Ref: 69/01
Date: 11 October 2001

The regulatory challenges that OFCOM will face were outlined today by David Edmonds, Director General of Telecommunications.

OFCOM will need to strike the right balance between regulation to support competition and protect consumers where necessary, and resist the temptation to intervene if regulation will not bring additional benefits beyond what the market will provide itself, David Edmonds said.

David Edmonds set out his views in a paper for a seminar held today on OFCOM by the Institute of Public Policy Research.

The text of the paper is attached.

Institute for Public Policy Research seminar on 11 OCTOBER

"OFCOM: What are we worried about?"

Paper from the Director General for Telecommunications

Introduction

The work to create the Office of Communications – OFCOM – as a new regulator for a new world has begun. Last December the Government published A New Future for Communications which set out a policy vision for the converging communications sector – consumers and the UK economy enjoying the benefits of a thriving, competitive industry and a coherent regulatory framework. A Regulators Steering Group (RSG, with membership including the chief executives of the regulatory bodies that will make up OFCOM) is already working hard to prepare the way for OFCOM and make sure that the Board can hit the ground running when it is appointed.

The RSG has built on existing working links to achieve consensus on a range of difficult policy and practical issues. We expect to publish a scoping study soon, with a suggested template high level structure for OFCOM and a transition plan covering the work needed to get the organisation up and running by the end of 2003. We will use it as the basis for taking the preparations forward in discussion with stakeholders.

Work on the practicalities of setting up the new organisation is underway. Of course, there is another important area of work – active debate on what will be the priorities and remit of the new OFCOM. And it is an important area that must be resolved before the final structure of OFCOM is put in place, because everyone is agreed that the form of OFCOM must follow function. This paper is written from a telecommunications perspective, but it is not intended to promote sectoral interests. It is intended to spark further debate on key issues that underlie and must inform decisions on OFCOM’s role, remit and structure - the context in which OFCOM will work; and how experience of promoting competition and protecting consumers in telecoms could be applied in forming OFCOM’s approach to regulation.

First, we need to recognise that OFCOM will be a regulator. Its role will be to regulate. Despite the continuing pressure from Government and industry, we should not encourage the notion to develop that the main role of OFCOM – or indeed any other regulator – should be to deregulate. No regulatory intervention should ever be made lightly, and certainly not without a robust grounding in analysis and evidence. The watchwords here should be appropriateness and proportionality. OFCOM will face fast-moving markets and will need to remain vigilant. It should allow competition to thrive, positively promote it on occasion and ensure that anti competitive practices are stopped. It should always regulate at the minimum necessary level and allow competition to deliver services to the consumer where this is possible. And where possible it should roll back regulation.

It is of course also critical that OFCOM is independent and the importance of this is rightly emphasised in the White Paper. Business needs a clear and predictable regulatory framework if it is to plan, invest and deliver, especially in fast-moving, risky markets. An independent regulator can give a degree of certainty and stability to this framework that a politician never can. OFCOM must also be independent of business. It will not be the super manager of a wide range of companies. Nor, more importantly, should OFCOM be the sponsor of the sector. Its overarching objective must be to ensure that consumers get the best deal possible. In the main this will be provided by competition. But, given the nature of the markets Ofcom will regulate, this will not provide all consumers’ needs. Protection of consumers where necessary is therefore a key role for Ofcom.

Why is OFCOM being created? It will place content and competition regulators, telecommunications and broadcasting regulators on the same premises – literally and philosophically. The basis for this is convergence. The old differences between television, radio and telephony for the conveyance of different services and information are becoming outdated. What we have now are increasingly common electronic communications services. People will still use different networks to seek broadcast type content. But much of that content is transferable between different networks now and will be increasingly transferable in future as the digital revolution drives increasing capacity across the networks.

The converged world changes the way that consumers interact, not only with broadcasters but also with banks, shops, and even their friends. Where people once called up to arrange a night out and then met at the agreed time, the process can now involve an email conversation, with a date put in a PC electronic diary that is downloaded to a mobile device that is later used to call and check the venue.

As content becomes increasingly common, people will more and more choose the delivery mechanism that is most suitable in any particular circumstance. The simple issue of the news illustrates this. You can start the morning at 6am listening to the Today Programme on your bedside radio. As you eat your breakfast, you can see the webcast version through your digital television. On the train you might read the newspaper and get updates through a WAP phone - you may soon be listening to these through a third generation mobile phone. At work it may be best through an internet stream on your PC. You can keep up to date through internet broadcasting anywhere in the world.

So consumers will be indifferent between the different methods of delivery – the choice they make will be whatever is most convenient at the time. And regulation must reflect this. We must examine critically whether regulation is still needed. If it is, we need to determine what form it should take. And, increasingly, we must make sure that it is applied consistently across all the competing technologies so that investment in infrastructure and services is not undermined.

