(A more developed version of this post is available on Emerald publishing’s Info periodical (paywall)).
The telecoms liberalisation process is a true EU success. It has eliminated borders for fixed line telephony, driven 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 But the only true measure of success is when the rules are no longer needed and can be repealed!
Later this year, a new European Commission President will make digital a top priority. As this blog argues more generally, their plan must mark a switch from supply side thinking (e.g. broadband deployment) to promoting adoption and use of information technology across the entire private and public sector. There is no more elegant a way of emphasising the raised ambitions than to start the process of repealing the telecoms rules that are too often currently considered to be the digital policy.
The case is not simply political; the rules have developed two fundamental flaws:
- the framework promotes horizontal competition within the telecoms sector; yet the impact of vertically related players is now arguably the dominant industry driver; and
- regulation is becoming ‘capitalised’ into a political economy, distorting incentives and not serving European consumers, notably with respect to spectrum allocation.
1. From horizontal to vertical
The growing importance of vertical relationships can be seen at both the retail and wholesale level.
Regulators have successfully ensured retail competition and consumer prices have trended steadily downwards. But it is services like Whatsapp that are truly disrupting the rents on SMS, just as Skype turned international telephony on its head a decade earlier. And players like Fon have the potential to change the face of mobile data by leveraging the peer economy.
The heart of the regulator’s task was to set prices for electronic communications network providers to buy wholesale capacity from incumbent operators. That remains a necessity for some challengers (discussed further below), but the defining wholesale relationships now are those of the major ISPs with the largest online content services. If regulators were once mediating between David and Goliath, the new battle is between giants.
While some of the incumbents have called for regulation of these relationships (a reversal of rhetoric that is worrying in its own right), the fact is that the commercial links do not begin and end with the connecting of networks, as it does between horizontally competing telcos. There may be marketing, content, advertising, software or other links that are much more significant in practise.
Whatever the breadth of the relationship between a telco and an online player, bargaining power is fundamentally affected by the number of outside options the other party has, and on the telco side of this equation regulation is a major determinant of market structure.
In other words, regulators cannot hope to have a proper overview of these vertical relationships, but their horizontal interventions are distorting the commercial bargaining power of the telcos.
2. 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 all of the stakeholders’ incentives, and that is now a threat to consumers’ long term interests. The new, pro-regulatory rhetoric of many incumbents is a red flag in its own right, but there are issues for most other stakeholders too.
The most effective competition generally came from e.g. cable TV players which needed little from regulated incumbents. Spectrum is the best way to help establish more competitors not dependent upon ex ante regulation.
Nonetheless, other challengers are clearly dependent on timely regulation, but as the market consolidates, pockets are deeper and ex post scrutiny is more feasible. More importantly:
- can challengers make the sort of long term investment decisions that policy makers want with an unknown a big as regulation to take into account?
- If the Commission announced the end game for telco regulation, the sector would still have half a decade to prepare, including more cross-border consolidation.
The defining issue in the mobile market has been roaming, or rather the Single Market. My contention is that a rush to (roaming) regulation was made too easy by the presence of the 2002 regulatory framework that could be built upon, and the macro policy picture ignored:
- Demand: why did mobile operators never perceive, and respond to, demand for pan-European services? I suggest the answer lies primarily in e.g. the failure of services sector liberalisation. With more cross-border business, a market with 3 or more mobile operators almost certainly have met the sort of demand single market entrepreneurs would have reflected.
- Supply: Single Market services needed someone to go first, and the candidate for that was Vodafone. Yet when they acquired Mannesman, the competition authorities 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.
Incumbent spectrum holders
Spectrum is the big story for the future of telecoms sector, and the Commission has rightly pushed for more rational management of this truly scarce resource. Leaving aside whether this should EU or national management, there is still far too little hard inter-departmental (defence, cultural, communications … needs) discussion about spectrum allocation.
Two issues exist:
- pricing mechanisms are still insufficient for policy makers to compare possible spectrum uses, and to give incentives for incumbent holders (‘hoarders’) to relinquish control.
- while spectrum is vital for infrastructure competition, the cost of missing competition is masked by the presence of regulation, and reduces the political pressure on hoarders. In other words, announcing an end to regulation would improve the hand of telecoms policy makers, relative to other parts of government, when making the case for more spectrum!
Structural reform applies to government too, as I argued recently. 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 their effectiveness and experience will be snapped up. The Dutch seem to have gone furthest in providing officials with a clear perspective of life-after-telecoms, and this can be emulated in other countries.
Let’s celebrate success
Commissioners Reding and Kroes both recognised that digital policy needed to be about demand as much, if not more, than supply. When heads of state met to discuss digital last October, their communique recognised the change in the nature of the debate, even while invited to consider a new set of amendments to the telco rule book.
It is time for the new President to declare telco liberalisation successfully completed, and signal that the ‘Digital Agenda’ is no longer simply a sectoral portfolio, but policy for the college as a whole.