Castles in the air

The news that the government has decided it now won’t bother with a Green Paper for the forthcoming Communications Bill came as little real surprise. The Green Paper was originally scheduled for “toward the end of 2011” but accumulated delays were fatally compounded by Jeremy Hunt’s required appearance before the Leveson inquiry – and the possible need to incorporate lessons from the inquiry in new legislation.  Slightly more surprising, however, was the DCMS explanation for its preferred approach.

“To help inform policy options for a White Paper, Government will be holding a number of half-day seminars. The seminars will cover a range of topics, focussing on key questions in each policy area”. Communications Minister Ed Vaizey added:

“Through these seminars, we will look in detail at how best to drive investment and competition. We want to shape the Communications Bill so that we have the right framework to secure our place as Europe’s tech hub.”

Wow, this is heady stuff.  Only last month, the DCMS guidance notes for its Super-Connected Cities program appeared to endorse the (highly ambitious) ‘EU 2020’ access targets (see para. 2.4); now we have the UK seeming to aspire to broadband dominance.  So what are these key policy questions that the seminars will need to consider?  Structural separation of BT, perhaps?  The application of wholesale obligations to all infrastructure?  National mobile roaming?  Well, no...

The topics nominated for the five seminars are actually as follows:

   

      ·        Driving investment in TV content

·        Competition in the content market

·        The consumer perspective

·        Maximising the value of spectrum

·       Supporting growth in the radio sector

All important subjects, no doubt, but offering little guidance on how to secure, in Hunt’s own words, ‘a communications infrastructure that provides the foundations for growth’.

Regulated competition (and the fallacy of picking winners).

Just back from yet another extended break and my first conundrum is the regulatory view of the competitive process.  Let me explain…. 

The first thing that comes to my attention is the latest broadband pronouncement from Neelie Kroes on how she sees the promotion of competition – in her words, “to reward those who relentlessly focus on consumer needs”.  Isn’t there a danger that this consumer-centric idea might actually distort the competitive process?  Take, for example, the decision by European regulators to favour service competition, rather than infrastructure competition, in the latter part of the 20^th century.  This certainly promoted market entry, and was presumably aimed at meeting consumer needs, but how sustainable was the competition it spawned?  According to ECTA's recent pronouncement, such competition can be remarkably fragile: “It is time for a wake-up call. The liberalisation experiment which Europe began in the late 1990s is close to failing because regulatory rules are not supporting the business case for even leading telecoms competitors.” 

So continued regulation is necessary to support the competitive process… Is that really a step forward for ‘consumer needs’?  By contrast, let’s look at Ofcom’s proposal to vary one of the mobile operator’s spectrum licences in order for it to deploy LTE and WiMAX technologies.  Surely a ‘slam-dunk’ for consumers…?  In reality, however, the licence variation might tilt the competitive playing field in a number of important ways – so much so that a competitor has argued:

“This is an extraordinary step for a National Regulatory Authority to take, given its duty to promote competition…Any such proposal must raise prima facie competition concerns...” 

Without reaching judgement on that particular issue, it demonstrates that the pursuit of competition in telecoms markets is a far more complex challenge than the simple maximisation of consumer needs.

Advertisements for myself

Ever the telco policy hound, I’ve been sniffing through the written evidence to the House of Lords Select Committee’s Inquiry into Superfast Broadband – all 381 pages of it.  Predictably (but disappointingly), the leading actors, BT and Virgin Media, chose to concentrate on what a good job they are doing in their respective ways – the panacea of an open access network (BT/Openreach) and a sustained duopoly for Virgin, viz:

“The key objective for Government should be the creation of an environment in which two or more network providers invest and compete aggressively to deliver innovative, high bandwidth broadband products.“

Apart from their support for the status quo, neither of these broadband giants volunteered any particularly new ideas or constructive reforms.  Nonetheless, the evidence does contain some memorable remarks – here are just a few: 

·        There is no direct relationship between availability and take-up of superfast services (Ofcom);

·        The government target of having the best broadband in Europe in 2015 is very challenging, and in our view will be difficult to meet (BSG);

·        BT believes that the Government’s target is capable of being achieved if public funds being made available from BDUK and local authorities are used effectively;

·        In the end the big issue for all the alternative operators is to decide whether the BDUK game is worth the candle (INCA);

·        The Government’s ambition is for Britain to have the best superfast broadband network in Europe by 2015….At the Internet Service Providers’ Association conference on 9^th November delegates were asked if they thought it would actually be achieved. Only one hand went up, and that was the rep from BT (INCA);

·        It is becoming clear…. the scale of the challenge for any provider of scale other than BT to enter the rural broadband market is significant, and that in all likelihood, BT is likely to win the vast majority of public money to upgrade its network in these areas (Virgin);

·        Arqiva is concerned…that there remains a risk that not everyone will get something by 2015; 

·        Research shows that achieving universal coverage of standard broadband provides the greatest return on investment. This is higher than the return for investment in building fibre networks (Talk Talk);

·        The speed of broadband is almost less relevant than the universality of broadband access…. Connect everybody (100% not 90%) and then demand will drive industry investment and innovation to increase the speeds (Wispa);

·        It is regrettable that responsibility for telecoms infrastructure was moved from BIS to DCMS, which is perhaps less tuned in to the needs of the wider UK economy (Geo);

·        We remain unconvinced of the need for obligations to provide “passive” wholesale products such as duct access (KCOM);

·        At the heart of the problem lies the fact that telecoms consumers’ interests have for decades been sacrificed on the ideological altar of infrastructure-based competition (Broadway Partners).

The joy of the internet

Isn’t the internet a wonderful thing?  One of its particular blessings is giving us unprecedented access to the workings of government.  Take, for example, the oral evidence submitted to the inquiry by the House of Lords Select Committee on superfast broadband.  This video evidence is available here. 

The Committee’s findings may or may not influence government policy but there’s no doubting the intellectual value of some of its input.  For instance, I’ve just been listening with interest to the thoughts of Francesco Caio, currently CEO of Avio Group, but formerly of C&W and the author of a 2008 report on barriers to investment in next generation access, Caio makes the important point that another facet of the internet is to separate the roles of service provider and connectivity provider.  As the internet increasingly provides direct access to end services – voice telephony, movies or whatever – the identity of the connectivity provider becomes increasingly irrelevant.  Since this separation idea conflicts with the current model of duopoly competition in the UK – based on the respective bundles of services offered by BT and Virgin Media, we may need to think again about that model of competition.  In particular, we may need to address (again) the concept of last-mile access as a natural monopoly.  So just targeting ‘the best broadband network in Europe’ may not be a sufficient goal for the UK:  Caio believes that policy makers need to set some kind of vision for the long-term aims of the country’s broadband sector.   

All good stuff - and brought to you free by the wonders of the internet…

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…