Electronic Communications Networks and Services: LFMI’s Response to Public Consultation Process

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Objective of the Consultation

The review of the regulatory framework for electronic communications is one of the 16 actions of the Digital Single Market Strategy adopted by the Commission on 6 May 2015 and the key element for creating the right conditions for digital networks and services to flourish (the second pillar of the Strategy). In accordance with the Commission’s Work Programme for 2015, the review will be preceded by the evaluation of a Regulatory Fitness and Performance Programme (REFIT) aimed at assessing whether or not the current regulatory framework is “fit for purpose.”

The purpose of the questionnaire provided is therefore twofold. Firstly, it aims to gather input for this evaluation process in order to assess the telecoms regulatory framework against the evaluation criteria according to the following criteria of the Better Regulation Guidelines: effectiveness (have the objectives been met?), efficiency (were the costs involved reasonable?), coherence (does the policy complement other actions or are there contradictions?), relevance (is EU action still necessary?), and EU added value (can or could similar changes have been achieved at national/regional level, or did EU action provide a clear added value?)

Secondly, the questionnaire is designed to obtain views on the issues that may have to be reviewed with the aim of reforming the regulatory framework in the light of market and technological developments as well as achieving the ambitions laid out in the Digital Single Market Strategy. Further information on relevant developments and the emerging challenges for the existing sector rules can be found in the background document to the public consultation.

SUMMARY OF THE RESPONSE

General questions on the current regulatory framework and the universal service regime

  • Public investment is based on a wrong assumption that private sector faces a market failure and cannot provide sufficient quality and coverage of internet connection in some areas;

  • Public investment into high speed internet connection infrastructure might not be economically justified and might lead to stifled innovations and investment in the private sector;

  • If the Commission decides to invest into high speed internet connection infrastructure, it is of major importance to ensure possibilities of competition and cooperation with the private sector.

Spectrum Policy

  • Spectrum allocation will benefit from a greater role for market forces. Relaxing usage requirements and trading limitations to allow for secondary markets to emerge would be a way to achieve this.

Sector-specific regulation for communications services

  • Regulation of specific sectors should focus on the wellbeing of consumers rather than a regulatory-level playing field;

  • New over-the-top interpersonal communication service providers should not be put under the same regulations that apply to traditional telecom service providers.

QUESTIONS

General questions on the current regulatory framework and the universal service regime

Description

The Consultation states that relatively little full “infrastructure competition” has emerged in the fixed-line networks, except in very densely populated areas where cable networks were already present or where local authorities have been active; and the extent of upgrades to the highest capacity networks varies markedly. Various questions (3.2 General questions on the current regulatory framework; 3.3 Network access regulation; 3.6 The universal service regime) cover different aspects of the same issue – the problem of providing end-users with a stable high speed internet connection and ensuring possibilities of competition in the process.

There are two main areas in this field: 1) a policy assumption that in some areas private sector is unable to ensure a sufficient network connection to end-users due to a market failure; and 2) a necessity of competition and innovation when ensuring network access to end-users.

  1. The assumption of a market failure

One of the greatest risks to any possible future investment into any further fixed-line or wireless technologies providing full ubiquitous and accessible very high-speed connectivity across the EU is the aim to invest public funds into the development of broadband internet infrastructure. It is especially relevant to rural and other areas which may pose difficulties in terms of geographic coverage.

Such public investment is usually backed by the argument that the private sector is incapable of providing the necessary connection due to a market failure. The Commission claims that given the scale of investments needed to roll out and upgrade the current connections to the next generation of digital networks – often based on fibre technology – there is a serious risk that a market failure will rapidly increase the so-called “digital divide” across Europe.

