Contents

Introduction

General State of Competition in Telecoms (focus on gains to consumers)

Convergence (definition, characteristics, implications)

Delivering the Broadband Revolution - Oftel’s current consultation exercise, "Access to Bandwidth"

Oftel’s Role (regulation in the era of convergence, our Long-Term Strategy

Conclusion

Introduction

I was asked to speak around the theme of "Telecoms Industry Competition, Convergence and the Bandwidth Revolution"…

These are areas of rapid change as well as growing media and general public interest.

They are also, each of these topics, large and complex subjects in themselves.

So, I have structured my comments along the following lines:

Firstly, I will very briefly review some recent trends in the telecoms industry; focussing – as you might expect me to - on the benefits consumers have derived as competition has intensified.

Then, secondly, some general points on the accelerating pace of technological change, and what exactly I think we mean by "convergence".

Thirdly, I will look in more detail at a very topical example of the "bandwidth revolution", namely "DSL" (Digital Subscriber Line technology), which is on the point of commercial launch in many countries.

Oftel has thought hard - and consulted widely - over how best to ensure that this technology is made available to consumers as quickly and effectively as possible. And, by coincidence, we are due to publish our Statement on this, "Access to Bandwidth" in a matter of weeks.

Finally, I will consider the wider significance of these technology trends for industry Regulators, and how we, in Oftel, are seeking to ensure that our approach remains best suited to achieve our goals - foremost of which is ensuring, as always, the best deal for consumers.

So, to begin with, a look at Competition in the Telecoms Industry:-

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General State of Competition in Telecoms

Competition in the telecoms industry has been growing steadily in the UK since the early 1980s.

The UK, of course, was something of a pioneer in privatising its PTT and liberalising the telecoms market.

This process has led to many clear benefits….

The Direct Benefits to consumers have been dramatic, to list a few:-

• Prices have fallen dramatically, by 49% (for PSTN, in real terms) since BT was privatised; international call prices have fallen spectacularly (eg. calls to the USA down by 90% in real terms over the same period)
• There has been an explosion of mobile ownership/useage – over 20 million in the UK at the latest count
• Ownership of fixed lines has also continued to rise, reaching 94% of households in 1998, up from 88% in 1992 – ((and only 42% in 1972))
• New levels of consumer choice, with licensed service operators now running into their hundreds
• Cable TV networks offer a real alternative to BT for direct telephony access for around 50% of all UK households: there are now over 3 million homes enjoying telephony supplied by a competitor to BT.

• Indeed, the Cable companies are currently gaining over 35% of all new telephone subscribers, bolstered by bundling cheap telephony together with TV programmes over their networks.

• Suppliers’ quality of service levels are monitored closely, and publication of the results is helping to ensure service levels are maintained while growing competition is driving prices downwards.

Other signs of intensifying competition:-

• BT is losing market share (albeit in rapidly growing markets) – for example in international business calls, BT’s share is now under 38%

• Rise of new wholesale carriers - eg Colt, Energis, and even more recent new suppliers of international fiber networks such as Viatel:
• Four mobile service operators, all investing heavily, cutting prices and growing their market dramatically.

• Entry of foreign, especially US, companies into Europe, eg Global Crossing - MCI Worldcom (now acquiring Sprint in the world’s biggest takeover) –

• Emergence of digital TV – the UK is now seeing what has been described as the world’s fastest take-up of this technology (for which credit is due to the innovativeness of BSKYB and ONDigital as the earliest to market).

So, the telecoms industry is seeing increasingly intense competition – customers have clearly benefited from falling prices, increased choice, and the quantity (price adjusted volume) of services they are "consuming" is growing at an enormous rate.

Moving on now to the second topic, - CONVERGENCE….

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Convergence

The term "convergence" summarises many of the technical trends which are advancing almost daily, and are clearly set to change the landscape in which regulators must operate.

The term has been used widely in recent years in many contexts.

It once mostly referred to the moving together of telecommunications and information technology/computers; but it was also applied more generally to cover trends in related industry structures, corporate strategies, government policies on telecoms/broadcasting etc

So, it may be useful to clarify what we mean by convergence….

In a pre-convergent world, different communications media carried different types of information separately, and in different forms – eg telephone networks for two-way voice, broadcast networks for one-way audio-visual.

Convergence has meant that all of these information types can now be reduced to a common form – which is digital.

