characterized by the rise of a new generation of networks with higher speeds, also because of upgrades to the copper and cable networks. The merger between cable companies UPC and Ziggo into a single nationwide cable company brought a natural end to the consolidation process on the cable market. The promise of dynamism and fiber-optic rollouts depended on investments and economies of scale, which (somewhat paradoxically) could undermine the viability of infrastructure-based competition. Presumably though, by heavily investing, KPN and Ziggo (later VodafoneZiggo) would be able to compete fiercely on internet access speeds.

However, that did not work out as planned. Until 2012, KPN had repeatedly bought its own shares, and paid considerable dividends – money that could have been invested in fiber-optic rollouts. In 2014, ACM approved KPN taking a majority stake in fiber-optic company Reggefiber. That transaction gave KPN control over a company that, in the years prior, had really stepped up the roll-out of fiber-optic. KPN put the brakes on that roll-out, and the market subsequently hit smoother waters.

It wasn’t until years later, when new entrants that voluntarily offered access started rolling out fiber networks, that the market became more dynamic. Providers that previously were dissatisfied with prices and conditions for access were given more options, besides the possibility of investing themselves, which had always existed.

Where are we today?

One lesson is that public policy has little control over the telecom market. An industry with technological innovations and adapting business models has a life of its own. Also, the ladder of investment did not live up to its promise. In addition to favorable conditions for infrastructure-based competition, competitors are needed to shake things up, and trigger an investment race with their own roll-outs. Gamechangers are needed, until the fiber-optic roll-out will be completed, which will then add a new twist to the game.

Will investments focus more on quality or safety? Will we see more integration with digital content (such as music and video)? Businesses are inclined to stay clear of the commodity trap: by differentiating themselves, they aim at reducing competition on prices. That shouldn’t be a problem, provided they keep on competing with each other in other ways, and we don’t end up with ‘stagnant waters'.

Depending on the input it receives during the consultation, ACM will follow the course of the draft decision. However, the fact that there is sufficient competition does not automatically make the telecom market a regular market. Having affordable connections of high quality for everyone is extremely important for society. That public interest may be threatened if the current landscape were to take a turn.

Competitors may want to join forces because of economies of scale and the prospects of higher margins, as we saw earlier in the mobile telecom market (which doesn’t even require an expensive roll-out right up to people’s homes). In addition, smaller acquisitions below the turnover threshold could slip past concentration control, or providers of fiber-optic networks could abandon the idea of open access. In any case, we have the competition law, while the European regulatory framework and our telecommunications act will not go away anytime soon either. The instrument of access regulation remains in the toolbox.

Paul de Bijl, Chief Economist of ACM

* For a brief history of the Dutch telecom market, see P. de Bijl (2011), Broadband Policy in the Light of the Dutch Experience with Telecommunications Liberalization, Journal of Information Policy (1) p. 77–101. https://doi.org/10.5325/jinfopoli.1.2011.0077

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