Accelerating broadband rollout – initiatives in regional Spain

Peter Gerrand, La Trobe University

Published in the Telecommunications Journal of Australia Vol. 56 Nos. 3 & 4, Spring/Summer 2006, pp. 84-92.

Abstract

This paper draws attention to some useful initiatives taken by regional governments in northern Spain in solving ‘market failure’ in modern telecommunications. Recognizing that the major carriers will not invest in broadband infrastructure in the less populated rural and remote regions, four regional governments have each invested in PPPs (public-private partnerships) that have been rolling out optical fibre and WiMax radio network infrastructure that is made available as a wholesale service to all interested broadband retailers. The intention is generally to sell the government equity once the rollout task is completed. One of the consequences has been to stimulate aggressive marketing by the incumbent Telefónica, which has increased its broadband access speed offerings four-fold since 2004 for basically the same retail price – while raising its wholesale pricing.

The term ‘two zones’ approach is coined to characterise the glaring dichotomy in Australian telecommunications regulation since 1991 for the city versus ‘the bush’, the latter known more formally in the legislation as RRURA: Regional, Rural and Remote Australia. Large amounts of money, totalling A$3.1 billion, were set aside in the 2005 telecommunications to subsidise infrastructure initiatives to compensate for broadband ‘market failure’. The Spanish examples offer a relevant model by which the Australian Government could invest revenues from its Communications Fund.

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The two regulatory zones

It has recently become common amongst Australian economists to refer to Australia as having two economies – the high-growth resources sector dominant in Western Australia, and the lower-growth services and manufacturing sectors, dominant in the other states [1]. While these two ‘economies’ are highly meshed, the metaphor is useful in explaining the boom in employment, remuneration, property values and population growth in minerals-rich Western Australia since December 2002, in contrast with the weaker performance in the rest of Australia.

By analogy one can coin the metaphor of Australia having two regulatory zones for telecommunications: the cities versus the bush, urban versus rural Australia. After all, the five waves of federal telecommunications legislation since 1989, together with the accompanying and subsequent federal funding initiatives and major reviews, have all treated ‘the bush’ – now described formally as RRURA: i.e. Regional, Rural and Remote Australia – as a special case.

Market failure is expected and generously compensated for in RRURA – e.g. the A$350M allocated from the Telstra partial privatisations of 1997 and 1999 under the Networking The Nation banner to fund networking initiatives by not-for-profit organizations in RRURA, and another $40M dedicated to the lowly populated island state of Tasmania, By contrast market failure is generally disbelieved, ignored and rarely tackled in metropolitan Australia. A rare and recent exception has been the extension of HiBIS (Higher Bandwidth Incentive Scheme) broadband incentives to Internet Service Providers, originally available only for new broadband services in RRURA alone, to include the outer metropolitan suburbs. This followed vigorous campaigning by local government, and disappointing take-up of HiBIS incentives in RRURA other than by Telstra.

A recent column by the author in this Journal [2] drew attention to the curious limitations of the Telecommunications Legislation Amendment (Future Reviews and Other Measures) Act 2005. This Act stipulates triennial, independent reviews of the adequacy of telecommunications – an admirable goal – but only in RRURA. Why not review the inadequacies arising in telecommunications across the whole of Australia?

This Act allocates substantial funds ($1.1 billion plus the ongoing income from $2 billion) to enable the Commonwealth to solve the telecommunications inadequacies identified by the independent committee – but again, for RRURA alone.

The two-zone regulatory model is of course the result of traditionally vigorous lobbying by the parliamentary representatives of the RRURA electorates – and, in the urban electorates, complacency or a credulous belief in the equitable benefits of market forces by their federal representatives, most of whom have rarely intervened in legislative debate to seek to correct for potential market failures within their own electoral boundaries.

The lobbying by rural politicians over every new wave of legislation clearly reflects the concerns of constituents having long memories of slow catch-up of parity with city residents in enjoying basic amenities such as modern telephony, Internet and broadcasting services. The mystery to me is why metropolitan residents put up with their own suburban ‘black spots’ – whether lack of cable modem rollout in the mid 1990s, or lack of high speed broadband access in the 2000s – without lobbying their parliamentary representatives more actively. But that seems an ongoing feature of Australian social history.

It is instructive therefore to examine how other developed countries deal with market failure in telecommunications, usually associated with the unpromising revenues of their lowly populated zones. This paper will describe a couple of interesting recent initiatives in regional Spain.

