EC Threatens Germany With Court Case

The European Commission today launched infringement proceedings against the German government over its new telecom law, which in effect gives Deutsche Telekom AG (NYSE: DT) a regulatory holiday for its €3 billion (US$4 billion) fiber-to-the-curb (FTTC) network.

But the legal tussle could give the German incumbent at least a two-year headstart over its local competitors in next-generation broadband access, exactly the kind of advantage the incumbent has been seeking and which its competitors have battled against. (See EC Goes to Court.)

Germany's new telecom law intends to relieve Deutsche Telekom of regulatory obligations on its new FTTC and VDSL2 network, which goes against European telecom law. The European Commission has issued several warnings to the Germans during the past year because the new law breached European rules. (See EU Orders DT to Share VDSL and Achtung! Regulators Force DT to Share.)

Now the EC has acted on those threats and launched infringement proceedings against the German government, bringing the total number of pending telecom cases against the mid-European country to six.

"It's surprising that Germany would take this measure," says a European Commission spokesman. "Germany is privileging the investment of Deutsche Telekom over the investment of new entrants, which is not in the spirit, nor in the letter, of European Union telecom law."

The German government has 15 days to respond to the Commission's letter issued today. If the government does not cooperate, then the EC will refer the case to the European Court of Justice. Once there, the case could take up to two-and-a-half years to be resolved, according to one regulatory analyst.

"It's a landmark decision because it sets a marker for what next-generation network regulation should look like," says Heavy Reading's chief analyst, Graham Finnie. "The EC's reaction gives a strong clue that they'll not allow countries to go down the Verizon Communications Inc. (NYSE: VZ)/Federal Communications Commission (FCC) route."

But the situation looks bleak for the competitive operators that rely on Deutsche Telekom's network for broadband access.

"The law creates a huge amount of uncertainty," says Ilsa Godlovitch, head of regulatory affairs at the European Competitive Telecommunications Association (ECTA) , an industry body that represents alternative service providers. "It could result in a very nasty and lengthy fight, which the market doesn't really need."

According to ECTA's latest broadband study, just 4 percent of broadband lines in Germany are supplied independently of the incumbent's network. "This is really not a country that can afford a regulatory holiday," says Godlovitch.

Deutsche Telekom planned to cover 50 cities in Germany with an FTTC and VDSL2 network by the end of this year. To date, the operator has rolled out the network in 10 cities and has said it will not continue the deployment until it had a legal guarantee of no regulation.

Now that this guarantee is in place, a spokesman says the rollout will continue, but details on how many cities, and the new timeframe, are not being revealed until the operator's investor day on March 1, when CEO Rene Obermann will outline his strategy.

"BT Germany is very concerned about Germany's attempt to carve parts of Deutsche Telekom's access infrastructure out of the scope of the EU telecommunications framework," says a BT Germany spokesman. "This court case will be embarrassing to the German government and detrimental to inbound investment."

Now that there are six unresolved cases against Germany, ECTA is uncertain what effect the latest action will have. "There is a big risk that the German government might not listen," says ECTA's Godlovitch. "It doesn't bode well."

The bigger issue is how to regulate next-gen access networks based on fiber access technology, whether it's fiber to the building or to the curb or node. The European Commission is set to address these issues in its next review of the telecom framework, but the first proposals are not expected until July this year, with implementation not expected until at least 2009. In other words, solutions to the problems the industry faces now won't arrive from Brussels for another two years.

"No one quite knows how unbundling would work with VDSL," says Finnie. "It's slowing everything down, which is frustrating for access service providers."

While the regulatory holiday spells bad news for the alternative carriers, it's good news for Alcatel-Lucent (NYSE: ALU), ECI Telecom Ltd. , and Siemens Communications Group , the vendors benefiting from the incumbent's new access network rollout. (See DT Flings Billions at Fiber Access and Alcatel, ECI Land DT Gig.)

— Michelle Donegan, European Editor, Light Reading

Michelle Donegan 12/5/2012 | 3:13:47 PM
re: EC Threatens Germany With Court Case The German government responded Monday afternoon to the EC's letter and disagreed with the EC's position. In the German government's view, the new telecom law conforms to the European regulatory framework and does not give special treatment to Deutsche Telekom's FTTC and VDSL networks.

The government's response makes a lengthy court case at the European Court of Justice much more likely.

Michelle Donegan 12/5/2012 | 3:13:47 PM
re: EC Threatens Germany With Court Case I agree.

Regional operator NetCologne is already building a 100 Mbit/s fibre-to-the-building (FTTB) network to cover 110,000 buildings in Cologne. It will spend Gé¼200 million over the next five years. Main reason for the investment: to cut costs by eliminating the last mile line rental charges it pays to Deutsche Telekom to deliver ADSL services. NetCologne says it paid Gé¼30 million to Deutsche Telekom in line rentals in 2005, which is Gé¼10.65 per month per customer.

It's not a nationwide alternative infrastructure, but it's a start.
xornix 12/5/2012 | 3:13:49 PM
re: EC Threatens Germany With Court Case On the short run, german customers will be hurt the most. Without a change, on the long run, DT will be hurt the most.

If they don't get efficient CLECs to show them how to perform at the lowest cost, to set a target and to stimulate the market, they will wander in their alternative incumbent world until it's too late.

It will be too late when there is enough market space for an alternative carrier (why not the subsidiary of another ILEC?) to deploy its own infrastructure with a quick enough ROI.

These things can happen must quicker than usually thought. If noone is buying their overpriced 60+Gé¼ (which, AFAIK, is the case) FTTC offer and if someone comes out with a more cost effective FTTH solution, they are screwed.

The days of ATM and expensive LL are definitely gone. The days of overpriced cell nets will soon be too.
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