Towards gigabit networks – a few considerations from the United Kingdom[1]

1: Introduction

Many countries^[2] agree that widely available gigabit-capable networks whether fixed or mobile will be needed and expected to increase competitiveness and productivity^[3]. New telecommunication/ICT networks take a long time to build and expand and if economies are to benefit from gigabit-capable networks, significant investment will be needed.

The following case study draws from the United Kingdom (UK) approach and sets out a few considerations that governments and ICT regulators may want to consider in moving their own economies onto the path of gigabit networks. The structure of the case study is as follows:

• Section 2 examines the investment challenge in gigabit networks;
• Section 3 discusses the UK approach to address these challenges; and
• Section 4 concludes with some considerations for governments and regulators.

2: Developing gigabit networks is commercially risky

Investment in gigabit-capable networks without the right incentives is commercially risky because of:

• Demand risk – While most agree that there are wider benefits to society of gigabit networks, consumers’ willingness to pay for them is still limited. Positive externalities^[4] and the experience good^[5] nature of products using these networks may mean that without intervention, the business case for widespread gigabit-capable networks is likely not commercially profitable.
• Sunk costs with a lack of competitive intensity – A high proportion of the costs of building networks are sunk (i.e., ‘one-off costs’ incurred in assets that cannot be diverted to other uses) and incurred before sales. For an operator with existing assets considering the deployment of a new network, this will make many existing assets obsolete. If costs associated with these assets are not considered, then a regulatory approach that is perceived to expropriate legacy costs has the potential to disincentivise investment by the operator and prospective new entrants in future sunk assets. This disincentive to invest can be compounded where competitive intensity is low because of the high opportunity cost for the operator from not investing in gigabit technologies and still using existing technologies^[6].
• Long pay-back periods – Gigabit networks are long-lived assets; the costs of which investors can expect to recover over a lengthy period. This could be 15 to 20 years, or even longer. Investors need to be able to commit funds with confidence that the regulator will not act inconsistently in a way which would lead to the investor not having the opportunity to recover its costs. However, over such lengthy periods, uncertainty about future market conditions as well as the possibility of regulatory change may mean that investors lack confidence of being able to monetise the assets sufficiently to justify the risks associated with investment in new networks.

3: UK approach to gigabit

The UK Government and Ofcom (the UK Communications regulator) acknowledge the commercial risk associated with developing gigabit-capable networks. But they also recognise that if these risks lead to investment delay, consumer demand will soon outpace the capabilities of the current network and it will take considerable time for providers to catch up. During that time, consumers and businesses would be unable to obtain the services they need and policymakers’ desires to spur economic growth could be thwarted.

As such, there has been a significant push in the United Kingdom to align investors’ incentives with the policy goal to accelerate at-scale gigabit investment, in advance of demand materialising. ^[7] The thrust of the UK approach has however mainly focused at present on full fibre networks. This is a departure from the previous stance of technology neutrality and was made because the United Kingdom is densely populated, affluent and has a strong fixed network endowment. 5G is perceived to be at an earlier stage of development^[8] and in any case, full fibre is seen as a key enabler for 5G.

The United Kingdom has adopted a multi-pronged approach to encourage operators and their investors to build gigabit networks. This includes:

1. Ensuring that the structure of the market is fit-for-purpose to encourage investment;
2. Looking for opportunities to reduce the costs of deploying gigabit networks;
3. Credibly committing to a long-term regulatory strategy to provide certainty to investors; and
4. Embracing geographically differentiated regulatory approaches to support the expansion of gigabit investment whilst committing to a smooth transition from legacy to new networks.

These various elements are described below and set out the UK’s rationale and decisions.

Ensure the structure of the ICT market is fit-for-purpose to encourage investment

In the United Kingdom, the main model of competition since 2005 was one based on network access to the incumbent operator’s network, BT. BT Group, has a vertically integrated structure, that comprises of an upstream infrastructure arm (Openreach) and downstream retail services.^[9] In 2015, there was significant debate that the vertically integrated nature of the company inhibited BT Group’s willingness to invest in full fibre.^[10]

Possible reasons debated were that:

• the long payback period of the investment could have meant that BT Group preferred to invest in shorter term projects to satisfy its shareholders rather than invest in network infrastructure which have payoffs realised over a much longer timeframe.^[11]
• the incentives of BT Group’s management may not have been aligned with those of the organisation as a whole and so may have led to a sub-optimal emphasis on short term returns.^[12]
• Openreach’s position of significant market power (SMP) in many of the markets in which it operates meant that it did not run a strong risk of significantly losing out to other firms in the short term if it chose not to make large investments in its fixed telecoms network because of its revenues/profits from existing services. Furthermore, if various parts of the firm face different levels of competition, there was a suggestion that BT Group’s management may have focused investment on those businesses where they face competition rather than on those where they do not (i.e., like fibre), even though investing in fibre would be commercially viable.