Spain’s relevant demographics versus Australia’s

Spain’s current population of 44.4 million is more than twice Australia’s 20.6 million, but lives within one-fifteenth of Australia’s land mass area. Each country has only 5 or 6 cities exceeding one million in population, but whereas Spain’s largest five largest cities accommodate 36% of its total population, 62% of Australia’s is squeezed into its top five metropolises. Spain has ten times as many regional towns and cities with populations between 20,000 and 100,000 – over 240, compared to Australia’s 24. [3] In principle, given Spain’s higher density urban living pattern (apartments being the norm), this demographic should advantage the provision of broadband access by DSL technologies.

While Spain has deserts and arid wastelands, its arable land accounts for 27% compared to Australia’s mere 6%. Thus while both countries have suffered a long term trend of internal migration from impoverished rural areas to the major industrial cities, Spain’s agricultural workforce remains at 5.3% versus Australia’s 3.6% of its total workforce. [4]

Average life expectancy from birth is close to identical (79.7 years in Spain, 80.5 in Australia) and literacy rates are similar (98% versus 99%).

In year 2004 Spain had 45 fixed telephone lines and 95 mobiles per hundred citizens, compared to Australia’s 58 and 82 respectively: i.e. a greater dependency on mobile phones in Spain. On year 2005 figures, Spain’s overall Internet penetration of 86% of its population was much higher than Australia’s 71%. [4]

In both countries telecommunications sales and profits are dominated by the incumbent carrier: Telefónica and Telstra respectively. In 2006 Telefónica’s share of the Spanish total broadband market has risen to 56% of the retail market and a further 15% via its wholesale ULL product [4].

Figure 1 - The 17 autonomous regions of Spain, shown with their Spanish names 
(except for Euskadi, the Basque name for the Autonomous Community of the Basque Country).

Figure 1 – The 17 autonomous regions of Spain.
(‘Basque’ is short for the Autonomous Community of the Basque Country, known as Euskadi in the Basque language).

Note: Ceuta and Melilla, enclaves on the coast of Morocco, have the status of autonomous Spanish cities. The capital ‘C.’ stands for Autonomous Community, distinguishing the administrative regions of Madrid and Valencia from their capital cities, which share the same names.

Broadband comparisons

In December 2003 both countries were low in the OECD Broadband rankings, but Spain (at 17th) with 5.4% penetration was significantly ahead of Australia (at 20th) with 3.5%. In both cases DSL, using the incumbent’s copper lines, was the dominant delivery technology, and largely confined to urban exchange areas. There was little commercial motivation for the incumbents to extend DSL or other terrestrial broadband technologies to lowly populated townships, let alone more remote dwellings.

In the 2000-2003 era State Governments in Australia were tackling the failure of market forces by using the leverage of whole-of-contracts to fund carriers to provide modest broadband access (generally 256 Kbps access) to regional schools, police stations, municipal libraries and other public agencies. Higher rates of broadband access, generally 2 Mbps, were specified for metropolitan high schools and other urban agencies.

These whole-of-government contracts were generally designed to provide significant overall cost savings to the State governments. They cross-subsidised the regional and rural broadband infrastructure, without requiring any greater total governmental outlay on telecommunications spending.

In Spain, the national government used its own and some EU funds to launch its ‘Internet in schools’ program in April 2002 to provide nearly 9,000 public primary schools with a 256Kb/s basic broadband service and about 3,500 public high schools with a 2Mb/s service by the end of 2005. The project did more than provide broadband access at each school: it installed a Local Area Network with multimedia-ready computers connected to the Internet and provided free software to create and edit multimedia content.

Spain is divided administratively into 17 ‘autonomous communities’, each with its own regional government, as shown in Figure 1. Since 2001 some of the northern regional governments, in areas traditionally associated with entrepreneurship, became concerned about the social and economic implications of poor levels of Internet and telephone communications in their rural regions. At least four of these, the Basque Government, the Generalitat of Catalonia, and the Governments of Navarre and La Rioja, took bold, independent initiatives with public-private partnerships to accelerate the rollout of broadband. These solutions have relevance to solving the dismal situation of broadband rollout in rural and regional Australia.

