European telecoms. The broader art of deregulation

Surprisingly, Europe's coming leader in broadband is France

WHEN it comes to promoting vigorous free-market competition, France does not spring to mind. Yet in broadband telecoms, at least, French consumers enjoy one of the most competitive markets in Europe. A new report from Ovum, a consultancy, calls France's performance “stellar” and predicts that it will soon overtake Germany as the European country with the most broadband-enabled telephone lines.

The champion of France's broadband boom is Iliad, a young telecoms firm that offers some of the most advanced services in Europe. For a mere €30 ($37) a month, Iliad's service, sold under the (not entirely accurate) “Free” brand, provides high-speed internet access, digital television and free nationwide phone calls. This is less than half the price of a similar bundle elsewhere in Europe - in the few countries where it is even available. No wonder Iliad has become France's second-largest broadband-internet provider, having signed up 768,000 customers since launching its “triple-play” combination in October 2002.

Iliad's success owes much to Autorite de Regulation des Telecommunications (ART), France's telecoms regulator. ART has been getting tough with France Telecom, the dominant, partly state-owned phone company. Three years ago, ART forced the incumbent to allow its rivals to use the “local loop ” - -copper wires that run from telephone exchanges to homes. ART insisted that this “unbundling” happen at some of the lowest prices in Europe.

France had the highest rate of broadband growth in Europe last year. It has the second-largest number of unbundled local loops in Europe and, proportionately, one of the highest. Unbundled loops free rival telephone firms from the grip of the incumbent. New entrants, such as Iliad, connect the lines directly to their own equipment, inside local exchanges.

This takes time and money: two years and over €100m in Iliad's case. But then a firm can provide TV, internet and telephone services to its customers over an ordinary phone line - which its rivals cannot do. Indeed, Iliad's reputation now precedes it. Under half of its customers use unbundled lines: the rest were attracted to the firm by its record of innovation.

Some industry insiders mutter that ART's intervention unfairly favours new entrants. Lower prices for the local loop may discourage the development of alternatives to the phone network. Why build a competing infrastructure when you can hire the existing one on favourable terms? Yet the folks at ART seem pleased with themselves. Consumers are happy too.

The clement regulatory environment has allowed Iliad to develop a nifty vertically-integrated business model. Iliad designs its own set-top boxes, runs its own optical network around France and has even built the kit that sits in the local exchanges. In the age of outsourcing, this do-it-yourself approach may seem untrendy but it lets the firm save money and cut prices for consumers, says Olivier Rosenfeld, Iliad's finance chief. Amazingly, in the midst of a land grab for customers, Iliad is already making money, turning a €34m profit on revenues of €293m in 2003.

So successful has been France's regulatory intervention that other regulators are now following suit - at least in Europe. According to the Paris-based OECD, prices for unbundling have fallen in ten European countries since 2002, in some cases even making French levels now look relatively pricey. (In America, unbundling has become quite controversial. State regulators have fought local phone companies to encourage local-loop unbundling - but with little success. The Federal Communications Commission has, as ever, been split on the matter.) In Britain, once in the vanguard of telecoms deregulation, high prices meant that only 8,000 local loops (out of 23m) were unbundled at the end of 2003. In May, pressured by regulators, BT, the incumbent, said it would cut prices for unbundled loops by up to 70%, moving in line with the European average. France's telecoms market, like its trains, seems to have overtaken Britain's.

Surprisingly, Europe's coming leader in broadband is France.

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