| The 25th July directives:
a user perspective on European regulatory reform 1 May 2002
|
Professor Melody, Ladies and Gentlemen
I trust that you realise we ought to be out in the streets with red flags and singing the Internationale instead of here in the tranquility of the Danish countryside to address questions about the future regulation of one of the most speculative arms of capitalism.
It is thirty years since I was last in Helsingoer, but it does not seem the sort of place for workers' processions let alone violent street protests against capitalism, globalisation and the evils of the World Trade Organisation (WTO). That leaves us with less fun and more of an intellectual challenge.
One of the few highlights of the debate in the European Parliament on the Regulation on the Unbundling of the Local Loop was the formal and rather solemn statement of opposition from the Communist Party of Greece. Their spokesman went on to call for all telecommunications services to be provided by the state. I imagine that spokesman is carrying a red flag today through the streets of a Greek city.
By now you must be getting a little confused by the joys of the 25th of July package.
If you are not confused, then you ought to be. For all the evidence
is that the package will give us greater regulatory diversity and not less,
less certainty rather than more. The scope for creative, even surreal,
interpretations is considerable and perhaps inevitable.
Historical background
INTUG has been in this business a very long time. Since 1974, we have been arguing for:
Back in the early 1990s we argued for the Green Paper on Telecommunications which set out the basic case for tearing down the structures of direct state provision of telecommunications.
Later we had a bundle of reforms that took effect at the end of 1998. For many European countries these brought the first real competition. One consequence of those reforms was the obligation to conduct the 1999 Review, a process which will reach something that passes for conclusions on 25th July 2003.
There is an element of the self-fulfilling prophecy in this. We said that we were introducing competition and that regulation would be a temporary substitute for competition. You can hardly then expect the conclusion that it is not working or that it is taking decades. The inevitable conclusion was that competition was working and that regulation could be reduced.
As will have been explained by the officials of the European Commission, there has been considerable consolidation and renewal of our telecommunications legislation. We have fewer directives, though it does not follow that we have less or clearer law.
The Commission undertook a series of expert studies in the initial phase
of the Review. This was followed by a series of well attended public consultations.
One unusual feature of this process was the pre-publication of "drafts"
prior to inter-service consultation. Traditionalists frowned on this at
the time.
Yet, later it was cited as an example of best practice. It seems that
Brussels bureaucracy can change for the better.
In July 2000 we were given the five draft Directives.
The inter-service consultation prior to this led to some difficult compromises, not least between the two leading directorates-general of Information Society and Competition. The Information Society view was that regulation was a substitute for the market and that the new package was to take us closer to a free market regulated only by the competition articles of the Treaty. This played into the hand of Competition who could argue that the regulations ought to look more like competition law. The proposals contained rather more competition law than people had expected or at least had the appearance of that.
I will come back to the problems and limits of competition law in a moment.
The process of the 1999 Review has soaked up enormous resources from all the players and will continue to do so for several years.
One MEP complained that he could have meetings with market players 24 hours a day, seven days a week. Lobbying is one of the few thriving labour-intensive businesses.
Finally, only last week, the Official Journal carried in all eleven official languages the four directives which are to be implemented by the Member States from 25th July next year. One directives remains in the Parliament where there is some hope that it will pass into law.
For some strange reason nobody bothers to translate them into Basque, Catalan, Occitan, Freisian or Scots Gaelic. European minorities are deprived of detailed knowledge of telecommunications law.
Now the battleground now shifts to the member states and the innumerable consultations. The lobbying effort moves there and is multiplied fifteen-fold.
Soon it will be the turn of the courts and the lawyers as we struggle to find the real meaning of:
European leadership
The Lisbon Declaration of 2000 gave us the eEurope Action Plan till to 2002. The forthcoming Sevilla Declaration extends that to 2005.1
Allegedly, the aim is:
| … to become the world's most competitive
and dynamic knowledge-based economy
…capable of sustainable economic growth with more and better jobs and greater social cohesion. |
This is a bit vague, making it hard to prove or disprove. Even the aims seem vague:
However vague, eEurope sets the broad ambitions of the European Union and gives an impetus to measures, both actions and statistics.
