OPTA, 5th Anniversary, Den Haag
4 November 2002


Professor Arnbak, De Heer van Welzen, ladies and gentlemen
Introduction

Thank you very much for the invitaton to be here and to contribute to today's proceedings.

INTUG has a strong connection with Den Haag, since we were founded here in 1974. It just shows how long it takes to achieve liberalisation that we continue to be active in that cause.

If I understand correctly, this is both a birthday party and an engagement party. It is a little unusual to become betrothed to marry so very young. Even at the accelerated pace of the Internet, marriage at a mere five years of age might be thought precipitate.

Nonetheless it is very sensible, bringing together the sectoral expertise of OPTA with the horizontal competition law expertise of NMa. It is an example which other member states might sensibly examine. In some countries they communicate, it is alleged, by means of consultations published in the official journal.

Etatisme by any other name

The European Union survives on the dialectical relationship between harmonisation and subsidiarity. Sometimes political forces favour harmonisation, sometimes subsidiarity.

The re-election of Jacques Chirac to the Palais de l'Elysée and his appointment of Jean-Pierre Raffarin to the Hôtel Matignon has re-opened the debate on the role of the state in various economic sectors, not least in electricity, but also in telecommunications.

On 6 August this year, Francis Mer, the French Economic Minister and Nichole Fontaine, the Industry Minister, in talking about electricity and gas, observed:
Les ministres ont confirmé lors de ces entretiens leur attachement à la notion de service public et à sa continuité, à travers la péréquation tarifaire sur le territoire et l’égalité de traitement.
Of course, <<service public>> is certainly not universal service. Nonetheless, it raises complex questions of how to ensure <<service public>> in a single European market. To what extent should we be ensuring equality of treatment and tariffs? Then what measures, in a liberalised market, can we take that equality amongst customers and amongst operators.

This issue was taken up by Romano Prodi on 18 October in a speech at l'Université de Paris-Dauphiné. He was foreshadowing a green paper to be launched shortly by the European Commission on the correct role of public authorities in ensuring the functioning of "services of public interest". It will see a detailed analysis of Article 16 of the Treaty establishing the European Community:
Article 16 (ex Article 7d)

Without prejudice to Articles 73, 86 and 87, and given the place occupied by services of general economic interest in the shared values of the Union as well as their role in promoting social and territorial cohesion, the Community and the Member States, each within their respective powers and within the scope of application of this Treaty, shall take care that such services operate on the basis of principles and conditions which enable them to fulfil their missions.
Clearly, we have made progress in many areas, but there are others where we need more analysis, especially in the light of experiences of:
We are due to have a review of the definition of universal service in telecommunications. A debate on Article 16 will be a valuable contribution to the framework for this.

I should note in passing that South Korea which will soon pass 10,000,000 broadband connections. It is giving serious consideration to making broadband part of its universal service obligation

The aspirations of the French government for public service must be achieved, in large measure, through a state-owned operator endebted to a level normally associated with a developing country run by a sequence of unpleasant military dictators. France Telecom appears to have many, but not all, of the characteristics necessary to be saved by the International Monetary Fund (IMF). I imagine they would impose some very severe conditions in their recovery plan.

It is not an enviable position, for either the French government or for France Telecom.

Yet things can only get worse as voice revenues decline.

The regulation of abuses in mobile call termination and international mobile roaming will reduce revenues. The various forms of IP-based telephony will erode traditional pricing models. It will not be possible to delay the write-offs on acquisitions made during the speculative bubble. The real value of Orange today is not what is shown on the France Telecom balance sheet, no more than than is the value of Mannesmann on the Vodafone accounts..

The operators need to find new revenue streams from customers and certainly not from tax-payers.

The proposals for "Le Plan Chirac", to save European telecommunications, will cause a dilemma in Washington; whether to laugh or to cry. Then they will complain to the WTO.

Before you decide to prop up 3G you need to know that it is a viable business and will have to be kept on a life support machine for years ahead. The truth is that today, it is not viable.

Leadership has passed from Europe to Asia, especially China and South Korea, and it is foolish to pretend otherwise.


A single telecommunications market

Considerable strides have been taken by the European Commission and by the member states towards a single market, not least with the adoption of the single currency.

Yet that work is very far from being finished. The reports of DG Internal Market make this abundantly clear. Significant barriers remain and we must work hard to pull them down.

Part of the logic of the single market is to be better able to compete with the USA. Yet the work of DG Enterprise on the competitiveness of Europe shows that there is still a very long way to go. We have to improve our understading of our poorer performance, as shown in the 2002 Competitiveness Report. Then we have to act on them.

