Vice-President of the European Commission responsible for the Digital Agenda
Investing in digital networks: a bridge to Europe's future
ETNO Financial Times 2011 CEO SUMMIT
Brussels, 3 October 2011
Ladies and Gentlemen,
Now is the right time to take stock and look forward to the future.
When I met with the CEO Roundtable before the summer, Europe's economy was already under strain. Since then we have faced yet more turbulent times and it is clear that we must fight for the economic and political future of Europe. In the current difficult circumstances, I am conscious of the fact that Member States, investors and consumers are focused on short-term priorities.
But to build a strong economy that creates wealth and jobs, we need clear vision and bold decisions. In the short term, we must tackle the economic crisis. In the long term, we must ensure Europe's competitiveness and safeguard our prosperity.
Europe needs to focus efforts in sectors that provide direct sources of growth, now and in the future. It is clear, more than ever, that information and communication technology is one of the sectors with the greatest potential to create jobs, increase productivity growth and boost our competitiveness. Studies show that the productivity leaders in Europe are those countries who have invested in, and made best use of, ICT. Already, the sector contributes half of Europe's productivity growth.
Over just ten years, if we get it right, broadband development could give Europe over one trillion euros in additional economic activity, and create millions of jobs. An increase in broadband penetration of 10 percentage points would increase Europe's annual GDP growth by between 0.9 and 1.5 %. That's why investing in ICT is investing in a competitive future: the Europe of tomorrow is digital. Or to put it another way – can we imagine a prosperous, confident Europe in 2020 that is not digital?
Almost 7 months ago, I asked the industry to join me to ensure that we will do what is necessary to deliver the platform for the digital economy that we need, now more than ever.
On July 13 I heard you loud and clear and I heard the message that the industry wants to be enabled to deliver.
I heard you about new business models. We discovered that there are no legal obstacles to develop such models. And I am sure the industry will develop them with great speed.Where I can I will support new thinking and innovation in this area.
There are plenty of possibilities to work across the business to develop what customers really want.
Also, I heard you on the need to consolidate in some specific circumstances and specialise in others. Both have a role to play in a healthy competitive landscape and we will be happy to look at concrete examples.We need – most of all – innovative services to further develop the market and get new business opportunities.
I am intrigued to find models to work together as public and private service developers and to see what is possible.
I think positive responses are now needed in response to what you told me.
But for all this we need the right infrastructure.
In particular, we need next generation networks to deliver the bandwidth-hungry services and applications that will drive future growth. No-one disputes that need. But there is no agreement on how to foster the deployment of such networks. Unfortunately, we see that, for the time being, telecom companies are hesitant to commit significant funds to fibre roll-out.
Most stakeholders consider that this is largely due to the existence of a competing legacy copper network; and that copper pricing plays a key role for fibre investment decisions. However, telecom operators are divided on the question of how copper access prices affect the incentives for fibre investment.
Alternative operators consider that copper access prices are too high given that the assets are largely depreciated. And they argue that, as a result, incumbents prefer to make good, easy profits on legacy infrastructure rather than invest significant amounts in new fibre networks. Therefore, they believe that lower copper prices would create the incentive for incumbents to go ahead with fibre investment.
On the other hand, incumbents argue that much lower copper access prices would erode broadband retail prices. And, as a result, make it difficult to charge the higher prices for competing fibre products which would be needed to cover the investment costs and risks. In other words, they consider it would be unattractive to invest in a parallel fibre infrastructure directly competing with a cheap copper network, at a time when many consumers do not yet appreciate the major difference, in capacity and service quality, between the two technologies.
I think that there is some truth on both sides. And I also have the impression that, as it stands, it would indeed be difficult to build new fibre networks competing with cheap parallel copper networks.
That is why, in the context of the public consultation launched today, I am very interested to explore possible models which could answer both arguments. Models which could create the right incentives for telecom operators – in particular, incumbents – to invest in next generation networks. .
Such models could for example combine two elements:
First, a general approach that would, in principle and after a certain time, gradually lower the access prices for largely depreciated copper networks.
Second, the possibility of derogating from or adapting this general approach where the incumbents credibly commit to invest in fibre networks in a relevant time frame, while at the same time promoting the switch-off of the old copper networks once the next generation infrastructure is in place. Indeed, I have seen evidence that the gradual switch-off of copper could reduce the cost to such a degree that new fibre investments break even in under 10 years. And thus align the interests of investors and long-term financing providers.
The approach I have just described would lower copper prices in areas where incumbents' legacy copper networks persist for some time without significant fibre investment. But at the same time, it would create an incentive for incumbents to replace old copper networks with new fibre infrastructure. Clients could then be migrated to fibre, and benefit from better services and applications for which higher wholesale and retail prices could justifiably be charged. Such a mechanism should also reassure markets that investment in fibre is safe and profitable.
