My talk is actually billed as focussing on the structure and design of Ofcom. Those issues are very important and I am closely involved in discussions with the other regulators with this in mind: I will refer to that a little later. But given the significance of the changes to which Ofcom is a response I want also to put views about Ofcom’s structure in context.

In my mind the likely structure of Ofcom must be driven primarily by its key functions. Those functions will be driven to a large measure by market developments and in particular the prospects for consumers arising from the process of convergence. So I want to start by looking at current market developments and prospects. Against that background I then want to pinpoint the areas that will lead regulation in the future and to identify what it is about convergence that challenges the current regulatory framework. I then want to address the questions posed in my talk of what an appropriate structure of Ofcom might look like, based on the strong belief that form must follow function.

Finally, but equally important, I want to address the regulatory approach that Ofcom should follow. I say finally but, of course, this is fundamental to achieving the benefits expected from convergence and meeting the aspirations of converged regulation.

Let me then begin by outlining the market developments, which are bringing about the changes to which Ofcom is a response.

Market Developments

A key feature of developments in the communications market is the rate of investment currently taking place and in prospect in the delivery systems for the provision of electronic communications systems. We know how much was spent on 3G radio licences but on top of that there will be infrastructure investment currently beginning to be rolled out which over the next few years will amount to perhaps £2bn to £3bn per annum on current estimates.

In addition BT is investing around £3.5bn pa in developing the capacity of its network to carry much higher bandwidth services to its customers. On top of this the cable industry is investing over £1bn pa in developing their UK networks to provide a whole new range of broadband services: and there is also substantial investment going into satellite and digital terrestrial TV. So overall we are likely to see around £6bn to 8bn of investment in communications infrastructure in each of the next few years – and not many industries are investing on anything like this scale. However, substantial as this is, the investment does not stop there. What consumers are interested in are services, which involve different offerings, based on a whole range of content and programmes: the traditional analogue channels still attract the greatest viewing but consumers also want dedicated sport, movies and children’s programming and so on. Now consumers are also benefiting from the interactive enhancements that go with them – earlier this month interactive Wimbledon on the BBC claimed 1 million viewers on the first day alone. This interactive service meant not only could viewers choose which channel they wanted to watch – they could also choose which tennis match they wanted to watch as well. Those who like predictability could watch Venus Williams’ power her way to a second Wimbledon title which people who were prepared to go through the stresses and strains of another Timbeldon could follow Tim Henman. Investment in these areas is difficult to predict as it may be driven by a wide range of small, innovative companies, as well as the larger traditional media companies, but it is also likely to be large.

Successful mass markets are hard to predict – as the totally unexpected worldwide explosion of SMS usage (‘texting’) demonstrates very clearly – but new service ideas emerging now include: interactive games and betting over TV or mobile terminals; location-sensitive services on mobiles (eg direct me to a nearby bookshop/MacDonalds); in-car navigation systems, constant monitoring of car mechanical systems, and indeed of some at-risk people’s medical condition, with automated emergency alert (eg for cardiac conditions). The list is almost endless.

The prospect, therefore, for the consumer is for a whole range of new services based on much higher bandwidth capability and especially of an interactive nature. It is the development and availability of these services that the impending information/communications revolution is centred on. They have the potential to cover all aspects of our lives from home working to shopping to education, travel and health care, culture and so on. It is already possible to access shopping channels, to purchase anything from a pizza to a holiday through the remote control. It will soon be possible to access the Internet using natural speech, and receive a response via (synthesised) voice – with obvious benefits for easy and cheap access. The next stage will be public services and information - the Government are soon to launch an interactive educational channel which allows children to learn using a mix of television teaching and working through examples and no doubt plans exist for everything from health education to ways of paying parking tickets are being discussed.

The most well known development in the communications sector over the last 2-3 years (after the huge boom in pre-paid mobile phone) is, of course, the Internet which getting on for 40% of homes can now access. That has challenged the traditional communications technology based on voice and it is the basis for the phenomenal growth of E-commerce. Data is now the major growth driver on BT’s network and significantly outweighs basic voice volume.

The Internet itself illustrates perfectly what convergence is about: it can be accessed by the PC or through a digital TV and, albeit currently in a limited way, from a mobile phone. These quite separate technologies can now provide the same types of services – that is what convergence means in my mind.

At the present, however, consumer requirements for Internet access are being met by what we call narrowband capability, ie not much more than that needed for voice messages. The massive investment I referred to a few moments ago is aimed at providing much greater bandwidth, able to support a greater range of services. The technologies are being, as I say, deployed but at present there is, beyond Internet access, no really clear demand for these broadband services. There is something of a chicken and egg situation here. Because it is a new world, suppliers need to ensure their services meet the needs of consumers but consumers are not clear what they want since it is new and likely to be very different from current services: hence there is a kind of discovery process going on which has yet to change into a real market uptake. There is no doubt that prospects are there but as with all new things take-up is difficult to predict.

