Deutsche Telekom Forced to Open VDSL Network to Rivals

The European Commission has endorsed a regulatory measure that requires Europe's largest telecoms group to open up its 3-billion-euro (US$3.9-billion) VDSL network to rivals. Deutsche Telekom is now required to grant its competitors “bit-stream” access to the network, regardless of the technology used (ADSL2, ADSL2+, SDSL, and VDSL). The European Commission has also requested that access prices should either be set sufficiently below Deutsche Telekom's retail prices to prevent any margin squeeze, or calculated by the regulator on a cost basis. Deutsche Telekom has so far constructed its VDSL network in 10 German cities, but previously threatened that it would curb its planned 3 billion-euro investment if its requirements were not met.

Outlook and Implications

Europe Pushes for Complete Telecoms Liberalisation: BnetzA proposed the regulatory measure to the European Commission last week. BnetzA has sought to curb Deutsche Telekom's dominance of the German broadband market, despite the domestic political pressure to do otherwise (see Germany: 17 August 2006: Regulator Warns Deutsche Telekom on Access to VDSL Network). Deutsche Telekom had attempted to lobby the government to let it close its new VDSL network to competition, in order to recoup its hefty investment. The incumbent expected to exploit a loophole by differentiating so-called bit-stream access from other broadband offerings. It claims that its new VDSL network should not be subjected to the same unbundling regulations—which set third-party access at regulated prices—as its legacy xDSL networks. The German government intended to pass a new law that would exempt Deutsche Telekom from having to share the network. However, the European Commission insisted that “bit-stream“ access should not be granted special status, and warned that the German government could face charges of violating the European Community (EC) Treaty if it did not alter its stance (see Germany: 7 July 2006: EU Ups Pressure on German Government over VDSL Broadband Network, 29 June 2006: Deutsche Telekom Rejects EU Demands on VDSL Network Sharing, 18 May 2006: Government Keeps Rivals Off Deutsche Telekom's US$3.9 bil. VDSL Network and 2 September 2005: Deutsche Telekom Unveils US$3.7 bil. Fibre-Optic Network Upgrade Plans).

European Information Society and Media Commissioner Viviane Reding has praised the German regulator for its independence. However, she has also criticised Germany's slow progress with the required open-network measure. Bit-stream access has already been available to alternative telcos in the vast majority of EU member states for a number of years, while the German regulator took more than three years to implement the measure.

BnetzA started to measure up to the EU open-network requirement after Deutsche Telekom was named as a dominant market player in December 2005. The European competition authorities criticised the German incumbent’s stance, saying that the move would lead to the remonopolisation of the German broadband market and stifle broadband growth (see Germany: 9 August 2006: ECTA Warns Deutsche Telekom Against Stifling Broadband Growth).

Deutsche Telekom is likely to face increased pressure from rivals, including MobilCom and the Vodafone/Arcor group, which have been consolidating their positions in the German telecoms market and reinventing their strategies as integrated service operators (see Germany: 21 August 2006: Vodafone to Reinvent German Unit as Integrated Services Operator). As its domestic business in Germany has continued to decline because of increased competition, pricing pressure, and a more stringent regulatory environment, Deutsche Telekom will look to further cost reductions and an aggressive pricing strategy to offset the negative trends. In practice, this will mean a further margin squeeze.

Ruling Sets Precedent: Germany has succeeded in not setting a risky precedent for other EU member states. The debate has had implications across the continent and the rest of the world, with various national regulators attempting to prevent similar demands from their telecoms incumbents. Earlier this month, the French regulator urged all telecoms players in France to get involved in the financing of a similar high-speed fibre link, in order to forestall a potential stalemate that could occur if France Telecom exclusively funded such a network roll-out (see France: 15 August 2006:French Regulator Draws Up Rules for Fibre-Optic Network). In Australia, Telstra is now still willing to roll out a new A$3.1-billion (US$2.3-billion) fibre-optic network for high-speed broadband services, and has been pushing for the regulator to recognise it full costs. However, it did drop the plans earlier this month, as it could not agree on access rules and pricing with the regulator. The Australian incumbent also requested that its new network not be subjected to the same unbundling regulations as the legacy system (see Australia: 14 August 2006: Telstra Still Keen on Fibre-Optic Network Plan and 7 August 2006: Telstra Abandons US$2.3 bil. Fibre-Optic Network Plans). It remains to be seen whether Deutsche Telekom reacts in such an extreme way. Global Insight doubts this would be the case, it as it would have a negative impact on the operator’s overall migration to an IP-based network, and on a future growth strategy based on advanced broadband offerings such as IP TV and converged services.