Many in the United Kingdom pointed to the structural changes that had taken place in New Zealand, Australia, and Singapore^[13] and wondered whether the changes there, that had led to significant public sector investment should be considered in the UK. Therefore, Ofcom conducted a review of the structure of the market.^[14]

In 2016, Ofcom concluded that Openreach has a particular role as the custodian of a national asset – on which many consumers will continue to rely on, however successful is investment in alternative networks. It reasoned that the then current structure of Openreach as a business division of a vertically integrated BT creates an inherent risk that important strategic investment decisions are ultimately subject to the views, decision-making powers, and duties of the BT Group Board. Ofcom considered therefore that this may create the risk of an investment outcome which is suboptimal for the United kingdom. Consequently, it advocated that Openreach should be legally separated from BT Group so that it can have operational autonomy to deliver its priorities in the interests of all UK downstream customers.^[15]

Ofcom recognised though that even with legal separation, there was no guarantee that the ‘ladder of investment’ argument^[16] would hold and that downstream competitors would push for major network investment. Given that the costs of rolling out the copper network had already been sunk, Openreach and downstream competitors using Openreach’s network would likely rather exploit these assets for as long as possible, rather than invest in new fibre networks – unless there was sufficient competitive pressure from alternative fibre infrastructure providers. Thus, alongside legal separation of BT, Ofcom also advocated for a strategy to encourage, where practical, the large-scale deployment of new competing fibre networks. This is because, in its view, infrastructure competition plays a greater part in driving network investment.^{[17], [18]}

Look for opportunities to reduce the cost of deploying networks

The largest expense incurred when deploying a network is typically the costs of civil works in laying passive infrastructure like ducts and poles. To reduce the cost and make it quicker and easier for telecommunications providers to roll out new fibre infrastructure, the UK Government implemented new legislation and non-legislative approaches to address barriers to deployment. This included simplifying wayleave agreements, standardising nationwide planning regulations for street works and introducing time-limited tax breaks for fibre investors.^[19]

In addition, because scale economies limit the benefits from duplication of passive infrastructure, the government also promised to review the regulations governing access to road, rail, and utilities infrastructure to further support market entry or expansion by gigabit investors. It committed to review whether the existing ducts, poles and pipes associated with water, sewers and gas could be used on a shared basis to further reduce the cost of deployment.^[20]

At the same time, Ofcom was also exploring options for passive infrastructure sharing to reduce the cost of investing in new networks. It considered that Openreach’s control of the main telecoms network gives it a significant competitive advantage in the deployment of full-fibre networks. Specifically, it can deploy networks more quickly than its rivals by using its existing network. New market entrants face higher costs than Openreach because they have no existing ducts or poles to use and must instead build a new network, which involves incurring high fixed costs. Therefore, to reduce the upfront costs for fibre roll-out, Ofcom proposed that Openreach (as a legally separate entity) should allow all operators, including BT itself to lay fibre using Openreach’s existing passive infrastructure. This, it considered, would encourage competitors to invest in their own fibre networks.^[21]

Moreover, by reducing the upfront costs for new fibre entrants and so increasing the possibility of infrastructure competition, this lessened BT Group’s and Openreach’s opportunity cost from not investing in gigabit technologies and remaining on existing technologies.^[22] Ofcom recognised though that requiring passive infrastructure sharing could affect BT’s ability to recover the costs of its earlier investments. Therefore, to provide certainty to investors, it committed that it would provide a fair opportunity for BT to recover its costs – see discussion in next section.

Besides a consideration of BT sharing its passive infrastructure to reduce the cost of network deployment and increase investment, there was also discussion as to whether there were alternative cost-reducing approaches. Two approaches (also considered by the European Commission in the context of the telecoms framework^[23]) were:

• A ‘wholesale only’ neutral host model. Under this model a wholesale provider which operates passive infrastructure, but has no retail arm, has an incentive to share its infrastructure widely. This provides an opportunity for investment risk to be shared amongst the wholesale provider and access seekers.^[24]
• A co-investment model. Under this model, two companies jointly invest in infrastructure, while competing downstream. This allows companies to share the risk of network deployment. ^[25] In Portugal, Vodafone and the cable operator, NOS, agreed to extend their FTTP networks with each operator taking responsibility for rollout in certain areas but then providing reciprocal access to each other on commercially agreed terms.

These models are not mutually exclusive and can be combined depending on specific circumstances^[26],[27].

