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30|11|06

Communications and Convergence Challenges for 21st Century for Digital Economies

Keynote Speech

30 November 2006
Ed Richards, Chief Executive, Ofcom

See the slides associated with this speech

Good morning and thank you, David and to you Margaret for getting this conference off to such a good beginning.

As David said today’s sessions will be posted up on our own website but also on YouTube and Google Video. That may be a first, for a regulatory conference.

Our conversations in the next two days may not match the 5 million downloads a month of the more popular YouTube videos – but if we really get the debate going, we should be certainly aspire to beating YouTube’s worst performer – the magnificently titled ‘video of watching paint dry’ that has itself secured an improbable 9 downloads – demonstrating I suppose that there really is a market for absolutely everything.

Secondly, those of you who attended last year’s Ofcom/UK Presidency Conference will recall receiving an attractive Conference bag with pens, notebooks and devices inside. This year the free gifts are a little more demanding. In the foyer you will see copies of two publications for you to take away. I hope that both will form a backdrop to today and tomorrow’s discussions – and a springboard to debate in the future as well.

SLIDE: COVER OF BOOK

The first – “Communications, the next decade” – is a collection of essays written by eminent thinkers on the communications market from Britain and the rest of Europe, America and the Far East. Each essay is individually thoughtful. Collectively we hope that they will point policy-makers and regulators towards the questions and some of the answers that will help us all make the best of the communications revolution in which we live.

And I am really delighted that several of the contributors are here today as panellists and speakers - Jonathan Zittrain, Isolde Goggin, Eli Noam and Carolyn Fairbairn – and that many other contributors are here too – I want to thank them for their contribution and encourage all of you to take a look at the book.

SLIDE: WORLD MAP SHOWING COUNTRIES COVERED IN ICMR

The second of our free gifts to stimulate our discussion is Ofcom’s first ever International Communications Market Report, which we published yesterday.

This report was prompted by the express wish of our stakeholders that our research should encompass a broader international perspective and that we should build on the understanding of the market that we have shared with stakeholders through our UK focused Communications Market Report.

We draw comparisons across the communications sector between the UK and six other major countries – France, Germany, Italy, the US, Japan and China – and we review comparable data in a further five countries.

You will see in both these publications Ofcom’s commitment to the international agenda and to placing our own policy in an international context.

Communications has in many ways always been an international sector. And that is more true today than at any point in time.

The internet is inherently a global medium. New technology does not respect geographic boundaries. Markets are more and more international in nature as global trade has risen and domestic barriers to investment and market entry erode.

And if you think about a contemporary supply chain – imagine a new IPTV service in any given European country – you see the truly global nature of communications services today:

That IPTV supply chain in all likelihood might feature:

And on screen perhaps:

How the world is changing

And alongside this globalisation, convergence is bringing sweeping changes to our sector. It is rapidly altering and in many cases undermining business models.

Driving a lot of this change is the growing importance of spectrum based services, as you see on this slide.

SLIDE: INCREASING IMPORTANCE OF WIRELESS (MOBILE AS % OF TELECOMS £)

Many of the new platforms that have emerged over the last decade and many of the prospective new ones are wireless in one form or another. Between 2001 and 2005, every country in our study – bar one - saw mobile revenues overtake fixed.

Data services have grown to between 15 and 25 percent of mobile revenues. Much of that is SMS. But as 3G becomes more widely adopted, wireless internet usage is increasing: 40% of Japan’s adult population access news and information from the net by wireless, with 29% in the UK and 26% in the US. These numbers will rise as technology like HSPA give mobile more competitive upload and download speeds.

Wi-fi hotspots are spreading rapidly. The USA has the most with over 26,000; the UK and Ireland have the highest per capita at 18 per 100,000 people.

And, as we have found with recent auctions, for any given piece of spectrum there are many different applications vying for access.

A second theme is increasing competition between platforms.

SLIDE: COMPETITION BETWEEN PLATFORMS (GRAPHIC)

Increasingly what were adjacent platform markets are competing head on: DSL or fibre versus cable or satellite;

Equally, previously distinct operators are also competing head to head.

In the UK, BSkyB, a broadcaster, is now a local loop unbundler offering bundled broadband; BT a telco will launch its BT Vision television service next Monday. In the US, Verizon is competing directly with the cable operators for Hollywood content to go over its new fibre network. France Telecom and Telecom Italia both offer full IPTV services.