LFMI’s Position

The assumption of a market failure is not entirely true

The argument of market failure is not true. Private sector investment into internet connection technologies is very significant. The global proportion of people using the Internet has risen at a compound annual growth rate (CAGR) of 12% in the period from 2008 through 2012. Due to the introduction of the 4G technology in 2010, there was a significant increase in the Internet speed too.1 Notably, it was not public investment but the private sector that gave a boost for such a rapid growth. When it comes to internet coverage, growth rates in mobile broadband penetration appear to be significantly higher than the already high corresponding historical growth in mobile cellular penetration. Mobile broadband penetration exceeds cellular penetration by 5 to 19 per cent. Given the increasing reach of mobile broadband networks and upgrades to newer technologies, fast uptake of mobile broadband access is very encouraging for increasing overall Internet penetration.

Therefore, the argument that the market has failed and the public sector must step in with public investment is not true. The Commission has formulated standards that may appear a bit unrealistic to reason its intervention into the market. The market has not failed, but performed precisely as it should. The regions with the most users and demand have seen the largest development of infrastructure. On the contrary, rural regions are not developing as fast as heavily urbanized ones for they have less users and lower demand. It would be strange and unnatural to expect the same or comparable level of IT infrastructure in cities and rural areas. However, the data suggest that internet penetration is increasing. This situation can be defined as a market in action rather than a failure. Market mechanisms define where the infrastructure development is necessary. It is important to acknowledge that investing into unlimited access to high speed internet is irrational as it competes with alternatives uses of resources. What is more, it should not be forgotten that such public investment may stifle innovation and competition as it is covered in this response further on.

  1. Inclusion of access to internet within the scope of universal services

Any possible inclusion of access to a broadband network connection within the scope of universal services will require public investment into infrastructure development. As it is explained above, markets develop in the areas of high demand.

LFMI’s position

Public broadband networks – economically unjustified and costly

Any active governmental participation in the development of broadband networks may lead to unexpected consequences. Let us take the United States as an example. In 2011 President of the United States Barack Obama stated that one of the goals of his term was to ensure that 98% of Americans have access to the Internet. The aim in itself is similar to that of the European Commission. As a result, public networks emerged throughout the United States, but the results were not as positive as expected. These government-owned networks did not meet the objectives in terms of coverage. Moreover, the private sector could have reached the same coverage without government intervention and additional financial burden on taxpayers.

Government-owned networks used taxpayer funds to build networks in areas where high-speed Internet was already provided by the private sector. This network overbuild is counter-intuitive since it requires taxpayers to fund and subsidize a public network that duplicates an already existing private one. Therefore, even if a government decides to develop broadband infrastructure, the assessment of the necessity of such infrastructure will be of vital importance in order to avoid duplication and maintain competition. Otherwise government-owned networks would unfairly compete with the existing providers. What is more, as a public entity, a government-owned network can practice various anticompetitive activities that may put private market participants at a competitive disadvantage. Thus, municipalities that use taxpayers’ money to build a broadband network actually act to forestall market entry and decrease competition. Government-owned networks deprive consumers of the benefits of competition and choice, governments lose tax revenue from private networks that might have otherwise entered that market, and taxpayers pay more in taxes as they subsidize the operation and maintenance of those networks2.

Finally, government-owned networks tend to fail because they lack a sustainable business plan and long-term resources to invest in maintenance and upgrades as technology evolves. When this happens, taxpayers have to fund these failures.

It is important to carefully examine the outcomes that have been registered in the United States in order to avoid the same mistakes, economic losses related, and other damages such as distortions of free competition and slower investments.

  1. Competition and innovation

The Communication states that with the opening of the telecommunications market to competition there was a need to provide safeguards for those circumstances where competitive market forces alone would not satisfactorily meet the needs of end-users, particularly in cases where they lived in areas which were difficult or costly to serve, or had low incomes or disabilities. However, a possible financial or infrastructural governmental intervention into the field of providing internet based on the argument of eliminating social exclusion of socially vulnerable groups should also follow the rules of competition. Thoughtless actions may lead to a stifled competition and slower innovations.