Credibly commit to a long-term regulatory strategy to provide certainty to investors

Investment in telecommunication/ICT markets is a multi-round game. For providers to have confidence to invest, consistent and predictable regulation over several years is needed. Ofcom recognised that a credible commitment was required to assure investors (both incumbent and new) that it would not act in an inconsistent manner which would mean investors would not have a fair opportunity to recover their costs.

As such, in 2016^[28], Ofcom set out its strategy for regulating communications for the next ten years. This represented a shift to encouraging large scale deployment of new fibre networks, driving widespread availability of competing services and supporting the rollout of 5G networks. While this regulatory commitment by Ofcom was helpful, the degree of comfort that this was able to supply is inevitably limited because the UK Government is ultimately responsible for setting the overall policy and regulatory framework.

In 2018, the UK Government added further weight to Ofcom’s regulatory intent and published its own strategic review of the United kingdom telecoms market.^[29] This again placed weight on supporting investment and directed Ofcom to adopt this in its regulatory implementation. This acted as a mutually reinforcing commitment mechanism to investors, which was then followed shortly afterwards by Ofcom’s plan for how it would achieve this.^[30]

Ofcom pledged that it would lengthen the period between competition reviews of the market from three years to at least five. The aim of this was to supply some certainty to investors that the regulatory approach would be stable for at least this period. It recognised though that this may still not be sufficient for investors. Therefore, it called upon prospective investors to frame their investment expectations with reference to past regulatory experience. In particular, Ofcom drew attention to its track-record to how it treated earlier rounds of telecoms investment and that it had given Openreach a fair bet on its previous generations of investment.

Specifically, Ofcom noted that the fair bet principle that had been applied to a prior investment cycle provided Openreach with an opportunity to make higher returns when a risky investment is successful to compensate it for the chance a risky investment may fail.^[31] In the 2018 Ofcom plan for full fibre, Ofcom reiterated that it believed that the fair bet principle is relevant and important to support investment and that it would apply the principle to fibre investment. This commitment to the fair bet principle was reiterated by the Chief Executive of Ofcom in 2020 who said “we would aim to allow all companies to achieve a fair return over their whole investment period, allowing for a margin above their cost of capital to reflect the risks….So to be clear, we don’t expect to introduce cost-based prices for fibre services until at least 2031”.^{[32], [33]}

This commitment consistently reiterated as Ofcom leadership has changed, alongside historical evidence of Ofcom’s approach to new investment should assure investors that regulatory expropriation will not happen. Though it is important to note that this is only one part of the pieces of evidence that investors will consider in deciding whether to commit significant capital outlays for gigabit-capable networks.

In broad terms, investors will want to understand, before committing funds, the opportunity to realise the potential upside from the investment to offset the potential downside risk associated with it. To inform this, they will want to know:

1. how legacy networks will be regulated because during the transition between old and new technologies, new gigabit networks will compete with legacy networks, and so regulation of legacy networks could cap the potential upside of new investment;
2. how the regulator will migrate from legacy to new networks and treat legacy assets because investors know that new investment will, over time become legacy investment;
3. And finally, how the regulator intends to meet its regulatory obligations to protect consumers vis-à-vis encouraging investment because this also has the potential to cap the potential upside.

Embrace differentiated regulatory approaches to support widespread gigabit investment and commit to smooth migration from legacy to new networks

To provide clarity to investors on the points above and assure them that they will have an opportunity to earn a fair return, the UK Government and Ofcom made clear that they would adopt differentiated regulatory approaches, to support the expansion of gigabit expansion, and that these would vary depending on the level of current or prospective competition in different geographic areas. The following paragraphs set out the different approaches.^[34]

Deregulate in areas with multiple competing infrastructure providers

Ofcom accepts that there are several areas (mainly city and densely populated areas) which are attractive for investors to build in. It noted that in these areas, the possibility of having multiple fibre investors means there are advantages to being the first. This, it concluded, could lead to a ‘race to invest’. The reason being that the possibility of other fibre investors entering could encourage investment in fibre by legacy networks (e.g., Openreach and others) because if they do not invest, someone else will and they would lose the profits they make from selling legacy products.

In these areas, where there is competition between fibre networks and no operator has significant market power, Ofcom says that it would remove regulation and allow competition between networks to drive good outcomes for consumers in terms of pricing, investment, and innovation.

Adopt anchor pricing in areas where there is the potential for competing infrastructure providers and give clarity on switching off legacy networks

In prospectively competitive areas, where solely one operator (i.e., Openreach) has significant market power, but where there is potential for competing infrastructure operators, Ofcom says that regulation needs to recognise that competing providers will only invest in building their own gigabit networks if this is more attractive than buying legacy or new wholesale services from Openreach. This requires balancing incentivising network investment with the risk that until new networks are built, consumers could face higher retail prices in the short term.

