CLECs - the deafening silence

December 2001 It has been two years since the unbundling of the local loop was put on the European agenda. Since then the number of competitive carriers hoping to participate has dropped dramatically and many services have been put back or cancelled. So what is the future for Europe's remaining competitive local exchange carriers (CLECs)?

In November 1999, the UK's telecoms regulator, Oftel, issued a statement that required BT to avail its copper loop - the so-called 'last mile' - to rivals in order to help facilitate the roll out of a national network of competitive broadband DSL service providers. With similar moves being taken by respective regulators across Europe, many observers believed that the transformation of Europe's broadband 'telescape' had begun. How wrong they all were.

Initially, a healthy number of telecoms and IT infrastructure companies announced they would be part of this process and - optimistically - approached Europe's various incumbents to discuss terms. Today, over two years later, and after much bitter recrimination, the dreams of many would-be DSL operators have evaporated, along with any delusional belief that Europe was on the fast track of broadband build outs.

A depressing report, published by the European Competitive Telecommunications Association (ECTA) in November 2001, shows how little the unbundling process has progressed in two years. According to the report, only one per cent of copper lines in the EU are DSL-enabled and, of those, only three per cent are provided by competitive carriers. The figures not only reveal the lowly state of broadband penetration (number of broadband-enabled access lines per 100 people), but also that, overwhelmingly, the incumbents remain in control.

The UK, in particular, has under-performed coming well down the European league table. According to the OECD (Organisation for Economic Co-operation and Development), in June this year the UK was fifteenth in Europe in terms of broadband penetration and twenty-second among OECD countries. (Since then, nothing has happened to suggest that the UK has moved up the league table).

Although DSL penetration has grown by 150 per cent since 2000 in the UK, says the OECD, broadband via cable modems has grown by 365 per cent. In fact, the UK is one of the few countries where cable broadband is still beating DSL broadband by a large margin.

top

Drop outs

Furthermore, not only has DSL failed to develop in the UK, most competitive carriers have dropped out of the process completely. Only three co-locators have placed orders with BT, compared to the 40 interested in the provision of DSL two years ago.

Part of the reason for this situation has undoubtedly been the obstructive behaviour of BT, and the inability of the UK's regulator to reign it in. Fibrenet, an infrastructure company that has been involved with the unbundling process from the start, found that BT had many ways of discouraging companies from setting up equipment in exchanges.

"BT said locating our equipment next to theirs would cause interference and that we would need a spectral management system to avoid this. No other country has raised this objection. They also said co-location was commercially complicated and they would need time to consider it," says Nigel Pitcher.

He also agrees that Oftel were hardly helpful. "BT played the game for 18 months and, unfortunately, Oftel works by putting all the companies in a room and making them talk. The timescale became protracted," he says.

Another competitive carrier, Easynet, tells a similar story, although it argues BT and Oftel are not totally to blame. "Co-locating is an incredibly complicated process. As a company, you have to set a timeline of 12 to 18 months," says Justin Fielder, director of product marketing at Easynet."

For those companies that did finally manage to get their equipment into BT's exchanges (central offices), often their problems were just beginning. "BT said operators had to be escorted to their own equipment, give two week's notice and pay E800 upwards, per visit," says Richard Greco, chief executive of Bulldog, a carrier planning to sell DSL wholesale to ISPs. "Under law BT has an obligation to let us in whenever we want," he adds.

top

Europe

The situation across Europe shows how important the attitude of the incumbent is to the progress of local loop unbundling. In Germany, for example, there are 2,000 unbundled exchanges and 93 orders have been placed with Deutsche Telekom, according to ECTA. That compares to the UK's 17 unbundled exchanges and three orders. This is due to the attitude of DT, says Greco.

"DT was more active than BT in pushing DSL. Germany got away very early," he says. However, despite this, competitive local operators remain 'underwhelmed'. "The German regulator hasn't moved quickly enough on shared access," says Greco. "People don't want to give up the incumbent as the voice provider, and Germany doesn't allow voice and data down one line from different providers. Plus, there are too many competitors fighting over too few customers," he says.

Likewise, Easynet has also had bad experiences in Germany. "It's taken us 19 months to order one co-location. DT's ordering methods are very inefficient," says Fielder. Moreover, he thinks the number of 'unbundled' exchanges is misleading. "Unbundling isn't working over there. What they don't tell you is that 99 per cent of exchanges have been unbundled to an arm of DT, not to competitors."