This allows all types of communications signals – voice, data, video – to be conveyed (as well as processed and manipulated) in a similar manner across all types of (digital) networks.

This convergence has enormously important implications which are becoming more apparent almost by the day:-

• Firstly, convergence means that previously distinct industry sectors are - around the world- blurring together (or would be if regulators allowed).

• Secondly, convergence makes possible interactivity – the possibilities here are endless, but early examples of applications here are video and TV on demand, teleshopping, interactive games.

• Thirdly, in terms of communications capacity – we are going to move from a world of scarcity to one where digital transmission capacity is expanding exponentially, almost without limit.

DSL (digital subscriber line) technology will provide the next leap forward in terms of delivering convergent services to large numbers of consumers.

This technology is able to provide high speed digital services - including movies and video - using existing, standard phone lines, the "local loop".

This is all very exciting.

However, to a Regulator, it immediately raises as an issue BT’s near monopoly ownership of the vital "local loop".

Oftel, like many overseas regulators, is actively considering how to ensure competitors have access to this part of the telecoms network.

Our recent Consultation Document (in July 1999), termed it "Access to Bandwidth" – which underlines what we are seeking to achieve in this area.

This topic is worth discussing in a little more detail, as DSL over BT’s local network will offer to most households their first experience of Broadband services…

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Delivering the Broadband Revolution

Services such as high speed, always-on unmetered access have been available to universities and larger businesses for some time.

The DSL technology means that these services can be provided to consumers over existing, standard telephone lines.

This has significant implications for the way people will use telecoms in the future. Soon, a single telephone line will not simply be the means to make telephone calls: it will also deliver high speed Internet access, video/TV on demand, cable television or a number of telephone lines.

We consider it important that consumers in the UK can have access to these information age services at reasonable prices.

It is Oftel’s central philosophy that this outcome can best be achieved through effective competition in the provision of these services and the access routes over which they are delivered.

A number of avenues are emerging in the UK now, such as cable, fixed radio links and satellite access that will enable these new information society services to be delivered to consumers.

But in the near future, Oftel has concluded that access for most people is likely to be through the local telephone line, upgraded to provide higher bandwidth capability (DSL).

Currently, BT supplies over 85% of these local access lines.

There is therefore a risk that BT’s position could create a bottleneck in the delivery of higher bandwidth services.

Against this background Oftel proposed (in our July document, "Access to Bandwidth") that, to promote competition, BT should make its local loops available to other operators, who will then be able to upgrade them to provide higher bandwidth access to customers.

This will mean that, rather than relying on BT to provide high bandwidth, other access operators can also determine when and where to rollout, and which form of the technology to use.

If we confirm these proposals, this will be a very significant step for Oftel.

I will be referring later to Oftel’s ‘lighter touch’ approach to regulation.

On the face of it, our proposals may not appear to be much ‘lighter’!

But I believe that taking action to ensure that competition develops at this stage will, in the long-run, create less of a regulatory burden.

Rather than Oftel needing to constantly monitor the products that BT offers, this should allow us to step back from detailed controls on BT.

Instead, BT will be exposed to competition and free to use its own commercial judgement as to how to respond.

We also expect that taking action to open the local loop to other operators will be a spur to competition in the delivery of higher bandwidth access and services.

This should in turn lead to prices falling and the overall market expanding, which could help other delivery routes, such as cable.

Our objective is a fully competitive market in higher bandwidth access and services.

Ultimately, the path should become clear for us to withdraw from regulation in this area.

Incidentally, only four years ago Oftel had an initial look at these issues and concluded that it was not appropriate to act at that time.

Then, the provision of voice telephony over the loop was our main consideration. The fact that we are looking at our policy in this area again, is another indication of the speed of change in the telecoms world.

In addition to this, you may be interested to know that, as has been suggested by the European Commission in its paper on key issues arising from the "1999 Review" (which I shall refer to again in a moment), we are currently working with the ITC to devise some rules upon which we might consider whether or not there should also be open access to broadband (Cable) networks.

Naturally, before we took any action we would need to be satisfied that cable operators were "dominant" forces in the market for entertainment provision – so it may well be that these are circumstances which are still some way off.

Having discussed Access to Bandwidth as a specific example of Oftel's approach to regulation, I turn now to more general issues of regulation, and how Oftel is striving to ensure that our approach remains fully suited to this world of accelerating technical advance….

