Much of what the Commission proposes goes in the right direction although some actions, such as plans to harmonize copyright, could stir controversy. Even US tech giants might be less worried than expected.
On May 6th, more quickly than expected, the European Commission released its much anticipated “Digital Single Market Strategy” (DSM).
The Juncker Commission has made the DSM the top priority of its five-year term, claiming €340 billion in potential economic gains, an exciting figure that should be supported by quantitative research analysis.
Much of what the Commission proposes in the 20-page document seems to go in the right direction, setting out three main areas to be addressed:
– Better access to digital goods and services. The Commission claims that delivery costs for physical goods impede e-commerce, pointing the finger to parcel delivery companies; that many sellers use unjustified geo-blocking to avoid serving customers outside their home market; that copyright needs to be modernized; and that VAT compliance for SMEs should be simplified.
– Creating the right conditions for digital networks and services to flourish by, encouraging investment in infrastructure; replacing national-level management of spectrum with greater coordination at EU level; looking into the behavior of online platforms, including consumer trust and the swift removal of illegal content and personal data management.
– Maximising the growth potential of our European Digital Economy by, encouraging manufacturing to become smarter; fostering standards for interoperability; making the most of cloud computing and of big data, said to be “the goose that laid the golden eggs”; fostering e-services, including those in the public sector; developing digital skills.
It is understandable that the Internet provides a channel for businesses to reach consumers more widely than traditional media, both in their own markets and abroad, and for consumers to have a wider choice and bargain-hunt more effectively.
In a truly single digital market there are opportunities to scale up that are not present in the much smaller national markets.
More controversial are the commission’s plans to harmonize copyright law, in particular its plan to ban “geo-blocking”, the practice of restricting access to online services based upon the user’s geographical location.
However, the most problematic point concerns “platforms”: the digital services, such as Amazon, Google, Facebook, Netflix and iTunes on which all sorts of other services can be built upon and which have come to dominate the internet.
Worried that the mainly American-owned platforms could abuse their market power, the Commission will launch by the end of this year an assessment of their role.
However the fact that most of the 32 internet platforms identified for assessment by the Commission are American and only one (Spotify) is European, hints more towards the fact that it is harder for new firms to scale up rapidly rather than abuse of market power.
What it is interesting is that Mark Zuckerberg doesn’t seem to consider a Digital Single Market a disadvantage for Facebook.
Instead, he supports the idea. Facebook has to deal with different laws in every country and a single set of regulation for the whole European continent would actually make things easier for Facebook.
The digital economy also depends on the availability of reliable, high-speed and affordable fixed and mobile broadband networks throughout Europe. There are no good reasons to still have national telecom laws in this field.
How will Europe successfully deploy 5G without enhanced coordination of spectrum assignments between Member States?
Let us not forget that these networks do not only have an economic value; they are increasingly important for public access to information, freedom of expression, media pluralism, cultural and linguistic diversity.
The following two pieces of legislation are related to the DSM:
– The General Data Protection Regulation (GDPR), replacing the 1998 Directive that generated the data protection regimes of 28 Member States, with a single one, was proposed by the Commission in 2012, has undergone amendments by both the EP and the Council of Ministers and could be adopted in 2015 or 2016.
– The Telecoms Regulation, reviewing the 2002 Telecoms Regulation to cover net neutrality and roaming fees, was proposed by the Commission in 2012, was amended by the EP and is currently with the Council, which has scaled back the EP’s amendments.
The upcoming negotiations on the Telecoms Single Market will give a hint of the challenges to come in creating a Digital Single Market over the next years.
The European telecom sector is faced with significant challenges in terms of rapidly emerging new technologies and new forms of competition and business models driven by these technology changes. 2015 will be a pivotal year for European policy makers, regulators and competition watchdogs to improve the environment for the European telecom sector.
Regulation is the single most important driver in the telecoms sector. HSBC’s Global Regulatory Heatmap report aims to take the regulatory temperature globally and to identify those countries where regulation is most and least supportive of investment, and then to assess how the world’s largest operators are exposed to these conditions.