The Basque carrier initiative Euskaltel

In the 1990s the Basque Government, which governs the region known as Euskadi (see Figure 1), was very concerned at the demise of its traditional shipbuilding and steel-making industries (centred in Bilbao). It took action to invest in new ICT infrastructure to support new ICT-enabled industries. Amongst many major initiatives, it successfully bid to host the new European Software Institute (established 1993 near Bilbao), and in 1997 it created a public carrier Euskaltel “to provide reliable infrastructures for the Information Society” [6]. The successful bidding for the new Guggenheim Museum in Bilbao, opened in October 1997, was an independent initiative by the mayor of Bilbao, but with the same motivation: the transformation of the local economy from heavy industries to new industries, in this case tourism.

Euskaltel is a PPP (public-private partnership) between the Basque Government and a consortium that includes private banks, Telecom Italia and Basque and other Spanish telecommunications groups. It provides ‘triple play’ offerings of high-speed data, voice and television over optical fibre and cable, as well as mobile voice, throughout the hilly and mountainous terrain administered by the Basque Government.

Euskaltel claims to have won 25% of the total telecommunication revenues in its territory in 2005, with 45% of fixed telephone subscriptions, 44% of broadband Internet accesses, 30% of mobile telephone users, and 30% of digital television subscribers. [7]

Euskaltel is currently investing €1,200M in rolling out a new generation optical fibre network to connect all its population centres. Euskaltel claims that at €600 per inhabitant, it is spending more on telecommunications infrastructure per capita than any other carrier in Spain. [7] Euskaltel has invested €10,000M in public interest projects such as connecting remote villages and providing telemedical support for elderly and chronically ill patients. [6]

The Euskaltel initiative has clearly been a major stimulus to competition by Telefónica to extend high-speed broadband in Euskadi.

Navarre and La Rioja’s rural broadband carriers

The neighbouring Pyrenean regional government of Navarre (capital Pamplona) set up a broadband carrier Retena, on a similar PPP model to Euskaltel and with a similar objective of solving the market’s failure to deliver affordable rural broadband. The Navarrese government’s €8.73 million broadband infrastructure program aimed to deliver broadband access, between 512Kbps and 4Mbps, via a new network to cover 75,000 residents in 886 rural communities. The cost of connection, installation, equipment and maintenance was free during a promotional period, which ran until 31 October 2005. [5]

The adjacent Community of La Rioja, much more famous for its red wine than its telecommunication services, set up a carrier Reterioja on a similar PPP model. Serving relatively small populations, neither Retena nor Reterioja were commercially successful. They merged, and were eventually sold in November 2005 to Telefónica’s US-owned major competitor Ono – buying the fixed network, its 42,000 customers and a debt of €2,200M – and France Telecom, which bought its mobile network business.

As examples of regional governments stepping in to fund key telecommunications infrastructure unobtainable through the operation of market forces, there is an analogy here to the Queensland Government’s initiative in 2001 to fund Reefnet, a 1,803 km optical fibre trunk cable connecting Brisbane and Cairns in competition to Telstra’s hitherto monopoly infrastructure on that route, to provide competition in wholesale infrastructure; and later selling Reefnet to Singtel Optus, Telstra’s largest competitor.

Fig.2 jpg

Figure 2 –Plan for the Catalan Rural Broadband Network. 17 municipalities were connected by optical fibre in 2005, and a further 50 are to be connected in 2006. [9]

The Catalan infrastructure rollout

Catalonia in northeast Spain (see Figure 1) has a population of close to 7 million – similar to that of New South Wales. Both Catalonia and NSW are dominated by their capital cities, Barcelona and Sydney: about 4 million live in each greater metropolitan area. For the past century both Catalonia and NSW have faced challenges in extending modern telecommunications cost-effectively to their sparsely populated hinterlands.

In 2004 the Generalitat (Catalan Government) allocated €45 million to a Digitalisation Program aimed to have 90% of Catalan companies with more than 10 workers using ICT in their operations by the end of that year.[5] The plan met with only moderate success, largely it was believed because of lack of affordable broadband: by the end of of 2004 only 50% of the regional towns had any broadband access to the Internet.

In March 2005 the Generalitat took action to provide affordable 2 Mbps broadband access to 100% of Catalan dwellings, including remote dwellings in the Pyrenees; and affordable 10 Mbps access to 80%. [5] It committed funding of a further €526 million in investments over four years in ICT infrastructure development in the region, including 60% of a PPP that is rolling out broadband network infrastructure throughout Catalonia, using an optical fibre backbone (see Figure 2) and WiMax wireless access. This infrastructure carrier will have a purely wholesale role, making its capacity available to all resellers at the same rates. Remarkably all the elected Catalan political parties supported this pragmatic solution. [7] The ideological belief in the power of the market alone to provide satisfactory national solutions has not penetrated so deeply in non-English speaking countries.

