World Dialogue on Regulation, Expert Forum Market structure, entry conditions, competitive standards and enforcement 5 November 2003, Køge Ewan Sutherland

INTUG > speeches > WDR November 2003


Introduction

At the beginning of the year, at an OECD Forum, the chairman of the South African competition appeals tribunal noted that he had been unable to find any mention of national  competition authorities in the very many accounts of the rapid growth of the Asian "tiger" economies. He wondered whether rapid economic growth simply did not involve national competition authorities and whether it do not have a necessary role for them. The consequence would be that economic industrial policies and the actions of market players were much more important.

Likewise, it is not easy to find a role for a national regulatory authority in the rapid growth of broadband in South Korea, Japan and in China. It has much more been a matter for industry policy in which governments ensured that market entry was possible and easy. Not the European grudging market entry of achieving a few percentage points of market share in the face of stiff resistance of incumbent operators, with door-to-door fighting, but massive entry of hundreds of thousand of lines each month.

At the same time the public authorities in Asia have made clear their expectation that some operators will fail and that they would be absorbed into the winning larger groups by consolidation. Companies have known that they had to grow and to develop new business models or that they would be eaten by a rival.

Korea and Japan have baseline broadband offers of 8Mbit/s per second for under EUR 30 per month. This year, the Republic of Korea has seen the substitution of some hundreds of thousands of lines of VDSL from its largely saturated ADSL market. For the last half year Japan has been adding about 350,000 ADSL lines and 100,000 FTTH lines per month; the latter at a price of about EUR 50 per month for 100Mbit/s. The aim of the operators has been the creation of a mass market that would serve both manufacturers of equipment and, perhaps more importantly, those firms developing new services and new forms of content. Both would create positive feedback effects. The operators offer service providers a real test for innovative services on an enormous numbers of potential customers. It has also allowed the operators true economies of scale plus experience of innovative users from whom the new patterns of use could be determined, in order to obtain insights into consumer behaviour and market opportunities.

The operators knew their old business models were dying, but did not know their future business models. They are relying on customers to help them find the new models. Innovation happens close to the customers!

There are no equivalent broadband offers in Europe, most customers have to make do with a quarter or a half of a Megabit per second. There are some 23 million lines in Japan-Korea m which have a combined population of only 175 millions, compared to about 11 millions lines in Europe at a typical speed of one-twentieth that in Asia. The market structures in Japan-Korea are excellent, with the incumbent operator having half the market shares seen in Europe, where they invariably dominate. New entrants have really substantial market shares.

The new European telecommunications legislative package offers nothing that will help remedy this difference. It will not create a single market in the near future. It will not spur incumbents to match their Japanese counterparts. It will not allow new entrants to achieve Asian scales of operation.


Market structure

The European goal has, allegedly, been the creation of a single market in telecommunications. This has neither happened nor will it happen in the foreseeable future. So that if it is a goal, it is one of a somewhat theoretical nature.

There have been many measures taken to achieve the single market in other sectors of the economy, led by the Internal Market Directorate-General while the Information Society Directorate-General is left to do the same for telecommunications. The goal is the creation of a single market of several hundred millions of customers which would offer manufacturers and service providers enormous economies of scale. It is also seen as essential if European competitiveness is to reach the levels of the USA and Asia. Telecommunications demonstrably lags other sectors of the economy in terms of progress towards the single market.

The current telecommunications regulatory package has very few incentives for any of the players to work towards harmonisation and none whatsoever to achieve the more ambitious goal of a single market. Harmonisation is window dressing to make things look a little more European and is unrelated to the single market.

The demand for trans-national services is mainly from large business users. In fixed telecommunications there is a market with a small number of service providers and modest but adequate levels of competition. However, at the edges these service providers rely on the provision of wholesale inputs, such as tail circuits, from incumbent operators. However, in mobile telecommunications there is only international mobile roaming - a long running market abuse - where customers are grossly overcharged for using their mobile phones in foreign countries. The prices charged have not otherwise been seen in other telecommunications services for ten or fifteen years.

Global or pan-European mobile telecommunications are simply not available, nor are fixed-mobile converged services. There is no reason to expect them in the near future.

We have markets that are still national and that remain dominated by the incumbent operators. They use the 3D strategy of Deny, Delay, Degrade, to see off their competitors. Few wish to enter, say, the French market, when they have to face the politico-regulatory might of France Telecom. To make matters worse, broadband seems to be favouring incumbents who can combine 3D with quite significant economies of scale.