Ofcom’s approach to strike the balance between protection of consumers and incentivising investment in gigabit networks is to use an anchor pricing approach. The anchor pricing approach is a way of setting charge controls when costs are affected by technological change.^[35] A key principle of the anchor pricing approach (previously referred to as the “technology neutral” approach) is that consumers of existing services are not made worse off by the adoption of new technology.^[36]

In applying the anchor pricing approach to fibre roll-out, Ofcom solely set a control on Openreach’s lowest speed legacy products (i.e., those at and below 40 Mbit/s download speed, and 10 Mbit/s upload speed). This control is not cost-based but instead the price of the legacy copper wholesale services is indexed to increase with a measure of inflation (e.g., the Consumer Price Index). This, Ofcom concludes, should allow sufficient margin for BT to invest and allow it to accelerate the depreciation of the copper assets to avoid any stranded legacy assets. In other words, it has made clear to investors that it would adhere to the fair bet principle and allow Openreach to have an opportunity to recover the costs of its legacy assets.

For higher speeds, Ofcom allows pricing flexibility. Therefore, if infrastructure operators can develop and deliver innovative services that consumers are willing to pay for, this should allow BT and other fibre investors to obtain a fair return on those fibre investments and provide sufficient margin to invest.

Ofcom accepts though that investor certainty could be affected if the regulatory approach is not clear on how quickly legacy networks can be switched off and the charge control on copper services is withdrawn. Specifically, Ofcom acknowledges that as Openreach upgrades its network and the number of consumers buying gigabit products also grows, it may want to move consumers from the copper network onto the new fibre network to avoid parallel running costs. Further, Ofcom recognises that if networks are run in parallel, the charge control on copper services and how that affects prices on copper-based end-products will constrain the retail prices on fibre-based products, and so again can impact investor sentiment. Ofcom has therefore agreed that once Openreach has built out to 75 per cent of an exchange area, it can move customers onto the fibre network.^[37] It has further agreed that it would withdraw the copper anchor charge control two years later subject to full coverage being achieved in the exchange area.

Ofcom recognises though that end-consumers could be subject to fluctuating prices during the transition period. Therefore, to strike a balance between protecting end-consumers and encouraging efficient migration to fibre, it has made clear that where Openreach moves customers onto the fibre network and end-consumers still choose to take a lower speed product (i.e. commensurate with the legacy 40 Mbit/s download speed, and 10 Mbit/s upload speed) but it is now over a FTTP line, Openreach can charge a small premium to reflect the superior quality and reliability of the fibre network.^[38]

Ofcom has also announced that it does not expect to implement any cost-based controls for fibre services until at least 2031 and hopes that competition will develop sufficiently, such that all controls can be removed. It has said though that, if in 2031, competition is still not established, it would look to regulate but it would do so in a way that supports investment and competition. Specifically, it has stated that should it be necessary to set cost-based controls in the future, it would honour the fair bet, and look at the investments taken, the risks faced at the time of investment, what the cost of capital was at the time of investment and ensure that the returns earned had sufficiently rewarded those risks.

In setting out its regulatory approach, Ofcom is therefore being transparent with investors on the potential upside they can realise from any investment they make, where they are operating in prospectively competitive areas. The investor community response to these policies has been positive^[39] but it is still early days, as to how this translates into committed fibre investment.

Adopt a RAB approach in areas where competing infrastructure providers is less possible

In areas where Openreach is the only infrastructure provider and material and sustainable competition to Openreach is unlikely to be possible, Ofcom has said that it will adopt a regulatory asset base (RAB) approach.

In concept, the RAB approach is a way to ensure that costs of investment are recovered, alongside an appropriate return on capital. This provides investors with comfort that their investments will not be treated unfairly. The regulator and the regulated firm agree a defined set of outputs and capital expenditure plans before any investment is made.^[40] The costs of achieving these outcomes are then put in the RAB, which is used as the basis for setting regulated price controls for all services. As the costs of the agreed investment are recovered across a wide range of services, the regulated firm can essentially cross-subsidise between different groups of consumers.^[41] The RAB serves as a mechanism to secure investment in cases where it might not otherwise have occurred due to the level of risk facing the regulated firm. If the investment is not as successful as expected (for example, because demand is too low), the regulated firm can still recover the investment costs through higher premiums or cross-subsidies from consumers buying other services.