LFMI’s Position

Any public investment must ensure competition. Even if the Commission decides to proceed with a public investment plan, it has to follow two fundamental principles: it must cooperate with the private sector and ensure competitive procedures.

Cooperation with the private sector will not only provide private entities with an opportunity to participate in infrastructure development, but ensure that the best practices of the private sector are used in the process. Private companies could bring advanced business management techniques, innovations and private investment into infrastructure development projects. This will not be possible without ensuring competition, because the public sector will deliver the most by engaging in competition for the participation in infrastructure development.

There is a danger that the government would see a public investment plan as a carte-blanche to favor public companies in tenders, create government-owned IT entities and engage in business. If the Commission goes ahead with this plan, it must provide very stringent safeguards to prevent governments from engaging in such practices.

If the Commission decides not to uphold these principles and invest into infrastructure, it may slow down innovations. With public infrastructure in place, the private sector might lose incentives to innovate and devise cost-effective ways of reaching far-away end-users.

Spectrum policy

Description

The Consultation states that while technical harmonization of the use of radio spectrum for EU-wide allocations has progressed significantly based on the 2002 Radio Spectrum Decision (RSD), the designation of (additional) spectrum to a (new) application or technology in the EU still requires several steps. It is vital to ensure proper competition in the field of allocating radio spectrum frequencies.

LFMI’s position

Spectrum regulation is a good example where good intentions of regulators to harmonize spectrum policy may ultimately harm competition. There is good reason to believe that a broader spectrum should be awarded to mobile operators, especially those considering the launch of 5G services in the near future. However, one should refrain from conflating technological and economic considerations. Although mobile may be a superior technology to broadcasting from a technical perspective, this does not necessarily imply that it is the task of national governments to determine the best way to pursue ultra-fast broadband connections and the Commission should not be the one to pick winners in spectrum allocation.

Regulation has many ways of affecting market developments, especially when regulators are in charge of resource allocation. However, the efficiency of the outcome depends on whether or not market players have the opportunity to decide upon the best use of the spectrum available. This may be addressed by relaxing the usage requirements and trading limitations that would allow the emergence of secondary spectrum markets. A market-driven mechanism should be the path for the Commission to follow.

Sector-specific regulation for communications services

Description

The Communication states that over-the-top (OTT) services are increasingly seen by end-users as substitutes for traditional ECS, such as voice telephony and SMS, used for interpersonal communication. Such OTT services, however, are not subject to the same regulatory regime. As a consequence, the issue of a level playing field has been raised, with some stakeholders calling for a re-evaluation of the existing provisions in order to ensure that wherever the activities of providers of competing services give rise to similar public policy concerns, they would have the same rights and obligations (i.e. end-users’ protection, interconnection, numbering, etc.) But the main goal in terms of regulating different types of service providers is not to create a regulatory-level playing field, but to ensure the wellbeing of consumers.

LFMI’s position

At the moment, telecom operators are competing with the OTT services that are chosen by end-users as substitutes but are not subject to the same regulatory regime. We should bear in mind that if the same economic regulations that are applicable to the telecom industry were imposed on their OTT competitors, they could restrict competition in the OTT sector and therefore stifle innovation. If new ways of providing interpersonal communication services are working well enough to compete with the incumbent telecom industry even in its early stages of development, there is no reason to regulate it, especially from the point of view of competition policy. The goal of the Communication and the Digital Single Market Strategy is to increase competition and innovation, and to implement rules that will foster them.

Even though equal rules are usually regarded as instrumental in this respect, the case of Voice over IP technology (VoIP), for example, shows otherwise and suggests that equal rules may bring equal restrictions that would stifle the performance of a particular sector.

1 http://www.internetsociety.org/sites/default/files/Global_Internet_Report_2014_0.pdf

2 ]http://www.coalitionfortheneweconomy.org/wp-content/uploads/2012/01/1-6-12-Coalition-for-a-New-Economy-White-Paper.pdf

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