Sydney 10 March 2003
Ewan Sutherland
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Convergence
and regulation Sydney 10 March 2003 Ewan Sutherland |
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| Introduction |
Mr Chairman, thank you very much for the invitation
to speak here today about convergence and regulation. I wanted to take the opportunity to stand well back and ask how one might possibly devise structures for a regulator. It is equally important to consider the appeals procedures, since only together can you achieve global best practice in well-regulated markets. |
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| Convergence |
Convergence has many meanings, though these seem
not yet to have converged. Rather more than a decade of discussion has caused
them to diverge. There are no signs of convergence of understanding or,
indeed, or practice. There is no reason today to suppose that divergence
will end. At one level, it means all communications will be carried using the Internet Protocol (IP), but that is only a little more helpful than saying that they are carried by electromagnetic waves or electrons. All packets and all bits are not equal. Packets carried by mobile network operators seem to be more highly valued packets or at least are charged at a higher rate. Once upon a time convergence was to be videotext - Minitel and Prestel - based on the combination of the massive penetrations of television and telephony, both over 90% in leading OECD countries. The French "success" of Minitel was ultimately limited by the failure of service providers to move to the Internet. It was never clear how much subsidy went into Minitel and this was the subject of some concern to the Cours des Comptes. The same body denounced the French Government for debauchery because France Telecom collected revenues from its customers for sex lines operated by third parties. Yet that same "kiosk" payment system made Minitel the success that it was. We have certainly seen convergence of devices. Today in Sydney there are advertisements for a mobile phone that is also an item of jewellery. There are also adverts for a fridge that has an Internet browser. Both, interestingly, from South Korea. Computers are now often used as telephones, to listen to music and to watch movies. Importantly, they are also used to create content. Mobile telephones can be used to play games and so on. The manufacturers have been busy and successful in developing converged devices. They will continue to play a central role. They are continuing to spend on research and development to maintain their market positions. Convergence of services has been less evident. The UK television programme to select a pop star, generated EUR 110,000 in revenues from SMS. We have seen radio and television "broadcast" onto the Internet. A few can receive video clips of goals scored by their favourite football team. We have seen some convergence of ownership. However, AOL-Time Warner and Vivendi are hardly examples to be copied. Really it is more an issue of leverage of market power from one market to another. We have seen very little convergence in business models, the steps taken remain very uncertain. Generally, businesses can leverage crude market power, but they do not have the competences to build integrated models, their expertise seldom lies in the new markets. Telecommunications operators struggle with value-added services, but know even less about content creation. The business models remain little more than embryonic. This is especially the case in broadband where the operators have still to discover how to make money. Some continue to throttle the bandwidth, in the hope of rediscovering monopoly rents. Others, as I made clear last Thursday, are experimenting with six, eight or twelve medgbits per second, allowing network games and video on demand. They do not know the new model, but they will discover it. However, the Australia broadband mode is more like bonsai, with 0.5 Mbps not 8 Mbps, 1.0 not 12 Mbps. |
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| Regulation |
An important question is the likely duration
of the regulation. If you believe that telecommunications is nearly competitive
and that competition law will suffice or almost suffice in the foreseeable
future, then you will take a very different view from those who anticipate
enduring and substantive regulation of the sector. Underlying this is a WTO commitment by Australia and many other countries to have an "independent" regulatory authority. Yet, the WTO agreements are fairly vague on how this is to be done. The details are left to individual countries to work out. There are no corresponding commitments to liberalisation and opening the marketing in cultural area. An obvious exception is Japan which still does not have an independent regulator. I was being asked last week in Tokyo whether the absence of an NRA might explain the great surge in Japanese broadband. However, I hope Japan will commit to an NRA during the World Trade Organisation (WTO) Doha Development Round. There needs also to be a range of horizontal measures, not specific to telecommunications:
There is currently an interesting debate regarding merger control in Hong Kong. I participated in a workshop on this last week. Here, it is being introduced first to network operators in advance of a general merger regulation. It would be a highly beneficial for Hong Kong to take this first step towards better economic regulation. It is generally beneficial to have peer review and participation in bodies such as the OECD. The recent Economic Survey of Australia indicated the need for further liberalisation in fixed-line telecommunications. We have just seen a peer review of competition policy in South Africa under the auspices of the OECD. These benchmarking and assessment exercises are enormously useful to all parties, the assessed and the assessors alike. The recent debate at the OECD Global Forum on Competition Policy made it clear that there was little agreement on the roles and structures of a competition authority. These varied enormously and there was a lively debate on the importance of different issues. It was very clear that many heads of competition authorities aspired to the stardom of Allan Fels; to have the same thick press clippings book. However, others were aware of the risk and the potentially adverse consequences of that sort of profile. An important question is whether and to what extent a competition authority relies on economic regulation and when it must be set aside in some more nebulous test of the "public interest". In several countries that test is undertaken by the minister, a position which creates some measure of political responsibility for the decisions, but may critically undermine the decision-making of the competition authority. Countries are left then with considerable scope to adopt and to adapt global best practice to their national legal system, to political and business cultures. It is essential to be proactive in looking at how other countries perform their regulation, especially as we move towards new business models for broadband. Not only those that speak and write and English. Sometimes, it is worth the effort to explore more widely. For many people it seems very odd to be adopting new regulatory structures in advance of the new business models. Especially given likely delays in any subsequent changes to regulatory structures. There is no point in regulating yesterday's problems. |
