Competitors Fear Switch to Fiber Will Revive DT Monopoly

Last month, DT said it plans to spend about 3 billion ($3.6 billion) to roll out a fiber network with speeds up to 50 Mbps in Germany. The move is part of an effort to offer DT users triple-play bundles of communications services, Internet access and individually accessible entertainment. The first cities are to be linked to the fiber network by mid-2006. The new network will replace DT copper lines.

“Such sums can only be invested when adequate conditions for the return of investment are given,” a DT spokesman told us. The company’s offer to build the network is said to have been accompanied by a request that Germany’s national regulatory authority, BNetzA, deregulate wholesale and subscriber prices on glass fiber networks. This shakes up alternative telcos.

Fiber cables don’t support alternative DSL, which needs metallic loops, said Axel Spies, a lawyer at Swidler Berlin who represents the German Competitive Carrier Assn. (VATM). Under the guise of innovation, DT is pursuing a “nationwide campaign that explicitly focuses on pushing its competitors out of the market” because it fears further losses of its broadband market share, he said: “What DT intends is to extend optical fiber lines massively beyond the central office towards the end-user.” DT said it couldn’t comment on competitors’ statements.

Rivals have seen that strategy before, Spies said. In 1990, after reunification, DT replaced copper cable with optical fiber in E. Germany to upgrade that area’s rotting infrastructure. The move was “disastrous” for competition because alternative DSL wouldn’t work on the fiber line. DT’s new network will do likewise, creating a bottleneck that undermines alternative network operators investments, he said: “Many end customers, in particular in eastern parts of Germany, have waited for years to obtain DSL, but can’t have it because of the deployment of fiber-optic cables by DT.”

At the same time, DT is trying to persuade BNetzA to back off price controls, Spies said. If it succeeds, and copper line price controls are found not to apply to fiber, “the door will be wide open for the incumbent to charge dumping prices to conquer this market.” That will leave competitors in the same position as years ago, when DT tried to stifle competition by cutting DSL prices. “In the end, the massive deployment of unregulated fiber lines would lead to a remonopolization of the market,” Spies said. “It’s a huge millstone” around rivals’ necks.

Under European law, telecom operators with significant market power (SMP) must give alternative providers unbundled access to metallic local loops. The new EU e-communications regulatory framework requires watchdogs to see if SMP exists in 18 telecom markets, one of which is wholesale unbundled access to metallic loops.

In its analysis, Germany’s regulator found that DT has SMP in the relevant market, which it said consists of copper and “hybrid” loops but not pure glass fiber. RegTP, now BnetzA, ordered DT to give competitors full unbundled access to the copper loop. But the EC questioned the regulator’s decision to omit fiber loops from its market definition, saying: “To the extent that fiber glass connections can be used to offer wholesale unbundled access to local loops and sub-loops for the purpose of providing broadband and voice services, like metallic loops and sub-loops, they may… on the basis of specific national circumstances, form part of” the relevant market. The Commission asked RegTP why its antitrust remedies shouldn’t apply to fiber connections.

Despite EC concerns, the regulator “intends to withdraw DT’s existing obligation to provide access to its glass fiber connections without a market analysis,” the Commission said earlier this year. In settings where DT has rolled out fiber connections not only to handle high capacity demand but also as a substitute for metallic loops to connect residential customers, there may be no reason to distinguish fiber optic from metallic, the EC said.

DT is “making a lot of effort to demonstrate that this next generation network-like development is an emerging market and as such should not be regulated,” said Sandro Bazzanella, European Competitive Telecom Assn. (ECTA) dir.-EU affairs. In ECTA’s view, “the types of new applications offered by DT are mainly TV-like services, and I confess that it is difficult to see TV as a new service,” he said.

The principle of technological neutrality should apply to the local loop, Bazzanella said. It shouldn’t matter if it’s delivered over copper or fiber -- the last mile clearly remains a bottleneck for competitors and deregulating it will “simply signify a return to a monopoly for the incumbent which will at the end be prejudicial to the end-user.”

The confusion highlighted by the split between Germany and the EC over access to local loops is among “pending problems” the EC should address when it reviews the list of markets regulators must analyze for competitiveness, said Philippe Defraigne, dir. of Cullen International, a Belgium-based telecom regulatory monitoring consultancy.

The regulatory situation is clearer in the U.S. In recent years, the FCC has moved to boost construction of fiber networks, particularly local loops, said Russell Blau, a partner with Swidler Berlin. Incumbents generally are required to give competitors access to the local loop at cost-based rates, but in 2003 the FCC ruled that incumbent local exchange companies that build fiber to the home aren’t bound by those rates unless the fiber replaces an existing copper network.

If it doesn’t, incumbents can cut competitors out of the more favorable rate, Blau said. And even if the fiber replaces copper, incumbents need offer rivals only the regulated rate for a single voice-grade channel, keeping them from offering more than simple phone service. In any case, the FCC seems to have resolved the issue to telcos’ satisfaction making further relief possible but unlikely, he said.