We must ensure that the barriers to the adoption of the cheap and effective ICTs are removed.

Sometimes those of us in telecommunications exaggerate its importance. We forget that however important telecommunications may seem to us, it is only an input to the other sectors of the economy.

The simple truth is that we do not have and will not have a single telecommunications market any time soon. It remains national and sometimes it is a provice or a city; it is almost mediæval.

The new telecommunications legislative package

The plan was for a "big bang" to take place on 25th July 2003. Four new directives were to be transposed into the natonal laws of the fifteen member states and take effect from midnight. It was to be the culmination of the 1999 Review, built on the reforms of the Green Paper.

It seems increasing unlikely that there will be a gala ball that night in Brussels. This is not to be the Battle of  Waterloo. Instead it will be a long drawn out process. It is not even clear which member states will have completed the transposition by next July. The evidence to date shows considerable willingness, but only limited enthusiasm. The recent fall of the government here seems inevitably to delay transposition in the Netherlands.

It is even less clear how many of the very complicated market analyses will have been completed. At one time the European Commission was afraid of a tsumani of these analyses arriving on 23rd June, just in time for approval for 25th July. It now seems more likely to be a gradually rising tide.

The market analysis decisions to be examined most carefully are those submitted during the first week of August, especially those in the less common languages. When everyone is lying on the beach it is a good time to send in an obscurely worded proposal to do something innovative or against the spirit of the new legislation.

A couple of years ago, the Christmas Eve issue of the Official Journal carried the announcement by DG Competition of the inquiry into the Worldcom merger with Sprint. I am assured that the timing was the work of the lawyers for one of the parties and not the European Commission.

Many of us had hoped that the new telecommunications legislative package would be a major move towards a single market for telecommunications. We have been shown to be overly optimistic and, perhaps, naive. Neither the regulators nor the operators were ready for a single market for telecommunications.

The national politico-regulatory circuses have not yet voted for their own abolition. The NRAs went to considerable lengths to water down the powers of the European Commission. The position of those arguing for much greater harmonisation was rejected.

The eventual result was the procedure under Article 7 of the Framework Directive. A limited number of decisions go out for consultation with other NRAs and the European Commission. There is a limited veto power for the European Commission.

We must recall that there was no support for a single European Regulator. Not even from those who might have wanted the job.

The operators said that they wanted "light regulation". That translates as keeping regulation for their competitors, but not being regulated themselves.

When it comes down to it, what they really wanted was French light regulation or Italian light regulation. They do not yet want European light regulation. They feel much more comfortable dealing with their own government to talk about debts and their own NRA to talk about universal service. They even like to challenge the decisions of their own regulator in their own courts.

I have to congratulate Jens Arnbak on taking the inaugural chair of the European Regulators Group (ERG). Jens is unusual in being one of two Danish regulators and simultaneously one of three Dutch regulators. The Third Man is absent today, doubtless sitting in judgement in Rotterdam.

The NRAs have enormous capacities to go their own ways within the new framework.

So that it is very good news that the European Regulators' Group has asked for comments on harmonisation and the priorities in doing so.

The first steps are to ensure a common approach to analysing the markets. If all the markets are examined in different ways and with different measures, then harmonising the remedies will matter very little.

The work on the definition of the national markets is still to be completed. We are told the Recommendation on Markets is due to be adopted by the College of Commissioners any day. But then they have been saying that for months.

One explanation is the concern that it will send the "wrong signals" to the financial markets. Put very simply, listing the mobile markets of single operator fixed-to-mobile call termination, international mobile roaming and text messaging will cause self-styled financial analysts to downgrade the 3GSM operators. The operators will then make further cuts on capital expenditure hitting hard the manufacturers. I do not need to name names, but you can quickly identify which very senior politicians might be concerned about the viability of their national champions, both operators and manufacturers.

Once we see the market definitions, then we must ensure that the methodology for the application of the remedies is harmonised. Without that, we will never reach a single European market for telecommunications. Without a sngle market, we will never achieves the economies of scale.

The new Framework Directive in Article 15 (4) allows the European Commission to define trans-ntional markets that require to be regulated. That process for this has not even begun. Nonetheless, we could see some progress by the creation of regional markets, notably a Scandinavian market.


Financial markets

The 1999 Review was a strangely appropriate name. It was begun when the stock market bubble was still expanding. It was the Internet equivalent of the Tulpenwoede of the early seventeenth century.

With the present conditions of the financial markets the operators have come up with a new concept, it is that regulation should be related to the cost of capital. It is a sort of indexation. With the high costs of capital they should today be subject to much relaxed regulation. Of course it would have to work fairly. When interest rates fall, then regulation would have to be tightened. It would also have to work in other sectors of the economy.

