Viva Vivendi (sorry!)

I was a bit disappointed to see Chris Marsden berating Jean-Bernard Lévy, Chairman of Vivendi, for his recent article in ParisTech Review.  Admittedly, the piece is not terribly erudite – what do you expect from a company chairman? – but it’s ideas deserve more than Marsden’s dismissal of it as ‘how to end net neutrality’.  Yes, it’s a pretty naked bit of lobbying on behalf of a network operator (frustrated with the lack of sympathy so far shown by Neelie Kroes) but it does at least pose some of the right questions, e.g.

“How do we ensure that exponential increases in demand for bandwidth continue to be met both today and tomorrow? What hurdles must be overcome in the race to deploy ultra-high speed networks in the face of a less than favorable economic climate?”

Marsden’s attack is evidently directed at Lévy’s suggestions on ‘rethinking network management’ but the article also touches on ‘the dynamics of co-investment’ and the elusive concept of a 'two-sided business model' for the recovery of access costs.  The latter is an idea that has been relatively hot stuff in economist circles for nearly a dozen years but has so far failed to gain wider attention.  It’s essentially the rationale for me not paying Visa for the use of a credit card or, more to the point, why I don’t pay Firefox or Google for the use of their search engines.  In the broadband access market, the traditional arrangement is that access costs are levied exclusively on retail subscribers but, in a two-sided business model, these costs might be shared in other ways.  Chris Marsden and other net neutrality advocates reject the possibility of such experiments, insisting on maintenance of the current charging regime.  (Doesn’t that amount to price regulation?).  In the interests of progressing the vital debate on new network investment, let’s not stifle these ideas…

Smoke without fire?

I recently alluded to Vodafone’s claims that, in the midst of global recession, regulators’ continued emphasis on short term consumer benefits runs the risk of squeezing out the revenues needed for investment and growth – specifically in next-generation networks.  At this week’s Mobile World Congress in Barcelona, Vodafone CEO, Vittorio Colao reiterated that argument, (this time with particular reference to forced cuts in mobile roaming charges).  In his own words: “we should stop having this continuous intervention on prices and let the industry reinvest the money”.  Colao called for a moratorium on price regulation, arguing that successive cuts imposed by European authorities were endangering mobile operators' ability to invest in upgrading their networks for 4G capability.

Perhaps less predictably, the latter point was echoed in a keynote speech at the same event by Eric Schmidt, Chairman of Google, who claimed that mobile operators are being ‘regulated to death’, especially in relation to 4G investment.

None of this went down well with Neelie Kroes, vice president of the European commission responsible for the digital agenda.  She quickly hit back at Colao via Twitter, writing:

“Message to Vittorio and Vodafone: I call your bluff, and indeed do not respond well to threats. I take the side of the Vodafone customer. And I remind everyone that we want to get the mobile sector more spectrum and a bigger market. A fair competition in roaming is a good exchange for those opportunities. Remember, if consumers lose their fear of using their smartphones and tablets when travelling across Europe, operators will benefit as well."

OK then, rhetoric aside, who’s right in this debate?  Well, it’s pretty easy to side with the regulatory view taken by Kroes: if charges for call termination and roaming are way above cost, this looks like a straightforward case of the mobile operators abusing their market power, and needs to be corrected.  And, adding to the suspicion, these operators have ‘form’ in developing suspect economic arguments to defend their pricing behaviour – who can forget the legendary ‘waterbed’ defence for excessive termination rates?

And yet, and yet, to return to the thesis of that original Vodafone paper, its central point, put simply, is that times change.  In traditional (stable) voice markets, all the above regulatory logic holds good but we are now at a time of unprecedented demand for new and advanced services, This demand can only be satisfied through massive investment in new infrastructure and yet, in the midst of a recession, market conditions are highly unfavourable towards such investment.  Bearing down on retail charges, as the EC insists, can therefore create the double whammy of cutting off scarce investment funds and putting further pressure on existing infrastructure.  For instance, large cuts in roaming charges will both deprive the operators of much-needed revenues and, through increased usage, risk further network congestion.  At the same time, 4G investment struggles to keep pace with customer expectations while regulators ponder new ways of maximising the prices operators pay for the new spectrum. 