In the context of the regulation that Ofcom has imposed, it has set a cost-based RAB charge control in areas where competing infrastructure providers is less possible. This allows Openreach to recover the costs of both its existing copper network and its investment in fibre in these areas.^[42] This ensures that Openreach is incentivised to invest in a fibre network in these areas as it has certainty of cost recovery relating to gigabit investment. Further, because costs of investment in these areas can be recovered across a wider range of services and customers, end-consumers should, in principle, be protected against significant price rises. However, it should be noted that the more involved Ofcom is in protecting particular (e.g. vulnerable) customer groups, the more it will need to get into decisions on the exact structure of prices to allow a return on the investment made. This policy is still in its infancy so again, how this balance is struck, in practice, will be important to observe going forward.

Commit to public funding in commercially non-viable areas

The government and Ofcom also recognise that there will be areas of the United Kingdom which are not commercially workable. The UK Government has committed to support fibre roll-out in these areas, with significant levels of public subsidy to meet the policy goal to have at-scale gigabit networks across the United Kingdom.

However, it wants to ensure that public funding is targeted at those parts of the country which are truly non-commercial. The boundary between prospectively competitive areas, areas which are viable for Openreach, and truly non-commercial areas is unclear. Therefore, to avoid an approach which leads operators and investors to take a ‘wait-and-see’ strategy, an ‘outside-in’ approach has been adopted. This approach means that public funding is first directed to the commercially most difficult to reach premises and is run alongside commercial deployment of gigabit investment. This should therefore enable these commercially non-viable premises to receive gigabit-capable connectivity within the same timeframe as commercial areas, with all areas covered by 2033.^[43]

There has been much political debate on this approach as it is very much supply driven. Specifically, it has been argued that if there is no demand in these non-commercial areas, then this may not be an efficient use of public resources. The response to this criticism has been though that if the UK economy is to grow, waiting until demand materialises is too risky and has the potential to widen the gap between ‘the haves and the have-nots’.

4: Considerations for governments and regulators from the UK approach

The UK approach towards gigabit networks has mainly focused on fibre networks because the development of 5G is at an earlier stage of development and because fibre is seen as a key enabler for 5G. The balance between fibre and 5G is influenced by the fact that the United Kingdom is densely populated, affluent and has a strong fixed network endowment. Notwithstanding, much of the thinking behind the approaches adopted could be of relevance for governments and regulators around the world as they progress towards gigabit networks, though countries may choose a different balance between fibre and 5G.

No one can deny that there is an investment challenge in developing gigabit networks. National governments and regulators need to demonstrably be seen as working in tandem, in a mutually reinforcing way to provide prospective investors with certainty of the regulatory and political appetite for investment. Some considerations that may be of relevance are the following:

