Telecommunications Conference: 1 December 1997

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Introduction

• It must have been fascinating for you this morning sitting here listening to the parade of previous speakers telling us how good competition has been, or will be, for incumbents. Fascinating really that ideas which were novel and risky only 10-12 years ago are now just accepted as the way telecoms markets must operate. What was then seen as a threat to incumbents is one trumpeted as an opportunity.

• And competition is now embraced wholeheartedly. None of the caution we had in the early years. In the UK back in 1984 we went only as far as a duopoly to start with, to see how things went. And in the US, they kept the access network in monopoly hands. For the most part, the rest of the world were watching. Waiting to see if it worked.

• And now there is no question that it does. There are no sustainable arguments to relaxing restrictions on who can enter markets. Experience shows that it works. The EU will fully open up competition at the beginning of next year. WTO countries have signed up for it. Competition is king and crowned everywhere.

UK Experience

• So, what has competition done for the UK? The figures are familiar but they bear repeating. We tend to get blasé about it but we have achieved a hell of a lot.

• We've got over 200 licenced operators in the UK market. 50+ major players. A lot of capital investment in the UK from abroad. And we have no nationality restrictions on who can invest in telecoms here.

• 5 national carrier networks

• Cable companies and radio fixed access opening up the local access market. By 2000: 70-80% of population will have choice of 3 different access networks. Businesses, especially in city centres will have many more. This is actually very amazing and rare. We have real competition in what many said was a natural monopoly. That's why promoting competition in all market segments is so crucial for us. We can see it happening. Customers are benefiting.

• 4 mobile operators.

• Internationally we have over 60 companies licensed to operate international facilities and we expect competition will really hot up over the next year or two as these operators get access to capacity in existing facilities or on newly built capacity which is coming forward.

Consumer Benefits

• And, what have consumers experienced as a result?

Well for a start, prices for services have fallen significantly in real terms. In the UK, retail prices have fallen by around 50% in real terms since privatisation. And we are expecting them to continue to fall for all business and the great majority of residential users over the next few years. At the moment these price reductions on residential services are being driven by regulatory means - by a price cap on BT's residential services which effectively sets a ceiling on prices for other operators too. But as competition develops, then it will be the driver of price reductions.

• And adoption of new technology is developing at an accelerating pace, bringing greater and greater capabilities. This has led to.....

• An amazing - and sometimes bewildering - development of new services

­ number translation services taken off

- whole range of follow-me, call back, answering services developed

- mobile market exploded since new competitors entered

• Cheaper calls and new services have led to huge growth in the market [8%] pa over the past five years

• Competition is gathering pace. I have already said that I expect there will be no need for a retail price control in the UK after 2001 when the present price cap expires. And don't let's forget that there is already no price cap on business tariffs. Price caps on BT's business prices were removed in August this year. Competition in that market is effective and better protection for customers than I as the regulator could be!

State of Competition in the UK Market

• OK, so the business market is competitive but what does the rest of the market look like?

• But what is more interesting to me is that this is a freezeframe of now. We only opened the market up to competition domestically in 1991/92. Apart from Mercury, other operators only really got going in 1993/94. So we've only seen the effects of around 1-2 years of competition on the incumbent's operations. If you add a dynamic to the overview and project forward to, say, the turn of the century, the position looks really quite different:

Competition 2000

• Cynics sometimes moan that all competition has done is to reduce slightly the incumbent's dominance and to provide limited opportunities to other players usually via misguided indirect access policies. It's called the harmless parasite view of competition. Competition nibbles a bit at the incumbent's position but this is bearable and unthreatening. But look at this view of how ordinary telecoms markets will stack up in 2000 in the UK.

• This table has been produced using a range of Oftel and industry projections. Obviously it is a punt at the future - nothing exact. Look hard at those figures. Competition is doing a lot more than nibbling now. Obviously we can't put too much weight on individual figures. But what can we put money on?
  

• Well, I'd say there are several dead certs:

• Continued high levels of volume growth in calls and network usage.

• Huge increases in data transfer services with data becoming a key driver of network use in the near future.

• Many more players and not just traditional telecoms players. The market won't be just telecoms as we label it today. Increasing service provider competition. Convergence with broadcasting producing new services, new business. Similarly interaction with IT industries. Masses of choice, available in all sorts of unknowable ways. All the cut and thrust of real competition.

• The pace of change will accelerate. New products will come thick and fast with shorter and shorter times to market. Competition is cruel: one players seizes an advantage with a new development and another leapfrogs with something better. It's going to get harder for all our earlier speakers. And for those competing with them. But it will be great for the rest of us - we'll have choice, innovation and falling prices.

• And amidst all this change we will find by around 2000/1 that our world view has changed. It won't be BT-centric any more. BT's business will grow but the differential growth of other operators will mean that it is definitely not at the centre of the web by then. Looking across all telecoms markets, including mobile and enhanced services, BT might have around half of all revenues.