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Oftel’s ROLE - (regulation in a convergent world)

Oftel’s main goal is to "enable the consumer to achieve the best deal in terms of quality, choice and value for money in telecoms services"; competition is seen as being the best way of delivering these benefits.

While first articulated in 1993, this view has not really changed over the years. What has changed is the degree of effective competition prevailing in relevant markets as the dominance of the incumbent, BT, has lessened.

In part, technology has thrown up new ways of serving customers, but regulation too, has played a key role.

In Oftel’s early years, regulation actively promoted competition by establishing a network competitor (Mercury); a mobile duopoloy with Vodaphone, and limiting BT to joint ownership of a mobile phone subsidiary (with Securicor); later, the cable TV networks were freed to offer telecoms services, providing another important dimension of network competition to BT.

But markets – and technology – are moving apace, and we need to constantly ensure that Oftel’s approach to regulation keeps up, ensuring that we allow competitive markets full rein to deliver on our original goal - the best possible deal for consumers.

(This leads me to a minor digression on the highly topical issue of Internet Pricing….)

Most of these new communications services are important not just in their own right, but they also have a broader knock-on effect to the national economy.

This may be especially true for the Internet, where the USA experience suggests that cheap (unmetered?) access has been a key driver in the expansion of e-commerce.

But, cheap local access is not the only factor.

Taking all the costs of Internet access together, the UK does better than many commentators would lead us to think.

Competitive market pressures now seem to be working – producing a variety of services and tariffs, and exerting downward pressure on prices.

There are now over 350 Internet Service Providers (ISPs) in the UK, the majority of which are subscription-free, and many others offer other innovative price structures.

Some subscription ISPs offer unmetered access at weekends, others charge one penny a minute at all times of the day (even during peak times).

ISPs continue to innovate and recently we have seen ISPs launched which offer completely free and unmetered access.

The telephone companies are innovating too - earlier this week BT announced that they will soon be notifying me of a product which they believe should offer consumers even more choice in terms of Internet access.

As I have said before, I am committed to the Government’s ambitious targets for the UK as a leader in terms of Internet useage and e-commerce.

Oftel is doing its bit by encouraging operators to offer lower and more varied pricing structures (including unmetered tariffs) and encouraging new technologies like DSL (which I discussed a few moments ago) and Cable Modems.

(Now back to some more general issues on Oftel’s approach to Regulation in a "Convergent World"….)

Our strategy accepts that Regulation can itself impose costs, and so our aim is to keep regulation to a minimum - only regulating where the market, left to itself, fails to deliver the best deal, the so-called "lighter touch" approach to regulation. We will more explicitly consider regulatory intervention in terms of the balance of its costs and benefits, and also establish a review programme which will lead to regulatory disengagement as soon as this becomes appropriate.

There is also a (growing) need to be technology neutral, as neither we – nor anyone else – can predict market developments precisely, we need to be careful to avoid inadvertently closing off valuable new services, or deterring new suppliers from entering the market.

It so happens that we are just now completing a comprehensive review of our approach to regulation (our "Long Term Strategy") - and an informal discussion document is out with our "stakeholders" currently - responses to this are very welcome, and our Statement will be published around the end of the year.

There is an important message here for the industry - while Oftel believes competition is the best route to serving consumers (the "lighter touch" approach), the real test is, "What is the outcome for customers?" – the actions of the industry, the main companies and service providers (many of which are represented here tonight) should be able to demonstrate that competition is working to the consumers’ benefit.

So, our message to the industry is: Compete everywhere and co-operate – but don’t collude - in self-regulatory initiatives where this is in the consumers’ interest.

Now, looking out at the broader regulatory picture, "convergence", by bringing different sectors together, particularly TV and telecoms is also bringing the respective regulators together.

Aware of the possibilities of "duplication and confusion" the Secretary of State for CMS (Chris Smith) in his speech in Cambridge recently raised as an issue "how to rationalise the regulators".

We in Oftel consider that there should be a single regulator for the economic (as opposed to content) regulation of the communications markets.

Where there is more than one agency responsible for economic regulation (and in the UK now we have 3 covering telecoms and communications), there is a danger of duplication and overlap.

This could mean a waste of public resources.

And, to the industry participants, there is a cost; different regulatory bodies using differing regulatory frameworks and approaches may lead to a loss of consistency and predictability in the overall regulatory regime.

