The Service Providers Interest Group (SPIG) represents companies and organisations in the UK whose products incorporate a significant element of telecommunications. Its members provide wide ranging services, including mobile, Internet, data and content. Services operated by SPIG companies already span the telecommunications, media and IT sectors, and in some cases have done so for many years. Our experience strongly supports the paper’s view that there are tremendous opportunities for further economic and social development, therefore we welcome this debate on what sort of regulatory framework will create the best chance for fulfilling that potential within the EU. This contribution contains our assessment of the critical issues and actions, and comments on the specific questions posed. It does not cover other key dependencies, such as intellectual property and authentication.
The Green Paper deals with convergence within the platforms, networks and terminals through which services are delivered. It is clear that advances in technology have already multiplied the ways in which services can be offered: television now comes via satellite and cable modem as well as terrestrial broadcast; voice telephony is delivered not just by fixed exchange lines, but by mobile, satellite and Internet connections. It is also true that the associated cost improvements have brought previously
"elite" services, such as time-critical information, within the reach of a much wider population. However, though it is an essential component, the delivery mechanism is of little direct interest to customers. When considering a television service, customers are interested in the programming on offer and what it will cost them, not whether it comes by satellite or cable. Similarly, years of experience with "remote-access" services, such as home-shopping or banking, have confirmed that the vast majority of customers choose their supplier by the value and quality of their goods and services, and are very unlikely to switch to another supplier just because it offers telephone or Internet access.
Thus we believe that convergence should not be made an objective, or seen as something which is worth achieving as an end in itself. Even less should it be used as a means of driving services development, which would divert attention from those service aspects which most matter to customers. SPIG believes that convergence is of great importance, but solely because of the potential it offers for making economies of scope and scale, and thereby reducing the unit cost of service delivery. That can lower entry barriers in several ways:
Overall this should mean more business, and job, opportunities, and better value and choice for customers. Moreover, the benefit should be widely felt, in reaching a greater number of customers, both business and domestic, and across a greater range of locations than is viable with the high cost of specialised, demarcated delivery.
Similarly, SPIG would like to note that a technical capability to converge the delivery of services, whether over a common transmission path or to a common terminal, should not be presumed always to be the best or inevitable solution. For example, though a household without a computer might prefer to try Internet access via the television set, it seems likely that any reasonable level of use would conflict with programme viewing, and create demand for a separate terminal. It seems equally likely that the second terminal would be a computer, specific to the need, not a further Internet-equipped television. Another case is "video on demand", which has failed to find commercial success though it has long been possible to deliver good quality video over telephone lines: in large part this is because it is too expensive to compete with home video recording or video rental.
In summary, SPIG believes that convergence is a powerful agent for economic growth, however its value lies solely in its ability to reduce the cost of providing services. There should be no barriers to making the most of its possibilities, but neither should its progress be shaped by regulatory intervention.
SPIG agrees with the Green Paper’s assessment that the globalisation of services is inevitable, and is already happening to a large degree. We welcome the EC’s recognition of the need to consider its own regulatory options within a world-wide context. Many SPIG members already operate globally in this arena, and can confirm from their own experience that industry participants actively weigh the merits of different locations, and, if so motivated, can move their businesses far more easily than companies in most traditional sectors. This presents both opportunity and threat: the EC has the chance to create conditions which could draw in investment from around the world, or cause much of its "home" business to depart.
We support the intention to remove regulatory uncertainty. We agree that this acts as a barrier to investment, by reducing the amount committed or deterring it altogether. The global market brings the added dimension that companies might choose to invest outside the EU, rather than simply waiting for rules to be clarified. Clear but onerous regulation, which amounts to an extra tax, is at least as damaging, and reduces the viability of doing business in the EU. SPIG believes that the balance of regulation needs to be set in the full realisation that the services markets cannot be dictated by government intervention, because the providers, and their jobs and growth potential, can easily be directed to other states. For example, SPIG agrees that action may be needed regarding the decency of publicly available services. However it needs to be recognised that some solutions to this problem, such as obliging gateway providers to prevent any indecent material from ever reaching their users, are largely impractical, and would be so costly as to drive those suppliers outside the EU: thus the regulation would anyway be ineffective as users cannot be restricted to EU-controlled gateways. A far better approach is to agree through consultation a feasible target for self-policing; which in this case might be that service providers would not be responsible until notified of a specific problem, but would then be obliged to block the offending source.