• In my view, competition in the UK telecoms market will definitely not turn out to be a harmless parasite. And, as I said, that is good for all of us because it is only when competition looks like a real threat that incumbents get stirred into action to respond and challenge. We have seen the first phase of this in the UK. [As Sir Peter has already set out,] BT has risen to the challenge: it has reduced staffing levels, slashed costs; addressed quality and reliability; and is presenting new services to match or outdo its competitors. BT has seen the threat of competition and has got itself ready to meet the challenge. To the benefit of its customers.

• But the second phase of response to competition is the more difficult for the incumbent. Incumbents, by definition, have a history. That history is often the unhelpful legacy of existing network technologies and architectures. The legacy is unhelpful when set against what we know of the future: increasing convergence and broadcasting; and increasing demand for data services and bandwidth. And if that is where you want to get, you probably would not start from where most incumbents are today. Investment can, of course, get you some of the way but only some of the way. The legacy is a millstone and the investment to offset it is very large.

• By contrast new entrants can define their own architecture. They can be lean and mean. They can take in the latest technology and their networks have the bandwidth and capabilities to meet the new world.

• This is plain to everyone, of course. I know it, new entrants know it and incumbents know it. The interesting thing will be how and when the incumbent meets the challenge of the inherent deficiencies of their existing networks. How they match the competitiveness of new networks and seek to leapfrog the capabilities and services new networks can offer. And it will be interesting too to see how new entrants respond in their turn. Fascinating stuff - that's real markets in operation.

• That is actually my vision for telecoms in the UK in the not too distant future. Effective competition and the challenges of a normal market in operation. It will be some years off in other markets where liberalisation is only just beginning but with a far-sighted approach to regulation in those countries it will come in time.

Problems for New Regulators

• Which brings me to the second bullet I was meant to address today. "Organisational problems for new operators".

• Conference organisers always tell you that nothing irritates the audience more than speakers not properly addressing the bullet points in the programme. Well too bad. I reckon that the speakers this afternoon can tell you more about the problems of new operators than I can. I'd like instead to tell you a bit about what I see as the "organisational problems of new regulators". And there are quite a few new regulators starting up at the moment. How they go about their business will to a large extent determine what sort of commercial issues new entrants face in many significant world markets.

• What then should these new regulators have in their Starter Pack? From my own experience and, frankly, learning from the mistakes we have made in the UK, I would say:

• 1: Transparency

• There are two sides to this. Transparency in the regulator's own processes for a start. In Oftel we have found it to be a fundamental requirement of all we do that we are as transparent and open about it as we can be. It is important that all players in the market know what the regulator is doing because it effects all of their businesses. There should certainly be no suggestion of "cosy" talks with just the incumbent. Regulatory proposals should be exposed to scrutiny as much as possible. Not least because you usually find that this process reveals that policy proposals need to be changed. The regulator's initial view of the world may be quite different from that seen by the industry - new entrants or incumbent - and policy proposals to address a problem will need to be changed in consequence. This happens frequently with us and frankly Oftel regards it as a strength, not a weakness. What is important is that the final proposals when implemented are right and fit the market. It doesn't matter if the regulator's initial view was not quite appropriate. It is the final thing that matters.

• The second side is transparency of incumbent's costs. Unfair pricing at retail or wholesale level is the main issue for new entrants. They need to make a pitch for new business in a fair competition. Having in place a sound accounting separation system and an understanding of the incumbent's cost allocation processes is critical for the regulator. The regulator has to be intimately involved in the detail of this if the foundations of the regulatory regime are to be sound. And as much of this information as possible must be published so that competitors have the opportunity to scrutinise how, at a broad level, costs are derived. From the experience of running their own networks they can tell the regulator where things look fishy. The regulator cannot do this alone as he does not have the detailed inside knowledge of operating a similar telecoms business.

• 2: Interconnection

• This is absolutely crucial to the new entrant's business. It can amount up to 50% of his costs. New regulators absolutely have to bite the bullet on this. There's a whole series of things which need to be sorted out: establishing standard contracts, what services should be interconnected, how is interconnect effected, how is ensuring parity of quality of interconnection ensured. And of course interconnection charges are the central issue.

• Long run incremental costs are the only way to go. The EU has now signed up to this and the States are trying to achieve it. It may be difficult getting the incumbent and the rest of the industry to sign up. But it can be done. In the UK we have just spent two years of very detailed consultation in developing an approach which the industry and BT have now agreed with.

• On the other issues - after hammering at this for a number of years we do now have a framework of standard agreements between other operators and BT which actually makes the going fairly easy. BT carrier services now have a ready package for new operators and if things aren't agreed Oftel has powers to resolve disputes.

