Driving demand - Accelerating adoption: Regulator’s role
Daniel Rosenne, Chairman, Tadiran Telecom Communications Services, Israel
______
Abstract
Telecom regulators play a key role in setting up the environment and conditions driving demand and accelerate adoption of ICT services.
This short paper focuses on key issues and regulatory measures for fueling competitive forces by opening networks for innovated and agile value added service providers and enforcing market conditions that will allow them to compete.
______
- Overview
Regulators have a key role in driving demand and accelerating adoption of new services. The key role could be spelled out in a rather simple message:free market forces. One should note that regulators better refrain from shaping markets, and rather concentrate on the role of reducing entry barriers and free market forces, allowing for innovation, supporting adoption, removing obstacles.
Competitive markets are essential to promote demand and increase growth. Competition is essential in creating innovation, responding to real market needs and pushing down prices. Small and agile service providers, hungry for business, mean new ideas, service and technology innovation, lower tariffs, improved services, answers to local needs, language, and culture. These will strive and prosper only in a competitive environment;only in an environment with low entry barriers; only if the dominant players’oligopoly will not be able to block or crash the small players. Achieving this environment is essential for driving demand and accelerating adoption of new services.
Competitive markets, obligation to non-discriminatory measures, prevention of market power abuse by dominant players, are essential for growth in the telecom industry. How can such markets be created and supported, taking into account the nature of the telecom market, with huge investments required to create new broadband interactive services, considering the enormous size of the key players? Considering key playersare turning from bit-pipe providers to powerful service conglomerates?
Achieving competitive marketplace requiressuccessful implementation of several regulatory measures, such as: (a)cost based interconnect regime, the most important factor preventing market distortions that act as barriers for competition; (b)open access, key enabler allowing new small and innovative players to explore the public networkscapabilities; and (c) net neutrality, a rather ambiguous term, meaning limiting the public network providers intervention in services and applications provided by others.
- Interconnection is key
It was Professor Eli Noam[1] who coined the idea of “network of networks” back in the early 90’s, laying the theoretical foundation for modern interconnection regimes, and stressing the importance of interconnection on social and policy issues, free flow of content, universal service, privacy protection, and the competitive forces. As Professor Noam stated, “The regulation of interconnection is therefore becoming the paramount tool of government into the reasonably foreseeable future, replacing the regulation of telecommunications retail pricing, the rate of return, or competitors’ entry. It provides government with atool for extensive micromanagement of markets”. All of this is still valid.
Indeed, the major role of the regulators is to establish a pro-competitive interconnect regime, based on long run incremental costs (LRIC), with appropriate terms and conditions assuring non-discrimination and fairness,preventing abuse of market dominance, promoting competition, avoiding discrimination and assuring transparency.
One of the most far reaching examples of interconnection regulation is the May 2009 European Commission recommendation[2], calling forremoval of current asymmetrybetween wireline and mobile wirelessterminationrates[3] and bringing down termination rates throughout Europe toconsiderably lower level than today, approximately 1.5 euro cents to 3 euro centsper minute by the end of 2012. The removal of this major market distortion (fixed providers and users subsidizing mobile providers) will surely lead to increasing convergencebetween fixed and mobile networks, and will have a major positive effect on the telecommunications market- and the intake of new services.
- Open access is essential
Open Access, meaning that value added service providers may utilize public networks to provide services without discrimination, is a major key issue for promoting competition. In an era of convergence and consolidation, in which service providers are offering a wide array of value added services, with both vertical and horizontal integration, value added service providers, usually focusing on a specific set of services, find themselvesfacing formidable competitive disadvantages and severe discrimination, with limited assistance from regulators.
Although today’s telecommunications market is clearly consolidated and concentrated, the market structure debate, between consolidation and concentration versus pluralism and diversity, goes back many years. Back in 2003, Pat Longstaff[4] elaborated on the economic and technical forces at work in the communication sector, pushing it in many directions at once, and observed that “Unfortunately, policymakers in every country have generally been unable to decide if they want the communications sector, and the industries and firms in it, to move towards concentration ortoward diversity… In general governments see concentration as good when larger entities create economic efficiencies of scale and scope. Concentration will increase the industry’s competitiveness with other industries from other countries. Concentration has been encouraged or, at least, ignored when it enables an industry to develop a new product or service that can compete with another product or service that currently hasn’t much competition and may be perceived as too expensive… Governments thus see diversity as good, because it means continuation of the competitive struggle, lower prices, and the possibility of new products and services…..In other words, although most governments embrace diversity to promote competition, they are nevertheless willing to allow concentration if that would enable companies to survive a competition they are in danger of losing….Paradoxically, some concentration can promote diversity, and too much diversity will promote concentration”.