Alongside the increasing choice of devices and platforms, comes increasing complexity in service proposition, which in turn attracts the simplicity offered by a single customer relationship.

Our aim as a regulator is to ensure that consumers are able to make well-informed comparisons and that competitive disciplines operate effectively in the market. Migration processes, particularly for bundled services, will be an increasingly important consumer issue.

SLIDE: PRESSURE ON INCUMBENT TELCOS

A third force is, increasing competitive pressure on incumbents, often as a result of increasingly intense competition from within the conventionally defined market – of which broadband is perhaps the most clear example, but so too is the pressure on broadcasters from multichannel television.

Fixed line revenues, with some exceptions like China and Poland, are on a steep downward curve. Incumbent telcos must find new wave businesses in markets where they are the challenger to established companies.

Successful new entrants to the communications market, the Googles, Yahoos and e bays have seen huge expansion: revenue growth has long outstripped that of the established broadcast networks.

Consumers are spending more on communications services; global communications revenues increased by 26% between 2001 and 2005.

But some of the new entrants’ revenues have come from existing communications businesses. This is reinforced by rapid growth in new services.

SLIDE: VOIP PENETRATION ACROSS COUNTRIES

VOIP, with over 2 million UK users and much higher penetration in Japan and France, is accelerating the decline in fixed wireline call revenues.

SLIDE: ADVERTISING SPEND BY MEDIUM, ACROSS COUNTRIES

And internet advertising, which is seeing rapid and disruptive growth in many economies – and is particularly strong in the UK where it overtook commercial radio revenues in 2004 and is now one third of tv advertising revenue.

In the midst of these changes we already see a very challenging transition – a transition not only from analogue to digital, not only from circuit to packet switched, not only from linear to on demand but an ever accelerating transition from the uniformity and homogeneity of the communications experience that many of us grew up with, to a world of diverse consumer and audience needs and experience.

Some are racing ahead, innovating, experimenting, seamlessly moving between different media and platforms.
Others, uncomfortable with change, are seeking simplicity, and often protection, from an uncertain and, to them, confusing new world.

Convergence and the Consumer

For the user, convergence of platforms and services, and the integration of networks and content with processing power and storage are driving and reshaping consumer demands.

It is fuelling a new pattern of demand characterised by consumers who seek out three critical areas of change; they want more control, more mobility and more participation in the way they use and enjoy communications services.

People first tasted greater control when multi-channel TV replaced the choice of just a few networks. But it was still choice from the schedulers’ menu. Today the possibilities of personal control have reached a new level.

The critical technologies and services are interactivity, PVRs and VOD, local storage and downloading.

An iPod already holds 15,000 tracks. A life-time’s music under my personal, immediate control. Use of VOD and PVRs, is growing rapidly: already more than 10m homes in the US, and approaching 2m homes in the UK.

Why?

Because it transfers control from scheduler to viewer, from company to consumer.

SLIDE: DOWNLOADING ACROSS COUNTRIES, 18-24 GROUP

And downloading and P2P file-sharing of music, programmes, news and videos is growing rapidly in all the countries studied in our International Report. Most strikingly in China; where that growth is seen among all age groups.

Secondly, consumers want more mobility, with the flexibility and freedoms that it brings.

Mobile voice, messaging, mobile music and radio is being followed by mobile video. Consumers want mobile connectivity with the ability to browse online content as they would in the office or at home.

SLIDE: MOBILE TV TRIALS AND ROLLOUTS WORLDWIDE

Streaming mobile video content has been available to consumers since the launch of 3G services. Now, broadcast technologies such as DVB-H, DMB and MediaFLO, using distinct spectrum ranges, are driving the global proliferation of mobile TV trials and rollouts that you see on this map.

Here in the UK the trials suggested that people watched on average three hours per week – on the way to work, in their lunch hours, even at home in the bedroom.

Now we’ve seen the launch of a commercial service by Virgin Mobile using the DAB radio spectrum and we anticipate more.
The increased availability of new mobile services is meeting and driving demand from consumers, particularly younger consumers, for more and more of their media and communications come in mobile form.

It’s telling that in the UK and in many other countries, mobile is without question the 16-24 year olds’ platform of choice and the device they would least like to be without.