It is not clear that the detailed policy work is going to get the EU to the objectives. It becomes tied up in very political debates heavily influenced by the operators and manufacturers.
Europea has lost its leadership in mobile. It is not the result of bad regulation but of because the operators lost the plot. They not only believed their share prices, but built them into the business model. They paid billions to governments. Yet they did not have a clue what they were selling in WAP, HSCSD, GPRS or EDGE. They still do not today. Anyone who believe they know what 3G is or that the self-styled 3GSM operators can sell has clearly been exposed to much 900 MHz radiation.
The leadership today lies in Asia, especially the growth.
South Korea, as Sam Paltridge has shown you, has developed fixed broadband far beyond anything even in North America. The South Korean companiesare now rolling this out into other Asian countries. However, they are also intent on migrating their broadband services to mobile in the next couple of years. So they will take their knowledge of broadband into mobile once the 3G networks are there
China is the largest mobile market for handsets and voice traffic, yet it is still at no more than 12% mobile teledensity. It is the largest potential market for mobile services.
The mobile business is moving out of Europe, it is cheaper and bigger elsewhere.
It is almost soimetimes asked if the the regulators could have done
better. This is almost a rhetorical quesiton, since it it asking too much
that an NRA forces a commercial entity to behave more sensibly. The presumption
is that markets and market players know best, at least in the long run.
Unbundling the local loop
As Sam Paltridge will have made clear, Europe is not in the leader in either broadband or in unbundling the local loop. Where we do have rapid growth it comes from the incumbent operators.
Yet this was a fast track activity, spurred on by the Lisbon Council of March 2000. It passed into European Union law on 2nd January 2001.
It was the first use of regulation for telecommunications. This was to avoid the delays and problems of transposition.
It was a novelty in that it used "pre-emptive conciliation". The Council and Parliament agreed to make identical amendments on first reading, dramatically speeding the approval.
Robert Verrue, the Director-General of the Information Society, recently conceded that the Commission had underestimated the willingness of the incumbents to rush out their own retail ADSL services while throwing ever conceivable and a few imaginary obstacles in the way of their potential competitors. Once expansion in foreign markets had become implausible or impossible, the incumbents sought to reinforce their positions at home by whatever tactics were available.
The largest number of unbundled local loops is in Germany, the vast majority used for ISDN. Deutsche Telekom is now working hard to convert those users back to DTAG, to become customers of ADSL. We could well see a sharp decline in the total number of unbundled local loops in Europe.
In many member states we are still waiting for the completion of RIOs and the ancillary regulations to be put in place to make unbundling work.
Yet, the biggest problem remains the price squeeze between wholesale and retail prices. This will take much longer to sort out.
In the meantime, incumbent supplied ADSL is booming, but nobody knows
how we will get them to move onto HDSL and VDSL.
Competition law
On 27 July 1999 the European Commission launched a sector inquiry into telecommunications. This had three strands:
Mergers seem to have gone out of fashion. Nobody has any money to buy and few people would be foolish enough to accept share certificates in another operator. However, Vodafone seems to be trying to revive them today by going after SFR.
Merger cases are important in completition law and provide considerable guidance to the ways in which the new package works.
Competition law is a slow business in which years and even decades can go by. It was never designed to operate at Internet speed and there are no plans to re-engineer it.
One final concern is that the European Court of Justice may look at
the new directives as being competition law and expect the same standard
of evidence. If so, then the investigations under the new process will
have to be rigorous indeed.
Financial markets
The financial tide has gone out on information technology and telecommunications. The dot.com crash, dot.bomb or dot.con, call it what you will has seen a massive shift in sentiment away from ICTs.
Some incumbent operators have in a matter of months acquired the sorts of debts normally associated with third world countries. Yet those countries had built this up over a quarter of a century with the help of a string of unscrupulous and corrupt dictators.