• But the interconnection battleground is not just the regulator's domestic market. The whole world is changing and international termination arrangements are going to be major issues for all of us. EU liberalisation from next month will present us with questions about how we deal with potential big disparities in termination payments charged by operators in different countries. Through the WTO agreement too the cosy world of accounting rates will start to crumble. What will replace it?

• Well, no-one is terribly sure just yet, to be honest. But rates for termination must certainly fall towards cost, the excessive profits which operators have made on international calls will be heavily squeezed. And customers will benefit. But there is a problem in all this. Operators who are efficient and have low termination rates could be disadvantaged. They will pay higher termination rates for their calls to other countries, while operators in those countries will pay the lower, more efficient charges. The net effect for the more efficient operators of moving from high accounting rates to lower but differentiated termination rates will put them at a disadvantage since their rates will fall more than others. This can't be right. The international community of regulators must get together to ensure that termination rates in all countries move quickly to reflect the costs of an efficient operator. Only then will customers get the full benefit of international liberalisation.

• 3: Barriers to Entry.

• Frankly, UK we didn't move fast enough, early enough. All sorts of things for some time remained unchallenged in the regulatory framework which actually gave BT a significant advantage. The control of numbering, for example, should be taken from the incumbent as early as possible. This must be an absolute priority. Similarly, sorting out the competition issues arising from the incumbent's unrivalled access to customer information both for its own use and for directory enquiry services has to be addressed. There are many others. 'Search and destroy' is my message to government and regulators just starting out along the tough road of promoting competition.

• 4: Retail Pricing.

• Consumers will be looking to the regulator to ensure that he constrains the incumbent's power to raise prices. Their prices need to be subject to price caps. And regulators need to make sure that caps cover only monopoly services, that competitive services are separated out. If not, price cuts to match competition can be offset within caps by rises (or much smaller reductions) on the monopoly services. Regulators should also move to rebalance retail prices as far as is practical and politically possible. It is a difficult area but to the extent that specific controls are retained on rental levels this opens up arbitrage opportunities which artificially favour particular types of competition over others. We probably kept controls on rentals specifically in the UK for too long.

• Look also at margin squeeze. Regulators must make sure that there is a reasonable margin between the level of interconnection charges (which will be what the incumbent is paying itself through transfer charges) and retail prices. If there isn't enough margin to make a business then competition won't develop.

• Discounts: discounts and the ability to offer selective deals must be closely regulated. Otherwise the incumbent will pick off competitors in individual sectors one by one. Discounts should be kept separate from retail price caps and should be available only when applied to a broadly defined group of customers.

Aim of Regulation

• 5: this last point is over arching and all-important. In all regulators do, they must remember that the aim is a normal competitive market. If they are to keep this aim in sight they will need to follow 2 guiding principles:

• aim for a coherent framework which encourages entry, innovation, efficiency and sustainable competition and which is based on sound economic principles; and

• aim to be getting out of detailed regulation as soon as they can. They should not hang on. We must never forget that competition is the best regulator. Regulation is always a second best. Regulators should make sure that they have powers available to them to deal effectively with anti-competitive behaviour and then get out of detailed market management. And where regulation is still needed because competition is not yet sufficiently effective - then keep it to a minimum. Regulators shouldn't saddle themselves with the ghastly detail of complicated rules any longer than they have to. Such rules are necessary while competition is getting started but they distort the market. The market starts to grow around them.

• These guiding principles in turn define a number of objectives for the regulator:

• choose policy options which maximise the competitive outcome, thus ensuring that the long term interests of consumers are met.

• Neutralise the advantages of incumbents and dominant firms by removing artificial entry barriers and set entry terms to ensure efficient and sustainable competition whilst preventing behaviour designed only to harm the competitive process.

• Protect consumers  until competition can do the job itself - by preventing excessive and unfair pricing.

• Ensure that universal service costs are financed in a way that encourages rather than inhibits competition.

• If we get this right competition in the market will itself define the extent of the role of the regulator. As it strengthens regulators can pull back and take their detailed rules with them.

• Against this background, it is vital that the regulator has the full armoury of competition powers at its disposal. The line between the need for detailed regulation and reliance instead on broad competition powers will be a matter of judgement in the light of market developments. The regulator will need competition powers to enable a smooth transition from a regulated market to an effectively competitive one. That is why Oftel has been pressing strongly in the parliamentary consideration of the Competition Bill to retain concurrent competition powers with the Director General of Fair Trading. Tidy divisions of powers between different authorities in a fast moving market will not work.

• These aims have been at the heart of all our work in Oftel over the past few years. Increasingly Oftel has been moving away from the detail towards being an industry-specific competition authority. That's the other side of my vision: a normal market for telecoms and a competition authority role for the regulator. And I would emphasise that this is not just a personal vision. It is shared throughout the industry and knitted into Oftel culture and approach. Whoever my successor is will find this an unmoveable part of the framework within which they have to operate. It's part of the furniture here now.

ENDS

Oftel

November 97