1. Ensure that the structure of the market is fit-for purpose to foster investment. Broadly two types of market model exist. Each uses different levers to address barriers and create incentives for commercial investment and each has their own advantages and disadvantages:
   1. Competition in the market: These models rely on encouraging competition between operators to drive investment. Competitive models could range from those that look to promote competition at the retail layer only, to those that rely on network competition.
   2. Competition for the market: These models give network operator/s exclusive build and operating rights to specific geographies (e.g., localised franchises) or nationwide (e.g., a national nominated provider). Each area would have a single wholesale network operator who competes for the right to serve a given market.
2. These models are not mutually exclusive. It is possible to combine their various aspects to reflect the differing potential for commercial investment in different parts of the country. Each country should therefore review their own unique situation and judge what is the model of competition needed to deliver gigabit capability in their country. In the United Kingdom, to encourage fibre investment, the focus has been on encouraging new competing gigabit networks, but this has been driven by UK-specific circumstances which can accommodate competing networks. This is also the stance that is being taken in mobile in the United Kingdom, though this could evolve as standalone 5G develops. At present, this approach appears to be spurring investment announcements by companies, but it is still early days, so we will have to wait to see how it works in practice.
3. Look for opportunities to reduce the costs of deploying gigabit networks consistent with the model of competition being pursued. Governments and regulators should work together to address barriers to deployment using legislative and non-legislative approaches. The Connectivity Toolbox, produced by the European Commission, is a possibly helpful resource to draw upon. In the United Kingdom, the combination of government initiatives and regulation to provide access to incumbent’s ducts and poles has helped to mitigate some of the cost hurdles faced by fibre investors. Other approaches that can also be investigated to reduce the risk to gigabit investors are co-investment models on a ‘wholesale only’ neutral host basis or where companies are also competing downstream and the public funding of 5G use cases, to help de-risk business models.
4. Credibly commit to a long-term regulatory strategy to provide certainty to investors. Investment in telecommunication/ICT markets is a multi-round game. For investors and providers to have confidence to invest, governments and regulators need to not just commit to a long-term strategy to provide certainty to investors, but they also need to have demonstrated consistent and predictable regulation over several years. In the United Kingdom, this commitment about fibre investment has been made by both the UK Government and Ofcom to assure investors (both incumbent and new) that they would not act in an inconsistent manner which would mean investors would not have a fair opportunity to recover their costs. Multiple mechanisms have been used to assure investors. These range from public commitments by both the government and the regulator, reiterated public statements about these commitments as the senior leadership of the regulator has changed, drawing investors’ attention to how previous rounds of investment have been treated, producing legally binding statements on how legacy networks will be regulated whilst old and new networks run together, being transparent on how consumers will be protected and clarifying ex-ante, Ofcom’s approach to the fair bet on future investment. Much emphasis has been placed in the United Kingdom on this commitment mechanism to encourage not just BT Group but also other investors to invest in the country. This appears to have elicited a positive response from BT Group and the wider investor community, though it is still too early to say how this will translate into actual investment. A similar commitment will be needed to deliver 5G. The costs of 5G are significant and so there is a role for a clear ex-ante policy and spectrum management strategy in creating conditions that help to support investment and innovation to realise the full benefits of 5G.
5. Embrace differentiated regulatory approaches to support widespread gigabit investment and commit to a clear migration path from legacy to new networks. To support widespread expansion of gigabit networks, governments and regulators need to assure investors that they will have an opportunity to realise a fair return to offset the potential downside risk of investment. The mechanism to achieve this is to adopt different interventions that reflect the competitive conditions in different geographic areas. In the United Kingdom, for fibre investment, this has comprised of a public commitment to not regulate gigabit services where there is competing infrastructure, whether legacy or otherwise until at least 2031; reliance on an anchor pricing approach on a legacy copper service to protect consumers; allowing a price premium on the new fibre network to encourage migration; being clear on the conditions required to allow retirement of legacy networks; a re-iterated commitment to the fair bet should Ofcom need to impose regulatory controls on fibre in 2031; a promise to underwrite Openreach’s fibre investment in areas where competition is unlikely and a commitment to public funding via an ‘outside-in’ strategy. These approaches have only recently been implemented so it will be interesting to see how quickly fibre investment expands across the country in the next couple of years and whether there are any unintended consequences from these different approaches. It is likely that to deliver 5G investment, different interventions will also be needed, whether this is via policy and spectrum management of different bands or via differing approaches to the patchwork of technologies that may be required to deliver 5G capabilities.

To develop economies towards gigabit networks, governments and regulators around the world will need to take into consideration all these different elements. This will be important to provide investors with sufficient certainty of the regulatory regime that is being envisaged and to provide a basis for investors to move forward on their gigabit investment plans.

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1. The author, Dr Lisa Correa (former Principal Economist at Ofcom UK), would like to thank Professor Martin Cave and Pietro Crocioni for helpful comments on an earlier version of this case study. Any remaining errors are solely the author’s responsibility. ↑
2. See for example, the UK Government’s Future Telecoms Infrastructure Review, the European Commission’s policy on Connectivity for a European Gigabit Society ↑
3. See ITU’s studies How broadband, digitization and ICT regulation impact the global economy and The Economic impact of broadband and digitization through the COVID-19 pandemic – Econometric modelling ↑
4. Gigabit networks are likely to be an enabler, with diffuse and large benefits to the economy – see ITU studies at footnote 2. However, subscribers to gigabit networks only consider their own private benefit from gigabit consumption. They do not consider any of these wider external benefits in the consumption decision. Where the price mechanism does not reflect the full social costs and benefits of production and consumption, a divergence can occur which can result in sub-optimal production and consumption ↑
5. If consumers are unable to assess the value of products or services over gigabit networks prior to consumption, without intervention there may be insufficient demand for high-speed services, resulting in lower incentives to invest (lower than the socially optimal level). ↑
6. This is because the incremental returns available to an operator from investment in gigabit networks are reduced by the loss of profit it gets from legacy networks (i.e., the “opportunity cost” to it of losing its legacy revenues). If this loss exceeds the returns available from gigabit, the net returns to the incumbent from investment will be negative. ↑
7. The UK Government has set a target of rolling out gigabit capable networks to 85 per cent of premises across the UK by 2025. See National Infrastructure Strategy ↑
8. At present in the UK, mobile network operators (MNOs) are deploying 5G radio equipment alongside the existing 4G. Standalone 5G which involves the deployment of a new 5G core network is still a little way off. Notwithstanding, Ofcom is at present conducting a review of its future approach to mobile markets. The aim of this to gather views from the industry and then set a strategy for how it will approach mobile markets over the next five to ten years. This could therefore provide some certainty to possible mobile market investors. ↑
9. In 2005, Ofcom found that BT’s vertically integrated structure gave it both the incentive and ability to

   discriminate against competitors. The main manifestation of this concern was that

   competitors faced inequality of access and BT had historically engaged in forms of nonprice discrimination, through delays and inadequacies in wholesale products made available to its competitors. As a result, in September 2005, Ofcom accepted legally binding undertakings from BT under the Enterprise Act 2002. The Undertakings comprised of functional separation and equivalent of inputs. More information on this can be found at Ofcom, A Notice under Section 155(1) of the Enterprise Act 2002, 30 June 2005. ↑