One feature that has to be weighed in this supply and demand equation is the downturn in the capital markets’ expectations of the communications sector’s profitability. This does pose some severe challenges for regulation, given the extent of investment being undertaken and the rate of decline in investment sentiment in the last 12 months or so. Clearly the recovery in capital markets is not going to take place over night. But more importantly I suspect, for the first time perhaps, recovery in the communications industry is central to recovery in financial markets worldwide, which reflects the importance of the communications sector to all the advanced economies.

In this world regulation has to recognise that it has the potential to seriously affect the future, so care and sensitivity is called for. But that does not mean that we should sit on our hands. Whilst regulators cannot stimulate markets there may well be a role for Government in helping to sort out the stalemate. Given consumers natural apprehension about the value to them of as yet to be defined broadband based services perhaps Government has a role in increasing awareness of what such services are or could be and what they could do for consumers. The Government through the E-envoy has suggested a need for Government to show the way in making some of its services on line. One recently announced initiative provides for health education over digital (cable) TV, with links to nursing and GP appointments where required. However it is primarily for industry to devise products and services that consumers want and they too have a role in increasing awareness through demonstrations and trials assisted by advertising and promotional activities.

So, to sum up: the prospect is for a very significant change to the way that we live our lives propelled by investment in networks and a whole range of novel products and services. But it is some way off: we see glimpses of what is possible and much further innovation and investment is required to make it a reality but it is in progress and there is no doubt it will speed up when confidence returns. In short the prospect is exciting but it is early days.

Let me now talk a little bit about Ofcom.

Ofcom

I have said it is early days, but I have also said that the technology is already being deployed. This has begun to indicate a need for a fresh look at regulation as convergence between technologies becomes a reality.

The Government has, of course, recognised this in publishing a White Paper at the end of last year and through its commitment to establishing Ofcom as set out in its manifesto and confirmed in the Queen’s speech. This commitment was strengthened with the Government’s publication last week of a Paving Bill giving it powers to set up a small Board (of 3-6 people). The Board will not be a shadow Ofcom or have regulatory powers, and its sole function will be the preparatory work needed to make sure Ofcom hits the ground running when the main legislation is enacted.

In talking about the thinking that needs to be reflected in this preparatory work, let me first go back to the reason for Ofcom, as set out in the White Paper. The reasons given for a change to the regulatory structure were that the Communications sector is dynamic and important to the economy, that competition is vital to sustain and enhance the market but that the current regulatory framework for encouraging competition is fragmented and, in a number of ways inconsistent in its approach. That competition is fundamental to a dynamic market I fully endorse and from my own perspective in Telecoms, there are clear areas of overlap between the main regulatory bodies (Oftel, ITC and RA) which require a consistent and coherent regulatory approach. The key point is that these areas are increasing as we move inexorably towards a converged world. Current examples include terms and conditions for access to networks, availability of spectrum for different services, bundling of programmes, to name a few. In other words, what is required is converged regulation for a converged world.

So that is the background, but what does that mean for the structure of Ofcom. How would Ofcom be structured to deal efficiently and effectively with regulatory issues and to provide something more than simply the sum of existing parts?

Remember I said at the start that I am a strong believer in the concept of form following function: that is if we can identify the functions required of a converged regulator then that should dictate the form or structure that Ofcom should take. To take this forward let’s revisit the drivers of convergence. The reason I do so is that, in principle, convergence with all its new services should increase competition so why in that world do we need regulation, you might ask.

That’s a good place to start. To ensure the benefits of convergence are achieved and not stymied by a lack of competition, efficient and effective regulation must be absolutely clear about the regulatory challenges posed by convergence and focus on them: lack of a clear focus could make matters worse at a critical stage of market development.

If the main building block for a regulatory structure is to identify the drivers of convergence we need to be clear what these are. The clear underlying driver is the digital revolution, which vastly increases the capacity and flexibility of the different types of infrastructure provision, that is wire, fibre and radio.

It is important to note that these technologies do not change in the way they work: what does change is their capacity to carry information. The effect of this is to allow a vastly greater array of services to be carried by any one of these infrastructure providers, for example, the Internet is now available on all these infrastructures, as I mentioned earlier. So the prospect is for much greater competition in the types of services these infrastructures can supply.

