European telecoms regulation

Why the end of roaming surcharges is not the start of a Single Telecom Market

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Mobile phones are seen in a shop window in Yangon

The single telecom market which had to be

In the last few years many people, including me, believed that the phasing-out of roaming surcharges would have shaken the European telecom market, transforming the current puzzle of distinct domestic markets into a unified, single and big European telecom market. This was apparently the scope of the legislative initiative encompassing the roaming reform proposed by Commissioner Kroes in 2013, the Single Telecom Act also known as the Connected Continent (which ended up with Regulation 2120/2015). Indeed, we expected that once roaming surcharges would disappear, users would be able to subscribe mobile services from any operator in the EU, thanks to the fact that any domestic mobile tariff would be valid elsewhere in Europe. To make an example, a French citizen would purchase a Finnish mobile SIM from a Finnish operator if he/she believes that retail tariffs in Finland are more convenient than in France. In such circumstances, competition would fiercely emerge at cross-border level, with European citizens looking at better mobile tariffs available abroad, while mobile operators would be targeting clients everywhere in the UE, not only in their domestic market. Thus, the mobile European market would have rapidly becoming a unique competitive space leading to rapid consolidation amongst telecom operators, with the main groups (Telefonica, Orange, Deutsche Telecom and Vodafone) shopping abroad in order to be able to achieve continental scale.

The European institutions would have welcomed such development. In particular, since 2015 the offices of DG Competition have resisted plans for domestic consolidation by telecom operator, while letting open a window for cross-border mergers. The head of Competition directorate, Margaret Vestager, rejected mobile mergers in UK and Denmark, while imposing remedies in Italy, with this making clear that the time for domestic consolidation had ended. According to Vestager, mobile operators could continue to merge only at cross-border level while the phasing-out of roaming surcharges would provide the right incentive for that. The fixed market would have followed, since the biggest mobile operators in Europe are integrated with fixed networks.

What’s gonna happen instead

Despite the above, the expected consolidation in the mobile market is unlikely to happen. This is due to the final mechanism, introduced with regulation 2120/2015, setting the end of roaming surcharges. The retail and wholesale regime should be examine separately.

Retail

The Roaming-Like-At-Home regime introduced by Regulation 2120/2015 does not mean the European citizens may actually use a SIM card everywhere in the EU without paying roaming surcharges. In fact, the regulation prohibits permanent roaming, that is to say roaming services to be used in competition with domestic ones. In other words, European citizens may enjoy a free-roaming regime only when temporarily traveling abroad, not in order to get more favorable retail tariffs from foreign operators. The latter behavior is considered abusive or even fraudulent by the regulation.

Wholesale

While imposing the end of roaming surcharges by June 15, 2017, regulation 2120/2015 sets wholesale roaming access tariffs which are completely misaligned with domestic retail tariffs. Fact is, beginning from June 2017 the operator’s cost to provide roaming abroad will be 7,7 Euro per Gigabyte, with a decreasing glide path ending up with Euro 2,5 per Gigabyte in 2022. Such wholesale tariffs are fully inconsistent with domestic practice, since today mobile operators normally sell one Gigabyte for 1 or 2 Euro on average. It follows that many mobile operators, mainly MVNOs and small mobiles, will face losses when providing roaming services at domestic tariffs. The situation may be different for big mobile operators which normally exchange roaming traffic on the basis of bilateral agreements, based on the fact that inbound and outbound traffic are quite balanced. For such operators, wholesale rates have only a nominal value, no losses are incurred.

Because of the above, the phasing-out of roaming surcharges will put small and competitive operators at risk, while big mobile operators will be reinforced. No pan-european competition may emerge from this scenario, as big mobile operators will continue to defend domestic markets (where they can extract oligopolistic profits), while more competitive operators will be unable to be commercially aggressive. Under such circumstances, there will be no incentive for big mobile operators to merger at continental basis. The telecom market will remain fragmented as it is.

