(This article builds on my previous post about telecoms deregulation, and was first published in Info, January 2015)
The telecoms liberalisation process is a true European success. It eliminated borders for traditional wireline telephony, drove rapid roll out of broadband, and the sophisticated incorporation of antitrust concepts is a genuine technocratic triumph (one need only look at the cast-in-law definitions that still haunt the FCC to feel justifiably proud!). But the only true mark of success is whether policy makers feel they can repeal the legislation.
This article argues that that this is now possible, and on the basis of three arguments:
- The telecoms market is ready to become sustainably competitive. There are now hundreds of market players in Europe, and market shares are reasonably widely dispersed. Consolidation is expected, and will lead to competitors strong enough to operate in a market policed by competition law.
- Many telecom market dynamics are driven by players outside of the scope of the telecoms rules, such that regulation is now applied unevenly across the value chain. Internet technologies are now some of the most powerful substitutes for electronic communications services, even for seemingly intractable problems like roaming. Contracts for audiovisual content can determine the success of new services every bit as much as wholesale telecoms rules.
- Regulation is being capitalised into the political economy, distorting incentives to the detriment of European consumers. This is most clear in the area of spectrum allocation.
The most effective fixed line competition comes from cable TV. Spectrum policy matters because it is the best means to ensure additional infrastructure competition not reliant upon regulation.
The EU telecoms framework is premised on ensuring effective wholesale regulation, so that retail competition makes additional rules redundant. The ‘ladder of investment’ may have stalled, but it has done its job. In most member states, market shares are reasonably widely distributed among several players; competing brands are well established and some product differentiation is evident. The European Commission recently removed more retail markets from its Relevant Markets recommendation.
Nonetheless, many challengers remain dependent on the availability of wholesale products as the basis for their competing retail solutions. The question is whether this regulation continues to require oversight by a dedicated agency, or whether competition law is sufficient. Historically, entrants argued that competition law remedies were too slow to deliver them respite, but this needs to be re-evaluated.
Several observations apply:
- Consolidation is necessarily bringing competition authorities more firmly into the telecoms world. Cross-border consolidation should be encouraged, but competition authorities are right to be sceptical about incumbents simply buying out their domestic competitors. Larger players will have deeper pockets, such that case-by-case assessments need not bankrupt a complainee. (And injunctions exist where such a risk does exist.)
- Incumbent-led consolidation brings in the possibility of a new market dynamic: if incumbent A seeks to give a subsidiary of incumbent B a tough time in A’s home market, B may well be in a position to threaten retaliation against A’s subsidiary in its local market. Both national regulators might consider their incumbents’ behaviour abusive, while a holistic view might welcome the new market dynamics.
- The presence of regulation is a source of uncertainty for challengers too. Where margins are low, consumer interests are being served and there should be market exit, even if regulators are uncomfortable. More importantly, where margins are high, investment and entry should be expected, but the presence of the regulatory framework seems to have made it easier for policy makers quickly to confiscate rents before market forces had been brought to bear. This is particularly clear with the waves of retail regulation in the mobile market.
- Two of the four remaining designated ‘relevant markets’ exist primarily because of the calling-party-pays interconnection pricing model. Other models are possible, and jurisdictions where these models prevail simply do not have these artificial bottlenecks in their markets, and regulatory intervention may in itself be barrier to a switchover.
In other words, if the European Commission announced that it would bring forward proposals next year to repeal the telecoms package within, say, a period of five years, this in itself would focus corporate attention on the sort of consolidation necessary for a competition law regulated market.
Extra-market influences on the telecoms sector
Competition drives the strongest consumer benefits when competitors have dramatically different business models and cost bases.
In 1998, market opening enabled consumers to exercise a choice for a specific service – voice telephony. Now the telecoms sector provides consumers with a general purpose technology – the internet – and services such as Whatsapp and Skype are disrupting the rents on SMS and international telephony far more aggressively than anything happening within the telco sector. Looking to the future, another emerging internet phenomena, the ‘sharing economy’, is enabling FON to become a competitor for expensive mobile data roaming.
