FT World Telecoms Conference
16 November 2010
Speech to FT World Telecoms Conference
By Ed Richards
Chief Executive, Ofcom
16 November 2010
This is a difficult time to do business and a difficult time to regulate too.
The challenges we face are very substantial.
We need to see new networks but must be funded and deployed.
Established networks and some providers face greater competition of course - and sometimes tighter and greater regulation.
Innovation and entry - in networks generally, but especially at the edge and over the top - offers as much potential for change than at any time.
Revenue and cost models need to be able to respond far more readily to the seismic shifts we face, particularly the shift from voice to data.
I recognise the scale and significance of these challenges - and Ofcom's role within them.
Ultimately, markets, companies, technology, investors and consumers, rather than regulators, determine the outcomes in our market place.
But regulatory decisions often set the framework in which these different factors determine the final outcome.
Aims and objectives
In Ofcom's case, as we focus on helping to deliver the best outcomes for consumers and citizens across the UK, those decisions are underpinned by twin objectives at this time of greater change.
Firstly, sustain and enhance the competition that has been injected into the UK communications sectors in the past few years,
Secondly, promote efficient investment - especially in these crucial new networks.
Our approach is to follow the simple dictum: 'competition where possible, regulation where necessary'. That manifests itself across the work we do:
- Promoting competition and innovation.
- Focusing regulation on enduring economic bottlenecks.
- Deregulating where effective upstream competition permits.
- Making selective interventions on the demand side.
- Supporting transparency and choice.
I'd like to touch upon each of these very briefly.
Promoting competition and innovation
One crucial way that Ofcom wants to promote competition and innovation is in the steps we have taken to open up access to spectrum.
We have made real and substantial steps over some years, but it is only now that a clear way forward to the release of the crucial 800Mhz/2.6Ghz blocks is finally emerging.
We expect Parliament to consider the draft legislation laid before it within the next week or so, directing release of this spectrum and paving the way for the creation of new LTE networks in the UK.
Provided that this legislation passes successfully, we will be able to move rapidly to liberalise the 900Mhz and 1800Mhz spectrum, allowing it to be used to deliver 3G services, making it tradable, and also extend the duration of the 3G licences with associated enhanced coverage obligations.
In anticipation, we have begun our assessment of the conditions necessary to ensure effective competition once the 800Mhz and 2.6Ghz block are released.
The task is to draw upon existing and new knowledge and to understand what conditions are necessary to ensure effective competition in the market in the future and to design the auction accordingly.
In doing so, we are alive to the significance of spectrum to competition today and in the future, and therefore the potential for strategic bidding by firms and of the risk of outcomes that would place the benefits of competition at risk.
Subject to the Government Direction being made in the next few weeks, and there being no legal challenge to that Direction or any of our subsequent decisions, we can now set out our timetable:
- We aim to publish a consultation on our assessment of likely future mobile competition and detailed proposals for the combined auction, including details of any measures we propose to take to ensure effective competition, by the end of February
- That consultation will end in May
- A statement on future competition and details of the combined auction, together with draft auction regulations, in early autumn of 2011
- final auction regulations in place before the end of 2011
- Bidders' applications invited, eligibility checks and bidding itself to commence in Q1 2012
- Depending on how long bidding lasts, result known and licences issued in Q2 2012.
- The spectrum itself we expect to be available from the beginning of 2013
- The process of release completed, we hope, by the end of 2013
- Networks up and running shortly thereafter.
That is an ambitious timetable.
There are two important caveats; the first, as I have noted, is that any litigation against the Government or regulator will jeopardise this timetable.
And secondly, even with no such disruption, this is itself a stretching timetable; the equivalent time period for the 3G auction was around three years.
But we want to set out and attempt to hit this ambitious timescale because of the significance of this spectrum to our economy and to our society.
It is clear that we are talking about a very significant step forward - not only the most significant release since the 3G auction in 2001 but spectrum which is the raw material that will fuel an explosion in next generation mobile broadband.
For new innovation, for widening choice, for developing new services and for delivering high speed mobile broadband, this is an essential ingredient - with companies and consumers therefore sharing a common interest in making progress as early as possible.
Focusing on the enduring economic bottlenecks
Secondly, our approach to regulation has been to focus on enduring economic bottlenecks - those parts of the network where a dominant player controls a crucial upstream input.
Most now would regard BT's functional separation, along with the equivalence for downstream competitors that went with it, as an important step in this area.