There is therefore some merit on both sides of the argument, and the regulators need to recognise that.  In other words, Ms Kroes et al have to give greater thought to the consequences of aggressive price regulation.  Without that, their incessant calls for major new investment may be unrealistic

Dysfunctional network up for grabs

Oh dear oh dear, I find it terribly sad that a once-proud telecoms business now has nowhere to go but to provide backhaul capacity for the likes of Vodafone, At a time when network capacity is, or ought to be, so precious, it seems ironic that C&W’s assets appear to hold such limited value. This Guardian piece records the most recent (misguided) twists and turns the company has made but surely the broader conclusion has to be that, without a complimentary access network, C&W’s investments are indeed just so many ‘dumb pipes’.

In fairness, C&W has tried to fill this gap in the past – most notably with its abortive acquisition of some local Cable franchises – but, like many others, it faced a regulatory regime which failed to incentivise such investment.  I’ve said it before but what a mistake that was…

Climate change appears everywhere…

Is European telecoms regulation fit for purpose in the current recessionary climate?  Apparently not, according to my old chum, Richard Feasey, Public Policy Director at Vodafone.  Feasey’s thoughts are penned in a short paper for ‘Agenda’, the in-house journal of Oxera, the economic consultancy.  

To save you looking it up, the thesis of Feasey’s essay is that, even at this late stage, regulators need to adapt their policies to the changed market conditions the industry faces today.  He points out that the basis for our current ‘regulatory architecture’ was struck in the late 1980s and 1990s, a golden period for telecoms investment – a period when prices were still high and markets retained attractive opportunities to exploit efficiency gains and cross-subsidy. 

When the global financial crisis hit Europe in 2008, the initial reaction of policy-makers was to restate the importance of the telecoms sector to the broader European economy and to establish a new set of targets for it – in particular, the Digital Agenda targets for broadband penetration.  But no serious attempt was made to question whether the underlying policy framework was capable of delivering these new targets.  This has led to growing complaints from industry about the direction of European policy, e.g. 

• regulators placing too much emphasis on driving down consumer prices;
• regulators placing unrealistic expectation on market entry as a policy objective;
• regulators seeking ever-greater harmonisation of policy and prices at a time when the economic outlook among Member States is diverging sharply;
• regulators being required to undertake regular reviews of markets to assess and safeguard competition before investments have had time to pay back, thus creating uncertainty and undermining the investment climate.

Feasey therefore suggests that the European approach needs to adapt in a number of ways, for instance:

• Less focus on policy inputs such as the number of industry players, or market concentration, and more on outputs like market performance and the sustainability of competitors;
• Acceptance that, in some cases, oligopolistic competition may be the only way for markets to generate sufficient returns to fund major new investment in fixed assets;
• More tolerance of new models of competition like network sharing and co-investment.

Fundamentally, he argues that regulators need to accept that there is a tension between ‘policies aimed at delivering short-term gains for hard-pressed consumers and the long-term objectives of investment and European growth’. 

All of this is true (and kind of obvious). It’s maybe just a pity that the protest comes on behalf of the largest mobile network in the world.

Happy New Year, Mr Branson

At the risk of repeating myself, I was delighted to read this week that Virgin Media is to spend serious money (£110m) in upgrading its network – potentially offering its customers broadband speeds of up to 120 Mbps. 

As a veteran of the UK Cable industry, I remember my concern when Virgin originally took control of the weary industry survivors, ntl and Telewest. The initial emphasis on branding, marketing and ‘back office’ issues was both understandable and warranted but I was dismayed at the new group’s apparent distaste for the more technical aspects of its new acquisition.  The decision to outsource some of its network management activity to BT appeared to underline this apparent lack of interest in ‘plumbing’ matters.  Then and now, I found it incredible that the Cable sector seemed willing to forego its unique strategic advantage over broadband competitors – the undisputed superiority of DOCSIS 3.0 technology over copper-based alternatives.  Happily, if he was ever in any doubt, Virgin’s CEO (Neil Berkett) now gets it:

“This long term network advantage, combined with fast-growing consumer demand, means that today we have a window of opportunity to simultaneously step change the UK market, decisively differentiate our consumer proposition and transform our customers' digital experience."  Amen.

