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Europe’s Internet Handcuffs Show U.S. How Not to Regulate | Commentary

The United States’ future as a world economic leader may hinge on how the next Federal Communications Commission chairman approaches broadband policy.

With Tom Wheeler’s confirmation still pending, Congress should look at the European broadband experience as a cautionary tale, and it should ensure that Wheeler does not plan to follow Europe’s highly prescriptive broadband regulatory approach.

Since the late 1990s, the U.S. and the European Union have taken two very different paths on broadband policy. While the U.S. has focused on infrastructure-based competition, the EU has forced service-based competition through government regulation, with the primary objective of lowering prices.

When EU regulation was conceived in the 1990s, each state had previously run a publicly owned national telecom monopoly. EU-wide regulation aimed to ensure a level playing field across European borders to prevent member states from sheltering their national telecom incumbent from outside competition. This was the main rationale for the EU interventionist regulation at the time, but clearly this was not relevant to the U.S. context back then and is not today.

Contrary to what some have asserted, European broadband regulation is not a panacea. Moreover, Europe’s unbundling regulation — which allows multiple competing operators to offer broadband services simply by buying access to the network at a regulated price — has resulted in a telecommunications investment malaise across the European continent. While service competition can achieve low prices, the services delivered by the multitudes of providers are only as good as the single shared infrastructure, limiting performance.

As with any communications service, investment in infrastructure is needed to provide consumers with the quality services they demand. A decade after unbundling in Europe, per capita investment in telecommunications infrastructure now lags the U.S. by more than 50 percent.

The problem with the European unbundling regulation is that it pitted short-term consumer benefits, such as low prices, against the long-run benefits from capital investment and innovation. Unfortunately, regulators often sacrificed the long-term interest by forcing an infrastructure owner to share its physical wires with competing operators at a cheap rate. Thus, the regulated company never had a strong incentive to invest in new infrastructure technologies — a move that would considerably benefit the competing operators using its infrastructure.

After all, why would one infrastructure provider want to subsidize operations for all of its competitors? And why would those competitors wish to invest to deploy their own wires instead of using the regulated ones? Therefore, regulation curtailed all players’ incentives to invest in new infrastructure technologies.

In contrast, U.S. policies gave the companies that built and maintained the wires control over the broadband Internet delivered through their networks. This gave companies incentive to invest in new technologies and infrastructure, resulting in infrastructure-based competition between broadband providers. Consequently, in 2011 and 2012, more miles of fiber were installed in the U.S. than Europe-wide.

These investments in Internet infrastructure are critically important to the economy as a whole. By encouraging broadband providers to invest more than $1.2 trillion since 1996, the U.S. has grown its labor productivity, a key economic indicator that measures efficiency in producing goods and services. Had the U.S. followed the EU’s slower investment pace in information technology since the late 1990s, U.S. labor productivity would have been 25 percent to 30 percent lower than it is today.

Today, the U.S. leads the world in wired and wireless Internet subscribers, which have access to low prices, superior quality and unparalleled choice across different communications technologies. On the contrary, the relative slowing of European broadband performance has led to some soul-searching. The EU’s top broadband policymaker has indicated a forthcoming reduction of the scope for regulation in key areas.

Yet, ironically, some U.S. policy pundits are unquestioningly advocating the benefits of broadband regulation, while in Europe there is increasing awareness of the serious drawbacks from interventionist regulation — especially the downside to investment. For instance, this is the reason the European Commission is recently considering reworking its telecom reform plans in the area of wholesale access to mobile networks.

Clearly, the cautious U.S. decision to refrain from applying EU-style unbundling on providers has spurred competition and investment in the American broadband market, thus enabling huge advances in Internet technology. Reversing that decision would risk hindering further advancements in all services using broadband infrastructure.

Heading down a path of EU-style, interventionist broadband regulation could severely harm U.S. investments in necessary communications infrastructure, darkening U.S. competitiveness globally. It goes without saying that this path could reverse the momentum of the U.S. broadband market and worsen U.S. economic conditions overall.

If anything, the European telecom investment doldrums should clearly signal to Congress and FCC chairman nominee Wheeler that any country with an established infrastructure-based competition model would take a considerable risk if it jettisoned that model in favor of interventionist broadband regulation.

Martin H. Thelle is a partner and Bruno Basalisco an economist at Copenhagen Economics. They co-authored the new report “Europe Can Catch Up With the US: A Contrast of Two Contrary Broadband Models.”