As a result, vast swathes of traditional telco producer surplus have turned into consumer surplus. The declines in incumbent profitability reflect this huge transfer and deserve celebration, not hand-wringing. (We need to consider better metrics than GDP to capture these sorts of policy success.)
Interconnection of telcos and online players
More recently a debate has emerged around the connections between the major ISPs with the largest online content services. If regulators were once mediating between David and Goliath within the telecoms sector, this new debate is between evenly matched giants. While some telcos have asked regulators to intervene (a policy reversal that is worrying in its own right), this is definitely not the place for telecoms regulators.
The most compelling reason for not jumping in is that the commercial links do not begin and end with the connecting of networks, as was the case between horizontally competing telcos. Google is probably the most targeted by telcos for ‘swamping’ their networks (with traffic requested by telcos’ subscribers!). But the online giant arguably has several relationships with telcos that are far more commercially important than the arrangements it has on the network interconnection level. For example:
- Telcos purchase a lot of search advertising from Google to expand their business.
- Many telcos receive a substantial share of advertising revenues from Google as they embed a search box and advertisements on their consumer facing portals.
- Some telcos resell Google advertisements and other cloud products to their corporate customers.
- Marketing: use of the YouTube brand is a powerful way to demonstrate the benefits of upgrading a broadband connection.
- Android: what would mobile data subscription numbers look like if Apple and Blackberry dominated the market?
Secondly, telecoms regulators will struggle to give justice to the difference in risk profiles of telcos relative to online players. All businesses operate in environments of risk, but the parameters of that risk can vary a lot. The telecoms world has been conditioned to think of it in terms of the payback periods on massive investments in physical infrastructure. These are unquestionably substantial risks, but in the digital economy they must share the rhetorical limelight with others.
Online players do make investments in infrastructure, notably in data centres, but these are not substantial by comparison. Instead, online players take R&D risks, not dissimilar to pharmaceutical companies or film studios. These range in financial magnitude, but the fact is that huge upfront research costs are well able to result in a complete consumer ‘flop’ that simply needs to be written off. There is no simple way to compare these risks with those of a telco and sector regulators should not seek to do so.
While extending regulation to the online sector makes no sense, the continued presence of telecoms regulation is a distortion. When telcos sit down with online players, bargaining power is fundamentally affected by the number of outside options each side has. The fact that the number of telcos in the market is directly influenced by regulation means there can be no sense of a level negotiating field.
Some will argue that leaving giants to negotiate commercially would jeopardise ‘net neutrality’ and, with that, consumer interests. Advocates argue that the internet has a tradition of being neutral, but I believe its more important tradition is that it has been lightly regulated. Mandating net neutrality is not light touch and proponents should be careful about the precedent for intervention that they create.
The best argument for intervention is that today’s big online players can afford to pay for access, and in doing so can create bigger barriers to competition. But it is surely a confusion to address this risk by regulating telcos rather than instructing competition authorities to continue being vigilant about abusive behaviour by online players.
Rights holders and content
Regulated wholesale products are a prerequisite for some to offer a triple/quadruple play to consumers, but a deal with an incumbent is only a part of the picture. Often more important is the ability to secure audiovisual content.
The complexity of relationships between the content makers, rights managers and rights users are legion. Sometimes long term contracts continue to exclude new players, while in other cases exclusivity has been newly sought by an internet provider or an online service provider. A ‘must-have’ broadcaster can also exercise a hold-up power akin to a patent holder in a standards setting process.
Content right holders can often look out of touch with consumers, but competition authorities have only occasionally found reason to intervene. Telecoms regulators may feel that their efforts need to be complemented by additional interventions, but it would generally be wrong to do so.