The report shows, that the European region has faced the harshest regulation, although there are now encouraging indications the environment here is starting to improve.
The telecom sector is widely regarded as an enabler of innovation, productivity growth and international work sharing in the context of an increasingly competitive and globalised economy.
Academic research indicates that economic progress in any given country is driven less by the mere arrival of new technologies, and more by the speed, breadth and depth of their adoption.
Consequently, it is tremendously important that network operators invest heavily so as to ensure that the latest telecoms technologies are available on as ubiquitous a basis as possible.
Network investment is important for another reason also: as set out in HSBC’s Supercollider report, it can be clearly demonstrated that the primary driver of lower prices in telecoms is CAPEX.
In deploying more of the most modern systems, operators take advantage of new technology that is the basis for innovation, capable of handling traffic with greater efficiency, and thus at lower unit cost.
Lowering unit costs and prices should be a primary policy goal, as it is this that enables the development and adoption of novel applications and contributes towards productivity growth in the broader economy. However it has to be mentioned that there is a Babylonian confusion in the public debate on “price” meaning either the monthly bill or the price per unit (MB, text, minute voice).
This obviously raises the question of what might induce operators to raise their CAPEX, and here the empirical evidence is plain. The most effective driver of higher network spending is higher EBITDA margin for MNOs and competition, as this gives MNOs both the means and the incentive to invest.
The central challenge facing regulatory policy makers is therefore how to best to secure a benign investment environment, in which healthy margins support heavy CAPEX. To this end it has to be kept in mind, that regulation is the single most important driver for securing EBITDA margins.
[Tweet “However, Europe’s regulatory framework lacks incentives to invest and shows signs of obsolescence”].
Therefore it should be fundamentally overhauled in the course of the next framework review process.
To name only two examples of obsolescence:
(1) The current framework is too narrowly focused on legacy apps, still centered around traditional voice telephony, text messages and broadcast TV, now just legacy applications of a much bigger space: i.e. the digital services.
(2) The current framework is inherently slow, leading to inappropriate multi-year/multi-step iterative procedures that fail to keep pace with market and technology evolution.
Along the future regulatory trajectory in Europe, there are a series of challenging issues and required steps for regulatory modernization to be dealt with.
When defining the trajectory of regulatory modernisation, Europe should avoid going for incremental improvement and rather aim at an ambitious scenario and step in a “Virtuous Circle”, based on innovation, investment and smart regulation (“Regulation 2.0”).
The following listing of issues is not comprehensive; the order of listing does not indicate priorities:
(1) From traditional telco services to internet-based ecosystems – SMP regulation: In the telecom legacy world, telcos acted as gatekeepers aiming at monetizing single products or integrated value chains. Now, ecosystems controlled by the internet giants (OTT players or ‘edge providers’) are the new competitive engines that capture and deliver value.
These competitors were never foreseen by regulators, and yet have amassed customer bases that dwarf those of even the largest telecoms companies (for example the merged Facebook – WhatsApp conglomerate).
The emergence of such powerful forces does prompt the question of whether conventional regulation of the sector, stratifying the industry between incumbents obliged to provide wholesale capacity and resellers able to obtain this capacity on favourable wholesale terms, still remains appropriate.
(2) New regulatory bottlenecks: driven by the changes described earlier, traditional regulatory bottlenecks, like access to infrastructure will become less important or even become obsolete whereas access to the huge data collection and processing capabilities of the OTTs will be (or is already!) a crucial bottleneck for all players in the digital services sector to be dealt with.
(3) Market definitions: Will the current set of ‘recommended markets’ (even the most recent revised list of recommended markets) be a future proof instrument for regulators and competition authorities?
Looking at the Facebook – WhatsApp merger, access to data collection and processing, the ‘machine room’ of the internet giants seems to be a relevant topic for market definitions.
[Tweet “Market definitions need to get broader, more flexible and include OTT”].
They may also be either extended beyond national borders, or defined at a sub-national level.
In other words, will we continue to differentiate among separated vertical markets and spend considerable time and resources for their definitions and updates, whilst cross-subsidized business models exploit and profit shifts?