Why it ended up like this

Basically, while the traditional telecom industry had to accept the end of roaming surcharges because of political pressure, it succeeded in convincing the European institutions that domestic markets must be preserved because they are still important to make profit and sustain investments. The misalignment between wholesale tariffs and domestic practice has this scope: preventing foreign operators to attack domestic markets by way of convenient foreign/roaming tariffs. In addition, consumers cannot use foreign SIM to escape less convenient domestic tariffs.

As a result of the above, the scope of a single telecom market will be completely missed. On one side, there is no incentive for operators to provide cross-border services and consequently to merge. On the other side, bigger mobile operators are getting reinforced and will have the possibility to increase domestic tariffs, thus strengthening the isolation amongst domestic mobile markets.

The new US order about net neutrality and Internet, and the impact upon Europe

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The FCC, the US regulator for telecoms and Internet, will soon adopt a fundamental decision in the matter of telecom and Internet regulation: as anticipated by various sources, US broadband access will be soon classified as a telecommunication service (while it is currently classified as an information service)  with a twofold consequence:

– FCC will be empowered to impose net neutrality rules to US broadband ISP, and intends to do so: fact is, FCC intends to prohibit blocking, throttling and paid prioritization of online services;

– FCC will be empowered to impose access remedies to broadband ISP such as pricing control, ULL and bitstream, in other words to open their network to alternative operators like it happens now in Europe (NB: chairman Wheeler has specified that this power will no be enforced for the time being).

It is clear that the FCC is playing with the American ISPs the stick and carrot game, where the stick consists in the new NN regulation, while the carrot is the guarantee not to apply access regulation to broadband access. US IPS are scared about the possibility to apply access regulation to their networks and have loudly claimed that they could stop fibers investments if FCC does so.

While the FCC decision is destined to provoke an intense debate in the US, it is interesting to see whether it could influence similar debates in the EU, or vice versa.

Net neutrality

The EU is getting closer and closer to define a NN regulation. The Council is currently discussing a text which, after long months of debates, should be finalized by February 2015 so as to be submitted to the European Parliament and European Commission for the final negotiation and approval. In a previous post I remarked that the Council draft was too much telco-oriented and would have probably faced opposition or reserves by the European Parliament as well as by some directorates of the European Commission. Whatever the Council will finally agree, it is certain that the new US position will affect the balance of the European negotiations. The European Parliament will surely attack the paid prioritization proposed by the Council, on the basis that this practice is destined to be prohibited in US. Whatever the compromise will be, the Council will have to offer in return a more robust guarantee for best effort Internet. The Parliament will also feel stronger in advocating some symbolic amendments, such as an explicit reference to net neutrality and openness of the Internet. To sum up, the new FCC position on NN will surely help the European Parliament to defend its citizens-friendly approach.

Access regulation and competition

As stated above, the new classification of broadband in the US would theoretically permit an application of economic regulation to American ISPs, such as pricing control, ULL access and so on, although this possibility has been loudly excluded for the time being. It is therefore uncertain how this approach could impact on European policy, where access regulation is imposed in practice and not only in theory. The European Commission will start to revise the European framework in 2016 and there are strong pressures by historical incumbents (such as Orange, Telefonica and Deutsche Telekom) to lift regulation in order to boost investments (although the link between regulation and investments is controversial and challenged by many). In this respect, a paramount role will be played by the comparison of European and US data/figures relating to BB performances such as investments, speed, coverage, price, quality, consumer satisfaction and so on. In the past big US telcos such as Verizon and AT&T have loudly claimed that the US broadband market should be more successful than the Europea one, at least in terms of profits and network/fibers investments. Nevertheless, more recent data have radically challenged this assumption: various voices has shown that US consumers pay BB more expensive than in the EU, and the quality is not better. Also the debate about network investments has become more controversial, since it has been shown that with the Bush’s deregulation in the 2000 the percentage of revenue dedicated by US ISPs to investments has decreased. Only the profitability data resist for the time being: US ISP make more profit than European ones.

