EU Adopts New Telecom Rules That Anger Incumbents

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BRUSSELS (Dow Jones) The European Commission Thursday unveiled its long expected recommendations for revising telecommunications regulations that would force providers to share their cutting edge broadband infrastructure with rivals and extend regulation to new areas such as text messaging.

The moves anger both powerful incumbents, who think they are too restrictive, and their rival new entrants who believe they are too loose. They go in the opposite direction from the U.S., which has removed obligations on telephone operators to share their networks with rivals.

"We must open the markets when they are dominated by dominant players," EU telecoms commissioner Viviane Reding told a presse conference. "We have seen in all our analysis, where the markets are opened, investments are done and prices go down for consumers."

In the past, she has complained that the incumbents such as Deutsche Telekom and France Telecom control 80% of European broadband connections, while telephone companies account for only 38% of subscribers in the USA.

On Thursday, Reding also suggested that she is thinking of forcing the former state-run monopolies to separate their services and infrastructure into two separate companies. The infrastructure would then be offered to startup rivals on the same terms as the incumbents' services divisions. Reding pointed to the U.K., where the national regulator had put in a similar system with BT Group and it had produced in a boom in broadband. "In the United Kingdom, the regulator has opted" for this solution and had a "good experience," she said. "So why not to look at this good experience and maybe apply it Europe-wide."

She cautioned, however, that she was just considering this idea of structural separation and would only make a formal decision by the end of the year. "I will listen" to feedback from governments and companies, she said.

Reding also cautioned that she wasn't thinking of adapting the model used in the U.S., where the courts broke up incumbent AT&T into seven "Baby Bells," or independent regional operators.

US cable companies now offer strong competition to the Bells.

Rather than break up the E.U. incumbents, they would be required to establish separate divisions for their networks and their services, Reding said.

These recommendations come on top of Reding's previously announced plans to slash the cost of making and receiving mobile calls abroad, on "roaming" services.

In an interview with Dow Jones Newswires Tuesday, Reding said she planned to go ahead July 19 with that proposal, despite stiff industry opposition and operators' offers to cut their roaming rates voluntarily.

Details of Thursday's proposals have been leaked over the past weeks and have already caused consternation among incumbents.

Earlier this month, more than 25 telecom chief executives, representing companies including France Telecom, TeliaSonera and Belgacom, gathered in Brussels for a meeting with Reding. They demanded she loosen regulations, which they say are holding back investment.

They felt their requests were rejected, however, according to Michael Bartholomew, director of The European Telecommunications Network Operators' Association, who organized the Brussels meeting. His association represents 40 incumbent telecom firms in 34 European countries.

"Mrs. Reding is a populist," he complained, arguing that the proposals will prevent his members from investing in next-generation broadband services.

Not all Reding's plans have drawn the disapproval of the large operators. She plans to lift almost all regulation from retail calls, both fixed and mobile, arguing that effective competition exists in these markets.

All told, the EU Commission wants to cut the number of areas it regulates to 11, down from 18.

Such moves instead anger startups trying to compete with the former monopolies.

Steen Clausen, managing director of the Competitive Telecommunications Association, which defends the interests of new entrant operators, said Reding's recommendations will allow the incumbents to intensify "their anticompetitive behavior."

In particular, the incumbents will be allowed to bundle different services to squeeze new entrants to the market, he said.

Clausen said that in several countries Tele2 was undercut when the incumbents bundled fixed-line access with discounted call charges. Tele2 AB could not respond because it had to pay high charges for access to the incumbents' infrastructure, he said.

"We must still level the playing field - and that means regulation," Clause added.

The startups do appreciate how Reding plans to keep controls in place in many wholesale markets for fixed-line services. They also appreciate how new services such as text-messaging will be included.

The net effect, analysts say, will be to increase the regulatory burden on telephone companies.

Morgan Stanley said in a report earlier this week that "regulation, far from being reduced, is simply being more focused on where it hurts." If implemented, the E.U. recommendations will represent a 1% drop in revenues over the next two years for Europe's major telecom companies, the bank estimated.

Reding faces a particular problem with Germany. The German government has moved ahead with a new telecommunications bill that allows Deutsche Telekom to keep rivals off its EUR3 billion broadband network. Under this German draft law, the high-speed optical-fiber network will be exempt from regulation and from any requirement to offer its lines to competitors, at least temporarily.

In the interview, Reding called this proposed law unacceptable and threatened to take the issue to the European Court of Justice. A centralized European regulator should have power to overrule national regulators' decisions, she said.

The telephone companies insist that this tough regulation stifles investment.

The U.S. industry invested EUR34.5 billion in broadband in 2004, compared to EUR32.5 billion in the E.U.,which has more than 100 million more people, according to the European Telecommunications Network Operators' Association.

Reding countered that it is attempts by governments to protect national champions which have prevented faster broadband penetration.

While the German government "tries to impede competition," other governments such as Denmark and the Netherlands have opened their markets and are getting greater investment in broadband, Reding said. The Netherlands invested 0.79% of its gross domestic product in the telecom sector, while Germany invested only 0.27% of its GDP, she said.

Countries such as Denmark, Sweden and the Netherlands, where cable companies have been allowed to offer strong competition to incumbents, "get high marks for broadband, higher than the United States," Reding said.

-By William Echikson, Dow Jones Newswires; +32-2-741-1480; william.echikson@dowjones.com.

(END) Dow Jones Newswires"

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