The Green Paper considers various actions, such as research programmes, which the EC could initiate to improve the competitiveness of EU states in the global markets for information and transaction services. SPIG believes that a key role for government is in education, to ensure that information technology skills receive adequate priority and resourcing, so that the future EU workforce is equipped to reap the benefits of these opportunities.
Beyond that, we believe that government effort will be most productively employed in establishing a free and fair marketplace, with specific market projects best left to the industry players.
As discussed earlier, the use of any particular delivery mechanism is incidental to services customers. Hence goods need to be correctly described and of merchantable quality whether bought in a shop, by post, by telephone or over the Internet: regulation which differs according to the order method would be unsuitable, costly for suppliers, and its irrelevance could also be expected to confuse customers. Services need the regulation and licensing appropriate to their markets and market circumstances, irrespective of
delivery method. This might include food safety rules for potable goods, financial codes of practice for stockmarket data, and constraints on dominant players for uncompetitive markets. But, only that regulation and licensing which is directly relevant to the market in question should be applied. Sweeping constraints would not improve customer protection, but would raise the costs of regulatory compliance, and therefore hinder the growth of services sectors in the EU. SPIG supports a general adoption of the principles of the EC Licensing Directive for telecommunications, which holds that obligations should always be the minimum necessary.
Similarly, the delivery options used by services suppliers need their own forms of regulation, to fit the conditions of that delivery market. However SPIG strongly believes that those should not roll over into extra obligations on the services supplied to end-users. While such a unified framework may appear elegant in theory, the conflict of designing a single regime to cover very different markets and market structures would in practice cause cases of substantial over- or under-regulation, probably both. For example, a telecommunications operator with an effective monopoly needs much greater scrutiny and constraint than a supplier in a competitive area such as market research data who happens to offer telecommunications access to its information. We therefore support an approach which mainly retains the present separate regulatory regimes, modified to take account of convergence as the need arises.
Nevertheless, SPIG recognises that convergence has produced anomalies under the current regulation, which originated at a time when the services and the way in which they were delivered, i.e. telephone calls over a fixed, switched connection, were treated as indivisible. We believe that the solution is to make a clear distinction, and to apply regulation separately to services and delivery facilities. In general, delivery facilities are the areas where the most intensive regulation is needed, because the recent history of monopolies on supply means that competition is not well enough developed to be an effective deterrent to unreasonable behaviour.
Unlike services markets, the field of delivery facilities is characterised by suppliers with special and/or exclusive rights, which are either still in force, or so recently withdrawn that the legacy of market dominance remains intact. This is magnified by the enormous investment already sunk into utility networks, which confers a huge cost advantage over new entrants.
These conditions render normal competition law, which presumes some degree of effective competition, inadequate. SPIG believes that special extra regulation, such as the suite of directives developed over the past few years for telecommunications, is essential in these cases. The aim must be to create the best approximation to the commercial pressure which would result from actual competition, because real, sustainable competition takes a long time to establish from the starting point of a network monopoly. This is confirmed by the UK experience; in 1997 BT still had 80% of the leased lines market, and 84% of the switched lines and calls, more than a decade after liberalisation. SPIG therefore wishes to make the following points with regard to this critical area:
Finally, SPIG would like to note that the EU has a mature body of commercial and competition law already in place. Care must be taken to ensure that anything extra is only imposed if it is really needed, since unwarranted regulation distorts normal business activity, imposing extra cost on the suppliers, and thence the customers and general economic health. SPIG proposes the principle that specific extra regulation should only be imposed where there is clear evidence of market failure. As discussed above, we consider that this includes cases where a market, or a particular supplier, is shaped by the existence or history of special and/or exclusive rights. Thus regulation should not be imposed on service areas which are new, because no evidence of failure can yet exist. Neither should it be used to direct market development, which is best done by letting firms follow their own different plans, and succeed or fail at their own expense.