However, while it may be tempting to blame the situation on toothless regulators and bullying incumbents, the situation is a little more complex, as exemplified by the experiences of numerous operators in the US. Over there, local DSL operators have also been dropping out of the business, despite the absence of a monopoly telco - indicating that the provision of profitable competitive DSL services is anything but straightforward.

top

Debt free

Positively, those operators that still are in the unbundling process in the UK have one thing in common: no debt. "The market changed and suddenly these companies had to pay interest on funding," says Fibrenet's Pitcher. "DSL is not profitable, but for us it's a means to an end," he adds.

Fibrenet makes its money from its fibre optic network, supplying leased lines to large corporates and SMEs. DSL simply links that network to the business premises. "We're not competing against BT's DSL service, because that's simply go-faster modem access. DSL can help make leased lines affordable to small companies," he says.
Besides, Easynet believes that there was not enough business to go round in the first place. "DSL isn't mass market. It was naïve to think so few customers could be divvied up between so many companies," says Fielder.

Like Fibrenet, Easynet sells direct to businesses. "We've spent millions on equipment, so it makes sense to sell direct. There's only a certain number of customers. Setting up an exchange costs between E32,000 to E48,000; but, because we're debt-free, we can take the long-term view. We'll write the cost off over a number of years."

For Bulldog Communications the business proposition involves selling to consumers, but only through wholesale services for ISPs. "We're the only ones providing residential services but we won't sell direct. The only way to make money is through scale," says Bulldog's Greco.

But this does not mean investing in a huge roll out nationwide. The carriers have learned that it is only economic to invest in exchanges once it is established that there are customers to supply to. "We're operating on an exchange to exchange basis," he says.

This raises an interesting question, however. If all broadband providers - including DSL and cable - are only deploying their technology in the more lucrative areas of the market, where will this leave the hundreds of thousands of potential users who live in more remote areas. Should not broadband have its own universal service commitment in the way telephony has. After all, anything else would be to turn a blind eye to the digital divide.

Yet, according to Bulldog, the problem with residential ADSL is not price, it is the marketing. "The services haven't had sufficient publicity. We're not being bombarded with adverts for ADSL, because there's no way to differentiate between the services."

Greco believes that although Bulldog will be BT's only competitor, that alone will kick-start the market. "BT's product isn't good enough. There's only one service, at one speed, at one price. They've packaged it so it can't attack the leased-line market," explains Greco. "When Bulldog is deployed, there will be a number of unique offerings. ISPs will be able to offer different services at different prices," he says.

top

Broadband benefits

Bulldog and other carriers are confident that DSL will take-off - if consumers and small businesses can be convinced of the benefits. "The 'killer applications' are voice-over-DSL and video-on-demand. People are paying about E18 per month for voice lines at the moment. We could charge E8 for data and multiple voice lines. It would completely change the economics of broadband, but BT won't enable it because voice is their cash cow," says Greco.

Alcatel has just announced a deal with COLT Telecommunications in France to supply the voice part of a joint voice and data DSL solution. "Voice-over-DSL is only really coming onto the market now, but combined voice and data is the future," says Phil Tilley, vice president of marketing for Alcatel.

In contrast, Easynet believes the economics of residential access do not make sense. "The kit alone costs a huge amount and the number of customers required per exchange to make it work are very scary," says Fielder. "Cable has a massive cost advantage because of its shared network. DSL will never make a profit," he says.

Gloomy though this prognosis may be, others see cause for optimism - especially if they are operating across Europe. "We're seeing a recovery in Europe already," says Alcatel's Tilley. "COLT is getting the ball rolling in France and Portugal, and costs are coming down as the same contractors prepare exchanges for different companies. The smaller countries are also beginning to open up."

In the UK Oftel has stepped up its pressure on BT, introducing SLAs (Service Level Agreements) for carriers and fines if BT delays access to exchanges. BT itself is pushing ADSL harder and is lowering the wholesale price. Even the carriers have noticed a change in attitude. "BT has changed significantly. They've finally realised this is an opportunity they have to grasp," says Tilley.

"That's true as far as the wholesale product goes, although I've yet to see their attitude change towards co-location. But we have to focus on the positive side. We delivered DSL to Brighton in ten days recently. That wasn't possible ten months ago."

top