In light of the above, if the comparison of US/EU data will show that EU is performing better than US, despite the burden of internal fragmentation, it is possible that the EU access regulation approach will be endorsed by the US authorities, rather than vice-versa.

Broadband rural development: the “déjà vu” from the European Commission

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While people are still speculating about what will be the approach of the new European Commission to boost investments in broadband, Mr. Oettinger – the (German) commissioner for the Digital Agenda – launched a provocative proposal via his blog: in order to boost investments in rural areas, one should limit consumers’ choice by restricting the possibility to switch to another operators (lock-in) and/or exempting investing operators from regulation. According to Oettinger “wouldn’t it be better to have the option of broadband with a longer contract, than not to have broadband at all?”.

For sure, this declaration will shake the debate in Brussels well before to see the concrete proposals tabled by the new Junker Commission. Truly speaking, Oettinger’s proposal only addresses rural areas where objective reasons (small density, wide territory) for investment actually exist; however it is clear that many operators (Deutsche Telekom in primis) will soon flag this idea as a general solution for the BB market.

The most surprising aspect of this declaration is that Oettinger consider his idea to be a”fresh” one, as he ignored the last 5 years of regulatory debate in the EU. Just to remind, during the Kroes’ mandate (2010-2014, RIP) the European Commission embraced the mantra that competition could be a little sacrificed in exchange of more investments. This mantra was reflected in a deregulatory agenda with took place via the new Relevant Market Recommendation, the new NGA recommendation, the Connected Continent proposal and so on. While Kroes’ proposals shaked a lot the regulatory and conference debates in Brussels, the real market was basically indifferent, since broadband penetration and investements in Europe remained quite stable. There were lot of fibers announcements (so-called fibers to the press release) but less in practice, and depending on the country. The main effect of Kroes’ policy was to migrate the investments from FTTH to FTTC (i.e. shortening the fiber deployment to the streets cabinets, rather then up to house-holdings), because many operators, mostly incumbents, found more convenient to invest less in fibers and continue to exploit the monopolistic profits of the last mile made of copper. That’s BB Kroes’ heritage in peanuts.

The reason why this deregulatory solution could work in rural areas is still not clear. Oettinger says that it worked in the energy sector, where in facts similar proposals were made for very depressed areas in emerging countries. Maybe he referred to some zones of Germany, where some local municipalities are providing electricity in small territories. We do not know exactly, since his post provides for little explanations about. Oettinger says that “in some limited cases, for new pipelines, companies can be exempted from the requirement to provide competitors with access to pipelines. This is only given if they can convince the EU Commission that without that exemption the investment would not have been made”.

In any case, broadband is a bit different from energy. Most rural areas in the EU are considered niches markets and are frequently covered by small, alternative operators of any kind, with different business models: fixed, wireless, satellites, privates, municipalities, dark fibers providers, ecc. There is no clear evidence that regulation may be The Obstacle for operators, especially incumbents, to invest. It seems more a problem of margins: a big operator like Deutsche Telekom, with 235.000 employes and related costs, needs to concentrate on rich areas. A small flexible operator may have the costs structure to try the venture in niche areas, and the same for municipalities which also have to pursue a public objective. The main players, by contrast, prefer to stay in metropolitan/high density areas for obvious reasons, irrespective of regulation.

The lesson coming from US confirms this scenario: the main US operators, such as AT&T and Verizon, have massively invested in areas where they had to counter the competitive presence of the cable operators (Comcast and TW) providing Internet access. Outside of these areas very little was made, including rural areas, despite the fact that broadband access is fully deregulated in US.

This proposal would therefore not change too much in European rural areas, however it will be welcomed by European incumbents as a first step to enhance deregulation and remonopolization of BB markets in general. Oettinger seems aware of this and tries to avoid too rapid conclusions: “The needs of a dense city with rich competition may be different to those of an unserved rural area“. Thus, It will mainly depend on the concept and ambit of “rural areas”. Somebody in Brussels will soon argue that Tiergarten as well as Villa Borghese should be regarded as rural areas – at the end, there is lot of green there.