Specific responses to some of the questions asked by the paper are as follows:
Question 1:The nature and impact of convergence todayA) Whilst convergence is occurring at the technology level, to what extent and at what speed is this happening at the industry, service and market levels?
SPIG considers that convergence is spreading beyond the technology level, but in a fragmented way. We see the greatest and fastest increase in convergence where it has been able to make a marked improvement to the functionality or price of the services offered. For example, there are services combining text, audio and visual information sources, which are of real value to financial traders, who must find ways of assimilating ever-growing amounts of information. This reflects the view discussed earlier, that customers focus on the usefulness of services, rather than the delivery mechanism.
B) Are the effects of convergence already being felt in the business world and in our everyday lives, and if so, in what way?
Convergence is already affecting both business and personal life; however most common examples have long been possible, but have taken many years to become widespread. Services such as home-banking have been available for over a decade, but it is only in the last 2-3 years that easy-to-use, remote access enhancements have become a standard feature for nearly all UK retail finance organisations. Possibly the most dramatic example is business individual communications, where a combination of fixed and mobile telephone lines, working in concert with voice mail and e-mail, is now a standard practice which greatly increases contactability.
Question 2: The socio-economic, business and consumer impact of convergence
B) What effect are current developments likely to have on telecommunications, media and IT sectors, in terms of the underlying economics of those sectors, the services offered and the likely service providers?
As discussed earlier, SPIG believes that the importance of convergence lies in the great potential for economies of scope and scale which it brings to the delivery of services. Reducing the unit cost of services lowers barriers to market entry, which will mean existing suppliers will be able to offer more services, and it will be easier to establish new ventures. An increase in service variety is already to be seen on the Internet, where many suppliers which started with advertising are now moving into transaction services. A combination of competition and lower costs feeds through into better value for customers, which stimulates the growth of markets, and their ability to sustain more suppliers
A) Will convergence have a significant impact on job creation as well as on education and training in the European Union? How is convergence likely to impact the way in which we work. Will its effects be spread evenly throughout the European Community?
The response to Q1.B states our belief that convergence can bring more business, and to a wider range of companies. SPIG believes that this will feed through into substantial employment opportunities, from which EU member states will benefit unless that activity is attracted elsewhere in the world by regimes more favourable to business. The availability of flexible, properly skilled people is another dependency. Many new ventures will start small, and job flexibility will be important to allowing them to grow at a good but sustainable pace; for example, teleworking is likely to increase.
As described earlier, we feel that convergence will help economic benefit to spread more evenly through the Community, in that it will reduce the draw of specialised infrastructure and the tendency of business to concentrate where it exists.
C) What evidence is there of changes in Europe in the way services, information, entertainment and culture are being accessed in the home and in the office? What are the implications of the current levels of PC penetration, Internet use and TV penetration for the take-up of new services? What action (if any?) is needed to overcome low levels of multimedia computer penetration and Internet use?
D) In the light of the positions put forward in the Commission Working paper on the Fifth Framework Programme, what kinds of Community RTD projects should be launched in the context of convergence?
SPIG strongly believes that markets will be most effectively developed by the industry players concerned; the explosive growth of the Internet, which has been driven largely by start-up service provision companies, illustrates this view. We do not support state intervention in equipment and/or services markets, because this would unnecessarily distort the commercial process which must eventually prevail. Similarly, we believe that state effort is best directed to resourcing education in information technology, rather than expended on development projects.
Question 3: Barriers to convergenceWhat is the likely impact of the barriers identified and are there other barriers or factors which may have a significant impact on the convergence process in Europe?
We broadly agree with the identification and description of barriers to entry contained in the paper. In particular, we note that there does seem to be scope for the NRAs to class the same service differently from country to country, which, by fragmenting the EU market, would raise the cost of doing business. We also support the principles laid out in the introduction to the chapter, as we believe that competition rules should hold wherever possible; that there should be reluctance to impose new regulation; and that regulation should always be the minimum necessary to achieve the objective.