(4) Definition of services and categories, SMP-based regulation: The names and definitions of the current regulatory categories of “Information Society Services” and of “Electronic Communications Services” used in the European regulation, have become obsolete. The obligations associated with these categories should be reorganized as well as the legal instruments to be used.
Luisa Rossi (Orange) recently pointed out that, “…the old rules are no longer adequate and yet still apply, while new issues are not addressed and require action. This is why it is now important for the legislative framework and regulatory practices to embrace this phase of development…The starting point for the reforms should be the creation of a digital services categorywith the reclassification of traditional communication services, followed by the reorganisation of the associated obligations such as transparency and non-discrimination, security, privacy, data retention, emergency services, interoperability and portability. Hence, digital services would be subject to a common set of rules enshrined in a new horizontal European legislation, whichever the provider or the technology used. Such an approach should be preferred to sector specific rules.“
(5) Reciprocal regulation: Corporates from neighbouring areas of the economy such as payTV – to give just one example – have the right to purchase telecoms infrastructure, without there being the reciprocal right of telecoms operators to purchase exclusive media content on a similar basis.
(6) Preference for investments in infrastructure: While it may be desirable to address bottlenecks, such as in the access to fixed-line or even mobile infrastructure (via measures such as unbundling and MVNOs respectively), is it really desirable that those reselling the capacity should have an advantage over those building it? The consequence of this tilt to the competitive landscape will be that less infrastructure is deployed.
(7) Modernizing Competition Policy: DG COMPETITION statements referring to Austrian consolidation discuss the lack of an entrant as if it was a failure – on the contrary, it was a successful experiment to determine whether there was economic viability for a fourth player, and the answer was clear: there was not.
A negative outcome from an experiment is not a failure (Karl Popper on ‘Falsifiability’). Let dynamic efficiency gains work! Current competition policy and practice obviously overlooks that a growing part of the entire digital services market (OTTs) is completely unregulated and the remainder – much smaller part of the digital services sector – is strongly micro-regulated.
A recent set of papers by Papai and Csorba casts doubt on the assumption that introducing more mobile competitors into a national market is necessarily better for consumers. Forget the mantra of the crucial importance of the famous ‘forth player’, there is no special magic in the number “four”!
(8) Regulator’s dilemma and challenges: Legislators and regulators have two principal choices in this debate; full de-regulation or continued (selective) regulation. Key issues are: is regulation really capable of specifying how markets should function?
Most would concede this is something that is easier to achieve in industries subject to a slower pace of technological change and disruption, such as utility businesses.
By contrast, in telecoms the scope for disruptive technologies to transform the industry (for example, mobile, WiFi, voice over IP, OTTs, etc.) makes the system far more chaotic.
Given this inherent unpredictability, one group argues that there is an argument for allowing the market to take its natural course and that the competitive dynamics of an industry subject to Moore’s Law are perfectly sufficient.
On the other hand, those who do wish to see continued regulatory intervention argue that the question is rather how better to identify those areas that would benefit from it.
The so-called ‘three criteria test’ remains the preferred yardstick (the presence of sustained barriers to entry, the absence of effective competition, and the inadequacy of existing competition law to deal with the issue).
In any case,
[Tweet “regulators should do their utmost to stay updated with leading edge developments, technologies “]
and innovations on a global level to understand better the markets on the move and to base their decisions on these insights.
(9) Spectrum Policy: Europe’s method of allocating spectrum is one of the least harmonised and least efficient on a global scale.
Most industry parties agree that there is an urgent need to harmonise this process, in terms of awarding methods, coordinating the timing of awards, the duration of usage rights and the conditions on which spectrum can be traded.
One possibility could be the creation of pan-European licences. However, any such proposals (as per those in the “Connected Continent” (or “Telecom-Single-Market”) proposal seem bound to raise concerns amongst the member states.
Stronger instruments for the harmonization of timetables and awarding methods, license durations when assigning new spectrum are urgently needed.
In particular, Europe should be quick and harmonized in allocating and assigning spectrum for mobile broadband in the 700MHz band (2nd digital dividend).