At the time it was considered somewhat novel. Today, European law prescribes it as a tool that must be available to all other EU regulators in opening up their telecoms markets.
The growth in competition as a result has been unmistakable. The number of unbundled lines in the UK has risen to 7m today.
It was and remains an important step that has transformed the consumer experience of broadband.
But the world moves on, and so do the challenges. The new challenge for us is to apply our understanding of enduring economic bottlenecks to our approach in super fast broadband.
We know the investment case for BT in next generation networks is finely balanced. We also know that consumers are protected from excessive pricing of next generation services by the availability of current generation services. These considerations led to our decision not to apply price controls.
But while we want to promote investment, this must go alongside competition. So as BT rolls out to two-thirds of the UK we will promote competition by ensuring the provision of VULA (a fibre equivalent to LLU) to other providers.
Industry evidence and our analysis show this is the most cost-effective way to secure competition and innovation in the downstream market.
We have been working closely with BT and industry to ensure that BT's VULA product (called GEA) is designed to give other communications providers as much control over the service provided to end users as possible.
There are still important details to be worked through, but real progress has been made towards this goal, which represents successful industry collaboration and negotiation.
The second important step is a requirement on BT to open up access to its duct and poles. This could support further investment by the likes of Virgin Media, who have plans to use BT infrastructure to extend the coverage of their network beyond the current 50%.
Duct and pole access will also be particularly important in facilitating investment in the 'Final Third' of the UK, though we would be very happy for it to be used more widely.
In the short to medium term VULA is likely to be used more than duct and pole access. But in the passing of time we want to see both working well.
And we want to be clear that these two remedies are the priority in this area - because industry needs to know where we stand on the primary means of regulating access.
In addition a number of providers have also expressed some interest in the sub loop unbundling option. Should that interest harden, it is an area we are prepared to look at in much greater detail.
I believe there is now considerable support for our approach across industry and I hope that it will provide a clear and effective regulatory framework for the evolution of the market over the next 3-4 years.
Deregulating where effective upstream competition permits
The other side of this focus on regulation where it is necessary, is the opportunity it creates to deregulate elsewhere.
In narrowband or voice telephony, the introduction of suitable wholesale products, such as WLR, allowed us to abolish retail price controls in 2006 and remove ex ante regulation altogether in 2009.
The same story is true in broadband. As a result of the widespread development of unbundled lines, we have been able to remove regulation altogether in the wholesale broadband market in 70% of the UK. And we have recently proposed to extend the deregulated footprint, reflecting the continued growth of LLU based competition over the past two years.
In the future, we may be able to go further still - that would be very welcome as it merely means that the benefits of competition spread more widely across the UK.
In voice, wholesale competition has enabled retail deregulation. In broadband, competition at the physical infrastructure level has enabled deregulation at the wholesale level as well. The characteristics and level of deregulation differs, but the process - and our approach - is the same.
Selective interventions on the demand side
So far, I've only concentrated upon key supply side measures to stimulate competition and investment. It is also important to ensure that the demand side is functioning smoothly.
Let me emphasise that by and large we expect the demand side to be determined by straightforward consumer preference. But on a selective basis we should do things to make competition more effective and improve consumer outcomes.
Competitive communications markets are more likely to work well when it is quick and easy for consumers to switch between providers. We are now looking at switching processes in a number of sectors - including fixed and mobile telecoms - to make sure that the process is easy and reliable.
As markets change, as more bundled services emerge and the boundaries between services become less clear, the risk is that the switching process becomes too sticky or simply too costly for the consumer.
We are looking carefully at whether the current approach delivers effective competition and good consumer outcomes. We want to ensure that the consumer experience is convenient, low cost and that switching processes do not stand in the way of providers competing vigorously with each other. These are the primary objectives of our current work in this area.
Transparency and choice
Closely related to demand-side measures are those steps necessary to ensure that consumers know exactly what they are receiving and are able to exercise choices that are meaningful and are not obstructed or confused by poor quality or even misleading information.
In broadband, it was clear to us that the standard practice of offering "up to" speeds was unsatisfactory. Only a small proportion of consumers were aware that the speeds they were being sold did not correspond to their experiences of those products. Most remained completely in the dark.
As bandwidth demands intensify, that was clearly not tenable. The situation was made worse by the complexity of measuring speed. While some online services offered such tests, an industry-standard measure did not exist. So we took the initiative and introduced the first robust measurement of actual broadband speeds that we are aware of anywhere in the world.