It is very hard to know which companies have engaged in advanced financial engineering on or, indeed, off their balance sheet. There is a very genuine problem in knowing whose protests of innocence are too much.
The paper empires of the recent past are being revalued with massive sums being written off.
Eventually, financial analysts will question whether the absence of a business model for 3G is the true killer application, but killing the operators.
There seems to be no reason to think that the financial markets will
change their view of telecommunications any time soon. Even if orders and
sales become more buoyant, it will take a lot to convince the analysts.
Consequently will see more bankruptcies.
New regulatory process
Under the new scheme, the process will be to:
The approach to have the Commission define the markets in advance may not strictly conform with the approaches used in competition law. However, it does add enormously to creating legal certainty.
The use of a Recommendation leaves some flexibility with member states.
The geography of the markets remains unknown. It is far from clear what the "granularity" will be:
The NRAs will consult in all cases.
Once you have a service and a geography then you have to identify effective competition.
It is looking to the future, as in a merger case. It is subject to market players making promises and hints, expressing hopes.
It may not make Europe or even specific countries competitive. This failing is embedded in competition law.
It is not very clear what will happen if a market ceases to be competitive. Someone, users or market players, may want to re-engage the regulators.
How do you prove or disprove whether a market is effectively competitive? What sort of data do you require? There are complex arguments by NRAs claiming they cannot gather data which they might use for this.
What sort of methodologies do you use?
There is a exclusion for emerging markets, but ill-defined. An easy shelter for the incumbents and the mobile oligopolists.
Specific measures to be imposed on SMP 2.0 operators are based on this analysis. They include:
Band of brothers
We are not to have a single European regulator this time around. Perhaps that will come in the next package. The reason is very simple, there was no political support. Nobody argued for this! In retrospect it may well have been a mistake, but it is much too late to do anything about it..
What we are to have is a band of brothers (and sisters), the European Regulators Group (ERG). We are told that over the next year they will harmonise thinking. Yet they come from very different administrative and intellectual traditions.
The title band of brothers is being recycled in a movie title at present. However, it originally comes from Shakespeare's Henry V (not from Hamlet). It refers to a some soldiers facing the enemy. What unites the NRAs is a common enemy, the European Commission and to a lesser extent the operators who try to pick them off one at a time.
To add to the mix, there will be a variable geometry. That is the representatives of the competent regulatory authorities will be present, for example, broadacsting regulators. A further twist is that the Independent Regulators Group (IRG) will continue to exist and to function. It is far from clear how the IRG and ERG will interact.
The ERG is to be created by a Decision of the European Commission. There
were some extremely obscure arguments under "comitology" and how this body
was to be created. One consequence is that we are very unsure about the
openness and transparency of its proceedings. It may operate in the shade,
if not the dark.
Conclusion
We stand then on the brink of a new era. What it brings will be a mix of technology, financial markets, competition and regulation.
It is doubtful if the new package can address the market failures that I identified earlier, but we must wait to see.
The new package cannot and should not address the failure of the mobile network operators to develop a business model which both works and complies with competition law. It is increasingly obvious that the mobile operators have lost the plot, that they rely on revenues from roaming and termination while failing to devise new models for data services on 2.5G and 3G. They need to find a model which works within the new regulatory framework and Articles 81 and 82 of the Treaty.
The obstructionism shown in the unbundling of the local loop is likely to be matched by the regulatory and legal tactics in the consultations and reviews to be completed as the new package is deployed. This will be good business for competition lawyers as incumbents, fixed and mobile alike, seek to shore up their position and engage in delaying tactics while rushing out their own services.
One or two member states seem in a hurry to implement the 25th July package. It is unclear why they are in such a hurry. The risk to be first in court for judicial review or appeal.
The NRAs are digging in for a long siege on the industry. They do not see their role as temporary, but as permanent guardians of the public interest.
For the foreseeable future, Europe will remain a patchwork of national markets dominated by a few players. There will be no single market.
The brief period of being world class in GSM looks increasingly to have been luck rather than design and it will not be repeated.
Thank you very much for your attention.
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