The vision that Oftel holds for the future of the converging communications sector is commonly held . What we all want for the public at large, both as consumers and as citizens, is the same - high quality content, the best value for money and the greatest possible choice. In the digital age, competition is the best vehicle that we have to deliver this. Competitive markets will provide both the innovation in content and the investment in new services. And this is already there to be seen, heard and interacted with on the digital platforms, although we are still in a very early stage of the market.

We are making strides towards consumer and viewer empowerment. In the UK there is much we can be extremely positive about. Digital television has been a great success – already just over a third of households have digital TV. We are the pioneers, and were the first country to launch digital on three different platforms. There has been massive take up in the early stages with no signs as yet of this slowing down. Products that will entice new consumers to digital platforms are still being launched. That headstart gives the UK an advantage in exporting expertise and products to more slowly emerging digital markets in the rest of the world.

As the pace of convergence quickens, the drivers of the market will be increasingly difficult to predict. The dramatic rise and evolution in mobile phone use is instructive. The initial driver of increased ownership was the ease and convenience of voice services. But the key point about mobile take off is that it has moved rapidly and unpredictably, from the stuff of yuppie jokes through large scale take up by business to a mass market device that children buy with their pocket money and use to exchange text messages. This change has had less to do with regulation and much more to do with competition. Initial industry-led, Europe-wide decisions on standards subsequently allowed companies to invest in appropriate technology at reasonable cost and thus realise very quickly the potential market. Companies at all levels in the value chain have invested in technology and new services bringing greater choice and availability to consumers. Common European standards, innovation and competition backed up by relatively limited, highly targeted regulation - a useful lesson to us when looking at developments in a converged world.

So the question is: 'why, with all this competition developing and in prospect is there still a need to regulate?' Putting content issues on one side, the key challenge facing OFCOM in the short to medium term is that the number of delivery networks is limited by the high cost of building them and the economies of scale they exhibit. This means supply is relatively restricted and so, at least initially, networks will be the focus of economic regulation.

Even here, though, the prospect is not 'regulation for ever'. An important component of increased network competition is ready access to radio spectrum. Radio spectrum is an enormous potential resource. Freeing up access to radio spectrum has the potential to allow both greater usage of existing infrastructure and expansion and development of other networks and delivery systems, fostering more competition and thereby reducing the need for regulation.

How can the unused or underused radio spectrum be brought into play? By allowing those who can make best use of it to buy spectrum and use it flexibly to meet consumer demands. Those with more spectrum than they need, or those who have insufficient resources to exploit the spectrum they already hold - especially those, including broadcasters, holding spectrum for public policy reasons - should be able to sell any surplus capacity to the highest bidder just as they would sell land or other assets for which others had more use. The opportunities from the introduction of widespread spectrum trading - subject to usual constraints on preventing anti-competitive practice - are potentially enormous. This has been recognised by the Government and the Radiocommunications Agency, who support the introduction of spectrum trading. There will be difficult issue to address, but they must be tackled and overcome. The Cave review of spectrum management commissioned by the Treasury is timely in highlighting the key role spectrum trading can play in future.

Spectrum used flexibility and rapidly by telcos, broadcasters, and service providers to meet ever changing consumer demands, is the key enabler of convergence of services. And of less need for regulation in future.

The climate for investment is a key factor in the prospects for convergence. OFCOM will need to be aware - and wary - of the impact of its decisions on the substantial degree of investment needed to develop networks and services for a converged world. The current stock market position illustrates the fragility of investor confidence. But stock market difficulties should not mean an acceptance of market power. If regulation now, or in the future, is too intrusive or unpredictable it will further undermine investor confidence and weaken the prospects of competition that benefits consumers.

Experience of promoting competition and protecting consumers in telecoms

So in seeking to provide an appropriate level and type of regulation for a converged world, what relevant experience can be called on? There are lessons from the experience of telecoms which are highly relevant to the key challenge OFCOM will face. Open, transparent and predictable regulation needs to be developed or investment will be discouraged. And in some markets significant investment is needed if consumers are to derive the benefits of convergence.

Oftel has relevant experience of regulating to protect consumers and increase competition to deliver consumer benefits. First, in enabling competition to develop while at the same time protecting consumers against players with market power. Second, in removing barriers to entry and preventing anti-competitive practice, creating a climate where there has been massive investment by both incumbent operators and competitors. Third, protecting consumers against other forms of market failure associated with the nature of networks.

The outcome has been a better deal for consumers - lower prices, better quality of service and, most noticeably, the creation of whole new markets for consumers and a wider range of new and innovative services. Some figures illustrate this.

