Virtual world's future lies underground Deregulating manholes represents the latest creative approach, writes Richard Waters Manholes play a decidedly unsexy part in the internet revolution. Along with wiring ducts, aerial masts and the roadside cabinets where local telephone lines converge, they are part of an overlooked physical infrastructure on which the virtual world depends. The European Commission now believes that opening up access to facilities like these is a large part of the answer to the question of how to stimulate construction of the continent's next generation of high-speed networks. As they look to jump-start a new wave of investment, however, regulators in Brussels are likely to find themselves grappling with ideas that are far more politically unpalatable than this. Europe is already trailing in the build-out of both high-speed fibre and 4G wireless networks: short of adjusting the industry's competitive dynamics more drastically and allowing prices for some services to rise, it is hard to see how the cash flow will be generated to support what is shaping up to be a costly round of investment. Deregulating manholes represents the latest creative approach to the concept of "unbundling" - forcing network companies to rent out parts of their infrastructure to rivals at regulated prices in order to lower entry costs and stimulate competition. Europe has been at this for some time, but commissioner Neelie Kroes is extending unbundling beyond the all-important "last mile" connecting phone lines to customers in plans laid out this week. To hear many senior figures in the telecoms industry talk about it, unbundling has been the single biggest difference between the regulatory environments in the US and Europe over the past decade. The idea was first taken up in the US in the mid-1990s, though the established American carriers managed to block the idea in the courts a decade ago. Their peers in Europe had no such avenue for appeal, forcing them to give new rivals low-cost access to the local loop part of their networks to reach customers. The result: more competition, lower prices and dwindling cash flow. That has been a boon to consumers but, along with the slumping economy, has left network companies badly positioned to finance the next round of network-building. The contrast with the US could hardly be starker. Over the past five years, the operating cash flow of AT&T and Verizon has risen by a fifth, even as cash flow of the main European players has dwindled. As a result, shares in the two dominant US carriers have risen by more than half since the financial crisis, while their European counterparts have slumped, denting their ability to finance upgrades. This has not been lost on Ms Kroes. While pushing unbundling deeper into the physical infrastructure, she has at least signalled an intention to relax the accompanying pricing regime that has favoured new entrants. This is a work in progress: Europe's national regulators will have a big say in the practical impact of any changes and will be wary about letting a group of former national monopolists off the leash. However, promises to end the deflationary pricing rules on the "local loops" that operators have already opened up to competition, and to let them recover more of the costs of their new fibre networks in future pricing plans, are signals that broadband prices will be allowed to rise. Whether this will be enough is another matter. The telecoms companies have also been hampered by national fragmentation that has made it hard for them to reap economies of scale. They have also been far from blameless: even as their counterparts in the US have moved away from charging for legacy voice calls towards all-inclusive data plans, European operators have remained tied to the sinking voice market. The early signs from the 4G business also suggest that they have not yet worked out how to charge a premium for the new mobile networks. Ultimately, big mergers may be the only way to end the deflationary spiral in which the operators find themselves trapped as the continent's economic fortunes flag. Brussels has signalled it will accept a degree of consolidation with its move to a "single market" for communications. However, drastic restructuring does not look to be on the cards yet. The kind of moves that would bring the biggest change in competitive dynamics - for instance, reducing the number of mobile players in a market from four to three - remain a step too far. In this environment, the terms on which Europe's manholes are deregulated will at least provide a pointer about the direction in which the regulatory winds are blowing - and whether an unloved industry finally catches a break.