This in turn could deter investment and market entry, and all sectors are losers – taxpayers, operators and customers.

However, until the regulatory framework is overhauled, we are likely to see increasingly frequent projects which involve the regulatory authorities working together (as in the example of the OFT, Oftel and ITC jointly advising the Secretary of State, CMS on digital TV and access to new services).

A few words on Europe:-

Telecoms companies are increasingly international in their outlook, and regulation, too , is increasingly international.

The EU has been particularly important in liberalising markets in all EU member states (following the UK example!).

Already since the January 1998 liberalisation, the rapid pace of industry change has prompted plans for further regulatory reform.

There is a major review of communications legislation being undertaken at present, the so-called "1999 EU Review".

In fact, the European Commission published a "Communication" yesterday, setting out its broad ideas for regulatory reform and inviting comments.

This is likely to lead to legislative proposals in the second half of next year, with negotiations on those proposals lasting a further couple of years.

It is not a short-term project, but it is a very important one, and Oftel is currently seeking to ensure that as much of our approach as possible is incorporated in this new pan-European framework.

What did we particularly seek from the Review?

First and foremost, a regulatory regime which is capable of taking whatever action turns out to be necessary to give consumers and users the best possible deal, short- and long-term.

And refrains from action which is not dedicated to that end.

That means that we need absolute clarity of objectives.

Our consumers cannot afford regulatory measures which seemed like a good idea at the time but were not – because unnecessary regulatory intervention stifles innovation and investment.

Any regulatory measure needs to be tested rigorously against the agreed objectives.

We also need a regime which is responsive to fast-moving market developments. Monolithic approaches will quickly be rendered obsolete.

That means giving the national regulators substantial flexibility to act according to the needs of the moment, within the framework of the clear agreed objectives and broad principles set out in Directives.

We need to be able to justify objectively all differences in regulatory treatment between competitors.

Historical differences – fixed networks versus mobile networks, broadcasting networks versus telecoms networks – will not be valid for the next decade.

Current laws tend to be rooted in such historical distinctions.

Of course, we do not believe that new entrants to the mobile market should be regulated in precisely the same way as we regulate fixed incumbents.

But we do need to be clear about the reasons for any differences – and, if those reasons dissolve as markets develop, then our regulatory approach needs to adapt, in step.

Finally, we seek a regime which is transparent, light on its feet, accountable and harmonised.

Communications is a global business and all European regulators should be operating to the same agenda – albeit that some of the problems they face may be individual.

The Commission have some interesting ideas for institutional mechanisms to help get the balance right between responsiveness of individual regulators to local market conditions and harmonisation of approach.

The ideas are based on strong co-operation between the European regulators - and between the regulators and the Commission - rather than on a monolithic single European regulatory agency.

This will be one of the trickiest areas to get right – but I am very optimistic.

My judgement is that my fellow European regulators are fully committed to working in partnership with one another, exchanging experiences so as to identify the best regulatory approaches.

They have the right motivation!

If close co-operation does not deliver a harmonised approach, there will be strong pressure to sweep away national regulators in favour of a Euro-regulator.

Have we got what we sought from the Review?

So far, so good but we are not complacent.

Even if there is general high level agreement, much water will flow under the bridge before all the detail is settled.

And the devil, as always, is in the detail.

A final point on the future of regulation – though not strictly linked to convergence, or indeed telecoms.

One clear strand of competition policy now involves move away from industry specific regulation towards general competition legislation.

As competition grows in telecoms and the industry "normalises", Oftel will seek increasingly to use its non-sector specific powers given under the new Competition Act.

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Conclusion

We have seen growing telecoms competition, consumers have benefited from falling prices and expanding choice.

Technology is accelerating now, and services are converging.

Interactive Digital TV, and DSL are but early manifestations of the coming broadband revolution.

Convergence has already brought the merging of telecoms and computing, we are about to see telecoms converging with TV and broadcasting – it would seem logical for the relevant regulatory bodies to converge as well.

Meanwhile, at Oftel, we are focussed on consumers – ensuring they get the best value and choice possible and rapid access to new technologies.

Our approach involves minimum regulation, the "lighter touch".

With the rapid (and unpredictable) technical advance now unfolding, it is particularly important that we avoid impeding innovation or investment, and allow the markets full rein to what they – potentially – do best, which is to create new products and services and better ways of supplying traditional ones.

Thank you

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