10. Ofcom, Strategic Review of Digital Communications: Discussion document, 16 July 2015. ↑
11. This short termism in investment could potentially be consistent with the behavioural economic theory of hyperbolic discounting (see Strotz, 1956 and Laibson, 1997). Hyperbolic discounting deviates from standard economic theory by implying that consumers discount short term payoffs much more rapidly than longer term payoffs. Consumers prefer smaller sooner rewards rather than waiting for a larger-later reward. Although this theory is described in relation to individual consumer behaviour, it can also be applied to a firm because a firm is comprised of a small number of individuals making important investment decisions. ↑
12. For example, a long-term network investment may have a significant expected payoff but, if the payback period is so long such that decision-makers do not expect to still be working at the firm when the payoff accrues, they may have little incentive to undertake the investment. They may prefer a shorter term one with a lower expected payoff, but one which will accrue during their tenure. ↑
13. In New Zealand, Australia, and Singapore, public funding was committed to deliver the investment needed to deliver upgraded services, but a requirement of the funding was that the network of optical fibre cables needed to be run in a structurally separate manner from the operating service companies’ switches and routers. ↑
14. Ibid 10 – see section 11: Regulating vertically integrated firms. ↑
15. Ofcom, Making communications work for everyone: Initial conclusions from the Strategic Review of Digital

    Communications, February 2016. See Section 6: Strengthening Openreach’s independence. ↑

16. The ladder of investment is a regulatory approach proposed by Professor Martin Cave (2006). The idea in the ladder of investment theory is that new operators will enter the market using the infrastructures of existing operators, and then they will climb up the rungs of the investment ladder over time as regulators either increase the charges to access existing infrastructure or withdraw access obligations. ↑
17. Ofcom, Strategic Review of Digital Communications: Discussion document, 16 July 2015 – see paragraph 6.44. ↑
18. This is also the stance that is being taken in mobile in the UK. End-to-end competition in mobile has been a feature of the UK market from the start. This has driven network investment and the development of new services so that operators can compete for end-consumers. The focus of Ofcom thus far has been on protecting this, for example through the way they have designed spectrum auctions though they have been supportive of infrastructure sharing where this has driven efficiencies without impact on innovation. As the market evolves to 5G there has been debate on whether progress towards 5G would be served by greater consolidation or increased network-sharing agreements in the sector. Specifically, it has been argued that mergers may help to improve the business case for 5G investment whilst network sharing agreements may increase the scale of investment and the speed of 5G rollout. However, they may also reduce the competitive tension between mobile operators, and some argue could also dampen incentives to invest. No over-arching answer can be provided on which effect will prevail as this needs to be assessed on a case-by-case basis. Further as new technologies such as virtualisation and network slicing emerge, this could prompt a rethink of the competitive implications of sharing physical infrastructure. These issues are currently the subject of Ofcom’s review of its future approach to mobile markets. ↑
19. The Government Geospatial Commission is working to develop a National Underground Assets Register (NUAR) covering telecoms, electricity, gas and water networks. For more information – see National Underground Asset Register (NUAR). ↑
20. DCMS, Review of the Access to Infrastructure Regulations call for evidence – government response, November 2021. ↑
21. Ofcom, Statement: Promoting investment and competition in fibre networks – Wholesale Fixed Telecoms Market Review, 2021-26, 18 March 2021 – see Volume 1 ↑
22. Specifically, Ofcom hoped to spur the BT Board and Openreach to focus their investment on fibre investment to avoid the risk of significantly losing their market position to competing new fibre entrants. ↑
23. European Commission, The EU Electronic Communications Code (EECC), 11 December 2018 ↑
24. There has been much debate about the ‘wholesale only’ neutral host model. In the UK, Ofcom took the view that without competition at the wholesale level, a legally separated Openreach may still not have sufficient incentives to invest. Therefore, it also pursued a strategy to encourage new competing fibre networks to compete with Openreach at the wholesale level. ↑
25. This form of shared investment may not raise competition concerns where the companies co-investing are small nascent networks. Clearly though a similar venture that includes an incumbent would need to be scrutinised carefully to ensure that competition was not being undermined. At present, there is much debate in Europe as to how a co-investment model could work in practice and what the role of the regulator ought to be in this space – see CERRE Report, Implementing Co-Investment And Network Sharing, May 2020. ↑
26. In the UK, Openreach as a legally separate entity from BT and CityFibre as a wholesale provider of fibre network with no retail arm could be seen as examples of the ‘wholesale only’ neutral host model. Much debate took place as to whether CityFibre’s terms of access ought to be regulated. Given that Openreach is also working in this space alongside a cable operator, Ofcom considered that this should act for the moment as a sufficient competitive constraint on CityFibre’s terms of access. In the mobile space, a ‘wholesale only’ neutral host model is a common occurrence with commercial companies owning infrastructure that can then host mobile operators to deliver connections where the commercial case on a standalone basis is challenging. ↑
27. In the UK, a co-investment model (as set above) to help deliver gigabit infrastructure has not yet occurred. The nearest example of the model though is the Mobile Shared Rural Network agreement between UK’s mobile operators, EE, O2, Three and Vodafone. This agreement sets out how the four organisations will work together to build new sites that will deliver mobile broadband in areas where there is no existing 4G coverage from any operator. ↑
28. Ofcom, Making communications work for everyone: Initial conclusions from the Strategic Review of Digital