• investment in networks by fixed and mobile telcos in the four years up to 2001 has been over £30 billion. BT alone is investing £4 billion in the current financial year. The investment record shows no basis for an assumption in favour of a natural monopoly in communications, with all service providers having to base their prices on the cost base of a single network, under no pressure from competing networks;
• prices have fallen by 50% for fixed line telecoms customers in real terms since 1984 and mobile phone users have seen prices fall by over a quarter in less than 2 years;
• 99% of households have a fixed or mobile phone;
• and there are over 40 million mobile phones subscribers – compared to 24 million 2 years ago;
• the proportion of households with internet access doubled in the two years ending May 2001 to 4 in 10;
• competition is more vigorous in parts of the market – for example BT now carries less than 20% of international business call traffic by volume.

The challenge for OFCOM in terms of regulation will be the same as that faced by Oftel. OFCOM will need to get the appropriate balance between intervention in the market to create the right conditions for competition and to provide necessary consumer protection; and drawing back from intervention or resisting the temptation to intervene if it is not clear that regulation can bring any benefit over and above what the market can do itself.

To illustrate how this balance can be struck we can look at a meeting point between Oftel and the ITC: the question of service provider access to networks. While a relevant factor in key decisions we have made recently for the telecommunications sector, it is also an issue at the heart of convergence. In a world where different networks deliver the same content it is vital to have a clear – and clearly understood – general approach.

Oftel’s view on this is clear and consistent with the new EU Directives which set the basis on which service providers can get access to networks. It is reflected in the White Paper, and it has been developed in close collaboration with the ITC.

There are two reasons why we might impose open access: to ensure end users can receive Public Service Broadcasting, and for competition reasons. PSB channels are carried by all companies delivering broadcasting services to consumers in the UK, so these is no need to impose open access for PSB. But should open access be imposed for other content?

For competition reasons open access to networks should be imposed only if objective, clear and well-accepted criteria are met. The criteria we have developed are as follows. First, the company should have economic power in the relevant market. Second, the benefits of regulation should outweigh the costs. Third, open access should be a proportionate response to the problems in that particular market. Note that a case exists for intervention only if all tests are passed. Moreover, a further consideration is the terms and conditions on which access should be provided. These tests provide an appropriate balance between encouraging competition in the interests of consumers and limiting the exploitation of powerful networks.

Why emphasise a test of market power? The starting point is that viewers will want popular, quality content – so a requirement to carry is unnecessary where companies want to attract customers and those customers want to buy a particular service. Opening access to networks without economic tests would leave network owners who have invested billions of pounds unable to make decisions over the products that they supply to their consumers.

What does this mean in practice? If a given broadcaster cannot sell the content they want on the network they want, the network should be obliged to carry only where the refusal is due to the market power of the operator of the network. This is not doctrinaire adherence to extreme economic theory. It is about intervening in the decisions of companies only when it is necessary to protect the interests of consumers. If companies do not supply a range of content attractive to their consumers, they may not survive for very long. The rapid switching in mobile telephony suggests that the digital consumer is increasingly demanding, discerning and mobile.

There is another example. No regulation required One2One to do a deal with Virgin to let Virgin Mobile run a service based on 020's network, but it made sense to the parties to do so: a market solution, increasing the range of choice. If the regulator had intervened and required 020 to provide access, then the regulator would have been setting prices - why do that for a non-dominant network? Who is best placed to know the deal to strike – the participants with a keen commercial interest in maximising take up by consumers and utilisation of the network, or the regulator who will have to get involved, at second hand, in assessing network costs and likely demand? It is clear that if the market can work, we should let it do so.

In conclusion there are some key points to emphasise.

• the future holds great promise for consumers, who must be the focus of regulatory action;
• the implementation of the new EU Directives will enable proportionate regulation to be pursued across electronic communications services as a whole;
• OFCOM’s regulatory approach will be key to enabling the development of a market that delivers converged services to consumers, and in which there will be more competition than before;
• experience of regulating to protect consumers and promote competition to deliver consumer benefits in telecoms will be highly relevant to the challenges facing OFCOM.

And some answers to the questions for this seminar.

• can OFCOM improve the lot of consumers? Yes, and OFCOM will be in a better position to do so than five separate regulators;
• does establishing OFCOM involve major upheaval? Yes for the regulators, but not for stakeholders if we get the structure right;
• what is key to convergence happening? Spectrum trading, with its potential for getting rid of entry barriers and removing constraints on spectrum usage that belong to a less competitive, slower moving world;
• how could OFCOM get it wrong? If it adopts a wrong, over-intrusive regulatory approach it will undermine investor confidence in building and upgrading delivery systems and networks and creating content. And if it does not act quickly enough to prevent dominant players excluding others from competing in the market.