One should realize the importance of open access, especially in today’s consolidated markets, as the small, agile, innovative and hungry for business value added service providers were in the past the main innovators of new ideas and services. However, in the modern mobile, broadband and converged world, they almost disappeared.
Telecom regulation models are essentially based on the key principle of equivalence. This ensures that all players have equal opportunities to access and use public networks, and service providershaving market power in ways that can affect competition must adhere to rules assuring effective and sustainable competition. In modern times, with bundling, convergence and a wide array of services, the implementation of this principle is completely off track in many countries. Limiting the power of the small players is bad news for competition, andpursuing open access creates the right balance between concentration and diversity, and is the basic ingredient allowing the existence of value added service providers, so important for innovation, competition, creativity, and accelerating development of new services.
- Net neutrality is crucial
Net neutralityrefers to a network open to carry every form of information and support every kind of application. Net neutrality deals with a central concern, the power held by access providers - wireline, cable and wireless providers - to select, price or differentiate among information streams passing through their networks. Enforcement of net neutrality is considered essential for achieving competition and market development.
Although the net neutrality concept goes back to the telegraph days, it was Professor Tim Wu who popularized the term in several important papers published in the last decade[5], predicting that “Communications regulators over the next decade will spend increasing time on conflicts between the private interests of broadband providers and the public’s interest in a competitive innovation environment centered on the Internet”. At the time, Professor Wu considered network neutrality as an Internet issue, in terms of neutrality between applications, as well as neutrality between data and QoS-sensitive traffic, and proposed legislation to deal with these issues.
The concept developed further in recent years, dealing with wireless net neutrality. It was again professor Wu, in a paper published two years ago[6], who pointed out practices of mobile wireless service providers in several key areas, including: (a) Limiting devices and application: exercise excessive control over what devices may be used on public wireless networks; (b) Future crippling: forcetechnologies such as “walled garden” Internet access and block, cripple, modify or make difficult to use features such as call timers, WiFi technology, Bluetooth technology, GPS services, advanced SMS services, Internet browsers, easy photo and sound file transfer capabilities, e-mail clients and SIM card mobility; (c) Discriminatory broadband services: broadband 3G offerings with bandwidth and contractual limits that bar routine uses of the Internet, such as downloading music from legitimate sites like iTunes, using VoIP, use of sited like YouTube, etc.; (d) Applications stall: imposing excessive burdens and conditions on application entry in the wireless application market, under a “walled garden” approach to application development.
All this discrimination and application/devices crippling, common in many countries, by both wireline and mobile wireless service providers, is the major obstacle for development of new services, novel applications, and innovative business models, halting service adoption, hindering market development and blocking economic growth. Even the likelihood of such discrimination is enough to deter investment and funding, crippling the economy.
- Israeli experience -some examples and questions
Israel is an interesting “case in point”. A country with 7.4 million population and1.7 million households, witha US$ 27,200 GDP/capita,has 9.3 million mobile phones (126% penetration), 35% with broadband wireless capabilities, on four competing networks, 3.2 million fixed lines (43% penetration),1.7 million broadband Internet connection and 1.5 million multichannel TV subscribers (cable and satellite), 88% of households.
Much like the rest of the world, the Israeli telecom market has evolved dramatically since the early 1990s as the industry was deregulated, opening segment after segment to competition. Leveling of the playing field led to a decade of competition, innovation, rapid price declines and high adoption rates.[7] Market growth leveled off towards the mid-2000's driving carrier consolidation, competition subsided and market reached status quo, with price levels stabilizing and adoption levels leveling off.
Today, Israel presents technology literate, competitive and vibrant telecommunications market, bustling with various services and enjoying fairly high adoption by end users, ranking Israel on the top of many usage charts globally.
Broadband penetration and adoption in Israel is a good example of the merits of pro-competition measures. Recognizing the market power of the dominant access providers and the negative effect it could have on the rather diversified Internet market, Israelwas one of the few countries where “structural separation” was chosen, rather than the more common “accounting separation”, in order to prevent cross-subsidies and noncompetitivepractices in the broadband Internet access market, resulting in simple regulation and enforcement.Since 2001, Bezeq (the incumbent wireline provider) and HOT (the cable company) are regulated by “structural separation” rules, limiting them to provide access services only (connecting broadband customers to Internet service providers), assuring open access and net neutrality. Israel broadband Internet customers actually receive two billsone for the access services, the other from the Internet Service provider (ISP).[8]
The result of this rather strictpro-competitive regulation was rapid market adoption and growth of broadband penetration, which grew from 2000 lines in 2001 to current 1.7 million lines. The high adoption pace is demonstrated in figure 1.