    Communications, February 2016. ↑

29. DCMS, Future Telecoms Infrastructure Review, 23 July 2018. ↑
30. Ofcom, Regulatory certainty to support investment in full-fibre broadband: Ofcom’s approach to future regulation, July 2018. ↑
31. An investment is a “fair bet” if, at the time of investment, expected return is equal to the cost of capital. Hence, ensuring that the fair bet is satisfied may entail earning returns above the cost of capital to compensate for the added downside risks that were faced when the investment was made. In the case of superfast broadband investment, the effect of the fair bet commitment was there was an initial 10-year period of pricing flexibility. This was because Ofcom concluded that given the nature of these investments, Openreach should be given the ability to earn cumulative returns in the range of 12-14 per cent, to compensate it for upfront risks. ↑
32. Dame Melanie Dawes gives a speech to FTTH Council Europe, 3 December 2020 – Full fibre must be a fair bet ↑
33. This statement was followed up with a view that if competition develops sufficiently, there would be no cost-based regulation of fibre services except possibly for vulnerable consumers. ↑
34. Ofcom, Statement: Promoting investment and competition in fibre networks – Wholesale Fixed Telecoms Market Review, 2021-26, 18 March 2021 – see Volume 1, Volume 3 and Volume 4. ↑
35. A detailed description of the principles of anchor product regulation was set out in the Ofcom consultation, ‘Future broadband: policy approach to next generation access’, 26 September 2007, see especially Annex 7. ↑
36. Such investment would only occur if it can deliver existing services at lower cost and/or deliver new, more advanced services than is currently possible with the existing technology. As such, drawing a parallel from the Pareto principle, anchor pricing means that customers of existing services should not be made worse off, but others could be made better off through the newer services. ↑
37. The threshold of 75 per cent of an exchange area was chosen to ensure that Openreach could not target lesser coverage across more exchange areas to the detriment of competing infrastructure investors. This, it felt should strike a balance between fostering investment and safeguarding competition. ↑
38. This could be argued to violate the anchor pricing approach because consumers would now face a small increase in prices and so may argue that they are worse off. However, when the number of customers on legacy products become progressively lower so that average incremental costs per customer rises sharply, then, it may be important to reflect this change in forward-looking costs in prices to encourage efficient migration. In other words, it may be appropriate to allow prices of these lower speed products to rise to encourage customers to migrate. ↑
39. See BT Group response to Ofcom’s Wholesale Fixed Telecoms Market Review 2021-26, Virgin Media responds to Ofcom’s Wholesale Fixed Telecoms Market Review, CityFibre responds to the publication of Ofcom’s Wholesale Fixed Telecoms Market Review. ↑
40. This is a departure from the previous approach to telecommunication/ICT regulation and requires careful monitoring of the investment programme by the regulator to avoid the risk of ‘gold-plating’ the costs of investment. ↑
41. The regulator would need to pay careful attention to how costs are being recovered from consumers and consider whether the price premium required to recover investment costs is proportionate to the benefits of the investment. ↑
42. Ofcom, Promoting competition and investment in fibre networks: Wholesale Fixed Telecoms Market Review 2021-26, Volume 4: Pricing remedies, 18 March 2021. ↑
43. Ibid 28 ↑