However, although there is more competition at the service level, there is limited additional competition at infrastructure level. That remains at least in the short term rather limited to that we see today. The prospect is that this will change simply because the services they supply will compete with each other, and especially so in an exciting new world that is coming where radio spectrum can be bought and sold based on the value that buyers and sellers place on it rather than determined by someone not involved in the business.

But an increased supply of networks through steps such as spectrum trading is not here yet. In the short to medium term therefore it is the area of infrastructure provision on which regulation should focus. That seems to me the key focus of converged regulation. However, current regulatory activities unaffected by convergence would, of course, still continue for the foreseeable future, for example, issues to do with content and programme access to a wide range of people. Also the tricky issue of ‘must carry’ and its impact on infrastructure investment. And access to Pay TV systems will also need to be addressed. These are aspects of infrastructure regulation but they are not driven by convergence. However, they do need a clear coherent regulatory approach. Issues to do with spectrum management will also continue to need to be addressed, albeit in a more holistic approach. Indeed in many ways the opportunities arising from better use of spectrum is the key to achieving the converged world for the provision of both broadcasting and communications services.

A major challenge for Ofcom will be to balance incentives to invest and innovate with the opportunities for greater competition and the need for access by programme makers and content providers. These involve different regulatory concerns and it is important that any structure recognises this if it is to achieve appropriate regulation and maintain confidence to invest and innovate. Because of the limits to infrastructure competition and the need for access at different levels effective competition may not occur without regulatory involvement but it is important to get the balance right and the test must in the end be the benefit to the consumer.

So this suggests a structure which ensures the key regulatory drivers are able to be separated and addressed, for example, access issues, content issues and spectrum management and final decisions arrived at by balancing all the related policy considerations with the ultimate test of benefits to the consumer. This means that Ofcom will not be a simple merger of the existing bodies because it will need to assess a range of key policy issues against a background of convergence in provision.

Crucial to Ofcom’s effectiveness is its credibility amongst all its stakeholders. To help ensure this the structure needs to be sufficiently focussed and transparent that stakeholders can communicate directly with those most likely to affect their interests. All of the regulators have a clearly identified stakeholder relationship and this should not be lost, though it may be changed in a converged world. Funding issues are also important here: the various parts of industry will need to be clear just what elements of Ofcom they are funding and that tends to reinforce a functions based structure.

The White Paper suggested a Chairman and Chief Executive with a Board composed of Executive and non-Executive Directors. It seems to me that the executives will need to have clear line responsibility for the key regulatory functions that I mentioned just now. In order to help bring this about a regulators’ steering group has been set up with the backing of Ministers, which comprises all 5 regulators. We have agreed an MOU, which sets out working arrangements, and we have commissioned a firm of consultants to report by the Autumn on a small number of organisational and structural options, the criteria for judging them and a transition plan. That will not be the end of the matter as it will only be the outline of the structure: how it works and its day-to-day arrangements will need to be further considered.

The Paving Bill I mentioned earlier effectively formalises the regulators’ steering group. The existing functions of the regulators will continue and part of the steering group’s role in helping the new Board pave the way for Ofcom will be to ensure areas of overlap and common interest will be dealt with in a coherent and consistent way to ensure effective regulation continues.

I would like now to turn to the third part of my presentation: that is what are the principles on which Ofcom should regulate the Communications sector.

Regulatory Principles

As I have said, I believe that the key focus for converged regulation is the development of sustained and effective competition between delivery systems. But, closely related to that there will be a need to ensure a consistent approach to the policing of anti-competitive behaviour wherever it occurs, based on standard competition rules and guidelines.

This is, of course, something that Oftel has been closely involved in for some time but that does not mean it is not also applicable to the New World of convergence. To give greater clarity in our approach we have, over the last year or two, set out a strategy for regulation. The structure of the strategy is not especially novel. We have a goal, objectives for meeting the goal, based on my duties under the legislation, and a set of principles about how we meet the objectives.

The strategy can be summed up in the phrase ‘competition plus’. We put consumers at the heart of everything we do and it is the impact on them that is the key decision tool. My belief is that consumers’ interests are best met by effective competition and therefore the key objective is to encourage competition wherever feasible and sustainable. Through competition the consumer is most likely to get the widest choice, lowest prices and new innovative products and services.

However, we recognise that the nature of the communications industry means that competition is not always possible and will not of itself meet all consumers’ needs. It is doubtful whether Universal Service will be provided without some regulatory rules: equally there are issues to do with standard setting and rules on interoperability to ensure networks can operate together. And another important aspect is telephone number availability. Whilst there is dominance then price controls may be required and access terms will need to be set by the regulator. All these areas are what I call the ‘plus’ part of the label ‘competition plus’.

