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The telecoms sector provides the key building blocks of our increasingly rich and complex information society. As private individuals, we rely on telecoms to keep in contact with our friends, our loved ones, and the world around us. In the workplace, telecoms is an increasingly important component of business competitiveness. Looking ahead, if even a tenth of the claims being made for broadband by its champions are true, it will not only transform the way that we live and work but will have profound effects on our shared culture.

Regulation has had a decisive impact on the growth and structure of telecoms markets. For this reason, Ofcom (the Office of Communications) is launching a fundamental review of the telecoms sector and how it is currently regulated. The Review will enable us to set out a strategic direction for our activities in relation to telecoms, and will create a new settlement between the regulator, the companies we regulate and the citizen-consumer. The Review seeks to answer the five fundamental questions which are set out at the start of the Executive Summary of this document. Along with the measures we are taking to liberalise radio spectrum rules, this Review will be a key building block of our future approach to economic regulation.

The Review will be rigorous and evidence-based. In this first phase, we want, with the assistance of our stakeholders, to gain as full an understanding as possible of the prospects and challenges for the sector between now and the end of the decade. In Phase 2, which will commence this summer, we will take the lessons from this first consultation and create policy recommendations on which we will then separately consult. Finally, we will issue a statement by the end of the year which sets out our future approach.

The legislation under which we operate requires that we regulate only where strictly necessary. Many parts of the economy operate without the kind of detailed, sector-specific regulation that we apply to telecoms. Our starting point, therefore, is to ask the question: "Why regulate at all?" Although it is unlikely to be desirable in the short term to withdraw completely from sector regulation, we do want to develop a strategy which could lead, over time, to substantial scaling down of regulation.
It can sometimes be forgotten how far, and how fast, the sector has developed since BT (British Telecommunications plc) was privatised in 1984. Prices for calls have tumbled and quality of service has improved out of all recognition. New services have been widely and successfully deployed. Mobile is perhaps the most striking example: there was no mobile market in 1984, now more than eight out of ten of us live in a household with a mobile phone.

On the other hand, some aspects of the telecoms market remain problematic. Despite nearly 20 years of regulatory activity intended to promote competition, the detailed market reviews conducted by Oftel (Office of Telecommunications) last year concluded that BT remains in a position of Significant Market Power (SMP) in many of the fixed telecoms markets examined. This contrasts sharply with the optimistic expectations of governments and regulators, expressed at various stages over the years, that fully effective competition would rapidly be established and regulation could consequently be withdrawn. Nor do international comparisons always suggest that the UK is as far out ahead of the pack as we would wish and expect to be, given that we started the liberalisation process quicker than most of our competitors.

This document charts the evolution of regulation over the last 20 years, and the choices and dilemmas that regulators have faced. It seems likely that Ofcom will need to wrestle with similar choices and dilemmas.

We also look ahead to changes in technology and patterns of consumer demand that will shape the competitive landscape between now and the end of the decade. The last ten years have seen a shift in emphasis in the telecoms sector from traditional voice telephony services to new data services. Now a second wave of technology change is moving the industry from an analogue, narrowband environment to a digital, broadband environment. Some of this change takes place in the 'engine room', the networks of the various telecoms operators themselves, and is invisible to most of us, though no less important for that. However, some of it also will be reflected in new retail services for consumers.

There has been a tendency to regard regulation of the telecoms sector as a residential consumer issue. But in a knowledge economy, and certainly in a digital, broadband working environment, effective competition for business customers is equally important, and perhaps in sharper focus now than it was in 1984.

We will therefore look at the prospects for the introduction new voice services such as Voice over Internet Protocol (VoIP) and next-generation 'broaderband' services offering much higher capabilities than the broadband products currently available. We will also consider the scope for further competition between companies that we currently think of as being in different parts of the market, such as mobile and fixed. These changes are important because by increasing the scope for competition they may reduce the need for continued regulation.

It is always necessary for regulators to also ask the question: "What do consumers really want?" Regulators run the risk of adopting approaches which are too theoretical and insufficiently grounded in practicality. We will be undertaking extensive research into the attitudes, needs and expectations of consumers in each of the residential, small business and large business sectors in order to inform our decisions. We will also look at potential barriers to consumers' exercising choice such as lack of comparable market information.

A review of this breadth is a significant task, and it is important we do a thorough job. Equally, it is important for our stakeholders that we can set our strategic direction as soon as we can. We are aiming to complete the Review by the end of 2004.

The success of this Review is partly dependent on the quality of the inputs and insights that we receive from you. We recognise that predictions of the future cannot be an exact science. However, the more high quality feedback we get from market participants, consumers and other stakeholders, the better our prospects of correctly identifying the key trends and issues. Please therefore do tell us what you think.

David Currie, Chairman
Stephen A Carter, Chief Executive

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