In addition, I want to explore further the scope for guidance regarding wholesale pricing for next generation networks. In particular, the manner in which the risks related to such infrastructure investment are taken into account in calculating the cost of capital. Risks relative to consumer take-up, competition from other types of network, and execution risk, for example. This is an important building block to ensure an adequate rate of return on fibre investments.
More generally, to facilitate investment, and unlock access to the long term funds better suited to infrastructure investment, the Commission will shortly propose an initiative on project bonds, an initiative which has already got a positive reaction from investors. For the 2014-2020 period, the Commission has proposed a new “Connecting Europe Facility”, of which 9.2 billion euros would be used to support broadband investment and pan-European digital public services. 6.4 billion euros of this would be earmarked for broadband infrastructure, largely in the form of equity, debt or guarantees. The Commission and EIB would also provide credibility, and improve the projects' credit rating by absorbing part of the risk.
In this way EU money would leverage other private and public investment. Indeed the 6.4 billion euros could generate up to 100 billion euros in broadband investment – over one third of the estimated figure needed to meet Digital Agenda targets.
In addition, the new Member States and certain other areas will continue to benefit from Cohesion funds.
Through these initiatives, we will establish a predictable regulatory environment. We will favour competition while recognising the cost of investment. We will make funds available for sharing risks and stretching maturities. And we will make a major contribution to financing the networks needed for a truly digital Europe.
But the future is not only based on fixed broadband: just look at the rocketing use of smartphones and other mobile devices. Wireless is a major component in the policy mix to get every European Digital. Correct spectrum policies will help the roll-out of next generation mobile networks and that is why I am fighting for spectrum management in the EU to be flexible, competitive and coordinated.
Infrastructure is just one strand of the digital agenda. But the different strands this agenda are not isolated - they support and promote each other in a virtuous circle. And so we must achieve all of them together.
That means also ensuring the demand is there to make investments commercially viable. We must ensure that European consumers have access to interesting content – not only entertainment, but also education, eHealth, eGovernment, e-banking, and much more. And equally we must ensure that people are not deterred by a lack of trust in the Internet.
We are taking steps to do all of these things. I want to remove barriers to the digital single market to make it easier and more rewarding to develop content. And I will take steps to improve confidence, including initiatives on data protection, child safety and internet security.
This brings me to the importance of having an open internet. Within the eco-system, we must retain a robust best-efforts internet. And everyone must have access, from the two inventors in their garage innovating and creating, to the end-users who will make use of their new services.
You know my philosophy: the best way to deliver an open internet is through competitive markets. But for competition to work properly, customers need to make informed choices, and to know exactly what service they are getting. And they need to be able to switch operators easily and quickly. New telecoms rules that came into force last May specifically require operators to be transparent about the services they offer and that customers can switch phone operators within one working day while keeping the same number.
I have asked BEREC, where all Member States' telecom regulators are represented, to give me facts and figures on transparency, blocking, throttling and switching.
It is very important that we wait for the facts and figures before acting. And if we do need to act, we must do so in a coordinated way across Europe.
I regret very much that The Netherlands seems to be moving unilaterally on this issue. We must act on the basis of facts, not passion; acting quickly and without reflection can be counterproductive. For example, requiring operators to provide only "full internet" could kill innovative new offers. Even worse, it could mean higher prices for those consumers with more limited needs who were ready to accept a cheaper, limited package.
During the CEO Roundtable process, you told me that you would like to continue working on transparency and best efforts internet. I encourage the industry to come up with initiatives in these two areas, and ideally also traffic management. The format you choose to continue your discussions is up to you. In parallel, I will study the facts and figures that BEREC is due to deliver. We will then be able to take the most appropriate action.
Building on the positive spirit of trust and collaboration created during the CEO Roundtable process, I welcome your proposal to continue work on interoperability between different networks, in terms of quality of service and security features. This will ensure that, in future, there are no difficulties in offering "enhanced services" like videoconferencing, high-quality video, or cloud computing. And I also welcome your intention to continue working on standardised Bitstream products allowing the provision of a higher quality of service.
We need to take policy initiatives which make a substantial, positive difference in the real world. We need to deliver - Europe is under pressure to create smart sustainable growth.
All of you know that I am determined to deliver the Digital Agenda. In the gloom of an economic crisis, we must show our citizens that the future holds a bright promise. If we fail to provide for Europe's future, if we do not now start to invest in cutting-edge broadband, then our children and grandchildren will pay the price. But if we succeed, it will be a concrete achievement to tie our continent together: a decision which, in the future, none will regret.