Analysis: Europe seen needing regulation on Internet access

LONDON Wed Dec 22, 2010 9:58am EST

LONDON (Reuters) - Europe's confidence that it need not follow the United States in adopting rules to ensure fair Internet access may be short-lived, as competition between mobile operators and service providers like Skype intensifies.

A debate over net neutrality -- the principle that all Internet traffic be treated equally -- has been heating up in the United States for years but has so far generated little public concern in Europe.

At stake is the ability of Internet service providers (ISPs) to ration access to their networks, allowing them to manage congestion but running the risk they will favor their own services or those who pay more, restricting consumer choice.

The U.S. communications regulator on Tuesday adopted rules that banned high-speed Internet service providers from blocking lawful traffic but allowed them to "reasonably" manage their networks.

In Europe, telecoms operators such as Deutsche Telekom (DTEGn.DE), France Telecom FTE.PA or Telefonica (TEF.MC) -- former state monopolies which typically have close relationships with national governments -- still have the upper hand.

The European Commission has so far refrained from legislating to avert a looming conflict with the likes of Skype, Google (GOOG.O) or Facebook, which offer virtually free voice communications and messaging, striking at the heart of the carriers' business.

But Internet service providers (ISPs) -- mainly telcos in Europe -- already actively manage traffic to make it more efficient, and the potential to do more to protect their own services or earn extra revenues may be too much to resist.

"Mobile operators will be sorely tempted to do all they can to block the competition and stop them from cannibalizing their revenue streams," says Bengt Nordstrom, chief executive of Nordic telecoms consultancy Northstream.

"While operators have dodged the net neutrality bullet for now, they can expect further intrusion from the European Commission in the not-too-distant future," says Nordstrom, who predicts such intervention will come in 2012.

JUST ALGORITHMS

Europe's competitive environment is different from that in the United States, with fiercer rivalry among more mobile carriers operating in smaller markets, and a less-developed cable infrastructure.

This has led some to argue that the need for legislation in Europe is far less, as competition between ISPs allows customers to easily switch to an alternative provider if they are not getting the services they want.

At the same time, the operators argue they need and deserve help to upgrade their networks, which have begun to creak under the weight of traffic generated by services like Google-owned YouTube, Facebook and the BBC BBC.UL iPlayer.

"What is evident is that Internet search engines use our networks without paying for it. That's real luck for them and a disgrace for us," Telefonica Chairman Cesar Alierta said this year. "We do everything. I mean, they just have algorithms."

Bernstein analysts wrote in a recent research note: "In Europe, unlike the U.S., the net neutrality debate can, and we think will, be cast not as a battle for free speech but instead as a battle between aggressive over-reaching, freeriding U.S. content companies and homegrown European infrastructure providers (that also happen to be the number two or three employer in each respective country)."

They said their stock preferences to play this state of affairs was for European telcos and U.S. cable operators.

Vodafone (VOD.L) Deutsche Telekom, France Telecom, Telefonica and Telecom Italia (TLIT.MI) have all complained about Google, Facebook and Apple (AAPL.O) using their networks to deliver services without contributing to network investments.

So far the European Union has taken a wait-and-see attitude, having directed national governments to ensure ISPs adopt non-discriminatory and transparent policies -- something they will have to put into practice by May 2011.

Meantime, it is consulting to determine whether traffic-management tools deployed by ISPs constitute a problem.

"There is cognitive dissonance. The service providers say we're not doing any of this, the likes of Skype say their services are being throttled," says one senior EU official. "It's clear that you have to be vigilant about these issues."

POWER BALANCE

Who holds the balance of power in the delicate relationship between the telcos and the content providers is "the $64,000 question," according to Andrew Bud, founder and chief strategy officer of mobile transmission and billing firm mBlox.

"That power balance is continually shifting," said Bud, who has long argued companies that want to push their content and services through networks to consumers should pay. He sees Europe as past the need for a net-neutrality debate.

"I can see events accelerating toward a new consensus," he said, citing most recently a speech by British Communications Minister Ed Vaizey in which he said it might make sense for content providers to pay for differing levels of service.

Northstream's Nordstrom reckons that consolidation in the trillion-dollar telecoms industry will pick up pace, changing the status quo, and predicts that European regulators will step in to legislate in 2012.

He points to carriers' past reluctance to self-regulate in the case of roaming charges for making mobile calls abroad -- costs that were eventually slashed by the EU -- saying operators tended to exploit favorable conditions for as long as possible.

"Nothing happened until regulation came, and now it's data. Operators are rather waiting to be regulated and trying to leverage the situation as much as they can," he says. "There's a lot of money to be made before regulation comes in."

(Editing by David Hulmes and David Cowell)

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