A final comment: Oettinger seems to say that an expensive, maybe crap, and not changeable BB may be better than no BB at all. It could be. However, there might be better solutions, like using public funds, financing pure network infrastructures with access to any service providers, leaving to citizens the property of their last miles, ecc ecc. The debate is open.

The new relevant market recommendation: Kroes playing the last (deregulatory) trump

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The European Commission has published the new recommendation on relevant markets, i.e. the document which will guide the national regulators (“NRAs”) in assessing competition in the EU and imposing regulatory remedies such as access to networks, price control, non-discrimination and so on. The European Commission made various substantial changes to the previous recommendation, including withdrawing markets 1 and 2 on retail fixed telephone access and wholesale fixed call origination. While ETNO, the incumbents’ association, has welcomed the new recommendation as a further step on the way of a possible deregulation of the European market, ECTA, representing the alternative operators, has showed some worries but also recognized that some clarifications go in the right direction. Thus, both associations (whose telcos members are mostly affected by the new rules) remained relatively prudent and have not dramatized too much in positive and negative terms.

According to Commissioner Kroes, the partial deregulation inflated by the new recommendation reflects the increasing competition in the market. This opinion is not shared by everyone however: the European regulatory agency Berec stated in an opinion that the deregulatory measures appear to be a bit premature.

When at beginning of 2014 a first draft of the recommendation was published, alternative operators were dramatically alarmed because it was clear that Kroes effectively intended to pursue a deregulatory agenda. Thus, after reactions and critical comments also by other Commissions’s departments and institutions associated to the legislative process, such as Berec and Cocom, the entire reform has been revised. While the reduction of relevant markets remained unchanged, important clarifications have been inserted in the Explanatory Note (the annexed text providing practical guidance) in a way to ensure sufficient flexibility and empowering NRAs to continue to adopt regulation to target competitive problems, also in areas where the Commission wished deregulation.

It is not the first time that an important deregulatory boost announced by Commissioner Kroes ends up with moderate practical results. The reform of fibre networks regulation (i.e. the new NGA recommendation) as well the Single Market Package encountered the same destiny. In all cases Kroes is paying because of her iper-political top-down approach: in 2012 she endorsed a deregulatory agenda in order to meet the financial needs and claims of incumbents operators, but then she failed in finding the market evidence for this approach and, worstly, she missed the support by other Commission’s departments (DG COMP, ECFIN, CONS). Also other institutions such as Parliament, Berec and Council have been quite cold and critical vis-à-vis Kroes’ approach. As a result, all impressive deregulatory initiatives have been watered-down and, what’s worst, the market has encountered an increasing and continuing legal uncertainty. The roaming chaos is an example: the entire Roaming III Regulation (2012) has been affected even before entering fully into force (July 2014) , because the Single Market proposal (September 2013) contained incompatibile proposals.

The impact of the new recommendation will therefore depend on the practical implementation by the NRAs as well as by the attitude of the new commissioner in charge, Oettinger. The deregulation of markets 1 (retail access) and 2 (call origination) may provoke some increase of retail voice prices by deregulated incumbents, depending on the degree of competition in each national market and the ability to alternative operators to provide the same services via ULL or own networks. In this respect, the developments of potential competing OTT services shall be also monitored: it is a paradox, but big telcos such as Orange and Telefonica should thank Skype and Whatsapp for the deregulatory result.

Wholesale access networks was not deregulated, however the Commission loved to see the market to migrate to a model of virtual ULL concentrating all access investments (and related control over services) in the hands of incumbents. This scope was not completely achieved, as at the end the Explanatory Note stated that NRAs are expected to continue mandating physical ULL, because it is usually considered to be the most adequate access remedy, as it ensures alternative operators’ ability to differentiate their retail offers and innovate. The Commission however added that in situations where physical ULL is not technically or economically feasible, NRAs may mandate virtual access products (as some NRAs have already done in the EU).