SPIG considers that many of the barriers listed, such as access to users, restrictions on use of infrastructure, and high telecommunications prices, are capable of being tackled by the existing framework of EC telecommunications regulation; this will be a vital defence against the market power of incumbent operators in the years before liberalisation produces real competition. However we believe its effectiveness would be greatly increased by adopting a services/facilities split as the basis for the accounting separation and cost-based pricing required of operators with significant market power. Furthermore, we consider that the ability to obtain sufficiently unbundled services, at cost-based prices, is extremely important to services development, and already forms a barrier; again, the level of unbundling needs to be down to the facilities level, otherwise the incumbent operator retains control over the structure and specification of services building blocks.
Question 4: The impact of convergence on current regulationA) Do current developments require more or less regulation in the sectors affected by convergence, more or less reliance on competition rules, and more or less reliance on market forces to achieve the objectives identified in earlier Chapters?
As already stated, SPIG believes that market forces should rule unless there is a clear case of market failure: extra regulation should only be considered if such evidence exists. We consider that the existence or recent history of special and/or exclusive rights, such as in the telecommunications sectors, fulfils the criterion of market failure. SPIG supports the current EC competition rules as complementary to the action of normal market forces, in that they protect the interests of consumers and responsible suppliers. However, we believe that competition rules alone are inadequate in markets where real, sustainable competition does not yet exist.
B) Whether , and if so, to what extent, convergence undermines the principles underpinning existing regulatory approaches in the telecommunications, media and IT sectors?
As discussed earlier, SPIG does feel that convergence has highlighted anomalies, in that same service can be treated differently according to its delivery method. However we believe that this is not a problem of principle, but that service and delivery facility were (wrongly) seen as indivisible, which was generally the practice when the sector regulation was devised. We believe the solution is to retain the existing regulation, but to ensure that it is only applied to the delivery facilities, not to the services: moreover we believe that this is the right approach regardless of convergence issues.
Question 5: Overcoming the barriers - getting the right regulatory framework for business and for consumersC) Will convergence require changes in the approaches to the award and pricing of frequency spectrum, and in particular, what approach should be taken, in the light of convergence, to the issue of completing the transition from analogue to digital services, including the need for a timetable for analogue switch-off?
Radio spectrum allocations, managed by the Radio Agency (RA) in the UK, are subject to international agreements determining the precise frequencies and technical specification of infrastructure and user equipment. To date spectrum for mobile telephony has been allocated at 900 MHz for analogue cellular and GSM (Cellnet and Vodafone) and at 1800 MHz for GSM (One 2 One, Orange, Cellnet and Vodafone). There is no ‘spare’ spectrum for any other GSM operator. Third generation system (UMTS) spectrum at 2 GHz has been identified across Europe, though not fully confirmed. In the UK the DTI expect to issue 3-5 national licences following an auction in 1999. All the currently available spectrum for commercial TETRA ( a new mobile radio technology that has good data support) has been allocated to a single operator.
Access to radio spectrum is a bottleneck to infrastructure competition in mobile telecommunications.
Apart from the technical specification, and thus current licensing (under the Wireless Telegraphy Act) limitations, of sending voice, data and broadcast signals over GSM or broadcast frequencies, the licence fee structure is not equitable. From summer 1998 the RA will be able to charge more for spectrum to persuade users to use it more efficiently. However the Government is only planning to apply ‘administrative pricing’ to mobile communications and not to broadcasting.
The barriers to convergence are:
The barriers will be removed by:
The timescale for these changes could be 5-10 years. It is essential, therefore, to develop competition in service provision with access to unbundled network services on equal terms to all service providers.
D) What should be the objectives of standardisation in the light of convergence, and what should be the relationship between regional and national standardisation?
SPIG agrees that standardisation is an important matter. However it is in the interests of all concerned to avoid the market fragmentation which lack of interoperability would cause: this is demonstrated by the emergence of IP as the de-facto basis of Internet communication. We therefore believe that standardisation should continue to be led by the industry, in accordance with the needs of the market. Moreover, we believe that standardisation must develop on a global basis, because that is the extent of the market. Though useful in the past, the relevance of regional focus is fast decreasing.
E) What additional action (if any) is required to ensure that the interests of consumers and of users with disabilities are respected in the light of convergence?