Of course, it is what one has come to expect from many operators: self-serving nonsense.

The most odious proposal comes under the banner of secondary spectrum trading. It is to take the spectrum assigned to some poor struggling fifth or sixth operator - perhaps the French or German national champion - divide it up amongst the other players. It allows that company to make a dignified retreat in order to concentrate on other markets. The more suspicious might suggest agreements on "areas of interest".

It is the equivalent of buying up the factories of your competitors and scrapping them. Nobody would ever be able to get at that spectrum again. Future market entry would be impossible. Consolidation would be made permanent.

The logical alternative would be to return to the spectrum to the regulator, in the case of the Netherlands, to the Ministry. It could then be reassigned at some future point when the market had developed and could support another operator. It is an argument supported by the recent McKinsey study on 3G licensing.

This would allow the number of players to be reduced if that is really essential, while forcing the 3GSM operators to consider future rivals. It would also serve the public interest.

In any event, there will be new technologies. PCCW got out of mobile telephony in Hong Kong, by selling their business to Telstra, for a lot of money. It then announced Wi-Fi or IEEE 802.11b coverage for the whole Special Autonomous Region (SAR). Others will go down this and even more innovative routes in order to achieve cheaper delivery of services.

The real problem is that there is no money for new entrants. Without the prospect of market entry, surviving incumbent operators will just kill off competitors one at a time.

We have to reassert our belief in competition. We have to do more than just wait for a change in sentiment in Wall Street and the City of London.
Globalisation

If you speak in public about globalisation you run the risk of being attacked as carrying the message of evil trans-national corporations.

In telecommunications the story is one of a series of failures of globalisation. The leading operators have tried alliances, joint ventures, acquisitions and mergers, all have failed. Smaller operators have tried market entry, though few have survived.

Someone characterised the telecommunications crash as being like the meteor that wiped out the dinosaurs. Except in this case the warm cuddly mammals were wiped out and only the dinosaurs survived.

There are people in the room from KPN or with shares in KPN so I will not spend long on the stories of Unisource and KPNQwest. The most recent reports suggest that some US$ 40 billions are to be written off by Qwest and that is without having bought any 3G licences. We should skip over the proposed marriage with Belgacom as being too much like something from a nineteenth century novel..

France Telecom and Deutsche Telekom tried to recreate the Franco-German political axis as Atlas. It later became Global One with the participation of Spring. Today it is Equant. Allegedly, it is for sale, if someone is left with enough money to pay for it.

The failure of Mobilcom is all too clear, not least to German taxpayers.

The result is that when you put global telecommunications out for tender, the best you can get are  sub-continental blocks.


Technological neutrality

This is often a euphemism for evading regulation. Or else it means imposing some rather unpleasant regulations on potential or actual competitors.

We have heard a lot in recent months about "legacy regulation" being imposed on allegedly competitive sectors. Those legacy regulations include such crucial issues as QoS, Calling Line Identification (CLI) and number portability. These are difficuly to import on IP networks. However, consumers expect and often require these features.

At the same time, the European Commission's market definitions will certainly avoid the issue of the  contestability of call origination on fixed and mobile networks. We will have to come back to that in a couple of years.

As we work our way through the implementation of the new legislation then the realities of technological neutrality will begin to become clearer. We will have to face up to the integration of technologies and also of pricing models.


Conclusions

The position for regulators and those in ancilliary occupations looks good. The regulation of telecommunications will contnue for years to come.

We have a sunet clause, one that Wim van Welzen helped to craft. I am very glad we did not end up with the fixed dates that had been proposed at one time. What we do not have are markets where the conditions are met, namely effective competition. So that the test was and remains correct, it is just that we will have to wait a little longer than we had hoped.

The methods employed by regulators have swung towards competition law. However, they will swing back, once people realise how long and complicated are those processes. Some people thought that Long-Run Incremental Costs (LRIC) was overly complicated. They are learning how much harder is the application of a price squeeze test.

I do not need to go over the geographic scope of companies based here in the Netherlands, of Royal Dutch Shell, ABN-Amro Bank, Ahold, Fortis and Unilever. These companies are looking for European, trans-Atlantic and global services.

Yet what is really available today is fixed voice and data continent-by-continent. Even then it is heavily reliant on regulated inputs, other than in the financial districts of a handful of cities. That is leased lines, interconnection and unbundled local loops at cost-oriented prices and with non-discriminatory provision.

You still have to buy many services country-by-country, notably GSM and ADSL. In that respect, the immediate future is national and sometimes worse, it is city by city or line by line. Consumers and buinesses need, more now than ever, a single European telecommunications market.

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