In looking at the future of Ofcom and the much wider remit it will have, I believe that the ‘competition plus’ label could be equally applicable. The key concerns for broadcasting regulation are plurality, diversity, taste and decency, accuracy and impartiality of news, concerns on advertising content and sponsorship and so on. Although there are also, of course, competition and economic related issues such as self-promotion by public service channels for their related commercial arms. On the spectrum point, the problem of spectrum management and its efficient use requires something more than a straight competition framework, though the prospect of spectrum trading will change this to a considerable extent. But the point I would like to make is that the areas not driven by competition concerns can fit under the ‘plus’ part of the strategy headline.

The essential point of the ‘competition plus approach’ is that the regulation of the ‘plus’ elements should not undermine the overarching aim of meeting consumers’ demands by competition. Whatever rules are set under the ‘plus’ heading must be consistent with encouraging investment and innovation and should not stymie the entry of efficient providers. Assessing how to meet the ‘plus’ elements must be balanced with the economic and commercial factors, which are at the heart of convergence.

Given the market uncertainties at present and the volume of investment expected over the coming years, predictability in regulation will be vital to ensure confidence. To a considerable extent that can be achieved by following generally accepted regulatory principles based on sound and well established economic analysis, especially in regard to access and anti-competitive practice issues. Obtaining the right balance between access to networks by other competing networks and service providers, programme makers and so on, whilst ensuring networks have the incentive to continue to invest will be a crucial challenge for Ofcom. But there is a great deal of experience on these issues and we will need to draw on that to provide confidence to stakeholders.

Attempts to manipulate the market in particular ways will be seen as undermining commercial prospects and destroying fragile confidence. This again reinforces reliance on established economic rules and procedures.

Removal of entry barriers will also be a key challenge for the regulator. Oftel has done much in this area over the years but the greatest opportunity at Ofcom lies in its handling of spectrum issues. The strategy, the analogue switch-off and the proposals for spectrum trading offer a great opportunity to bring competition at all stages in the value chain and Ofcom will clearly need to give this aspect a very high priority.

I am conscious that I have stressed the regulatory approach: that’s primarily because that is what Ofcom will be doing but we should see the new converged world as enabling much more competition, for the reasons I referred to at the opening of my presentation. Greater competition means in the long term less regulation, less setting access terms and conditions, less concern about licensing of spectrum and ‘must carry’ provisions etc. Most importantly more competition means less regulatory risk to investment and innovation necessary to bring the benefits of convergence to consumers.

In our part of the industry you will know that from next year the rules under which we regulate will be set within a clear and coherent EU framework. That framework has a clear vision of the need to regulate by ex ante rules where there is dominance in defined markets but with a clear prospect of moving away from these as competition develops. Any regulation in a world of greater competition will rely on competition legislation. That is a prospect I firmly endorse and is embedded in the Oftel strategy.

In all this, the credibility and effectiveness of the regulatory body will be enhanced if it is clear it is independent of Government. If investment on the scale envisaged is to occur this independence is vital and I am pleased to see that it is enshrined in the White Paper.

Before winding up, let me just set down a few other regulatory principles that I have found to be central to effective regulation. Transparency and openess: leads to confidence amongst stakeholders and encourages rigour in regulatory analysis and in policy making. Ability to openly challenge through a clear consultation process is vital to good regulation.

Predictability: I have already mentioned, but it is a vital underpinning to investor confidence and to all those affected by regulation.

Minimal regulation to avoid excessive intervention when it can be avoided and focus on the key regulatory issues to address them and leave it there: continued meddling and intrusive regulation unless there are very clear reasons and clear rules is likely to be counter-productive.

Achievable regulation - recognising that the regulator can create the right conditions for efficient delivery of services but the regulator should not and cannot effectively manage the companies that it regulates and it can’t make them models of efficiency by decree.

Well, I have talked at some length, let me leave you with a few thoughts on the challenges facing regulation. All the regulators come from different cultures, driven by their duties and the different nature of the industries they deal with. At Oftel the culture might be characterised as ‘arms length’, setting terms and conditions or settling disputes and leaving it to the market. In the broadcasting world there is a history of much closer involvement by ITC. Whilst the RA is involved in detailed management of the Spectrum. Merging these cultures will be a major challenge but by no means insurmountable. In the longer term the changes I have mentioned and especially perhaps freeing spectrum availability will help to meet this challenge.

We must reject a future based on the past, a mere copy-out of what we do now and have done will not meet the needs of consumers and all stakeholders in the future.

The future must be appropriate regulation with greater competitive opportunities to bring all the potential benefits of convergence that consumers expect.