Thirdly, participation. Consumers, viewers, listeners are less and less content to be passive recipients of communications services. They expect to be part of the service, to help determine the outcomes or generate the content themselves:

SLIDE: USE OF SOCIAL NETWORKING SITES, ACROSS COUNTRIES

Again, in our International Report, the figures from China stand out: 75 per cent of broadband users of all age groups use social networking sites. A much higher figure even than for the 18-24 year old group in the USA, Japan, the UK and France.

The rise of new, convergent media services is not just a challenge to existing businesses but also a challenge to everyone here today including regulators and policy makers.

We should ask ourselves whether we really understand the trajectory of this world.

We should reflect upon the challenge that one of the contributors to our book, John Naughton, set out suggesting that we ask a few blunt questions:

Because these forces of convergence, and the growing demand for mobility, for more personal control, for more participation are powerful forces which I believe in a few short years will transform the conventions of commercial and regulatory practice.

They will change the nature of communications in a positive way, but also in a disruptive way.

They will pose questions and demand answers for every company, every regulatory agency and every government over the next decade.

We will see significant commercial disruption, whether to existing business models or to previously secure corporate positions, as market definitions erode and one company’s opportunity for growth demands a defensive response from another.

Across the industry we are already seeing consolidation: in the incumbent telcos and in cable in the US; DTH operators in continental Europe; and in the UK, cable and the altnet telcos.

And alongside the creative destruction that periods of innovation and technological change always prefigure, we also face disruption to familiar and often cherished mechanisms for achieving social objectives.

The Universal Service Obligation was funded by the monopoly surplus of incumbent telcos. That is a surplus that is being swept away by competition and convergence. Commercial Public Service Broadcasting rested on privileged access to scarce spectrum in return for programming obligations. Competition, whether from terrestrial satellite, cable or IPTV erodes that privilege and with it the ability to deliver commercial public service broadcasting in the manner of the last 50 years.

And there is the fundamental challenge to the established consensus on content regulation – how as a society we regulate for acceptable standards. As Eli Noam notes in our book, this is an international issue: each society has particular cultural and social concerns. In America it’s sex; France language; in Germany racism; in Iceland, ownership; in Sweden, it's violence.

Oddly enough, in the UK it seems to be all of these things – if not always at the same time.

Society and our legislators have for a long time relied upon the edifice of traditional broadcasting’s reach and domination of our living rooms. That world is slipping away hour by hour. So we will need a new consensus on our approach to a world of device and platform proliferation. A world in which content may come from a transmitter in Crystal Palace but is just as likely to emanate from a server in California or the Cayman Islands.

It will be a world in which we will almost certainly need to rely more heavily on personal responsibility, self regulation and co-regulation than the traditional structures of formal regulation. And that in itself poses a major challenge.

Ofcom’s role and response

SLIDE: ROLE AND RESPONSE

Against that backdrop what should be the role and response of the regulator?

I believe this is a question all regulators need to ask themselves in a world of such change. For Ofcom’s part, our overall approach cuts across infrastructure, networks, services and content issues.

Let me turn to some of the most important international policy areas which I hope we will discuss over the next 2 days.

Policy Areas

Spectrum

SLIDE: SPECTRUM

I have said that I believe wireless innovation will be crucial - so let me begin with Spectrum. The traditional approach to licensing - user-specific and technology use-specific – is being made less and less relevant by convergence.

At its extreme, the traditional approach required taxi firms to apply for a change of licence if they wanted to use their private mobile radio for a next door courier service.

That can’t make sense in the modern economy. Take two recent UK examples of how flexibility offers benefits:

DAB is a sound radio technology, but now hosts a mobile TV service.

3UK’s 3G service offers unlimited VOIP, mobile TV; remote access to a home PC, live messaging and Google search. Others will follow with further services and innovation.

The case for moving to a more flexible approach to the usage of spectrum seems to us very powerful. And the components of that flexibility are clear. Service and technology neutrality; the freedom to trade spectrum; clearly defined usage rights; and effective protection against harmful interference.

Of course, there are many non-market users of spectrum – defence, health, the emergency services, and others. But even in the public sector, market mechanisms, can improve the efficiency with which spectrum is used. In the UK, pricing now applies in all these areas and is requiring these organisations to look hard at their real needs and to adopt more spectrum-efficient technologies. As a result, significant quantities of spectrum are being released for commercial use.

Of course, there are significant practical problems to be addressed. Perhaps the most important is that we do not start with a clean slate – much attractive spectrum is committed as a result of previous policies and allocations.