Figure 1: Broadband Internet growth in Israel
Source: companies’ reports
Consistent with the need to promote new services and innovation, the expansion of the structural separation regulatory measures to new areas was avoided. Israel has adopted a “hands-off” regulation policy in many areas, as evident in the mobile wireless services, were service providers enjoy rather high degree of freedom in providing new services, setting tariffs, etc., however, compared to the high adoption rate of fixed broadband Internet, the slow growth of non-voice revenues over mobile wireless networks is rather astonishing - in a fairly wealthy technology savvy country, with high rates of wireless penetration, one of the first countries to introduce commercial 3G services (in 2003), the adoption rate of wireless data services is fairly low in comparison to other countries, as demonstrated in figure 2, showing that although Israel is high on the charts showing wireless penetration and ARPU, it is rather low on the parameter of non-voice revenues as a percent of total revenue.
How do we explain this paradox? What went wrong? Could it be that the common discriminatory practices, mainly limitation of open access and abusing net neutrality, by consent of the Israeli regulator,delay adoption of new services?Is it possible that the high level of consolidation and the absence of innovative value added service providers have a negative impact on the rate of adoption of data services? If strict open access and net neutrality rules will be adopted and enforced, will we see a positive change in adoption rate of these services?
One should also ask a different question - in the case of the broadband Internet, if instead of the drastic structural separation, a more subtle solution would have been adopted, such as true implementation of open access and net neutrality, could better adoption rates be achieved? After all, the structural separation prevented the access providers from exploiting the benefits of convergence, bundling, economies of scope and scale.
Figure 2: Non-voice wireless revenues, penetration and ARPU in Israel - worldwide comparison
Source: Bank of America Securities Merrill Lynch Global Wireless Matrix 2Q09
- Summary and conclusions
Healthy and innovative competition can develop even in countries where monopoly providers control the access networks, providing telecomm regulators actively seek appropriate regulatory measures to assure competition in services and applications.
Competition is essential for high adoption rate for new services. Only competition can reduces prices and create market innovation and agility, necessary to drive demand and accelerate adoption of telecommunications services, compelling adoption to local culture and market needs.
Regulators have an important and critical role in driving demand and ensuring adoption of new services, mainly - create competitive environment, assure level playing field to all service providers,large and small, promote investments, deter discrimination, free market forces..
This short paper presents key ideas for the appropriate regulatory measures, including: (a) cost based interconnect regime; (b)open access; and (c)net neutrality, and present some examples demonstrating the effects of these measures.
The Israeli experience demonstrates the positive and negative effects of the regulatory measures on the adoption rate of new services. However, it should be emphasized that the rather drastic measure of structural separation, proven effective in the Israeli broadband case, is definitely effective and simple way to implement open access and net neutrality, but is a barrier to convergence, and such measures should be implemented only in extreme situations, when less drastic measures will not provide reasonable result.
Biography
Daniel Rosenne
Chairman, Tadiran Telecom Communications Services, Israel
Daniel Rosenne is Chairman and board member of several Israeli High-Tech companies, and provides consultancy services to governments, telecommunication operators, manufacturers and investors’ community, in various telecommunications strategy, regulation, management, business, operations, technology and engineering issues.
Mr. Rosenne served as Director General of the Ministry of Communication from 1997 to 2001, responsible for all aspects of telecommunication regulation, achieving major enhancement of competition and growth in the Israeli telecommunications services sector, accomplishing key amendments to Israeli Telecommunications Law and introducing spectrum auctions.
Before joining the Ministry of Communications he founded and was President and CEO of Bezeq International, Israel’s incumbent international service provider. His previous experience includes positions as Corporate Vice President for Technology and Business Development at Tadiran Telecommunications Ltd. and Vice President for Engineering and Planning at Bezeq, the Israel Telecommunication Corporation Ltd. He served for 25 years in the Israel Defense Forces, retiring with the rank of Colonel.
Mr. Rosenne holds a B.Sc. degree in electrical engineering from the Technion - Israel Institute of Technology, Haifa, Israel (1969) and an MA degree in business administration from the Hebrew University of Jerusalem, Israel (1984).
Contact information: Office +972 775231004
1
[1]Eli M. Noam , Interconnecting the Network of Networks, Cambridge, Mass: MIT Press (2001).
[2]European Commission recommendation of 7 May 2009 on the Regulatory Treatment of Fixed and Mobile Termination Rates in the EU (2009/396/EC), available at
[3]The asymmetry between wireline and mobile wireless terminationrates is very large (mobile wireless terminationrates are in general more than 10 times as high as wirelineterminationrates), and are the result of different practices for mobile wireless and wireline regulation, especially regarding costing methodologies.
[4]P. H. Longstaff, The Communications Toolkit: How To Build and Regulate Any Communications Business, Cambridge, Mass: MIT Press (2002).
[5] Tim Wu, Network Neutrality, Broadband Discrimination, Journal of Telecommunications and High Technology Law, Vol. 2( 2003), 141-178, available at