Responses from the incumbent

The Spanish incumbent responded aggressively to new competitors in its national broadband market. Telefónica doubled customers’ ADSL speeds free of charge at the end of 2004 and again in July 2005. The Basic ADSL user bandwidth was increased to 1Mb/s downstream and 300Kb/s upstream, the Advanced service to 4Mb/s and the Premium service to 8Mb/s. In offering these speeds, Telefónica was a year ahead of Telstra – who also buys DSLAM equipment from European vendors.

A marketing report by Paul Budde Communications observes that:
‘Between July and October 2005 Telefónica doubled the speed of its ADSL connections without increasing prices, after modifications of the Reference Unbundling Offer (RUO) to adapt the wholesale offer. Yet new entrants will be able to have access to Telefónica’s new ADSL2+ infrastructure following a regulatory decision in May 2006.’ [5]

In making these competition-stimulating decisions, the Spanish regulator CMT appears to be well ahead of Australia’s ACCC. And the welcome marketing tactic of doubling ADSL speed without increasing prices was instigated in Australia by niche competitor iiNet in late 2005, and not yet by incumbent Telstra.

The Paul Budde marketing report continues:
‘In February 2006, Telefónica was charged by the European Commission (EC) for abusing its dominant position in the Spanish broadband market. The Commission’s anti-trust investigation found that retail broadband prices in Spain are significantly higher than the EU average, with Telefónica accused of undermining competition by charging wholesale prices so close to retail prices that alternative providers are unable to mount a significant challenge to the incumbent. It also reported that the country was falling behind the rest of the EU in the construction of alternative broadband infrastructure, which further cemented Telefónica’s dominant position.’ [5]

Seasoned observers will note some similarities with the Australian scene.

Conclusions

As conditions exacted to win Senate support of the sale, in three tranches, of its equity in Telstra in 1997, 1999 and (optimistically) 2006, the Australian Government has underscored a ‘two zones’ policy approach to Australian telecommunications by setting aside large funds for funding rural telecommunications infrastructure and services. The latest such commitment is the Communications Fund, whose A$2 billion will generate the income to fund new broadband infrastructure in RRURA (regional, rural and remote Australia). All but $50 million of the complementary $1.1 billion Connect Australia fund is dedicated to initiatives in RRURA.

Both the Queensland Reefnet project and the Spanish regional broadband initiatives in Catalonia, the Basque Country (Euskadi), Navarre and La Rioja provide useful examples of how the Australian Government might get maximum economic and social returns from its use of the Communications Fund: co-invest in a suitable consortium to implement a wholesale-only network business that will roll out broadband infrastructure nationally across those low-population areas not yet adequately serviced by the commercial carriers. And then sell off the government equity in that wholesale business when it has completed its rollout.

To achieve the economic goals of Connect Australia, the Australian Government may need to enforce the pricing and location of suitable network interconnect points for the new wholesale network with Telstra’s fixed network, analogous to the 1991 Interconnect Regime that permitted the introduction of infrastructure competition in the Australian market – but with up-to-date technology solutions for interconnection.

References

[1] Victorian Department of Treasury and Finance Discussion Paper: A Tale of Two Economies: the regional impact of Australia’s resource boom, May 2006, at http://www.dtf.vic.gov.au/
[2] Gerrand, P., “Blues with Black Spots”, TJA Vol.56 No. 1, pp. 34-35.
[3] Wikipedia entries for Spain and Australia
[4] CIA: The World Fact Book at https://www.cia.gov/cia/publications/factbook/geos/pg.html
[5] Paul Budde Communication market report: Spain – Broadband Market – Overview, Statistics & Forecasts, 2006, purchased from : www.budde.com.au
[6] Alonso, A. & Arzoz, I.: Basque Cyberculture: from Digital Euskadi to CyberEuskalherria, Centre for Basque Studies, University of Nevada (Reno), USA, 2003, pp.39 to 41.
[7] Euskaltel website (in Spanish and Basque only), http://www.euskaltel.es
[8] Ferran Grau, O. (Subsecretary for Telecommunications, Generalitat de Catalunya), 2005. Private communication to the author, 20 September 2005
[9] Generalitat de Catalunya, L’Estratègia per la Societat de la Informació [Strategy for the Information Society], internal document, 2005

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