Credit: NASA

Continental Grift

Deutsche Telekom wants to be like Comcast.
What a bad outcome that would be
for the Europeans

In the world of telecommunications, humor is at a premium. When you find laughs, they are most often unintended. That certainly was the case late last month when the Financial Times included a sponsored magazine insert created by Ernst & Young (“Helping Businesses Raise, Invest, Preserve and Optimize Capital”). The cover model of the slick publication was the Deutsche Telekom CFO Thomas Dannenfeldt, staring straight into the photographer’s lens. Dannenfeldt, the cover copy proclaimed, has ideas about “transforming Deutsche Telekom to create a new legacy.”

And here is the joke: the giant incumbent European telecommunications company Dannenfeldt works for brazenly proclaims that benefits would accrue if it were allowed to be more like Comcast in the US: huge, unregulated, and able to charge luxury prices for services that, to consumers, feel more like a utility. And so, pointing to the US high-speed Internet access market as a success, it is urging European regulators to drop the requirement that it share its copper access lines with competitors — a key element of European competition policy that has driven consumer prices down.

Other European incumbent network access companies share this view. They’d love to remove regulatory requirements, consolidate, have greater pricing power, impose charges on services that use their networks, and, in general, be permitted to follow the US model. Because what’s happened in the US, they say, is terrific.

I was in Berlin that week to release a paper responding to the European network operators’ claims. My message to regulators there: Be careful what you wish for. If what you want is greater adoption of high-capacity connections to the Internet and a path to ubiquitous fiber optic lines, don’t look at us. Since the US deregulated high-speed Internet access, we’ve seen a tsunami of consolidation, divided markets, high prices, stalled adoption, and sluggish upgrades — leaving us with no clear path to a universal, future-proof fiber-based infrastructure for tomorrow’s economy. Most of the recent “capital investment” of the cable companies in the U.S. has come in the form of buying set-top boxes that the companies then turn around and rent at high monthly prices to consumers — so high that the boxes themselves are paid off in about a year even though consumers keep paying those monthly amounts. We’re not a good model.

You would not know this from Dannenfeldt’s comments in the paid-for publication inside the FT. He says the problem for Deutsche Telekom is “fragmentation in the market” (translated: he’d like to see many fewer network access players across Europe and be in a position to provide all Europeans with bundled fixed/mobile services) and the “challenge” of OTT services like Skype and Netflix.

Echoing the work of reliable industry analysts, he’d like to be able to charge Europeans and content providers more without necessarily investing in better infrastructure. And he sees network access providers as a “consumer media industry” selling a luxury product.

For Dannenfeldt and other European incumbent network providers, high-capacity connections are just like luxury cars. He says, “You can buy a decent car for €8,000, or you can buy an Audi for €50,000. And there are many people willing to spend the €50,000 because they like Audis… . . If people feel that they are getting more, they pay more.” He contends that this is happening with communications in the US and seems to believe this is a good thing. (He does not point out that we are paying Audi prices for the 2015 version of K-cars.)

Some EU policy makers have been sympathetic to the telecom companies’ yearning for consolidation and higher revenue: The EU’s top digital policy official, Guenther Oettinger, made that clear 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.

But if what European policy makers want is to foster economic growth and reduce inequality, the American model isn’t a great one.

The better answer for Europe? Set an extinction date for the obsolete copper wires now sold by incumbents, provide loan guarantees for companies willing to install wholesale passive fiber lines, ensure that those wholesale facilities are made available to competing providers at reasonable rates, and set the global standard for making basic fiber-optic-plus-WiFi services available to all at a reasonable price.

The result will be enormous investment in fiber by sources of patient capital interested in the long term, steady returns this asset generates, the creation of a large market for European information goods and services, lowered barriers to entry for European entrepreneurs, and reduced inequality. All to the good.

Charging for high-capacity access as if it were a €50,000 Audi, and allowing your communications transport companies to act like media moguls by preferring services with which they have distribution deals, are both really bad ideas. Or, said another way, these are good ideas only from the perspective of Deutsche Telekom and Comcast. Take it from us Americans. Who are certainly not laughing.

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