There is a second emerging area where clear information I think will be very important.
Last year's adoption of the European Framework moves us firmly into new territory. It gives regulators a range of powers and a clear responsibility to address the issues around traffic management.
This of course touches on the vexatious net neutrality debate. Some of that debate is rooted in social policy as much as economics, and in the question of whether citizens have "fundamental rights" to access an internet service.
That question of fundamental rights is a matter for legislators. But regulators have been given some clear tasks to fulfil. The key issues for us as are:
- Whether and in what circumstances we might consider using our existing powers to prevent traffic management techniques being used anti-competitively.
- How we use the new duties and powers to enable greater consumer transparency so that consumers can navigate their way around traffic management policies.
It is a timely moment to consider these issues.
Most agree that consumer transparency around traffic management practices will be very important and it is worth noting the important differences between Europe and the US, where more limited competition at the network ISP level, means that the potential for consumer detriment through adoption of traffic management is greater.
Where competition thrives, however, the case for a highly interventionist net neutrality policy is harder to justify on the grounds of consumer protection. But that only works when consumers know what they are being offered and what is being denied to them.
As we move into implementation of the Framework's requirements we now need to consider together whether greater transparency of traffic management policies will be sufficient, and will accord with how people actually make choices in the marketplace.
This will require both transparency and ease of switching.
We expect the evolution of the internet economy to remain under close scrutiny. Legislators will want to be satisfied that the deployment of traffic management and the emergence of a new market for 'managed services' such as IPTV with guaranteed quality of service is not to the detriment of the ‘best efforts' internet, with its vast capacity for innovation and low entry barriers.
If the European Commission's vision of an "open and neutral net" is in any way under threat, we can expect the politicians to return with more dramatic proposals.
Setting a clear strategy
Net neutrality is just one example of the increasingly global nature of the issues that regulators currently face.
Here in Europe, the Digital Agenda recognises our sector as a source of growth and future innovation.
Within that, the European Commission's broadband strategy aims to encourage investment in superfast broadband in Europe.
On the spectrum side, the arguments for closer European co-operation are strong. Europe gained enormous advantages from its early lead in developing a mobile market based on common standards.
But Europe now faces new challenges from, on the one hand, the software and applications giants of the US, and on the other, a new wave of technological development and innovation from Asia.
To maintain our competitive edge and to deliver benefits to consumers, we need to maximise economies of scale for devices and technologies, and that means, as a pre-requisite, a co-ordinated approach to the management of spectrum resources in some critical areas. So we welcome the Commission's initiation of a debate about such co-ordination through its publication of a draft Radio Spectrum Policy programme.
Our duties and responsibilities are set in a European and international Framework, and Ofcom will work very closely with the European institutions and other international partners.
In this context, the newly created Body of European Regulators - BEREC - has a critical role to play in providing regulators with a cohesive voice and ensuring consistency and quality in the way regulation is applied across Europe.
BEREC has recently made an important contribution to the European debate on net neutrality. Ofcom is working closely with other European regulators and we will do everything we can to make BEREC a success.
The final area I want to touch upon - the need for widespread dialogue and consultation.
It’s always tougher therefore to convince people of the importance that Ofcom and I attach to this.
Engagement with industry can't mean consensus in all we do, not least because different players are often quite happy for their competitors to be well regulated while they are freed from such burdens.
But we can glean extremely important information from different perspectives, and we can keep the communications channels open that mean industry understand our approach and our thinking.
Unpredictability can be a good quality for a commercial entity. It is less desirable for a regulator.
So it will remain our objective to be open about our plans, open about our aims and to set out our thinking as carefully and as clearly as possible.
At a time when resources are scarce and we like many others must cut our coat according the cloth of severely constrained public finances, it is more important than ever that we ensure a dialogue about priorities and objectives.
As we make choices about new networks and new services, driven by new standards and new technologies, the challenges facing markets, companies, investors and consumers have seldom appeared more acute or more diverse.
Our approach - focusing regulation on enduring bottlenecks and deregulating downstream - remains, we believe, the best way to allow investment decisions to flow in a way that benefits consumers and supports innovation and investment.
A new wave of investment in networks is a priority in meeting these challenges, and I hope I have today set out where regulation and the regulator can provide a stable and clear framework from which to make those investment decisions.