Measures should include: (1) No – or significantly higher – spectrum caps, (2) Perpetual usage rights with ‘use it or lose it’ rule imposed, (3) Fostering secondary spectrum market.
(10) Net Neutrality: The EU legislation on net neutrality should allow operator innovation with specialized services, which will be a key for 5G, subject to transparency and other appropriate safeguards. This is also a question relevant for the competitiveness of the European industry.
If the US will be allowing for the equivalent of specialized services in the future (which is an open issue for the time being), so if EU operators are not able to innovate with specialized services, such innovations will likely happen outside the EU, in places like the US.
An example would be the Connected Continent proposals on net neutrality, which initially amounted to a very judicious compromise in the eyes of many industry experts, but which was subsequently heavily modified in the European Parliament.
(11) Change process in EU: Perpetual regulatory intervention tends to necessitate more and complex legislation, and the legislative process is itself fraught with risk, since there may be a tendency for positive proposals to be diluted or even reversed when these highly complex topics are debated.
(12) Benefits of scale: Scale already plays an important role within the industry, and in future there will probably be opportunities to extend scale effects still further: for instance, as platforms standardise around IP technology, greater cross-border synergies should become feasible.
This is welcome, since many recent regulatory reforms (such as with regard to termination rates and roaming charges) have arguably reduced the incentive for cross-border consolidation.
(13) License to fail: In a dynamic and competitive market, there will, by necessity, be companies that fail. Indeed, the very fact that there are losers actually indicates the success of competition.
However, European regulation has often shied away from recognising this. For example, it has been particularly difficult to use the ‘failing firm’ defence to justify a merger – including in those cases where financial investors would have concluded that the target company could not sustain the level of network and customer investment required to be able to compete effectively.
Even those industry observers looking for regulatory reform rather than programmatic de-regulation agree that the consolidation of smaller players (thereby creating stronger entities with margins better able to support investment) would be a powerful positive – hence the widespread support for four to three in-country mobile consolidation.
In conclusion, there is much agreement amongst industry experts that the current regulatory framework in Europe shows clear signs of obsolescence and should be without further delay fundamentally overhauled.
All sides call for a more cohesive approach, and the formation of a coherent industrial policy for the telecoms sector, so that it is better able to compete against its global rivals – in terms of investment ability, innovation adoption, network capability and attractive unit pricing.
This post was originally published on www.serentschy.com
EU governments look pretty keen to scrap plans for more coordination in spectrum licensing across the continent. However, the move may jeopardize future efforts to improve Europe’s mobile networks, with negative impacts on consumers and businesses alike.
It is unclear whether EU member states are going to broker a deal on the Telecoms Single Market package anytime soon. Differences abound on the details of Net Neutrality provisions and plans to end roaming fees featured in the proposed bill.
However, what’s more certain at this stage is that most governments are keen to get away with the package proposals pushing for more coordination in spectrum licensing for wireless broadband.
If confirmed, the move would strike a fatal blow to the very spirit of the legislation.
For in a world increasingly dominated by mobile communications there will be no digital single market without a higher degree of harmonization in spectrum policies.
The expected gains will be paramount to speed up the roll out of 4G networks, bringing huge benefits to consumers and businesses alike. The same goes for the introduction of more flexibility and market-led mechanisms in spectrum usage provided for by the legislative package.
Speaking at a recent GSMA event, the EU new digital single market chief Andrus Ansip urged governments to make up their minds rightfully pointing out that more cooperation on spectrum assignment “is not a technical issue” but would translate into cheaper and higher quality connectivity, as well as new services.
MEPs should also step up their pressure by threatening to block any incoming inter-institutional negotiations on the TSM proposal if member states water down or drop its provisions on spectrum usage. It would be a logical step since the European Parliament in April passed an amended draft of the bill that reinforces its original plans on spectrum harmonization.
The truth here is that auctions for frequencies have long provided an easy source of revenue for governments. This explains their reluctance, also welcome by national regulators, to relinquish powers to a more centralized mechanism of the sort contemplated by TSM package. A single market for wireless communications would be however a far more lucrative bargain for everyone in the long run.