We need to address carefully the complex issues around the liberalisation of existing holdings of mobile spectrum.
And we need a thorough and balanced examination of issues around the spectrum that will become available after digital switchover. An issue that is live in many of our countries.

We expect significant amounts of new spectrum to start to come to market from next year, all subject to our liberalised approach and available for trading.

But spectrum liberalisation will work best where it is multi-lateral. A European move to embrace liberalisation will reap greater dividends for UK consumers than if the policy is pursued in isolation by the UK authorities. That is true for all EU countries and would benefit the European economy as a whole.

So we welcome the Commission’s proposals to make spectrum liberalisation one of the key objectives of the Framework Review.

There are concerns – which may be shared by some of our speakers at this conference - that liberalisation could lead to fragmentation of the single market. We need an approach to liberalisation which addresses those concerns. I am sure that is what the Commission wants to do, in collaboration with Member States.

Ultimately, the ability to generate real economies of scale in equipment and technologies is likely to be improved in Europe if artificial restrictions on usage of spectrum are removed. This still allows for harmonisation, but harmonisation led by the market rather than imposed by policy-makers.

Networks and services

SLIDE: NETWORKS AND SERVICES

Convergence can also be expected to have an increasing impact on the central task of promoting competition in networks and services.

Will the effect of convergence, over time, be to remove current sources of market power, perhaps even including the enduring bottleneck of fixed access?

The US authorities’ view is that inter-platform competition is already sufficiently strong to remove the need for intra-platform regulation, such as unbundling requirements. Some voices argue for a similar approach here in Europe.

But there is a need for caution. Many of you will know that we have examined this question in the UK as part of our strategic review of telecommunications. We concluded that there was no prospect in the short to medium term of inter-platform competition eroding BT’s bottleneck control in fixed access.

And nothing which has happened since the end of the review leads us to question that conclusion.

We continue to believe that addressing BT’s enduring market power through the undertakings BT offered in 2005 was the right solution for the UK.

The central elements of those undertakings were the operational separation of BT’s access business into a new business unit, Openreach, and equivalence of inputs for the key bottleneck products at wholesale.

The market is now seeing very significant increases in investment, major improvements in broadband performance and market consolidation consistent with our aim of sustainable, effective competition.

Why was BT prepared to offer such far-reaching undertakings? I believe that BT saw the argument that tough regulation of the access bottlenecks could lead in turn to significant deregulation elsewhere. And, of course, we have now seen deregulation of retail markets here in the UK. That seems to us what makes the BT agreement an opportunity for all.

We do not prescribe this approach as a one size fits all panacea. Different markets have different characteristics. But we very much welcome the Commission exploring whether this approach would be a useful addition to potential remedies at EU Framework level – and hope that where such an approach can benefit the European economy and European consumers then it is carefully considered.

The settlement with BT was also intended to provide greater regulatory certainty at a time when significant investment in next generation networks is planned by many companies.

It is worth reflecting on whether in aggregate the current regulatory system does enough to provide such certainty.

Big investments in new infrastructure – paying back over many years – are vulnerable to changes in regulatory approach. If we want to see such investments in our economies, then as regulators we need to avoid the risk of chilling investment.

There is no doubt in my mind that a major test for the next few years will be the framework for next generation investment.
Investment in next generation networks should be market-led and competition driven. We do not believe that market certainty or efficient investment is best delivered either by regulatory hand-outs, in the form of regulatory holidays for incumbents; or by unjustified financial handouts from the State.

Our emerging approach has two elements. First, the need for regulation to reflect the higher level of risk of new infrastructure investment, which is not, like today’s access network, a sunk cost with predictable demand.

And second, to sustain the competitive bridgehead that has been achieved in current generation broadband. That means a medium to long term migration path for existing competitive investments like LLU and appropriate next generation access requirements to promote competition, be they access to ducts, sub-loop unbundling or wholesale bitstream products.

Public policy outcomes

SLIDE: PUBLIC OUTCOMES

The third area where convergence will have a big impact is on delivery of those outcomes deemed desirable by society and which the market alone will not or cannot deliver.

I described earlier how technological and market changes will disrupt the mechanisms that we have relied upon in these areas.

Ofcom has done extensive analysis of the issues concerning public service broadcasting. There is no doubt that the traditional PSB model in the UK, where the BBC is complemented by the advertising-funded commercial broadcasters, is coming under severe pressure.