Operators have not been very aggressive in moving into the fixed market of their rivals. For example, Telecom Italia is not afraid that the Austrians, the Swiss and the French will march through the mountain passes to invade its market. What competition does come from these directions, they are confident they can cope with. A higher level of fear might tempt them to attack the markets of other incumbent operators.

While the consumer can buy pan-European brands of ice-cream and soap powder, the same is not true for telecommunications. The operators have relatively weak brands and they are geographically confined. An obvious comparison is between the brands of mobile network operators and those of handset manufacturers. They have taken an amazingly long time to develop their brand names and values.

In India, China and South Africa we have seen "limited mobility" services taking a significant share of the growth that would once have been expected to go to GSM or to CDMA. It presents a serious problem, since mobile network operators had expected to have unchallenged provision of services and they argue that the regulations have been changed when all that has happened is that their perception that mobility had high value has been challenged by new and cheaper technologies. Regulation cannot protect operators from new applications of technology.

In all countries the operators have manipulated the process of liberalisation into a politico-regulatory game. They work the NRA, the NCA, the members of parliament, the civil servants and ministers. In the case of the European Union, they work the European Parliament and the European Commission at all levels. Nothing that is done can avoid exposure by them. Nothing can avoid being subject to their vast resources, in order to ensure that their interests are protected. They can and do shadow all activity by government and regulators. It is a somewhere between a fifth column and the KGB.

The general answer to the question about the strength of competition is to ask "what competition?" For many consumers there is an insurmountable barrier of understanding the offers of the operators. It is a brave or a deeply obsessive person who can claim to have the correct the mobile telecommunications offer. For the rest, people make do with something that they hope is not too expensive. For business users, there are complex services to help with benchmarking, albeit at a steep price. There are also firms that will search through bills to find the many errors, for a percentage of the savings.


Enforcement

The old adage remains true, that "justice delayed is justice denied".  One of the tricks of fixed and mobile incumbent operators has been to seek to delay and to challenge the decisions of NRAs and NCAs. Any excuse is a good one, especially if it buys you one or two years of doubt. Uncertainty and delay favour the established markets players.

In theory the new European Union legislation ensures that the decisions of the NRA stand until the appeal is completed. However, there is a real risk of differences in the attitudes of national courts which must decide on the "exceptional" circumstances in which to suspend decisions. Moreover, some countries have an expert tribunal while others use administrative courts. Together, such differences create the basis for quite significant variations in appeals on decisions about the remedies to be imposed on operators.

INTUG has found competition law to be slow and not entirely effective. The leased lines case by the European Commission case ran on for a couple of years, before being rolled into ex ante regulation, a Recommendation. We began our work on international mobile roaming in 1998. It then became a case of the European Commission in 1999 and it remains open today. The market for roaming continues to grow in terms of minutes of traffic and the revenue collected by the operators. The abuses have been sustained in voice roaming for those five years and recently extended to GPRS where the data prices are quite incredible. Whatever else, the operators are not afraid of DG Competition or, perhaps, they are more afraid of the financial analysts who would react adversely to falling roaming revenues.

Competition law simply does not work at the pace of the high tech sector. It may be adequate for the steel industry or for car manufacturing. However, it has not the flexibility or responsiveness necessary for high-technology cases.


Conclusions

For larger operators regulatory risk is managed as a politico-regulatory "game" played on many levels from the individual national regulatory authority, through the parliament, government and courts to the European head of government. By contrast, for the new entrant, that process and the resources required to influence it are very difficult or impossible. Consequently a barrier to market entry is the "stake", that is the cost and expertise, necessary to enter and to be effective in the politico-regulatory casino.

For all that the European Union presently advocates technology neutrality, it was not so long ago advocating and pushing third generation mobile telecommunications. However, we have had to learn the hard way that 3G stands for Greed, Gullibility and Grief. The manufacturers and operators elected to pursue a path to their 3G heaven, despite the total absence of evidence of demand.  Today they face a 3G dystopia, where the hope of creating demand is very poor and where alternative technologies are pouring out of Silicon Valley.

Europe has an immense challenge to catch up on broadband with North-East Asia, in terms of creating a critical mass of lines on which to develop new services and new revenues. This requires vastly more lines and much higher speeds, but perhaps at the same sort of monthly prices. This is a challenge where the new European Union legislation will not help, nor would the old fashioned picking of winners. Instead, governments need to ensure real and substantial market entry, not just a few percentage points built up over many years.

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