SPIG believes that the interests of all consumers, including those with disabilities, are best served by vigorous competition which will produce service value and choice. Indeed this arena, with its emphasis on flexibility, may well improve the opportunities open to disabled people, for example through increased use of teleworking.
Question 6: Securing public interest objectives in the light of convergenceSPIG accepts the concern with regard to securing public interest objectives. However every obligation imposes a cost on the supplier, which may impede its ability or motivation to invest, and in the worst case may tip the balance of location to a non-EU site. This should be borne in mind when considering entitlement levels.
Question 7: The future shape of regulationA) Do current developments require a reassessment of the way in which rules are applied to the telecommunications, broadcasting and IT sectors?
As discussed in Q4.B, SPIG considers that convergence developments have drawn attention to anomalies which exist because the current regulation is taken to apply to services rather than the underlying delivery facilities of the sectors concerned. We believe this should be rectified by making a clear distinction between the two, and focusing the regulation on facilities. Services provided by the operators with market power in facilities would continue to be affected by regulation, via the measures which counter their ability to leverage dominance into other markets.
B) Does the existence of different regulatory authorities or ministries responsible for different aspects of telecommunications, media and IT activities offer a workable structure for regulatory supervision in the light of convergence?
C) Will convergence require a reassessment of regulatory responsibilities at a national, Community or international level, and, if so, which areas?
Regulatory compliance can be a significant business cost, and so plays a part in the choice of business location. It is of growing importance to the attractiveness of the EU as a base, that conflicts and/or overlaps of regulatory responsibility are resolved wherever they occur, whether between sectors, or over the level from which regulation is applied. However the key requirement is that regulation should be consistent and transparently applied, with swift processes for appeal and redress: any organisational
model which can provide this is suitable. SPIG also believes that specialist knowledge is vital if the sector regulation is to achieve its objectives. Thus even if separate NRAs are brought closer organisationally, that must not mean a generalisation of skills.
Question 8: The international aspects of convergenceA) Is further action required at an international level in the light of convergence?
SPIG believes that market forces should be left to drive the development of these activities, and that governmental effort will best be applied to removing artificial restrictions. However, in this fast-moving area, it will be advisable for the EC to monitor the business conditions, such as regulatory cost, which exist in alternative international locations, in order to make the EU at least equally attractive as a base for business.
B) What additional steps (if any) are required to encourage other countries, particularly in Central and Eastern Europe, to create conditions within which current developments can be exploited?
The fundamental requirement is the establishment of basic commercial rights and competition rules, which are needed for all forms of business. In addition, the regulation of incumbent utilities should take account of the positive and negative experience gained in the EU and elsewhere, with a view to achieving competitive supply as fast as possible. In particular, care should be taken in how incumbents are packaged for privatisation, so long term influence over market structure and access are not conceded.
Question 9: Principles and possible approaches in the light of convergenceA) What effect will convergence have on the principles for future regulation applied in the telecommunications, media and IT sectors, and should those principles be adapted in the light of convergence?
We support the principles which the paper lays out for future regulatory policy, although we believe they are appropriate regardless of the issue of convergence. However, as discussed earlier, we believe that the value and choice benefits which are delivered by unfettered competition are the best way to maximise participation in these sectors. The EC should avoid a prescriptive approach which imposes costly obligations on business, and may therefore deter investment.
B) If convergence requires adaptation of existing regulatory approaches, should that adaptation:
As described elsewhere, SPIG considers that the first option should be followed, but with the existing frameworks adjusted so that the regulation is focused on the underlying facilities which deliver services, not the services themselves. We believe this approach will overcome anomalies introduced by convergence, and moreover will provide a better basis on which to obtain sufficiently unbundled services and genuinely cost-based prices from incumbent operators.
We do not support the second option, which appears to bring a high risk of overlapping or multiple regulation. Moreover it assumes that regulation will be needed in markets which are either new or already competitive, which is against our view that special regulation should only be introduced when clear evidence of market failure exists. Neither do we support the third option, because we believe the conflicts involved in designing a single regime to cover very different markets and market structures would in practice cause cases of substantial over- or under-regulation, probably both. Furthermore we believe that significant time would be needed to develop such a framework, creating a damaging interval of regulatory uncertainty.