Its been and interesting week to contrast the discussions and shifts in the broadband markets in the UK and the US.
In the US, the Net Neutrality debate is coming to a head as President Obama sharing his thoughts and with the FCC now considering how they might inject some additional layers of competition in an attempt to use market forces to avoid operators fiddling with customers traffic.
At the same time there are UK reports that BT may be considering the scrapping their Wholesale division in favour of Openreach, reducing the separation between their infrastructure and the services that flow over it.
The timing of the latter reports couldn’t be better timed for the FCC’s deliberations.
In principle the UK has a market which creates a distinction between services and infrastructure; it is true the Europe doesn’t have the scale of problems the US has with net neutrality but our markets are certainly not in rude health.
To contrast the very different attitudes to net neutrality in Europe, its worth remembering that Eircom, the Irish incumbent was proud to advertise traffic fiddling, sorry shaped traffic, as a customer benefit offered at no extra cost to their valued customers!
Casting your mind back to the early dial-up days in the UK, there were innumerable ISP’s; many small, some large, and all with an individual, independent air about them. Remember Nildram? Pipex?
As the broadband market emerged there was significant market consolidation. Its possible, sensible even, to argue that this is a natural phase for any new market as it matures but today we have a very small clutch of vast service providers with a group of tiny, tenacious ISPs hanging onto a low single-digit percentage market share.
The UK’s flavour of net neutrality is less about meddling with content but with the content itself as BT and Sky wrangle over rights to sports with rugby fans currently the big losers.
The question the FCC needs to ask is “Why is this happening in the UK?”
Healthy markets rely on the participants’ abilities to differentiate and innovate. The ADSL broadband market was created such that the only significant differentiators were price and brand, and the only innovation was in the business model – the smartest way to give it away. Unchecked, this can only lead to the “pile it high, sell it cheap” environment with a small number of vast, lean organisations we have in the UK today. This isn’t a criticism of these organisations, either – they have been the most successful in coping with the market pressures.
The move to FttC (BT’s Infinity) has further impacted the scope for competition because its simply not commercially viable to deploy VDSL in competition to the incumbent with any scale. With no physical infrastructure unbundling there are no differentiators left apart from a brand associated with the content you permit over your service. This is the source of the inevitable and harmful battles over sporting rights with fans the biggest losers.
If the FCC are serious about using market forces to regulate net neutrality, they need to consider what the competition will be based on. A non-descript and narrow commodity market will result in a temporary pain relief and a diversion while the new service providers storm, form and then battle for content rights, taking the market full-circle but for more complex and expensive reasons; customers will increasingly become secondary as the competition becomes ever more concentrated and the battles ever more critical to the providers’ survival.
A US market will need to be created based on a set of products which can be combined to create a rich and diverse market, with ample scope for market players to innovate, and with sensible returns possible for all players in the market.
The UK doesn’t currently have this but if the FCC is smart it could start to lead the way if it learns from the UK experiment.
The fall-out for the UK?
If left unchecked, the trend suggests we should expect Sky to get more engaged in fibre infrastructure (they’ve just applied for code powers to dig up the roads) as BT gets more involved in content, and with BT preparing to use its 4G licence expect Vodafone to spend some of their considerable cash pile to get more interested in UK fixed broadband (Talktalk a target, perhaps?).
In other words, the links between content and delivery will grow stronger and the shape of competition more concentrated in the hands of an even smaller group of even bigger players with business models converging on Virgin Media’s (read: Comcast’s) cable model. And as this happens, expect Netflix, Google and Amazon to get more concerned about how their traffic is treated.
The UK’s trajectory is back to earth with a model not unlike the one the US is trying to escape.