Getting the message?

As promised, I’ve been mulling over Ed Richard's address to the Total Telecom World Conference last month.  Entitled ‘Competition & Investment in Superfast Broadband’, this was a curious speech, elegant in some ways but containing more than the usual share of empty rhetoric. In fairness, I thought it set out the challenges of the superfast era pretty well but it was rather less convincing in the solutions it offered. 

In essence, the difficulty is that ‘the ‘early fibre’ phase of broadband development involves considerably greater risk for investors and companies’ than did historic network upgrades, the uncertainties including:

·        the chosen deployment technologies;

·        consumer demand and willingness to pay;

·        capital expenditure and deployment costs;

·        end user equipment;

·        the nature of competition 

In response, says Richards, regulators will have to take the following approach: 

·        Avoid hostages to fortune by adopting policies that are light touch, long term and flexible

·        keep regulation and regulatory actions predictable

• respond to converged and bundled services by providing consumers with better quality information and by giving them more sophisticated switching options.

In other words, “We must accept that this phase of development is different to its predecessor and, most fundamentally, we must recognise that we need to aim to combine essential investment with effective competition…we aim to ensure that regulation is as adaptable, flexible and innovative as the broadband technologies that are being deployed”  Not exactly a policy blueprint, eh…?  And the central issue of how to avoid regulation acting as a disincentive to investment is barely touched on. 

It’s also unclear whether the suspected former tension between regulator and government has been resolved.  Richards is at pains to point out that the creation of ‘the best broadband network in Europe by 2015’ is government policy, not an Ofcom objective, and that “our regulatory approach needs to be seen alongside the context of the public policy objectives” (whatever that means).  More pointedly, Richards explains that: “we have worked with the government to identify some key criteria to ensure that public investment is the friend of competition and not inadvertently its enemy”.  Unfortunately, these criteria are not explained.  With that in mind, it’s curious to note that the latest consultation on duct & pole access – one of the central pillars of Richard’s regulatory strategy for the new era – has been launched by DCMS, rather than Ofcom.  Hmm…

Back from the dead…

Well, hello at last!  I must say it feels very good to be blogging again.  I won’t bore you today with all the ‘editorial’ reasons behind the extended silence: some will no doubt emerge over time.  For now, let’s just say that a planned summer vacation was unexpectedly extended into a seasonal sabbatical.  But the break did at least give me the chance to review the themes I’ve been addressing over the past or so.  

As I said in an earlier blog, one of my main concerns has been ‘the development of competition in the communications sector’, particularly the regulatory approach to fostering broadband access in the UK – both universality and the emergence of next generation, ‘superfast’ services. Underlying both issues is the worry that regulatory policies pay inadequate attention to the business models needed to encourage private sector investment in infrastructure projects with very long pay-back periods.  Over the past year this concern of mine with investment signals has to a large extent been played out through the blog’s close attention to the so-called ‘net neutrality’ debate, specifically its potential constraints on traffic management and the blocking commercial evolutions such as managed internet services or the emergence of new payment models. 

Looking back, I’ve noticed that possibly undue focus on net neutrality news may have crowded out the broader, and more substantive challenges of promoting infrastructure investment.  Happily, however, two fairly recent policy contributions by Ofcom may help to restore the balance. On 24^th November, it published its eagerly awaited statement, Ofcom's approach to net neutrality, setting out the steps it expects ISPs to take to ensure customers are aware of how internet traffic is being managed on their networks.  Without going into detail about the statement, it generally advocates a policy of non-intervention so far as traffic management is concerned, e.g.

“Our current view is that we should be able to rely on the operation of market forces to address the issues of blocking and discrimination, but we will keep this position under review”

For the time being, therefore, most concerns about neutrality are to be left to self-regulation and market forces. On that basis, I hope to avoid extensive coverage of the subject in future.  Instead, I’ll be concentrating on issues such as those raised in Ed Richard’s November 8th speech to the Total Telecom World Conference, ‘Competition & Investment in Superfast Broadband.  In fact I’ll be doing that next time…