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Status-Quo Disruption: What Constitutes Enough Competition?

October 10, 2012 - 2 Comments

By Howard Baldwin, Contributing Columnist

Interesting news came out of Europe last month regarding upstart service providers’ potentially disruptive behavior, as well as the responses of established competitors. The news begs the question about telecommunications competition – when does more competition lead to lower prices, and when does it lead to overlapping investment that drives costs up?

In an area as cutting-edge as telecommunications, does increased competition drive R&D investment or decimate it?

First, here’s what transpired in France. According to an article in TechCrunch, in the interests of boosting countrywide competition, the French regulatory agency ARCEP licensed a fourth mobile service provider: Free, a division of established ISP Iliad.

Although its services are by no means “free,” its pricing structure was highly disruptive: Free charges just $25 per month for unlimited talk and data in a country where residents are accustomed to paying between $57 and $82 per month for a couple of hours’ worth of talk time.

It was able to accomplish this through, as the TechCrunch article noted, “very clever technology, marketing and financial tricks” — not to mention adhering to the bare minimum of ARCEP’s demands.

These elements include: forgoing brick-and-mortar stores for online ordering and advertising; eschewing subsidies of mobile devices; deploying a network with as few cell towers as possible that still served 30% of the country’s population (per ARCEP rules); and signing a six-year roaming deal with competitor Orange to increase its range.

The result: Free now has 3.6 million subscribers, amounting to 5.4% market share. More important, its competitors — Orange, SFR and Bouygues — have all lowered their prices.

Catalyst for a Shared Networks Business Model

But there’s also another result: As Reuters reported, “France Telecom is holding discussions on the possibility of sharing its third-generation mobile network with competitors in order to cut costs.” The development is similar, the article noted, to a Vodafone and O2 announcement in June that they would share a 4G network in Britain in order to reduce costs.

This sets up an interesting conundrum that seems singular to telecommunications. In theory, more service providers competing for the same customers in the same location should lower costs for consumers. But if all providers merely mimic each other’s offer, then customers have minimal real choice.

However, competition comes not just from telephone providers; competition also comes from cable and satellite providers. With VoIP, both cable and telco providers offer so-called “triple play” service — phone, television, and Internet.

So what constitutes competition in an arena where investment costs are so high? Is it really fair for a regulatory agency to license yet another phone competitor when so many other communications options were already available?

As we noted in Public Sector or Private Sector: Who Should Deploy Broadband, the picture is getting even muddier, with the entry of private companies like Google entering the broadband marketplace.

At some point, doesn’t the cost of deploying more overlapping or duplicative network equipment to serve those competitive pressures become onerous? In that scenario, with costs going up and fees going down, service providers eventually reach a state of diminishing returns. At that point, do they decide to get out of the arena, thereby leaving fewer competitors?

In a rapidly evolving  industry such as broadband, status-quo disruption is natural, unavoidable, and probably to everyone’s benefit. But at some point, we need to consider the question of balance. What’s fair for consumers? What’s fair for service providers? And how do we balance the two for the greater good of both? That’s the question the industry is still having trouble answering.

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  1. isn't this just a function of business cycles. You have expansion and contraction.

    • Granted, you could say that. But if you're a forward-thinking policymaker you try to be on the front-end -- rather than the tail-end -- of the really big market disruptions.