Sean SpeerWe’re following Europe’s broadband path even as Europe confronts its challenges. Andrea Renda and Sean Speer, in the Financial Post, argue that Canada should learn from Europe's lessons on telecom regulation.

by Andrea Renda and Sean Speer, August 25, 2016

Ottawa has spent the summer consulting on a new Innovation Agenda with a focus on entrepreneurship, scientific research, the scaling of new ideas and the digital infrastructure needed to sustain it all.

New research published by the Macdonald-Laurier Institute should help: It offers a cautionary lesson from Europe about how not to support investment in digital networks. Europe’s combination of state-imposed mandates and top-down regulations has contributed to underinvestment and poor network quality.

Broadband infrastructure has become a driver of innovation, digital adoption and economic growth. Everything from consumer products to high-tech business processes to medical research rely upon a digital foundation. It’s no surprise that governments have experimented with different policies to encourage broadband investment and deployment.

Sometimes these policies can conflict with other governmental priorities such as price competition, promoting entry of new players in the market and the role of public versus private capital expenditures. The risk is that a singular focus on competition at any cost can actually carry significant costs.

The figures speak for themselves. U.S. investment in telecommunications infrastructure more than doubled European investment in 2013.

Regulators should keep in mind that a fragmented market structure doesn’t always lead to more dynamic competition and that competition is a means rather than an end. Herein lies the lesson from Europe for Canadian policy-makers.

European broadband policy has been marked by “access-based competition,” whereby regulators mandate that incumbent firms grant upstart competitors access to their broadband networks. The assumption was that mandated access to incumbent networks would lower the barrier to entry and create the conditions for new competitors to grow and eventually invest in their own broadband infrastructure.

A wide body of research shows that this so-called “ladder of investment” theory failed in practice. New entrants never climbed the last rung of the ladder to invest in their own networks and incumbents responded by cutting back on their broadband investment. Europeans got marginally lower prices, but in exchange for considerably less relative investment in broadband. It’s not a good trade-off, especially since broadband is such a crucial enabling technology for the broader economy.

The figures speak for themselves. U.S. investment in telecommunications infrastructure more than doubled European investment in 2013. Fibre-to-the-premise coverage is now double in the U.S. and overall Next-Generation Access coverage reaches 82 per cent in the U.S. versus 54 per cent in Europe.

As the European Commission’s then commissioner for information society stated bluntly in 2013: “Without the infrastructure to compete, we aren’t going anywhere — in any sector. We hurt consumers, we hurt the economy, we hurt our strategic future if we do not act.” Europe is now playing catch up in the global race for ultra-fast broadband. But past policy failures has it starting from a position of weakness. A recent report by Viavi, a firm specialized in network testing, confirmed that North America is home to nearly two-thirds of announced gigabit broadband deployments, while Europe lags behind with less than a quarter.

Which brings us to Canada and the government’s Innovation Agenda.

Canada has historically had “facilities-based competition” whereby different firms have competed based on the quality and scope of their respective networks. The goal has been to encourage private investment as a key driver of competition and broadband deployment. The result: 99 per cent of Canadians have access to high-speed in general; 96 per cent can subscribe to download speeds of five megabits per second; and Canada is now home to the second-highest number of LTE networks in the world.

Europe is now playing catch up in the global race for ultra-fast broadband.

Yet in recent years we have witnessed a Canadian policy shift in Europe’s direction. The so-called “fourth-player” policy was rooted in a similar vision of access-based competition. Mandatory network sharing was made the linchpin of the whole agenda. Now, in spite of the change in government, this federal policy has continued unabated.

The July 2015 CRTC decision mandated access at wholesale costs and the federal cabinet’s affirmation of this ruling has Canada heading down the European path at precisely the moment when Europe is coming to terms with its own challenges. The risk is that Canada turns its relative strength into a weakness, undermining broader economic objectives such as innovation, digital adoption and entrepreneurship.

Ottawa has rightly called innovation a national priority. But a real innovation agenda requires world-leading broadband infrastructure to sustain it. The lesson from Europe is that mandating access to high-speed broadband at regulated prices is not the best way to get there.

Andrea Renda is the author of the Macdonald-Laurier Institute study, “Winners and Losers in Global Race for Ultra-Fast Broadband: A Cautionary Tale from Europe,” and Sean Speer is a senior fellow at the Institute.

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