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| Convergence of regulation |
In addition to the "traditional" model of a purely
sectoral regulator, it is possible to imagine convergence in a number of
different ways:
Convergence with financial regulation has not been tried anywhere, but is worth consideration given the problems emanating from that sector. The grossly inadequate regulation of the financial sector has led to many of the problems we have today in telecommunications. To take the instance of the former colonial power, the United Kingdom is playing a very dangerous game of trying to reengineer its national regulatory agency at the same time as introducing a new legal framework. The first is to merge several regulatory bodies to create the Office of Communications. The second is to scrap existing telecommunications regulation and bring in a new framework, largely based on competition law, implementing a set of European Union directives that stem from the 1999 Review. It is a lot of change to be achieved in a limited period of time. It is a challenging task. We can be confident that content will continue to be regulated in most countries, though we face dramatic changes in the content and the regulation. You cannot continue to do this on measured volumes of output. Equally, you cannot now measure what is "viewed". You need new metrics and new approaches. Sometimes broadcasting may at a different level of government from telecommunications. This is the case in Belgium and in Germany, where it is devolved down from the federal governments. We can be certain that competition authorities will continue with their horizontal responsibilities. That gives us two obvious candidates for mergers, to put telecommunications with with the competition authority or with the broadcasting regulator. Is telecommunications more appropriately addressed under a competition law regime or under a content regime? Convergence with content, would seem to assume that the sector will be regulated for ever or at least for a very long time. It assumes telecommunications will need to be heavily and intrusively regulated , that it cannot be made competitive. Convergence with competition law, which will be enduring in all sectors, assumes that telecommunications will need only limited sector specific regulation in the future. A major concern is that broadcasting will overwhelm telecommunications by presenting more political and inflammatory issues. |
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| Appeals |
Too much of the debate focuses on the national
regulatory authority. It is equally and perhaps more important to get the
appeals procedure right. It can be an appeal to a court or to a special tribunal, it can be an appeal on the merits of the case or only on procedural grounds. The UK has a recent example of interest in Australia. The Competition Commission found in favour of the Office of Telecommunication and against the combined weight of the four mobile network operators on the issue of fixed-to-mobile charges. This will save British telecommunications users and those calling mobile phones in the UK a lot of money. It was very valuable to have the case heard there. However, the drawn out procedure meant that prices remained high for the duration of the case, more than eighteen months. In general and except in very exceptional cases, the decision of the NRA should stand until the case is heard by the appellate body. In South Africa you have the problem of the cases being heard by a the next available high court judge. This presents real problems in terms of the level of expertise of the bench. It is hard to expect a jobbing judge to understand the intricacies of, say, an interconnection case. If the substance of the case is to be heard, then it needs to be in front of a body with some specialist knowledge, whether a special court or a economic regulatory appellate body. Appeals based on tests of the public interest or a specific culture are never going to be easy to considered. |
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| Conclusion |
My personal concern is that convergence of regulation
of telecommunications with broadcasting is not sending the right message,
indeed it may send a very wrong message. It allows the telecom operators
to anticipate a regulated and thus a political future. They will then concentrate
on working with the NRA and with the politicians to manipulate the regulatory
environment to wound and maim their competitors all, of course, in the public
interest. It is an understandable reaction, but one we cannot afford. As users, we need competition. It is much better to say that you believe in competition in removing barriers to market entry and that you will maintain a process of liberalisation. The sort of speech that Allan Fels made last week at the ATUG Conference. I am not at all sure that there are economies of scale and scope in creating bigger and wider regulators. Perhaps if regulators were declining in numbers, then a "game reserve" for them would be of some benefit. There are no reasons to suggest that the market shares of the respective regulators are so great that a merger would be opposed. Are broadcasting and telecommunications regulators really undertaking the same sorts of analyses? Are they really imposing similar remedies? Are they subjective to similar degrees of liberalisation? Are the WTO commitments similar? I am far from convinced. I am not even sure I know how content regulators will control a world of streaming audio and streaming video. Thank you very much for your attention. |
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