Although the European Commission has pledged to work out new legislation on ‘radiospectrum management’, it would be foolish to give up on the rules put forward by former EU digital chief Neelie Kroes under the scope of the TSM package. In fact any future bill should build up upon them, impulsing greater harmonization and – why not? – even daring to break the great taboo of pan-European auctions.
At this stage a fresh legislative initiative would take a while to be drafted and presented, not to mention adopted. Do not expect anything like that before 2016. Meanwhile, the gap between Europe and other regions (such as the US) in LTE deployments, network speeds, total mobile usage or the rollout of advanced services may get bigger to the detriment of the continent’s economy.
To be sure, a lot is at stake here. Up to the new Commission and the European Parliament to convey this message to their national counterparts.
Europe’s broadband system is highly fragmented and in need of improvement. That helps explain why the European Commission is working toward a digital single market. Reduced regulation and tax rules harmonization play a key role in achieving this goal.
The EU’s struggle with broadband connectivity is largely due to inadequate investment in infrastructure from broadband providers. As the European Commission explained in its memo about the connected continent, there are hundreds of telecom operators in Europe, but none active in all member states.
Many European leaders are increasingly abandoning their regulatory approach and looking to the US broadband model.
The American market-led approach of facilities-based competition has resulted in greater investment in next-generation broadband technologies. American operators have invested almost twice as much per capita as their European counterparts in recent years.
While broadband investment can be cyclical, with periods of high spending for network upgrades followed by periods of lower spending and maintenance, the US has been the world pacesetter, investing some $1.2 trillion since 1996. Since then, an average of at least $60 billion annually has been invested to build and upgrade wired and wireless networks, to lay millions of miles of fiber-optic cable (more than in the whole EU combined), and to erect cell towers.
The EU is composed of some 28 nations, 24 official languages, and 11 currencies.
America’s de facto single market allows companies of all sizes to achieve scale, and this holds true for both large broadband providers that deploy infrastructure and for entrepreneurs and emerging companies that want access to a large domestic market.
Indeed, Europe is the top location for America’s digital exports, and some concern exists that the lack of broadband investment in the EU could inhibit the growth for some digital exports to Europe in the future. So both previously mentioned points are really the clue.
That helps explain why the European Commission is working toward a digital single market across the EU, with initiatives aiming to bring American-style investment, innovation, and entrepreneurship to the European broadband market and Internet-based industries.
Which are those recipes that could bring us potential success?
Generally speaking, the European Union should simplify and reduce regulation of broadband providers, remove barriers to consolidation, and embrace a market-led with technology-neutral approach.
1) Market-led broadband development. The government should not decide which technology citizens should have and shouldn’t give subsidies for broadband deployment where providers are investing. Given the right regulatory circumstances, the marketplace is willing and able to make efficient decisions about broadband.
A smart vision for broadband realizes that no one network can do it all and embraces a variety of network solutions and innovations that depend on the market. [Tweet “The broadband market, if allowed to operate freely, can meet the demands of today and the future”]
2) Creating a single market. The creation of a digital single market would permit the consolidation of broadband providers across borders, reduce costs through economies of scale, and create a better business case for operators to invest in broadband infrastructure.
It would also permit a more effective and continent-wide spectrum policy, the removal of inefficient national divisions, and the introduction of more comprehensive secondary markets to allow more efficient usage of the limited resource.
Harmonizing tax regimes across the continent would also reduce the burden on consumers and businesses.
3) Simplifying and reducing regulation. Regulatory reform is another necessary step in resolving Europe’s broadband challenge.
Removing the open-access mandate would encourage investment by market incumbents in next-generation infrastructure without fear of being undercut by non-investing new entrants.
Reducing the current regulation may encourage more independent investment in upgrading existing infrastructure.
And the most important is to remove national restrictions on consolidation across countries. This would allow operators to find the cost savings across borders and build a business case for infrastructure deployment.
Recently, the European Commission’s vice president for the digital single market, Andrus Ansip, said he is “worried” about the direction that negotiations over the Telecoms Single Market package have taken in the European Council, where member states appear divided on the issue.
We need to continue trying to convince them and focus on the overall keys to success that I have outlined above.
More help is required on this.