And whilst each market circumstance is different, I suspect the same will be true in other European countries, with pressure first on those genres which deliver broader public purposes but do not always generate large revenues, for instance regional programming and children’s TV.

PSB needs to be able to evolve to deliver public policy objectives in a converged world. But that world also enables the market to deliver more of those objectives. We need to ensure that the PSBs’ financial privilege is not used to foreclose commercial operators and thus prevent the market from delivering.

In the UK, the new Public Value Test for BBC services is an attempt to strike that balance. Part of that Test is a Market Impact Assessment, conducted in public by Ofcom. We are mid-way through the first; so it’s too early to say how effective the mechanism will prove to be. But at the least we hope it will introduce greater rigour, independence and transparency into the process.

In the UK we have helped begin a debate about the future of PSB. It’s a critical debate that will unfold in the next few years. At the same time we may need a wider, European debate about what happens next to public service content and genres that the market may not supply in sufficient quantity; and which the old PSB model is unable to sustain.

We will need to consider whether new interventions, and funding mechanisms, should be developed in response to the erosion of the old model.

The same is true in telecommunications of universal service obligations and the Commission proposes to review the current Universal Service Directive next year.

Making distinctions between fixed and mobile voice and narrowband data services seems questionable as calls flit seamlessly between fixed and mobile networks. It may be more sensible to think in terms of a future right to a voice and data service, however delivered.

And there is a looming question about broadband. Its availability and penetration is rising rapidly in most markets.

If broadband penetration reached a certain tipping point – for the sake of argument, 75% of the population – might we see more profound changes in the way that public services and private goods are distributed? As the majority of users start to use services on line, might we take a different view of the nature of an essential universal service.

In such a world, the case for a broadband USO might be made. That would bring with it some tough questions about the nature of the obligation and, crucially, how it would be funded. As with PSB, the historic approach of funding USO out of incumbent monopoly profits must be re-examined as competition intensifies.

Today the assumption is that incumbents will deliver USO, with any cost shortfall being made up through a levy on the rest of the industry. But where USO requires the roll-out of new services, it might be better to create contestable funding models, as Chris Giles of the Financial Times suggests in our book, funding models which allow a range of operators to bid to deliver a USO.

Regulatory structures

SLIDE: REGULATORY STRUCTURES

Finally, what does convergence tell us about the future shape of regulation, the relationships that we have with each other and with the Commission?

First, I believe that the UK Government was right to create a ‘converged’ regulator. But the club of converged regulators remains small and select.

Particularly here in Europe, there remain doubts about the converged model of regulation.

But how can the challenges posed by a phenomenon such as IPTV really be addressed effectively without some degree of regulatory convergence.

Viviane Reding has started a debate about what should be the best institutional structures to help us all deal with the challenges of convergence. We welcome that. Old models will have to change. The question is how?

There is a vital role for the Commission to oversee the operation of the single market and to provide a policy lead to Europe.

Effective regulation also requires national regulators, armed with knowledge of national market circumstances, to fine-tune the policy and determine the detail. That is true for regulation of telecoms markets, spectrum management and, given cultural specificity, particularly of content. Regulators must be more than just enforcement authorities – there needs to be scope to make appropriate policy adjustments for national market conditions.

You will deduce from these remarks that we are not yet persuaded by the idea of a European ’super-regulator’.

But our interdependence and our common European citizenship means that a European perspective is critical.

And there is scope for improvement in the way that national regulators work together. Particularly in telecoms, where the European Regulators’ Group is developing into a new and more vigorous institution.

I am delighted that Roberto Viola is here to discuss the role of the ERG and the important reform programme that he will carry forward next year. We support him in that purpose.

The process of negotiating the AVMS Directive has also highlighted the importance of co-operation in content regulation.

We have a European body, EPRA, which brings together content regulators from inside and outside the EU. I would characterise co-operation as currently being at the same level as it was on the telecoms side before the introduction of the EU Framework in 2003. We should think seriously about the case for increasing co-operation on the content side, too.

It is of course possible to get lost in these sometimes arcane, institutional debates and while we must have these debates we must not be blinded by them. We must always raise our sights and see a bigger picture. A picture of:

And in summary a radically different but inspiring new age of communications to which we will all need to respond and which will never stand still.

These are the challenges which as Ofcom's new Chief Executive I will relish addressing over the comings months and years. And I look forward to doing so with all of you here today.

Thank you


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