Distorted political-economic incentives
Regulators’ decisions have changed the face of the market since 1998, to the benefit of consumers. But regulation has also – inevitably – embedded itself in its stakeholders’ incentives, and that is now a threat to consumers’ long-term interests.
The upswing in pro-regulatory rhetoric from several European incumbents is worrying in its own right, and I have made the case above that regulation is no longer a one-way bet for the strongest challengers. Here I look at some additional ‘stakeholders’.
The defining issue in the mobile market has been roaming, or rather the absence of Single Market behaviour by wireless operators. My contention is that a rush to (roaming) regulation was made possible because it could be built upon the existing rules. Meanwhile, the Commission ignored the root causes of the problem:
- Demand: why did mobile operators never perceive substantial demand for pan-European services, especially from Small and Medium sized Enterprises? I suggest the answer lies primarily in, for example, the failure of services sector liberalisation. With more cross-border business, a market with three or more mobile operators would surely have responded with Single Market services.
- Supply: Single Market services needed someone to go first, and the candidate for that was Vodafone. Yet when they acquired Mannesman, the European Commission’s DG Competition bizarrely decided to limit the scope for ‘one Europe’ services. Even so, the merger precipitated a wave of pan-European industry alliances which might in turn have led to the consolidation now recognised as essential. And yet, with the industry in positive flux, the publication of socially regressive, price setting, roaming legislation quickly overwhelmed other market dynamics.
Effective implementation of the Services Directive remains one of the new Commission’s great structural reform challenges. Its impact will be felt widely of course, and that includes in the demands on mobile operators. This is something that the Vice-President for the Digital Single Market will be able to pick up.
Technology could also come into the picture. The emergence of ‘soft SIMs’, for example, offers consumers new opportunities to switch operators when they are travelling. It is a concern that the operators appear to be using their trade association to discuss a common response, but that could be an issue competition authorities are best placed to police.
Incumbent spectrum holders
Spectrum is key to long term infrastructure competition, and the Commission has rightly pushed for more rational management of this truly scarce resource. Leaving aside whether it needs EU or national level administration, the real issue is ensuring that enough spectrum is made available for the internet, as the key general purpose technology of the 21st century.
This is a debate that cuts across the interests of the ministries of defence, the interior, culture and others. Are the representatives of the communications sector in government well armed to win for the telecoms sector?
An unwillingness among policy makers to consider pricing mechanisms, even in private inter-ministerial discussions, means that the debate has an additional level of subjectivity. That is where the presence of regulators could be problematic. While infrastructure competition is strategically vital, ‘hoarders’ within government feel little pressure to cede spectrum to the public interest because regulation is protecting short-term consumer interests.
In other words, the opportunity from repealing the telco rules is that it will enable champions of the sector within government to make a stronger case for refarming.
Structural reform applies to government too. Regulators could no doubt fine tune the application of today’s rules for decades to come, but the best ones’ have kept their eye on the original goal and have strived to put themselves out of work, knowing that demonstrating success is the best way to long-term employability. The Dutch seem to have gone furthest in providing officials with a clear perspective of life-after-telecoms, and their path could be emulated in other member states.
The telecoms market has transformed beyond recognition. Consumers have more choices, and services are better. Regulation created the conditions for internet access services to take off, and online services now provide some of the most effective competition to traditional telco services, causing huge shifts in economic surplus to consumers.
The telco market today is inseparable from the digital economy being built upon its fibre and copper. The commercial links along the value chain are multiple, and ever changing. They influence the industry every bit as much as sector regulation, but the issues that do emerge in this broader context fall far outside the ambit of the regulators and, indeed, are too fast moving to justify other forms of ex ante regulation.
Competition law was always the long term goal of telecoms liberalisation, and its practitioners will be hugely involved in the predicted wave of mergers. Repealing the telco rules would accelerate the much desired market consolidation and, as the dust settles, competition authorities can be left to police the resultant playing field.