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Towards Gigabit Networks – A Few Considerations From The United Kingdom

 |  June 27, 2022

By: Digital Regulation Platform

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…