Why Europe Should Avoid The Mistakes of US Internet Access Policy

Over the last few years, policy makers in the EU have elevated the digital agenda to the highest tier of regional objectives. The implementation of a Digital Single Market is one of the European Commission’s top ten priorities -- including reforms of telecommunications law and the promotion of technology start-ups. This strategy is focused on integrating the EU’s fractured markets for digital products and services, facilitating increased infrastructure in- vestment, and catalyzing entrepreneurship so as to reverse Europe’s lagging performance in the global IT sector.

To reach these goals, EU policy makers have looked at the results in the US high-speed Internet access market to find insights and alternative regulatory approaches. Over the last fifteen years, the US has taken a markedly different approach to Europe in high-speed Internet access policy. Some industry analysts have praised American high-speed Internet access policy as highly attractive and even argued that Europe should adopt the American model of consolidation, less competition, and higher revenue. This view is shared and promoted by many of Europe’s largest telecommunications companies.

The EU’s top digital policy official, Guenther Oettinger, echoed these ideas in a 2014 speech: „So far, we have ensured that consumers benefit from the liberalisation of telecoms markets. From now on our actions must be more geared more toward allowing companies to make fair profits.“ Proponents argue that the American model will strengthen European network operators, drive infrastructure investment, and improve Europe’s competitive position in the global digital economy across market segments.

The public interest benefits of this thesis are based largely wishful thinking. Market data and analysis do not support these conclusions. On the contrary, the data demonstrate systemic problems in the US market for high speed In- ternet access. It would be a serious mistake for the EU to move towards the American model.

Our message to European policy-makers is a simple one: “be careful what you wish for.” The high-speed Internet access policy model that the US government chose 15 years ago aban- doned shared infrastructure competition to focus on competition between different modes of access -- fiber, copper, cable, and wireless.

The theory was that this type of competition would serve consumers, especially when combined with price deregulation and a permissive attitude towards mergers and consolidation. Instead, this model has delivered a small number of very lucrative telecommunications networks that largely do not compete with one another. For the country as a whole, the gamble has not paid off. It turns out that where consolidation is possible, competition is impossible. These policies have terminated competitive pressure, left consumers paying high prices in monopoly and duopoly markets, depressed adoption rates, and offered no clear path to a universal, future-proof fiber-based infrastructure for tomorrow’s economy.

This policy brief offers a summary analysis of data from the US and EU high-speed Internet access markets to highlight the relationship between policy choices and market outcomes. Our purpose is to debunk the mythology about the robust success of American high-speed Internet access policy and to support clear-eyed decisions in Brussels that will foster a ro- bust Digital Single Market. Far from reversing course and following the US down the road to divided markets, high prices, and sluggish upgrades, the EU has the opportunity to continue promoting the competitive market framework that has served European consumers well.

The goal of policy in this arena, after all, is not investment for its own sake but, rather, in- vestment within the context of a competitive market that prompts the delivery of better ser- vices and spurs greater adoption. Most importantly, adoption should be the primary objecti- ve, because that is what drives widespread economic activity. But without the lower prices for better services that competition will bring, adoption will not increase. This competitive framework also has the virtue of better promoting the creation of new digital businesses and thus supporting European innovation.

1. Over the past 15 years, the US and the EU have pursued remarkably different high-speed Internet access competition policies. The results have not been favorable for American con- sumers. The US market is a duopoly at best for most consumers and competitive pressures all but disappear for high-capacity connectivity. The future market for advanced digital services is a lightly regulated monopoly for most households.
2. The policy-relevant comparisons between the US and EU high-speed Internet access mar- kets are often misunderstood and incorrectly interpreted. Comparative capital investments in telecommunications networks in the US and EU stand at similar levels. The proportion of connections in high speed tiers is also similar. It is on price where the US and the EU have diverged -- and Europe, where consumers pay far lower prices for higher-speed tiers, has the advantage.
3. Americans pay higher prices than Europeans for similar high-speed Internet access pro- ducts, and these differences are growing at an increasing rate over time. The result is that America has gotten stuck on a plateau of adoption, meaning that there is downward pressure on the adoption of advanced digital services among low- and middle-income communities that are an important catalyst of economic growth. Affordability and adoption should be the most important metrics for policy-makers.
4. Although it is often claimed that deregulation in the US high-speed Internet access market caused increased investment in communications infrastructure, market data do not support this claim. The most successful network operators in the US market have reduced capital expenditures (as a percentage of their ever-increasing revenues) in the years since deregulation. Rather, it is consumer demand for high-bandwidth content and services that is highly correlated with investment and increased speed in the access tiers offered by ISPs. Where it exists in the US, competition has also driven increased investment -- or, at least, promises of future increased investment.
5. Consolidation among access networks in the US high-speed Internet access market has led to significant market distortions and consumer harms, including divided markets, discri- minatory pricing, and interconnection points that are highly congested due to commercial disagreements. Similar market forces in the EU are predictive of similar outcomes.
6. EU policy designed to strengthen telecommunications network operators against America’s market-dominant content providers (such as a soft Net Neutrality rule) may deliver revenues to existing European network owners. But these policies will likely have the counter-produc- tive effect of further weakening the EU’s own marketplace for digital products and services. This tension at the center of Europe’s digital policy agenda has not been addressed.
    

European high-speed Internet access policy has long benefited from the recognition that ad- vanced digital networks and the markets they support are not merely commercial inputs in the regional economy. They are the crucial infrastructures that support modern societies and combine the values of public goods and commercial value creation. The policy framework that seeks to support and increase these assets must therefore aim to balance the interests of what is best for the industries in this market and what is best for the public and the future of the overall economy.

This commitment to both public and private sector goals was abandoned in American high- speed Internet access policy for a decade. The results have been disappointing. They have produced a market structure that will not achieve optimal results for this essential infrastruc- ture -- leaving high prices and no clear path to fiber optic last-mile networks for most of the country.

The lesson for Europe is that consolidated scale in networks without regulatory oversight and reductions in competitive pressure are great for incumbent network owners, but that these policies do not necessarily support the goals of society.US policy makers are now recognizing these problems, but the course they chose years ago will be very difficult to reverse. Europe stands at an important crossroads for its Digital Agenda. It is not too late to learn from the mistakes of the US and turn those lessons into success in the EU. Multi-purpose, shared, future-proof infrastructure remains the key to successful telecommunications policy. These competition policies should be bolstered and paired with strong Net Neutrality and inter- connection requirements. The package of proposals to foster investment in next-generation networks should focus on adoption goals and combine incentives with subsidies to cover the gap between what private capital will invest and what is required for robust, ubiquitous de- ployment. Europe should build on its successful policy foundation and avoid the temptation of false promises drawn--often misleadingly--from the US example.