To sum up, the deregulatory agenda of Commissioner Kroes ended up more in a slogan than a practical achievement. The incumbents industry thanks in any case, because even a vague deregulatory trend is helpful when facing financial analysts and bonds purchasers. However, the emerging opposition of NRAs and governments to the Commissions’ approach opens the doors to a season of future litigations, unless the new commissioner Oettinger will invent something new.

Telecoms investments in the EU: the controversial data of the European Commission

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The European Commission published a Report on the telecommunications market in the EU, providing both economic and regulatory information with regard to the each Member States as well as to the EU in its entirety.

The report show strong discrepancies within the EU, especially with regard to BB penetration and NGA roll-out. However, the overall feeling of the Commission seems  positive: “… investment in the field starts to grow again, data traffic is growing quickly, together with an increase in VoIP calls“.

The Commission remarks a decline of revenues in the period 2010-2012 (from 327 to 323 billion). The report does not specifically analyze the background for such trend. However, it seems to me that the revenue’s decline is due to a combination of factors: on one side, it is the result of previous regulatory decisions (price decrease for mobile termination and international roaming, in particular), on the other it is caused by market trends as substitution of traditional cash-machine services such as voice and SMS by corresponding free Internet services (VOIP, chats, ecc). The emergence of Internet mobile access has not compensated yet the value destroyed by the OTT concurrence.  One could argue whether such figures are positive or not for the telecom industry: for sure, this is the sign that the time for the easy-money is gone and telecom operators must now face a fierce competition. The new reality is particularly hard for historical incumbents and dominant mobile operators which for ages have relied on high margin services such as PSTN voice and sms. La festa è finita. The consumers seem to be the winner of this trend, because the decrease of revenue of telecom operators basically means that the price of many basic communications services has fallen (in some cases to zero).

More controversial are the data about the investments. In the last years the Commission repeatedly maintained that telecom investments in the EU were slowing down, and this failure justified a radical regulatory change announced by Commissioner Neelie Kroes in July 2012. Despite of that, the data of the current telecom report show that investments in the sector have been stably growing (in the period 2010-2012) from 38 to 42 billions. The fact that European BB market was healthier than expected had been confirmed also by the European Parliament as well as by Berec in its critics to the Connected Continent proposal of Commissioner Kroes.

If the above is not challenged, one would wonder on which basis the European Commission in 2012 changed radically its regulatory agenda, since the main problem to fix – the huge lack of investments – did not exist.

To remind the facts, in July 2012 Commissioner Kroes announced that she intended to “stabilize” the cost of the traditional telephone networks (the ones based on copper and builded over 50 years ago with money of tax payers during the monopoly era) in order to secure cash-flow to incumbents and provide them with sufficient money to invest in new fibers networks. At the same time, the higher costs of the traditional copper network had incentivized new altnets to desist accessing that network while building new ones. In other words, the stabilization (namely: increase)  of the copper network price would have somehow encouraged both incumbents and altnets to invest in new fiber networks.

The strategy of the Commission was however challenged by many: first, with copper networks become even more rentable, incumbents would have stopped or slow down investments in fibers, in order to avoid cannibalization of the copper profits. Secondly, the matter is quite tricky with Altnets, since the equation “build or buy” is too simplistic. The increase of copper price would have probably helped some fiber deployers, but many Altnets would have been unable to make the with because too expensive.

In truth, Kroes’ move in 2012 had nothing to do with investments, it was rather aimed at securing cash-flow for historical incumbent operators, with the scope to protect them from the financial crisis and from extra-Europena take-over. The lack of investments claim was just an excuse to justify a dramatic regulatory overturn which, at the end, just helped big telecom operators to surf and survive the financial storm.

The European Parliament breaks to pieces the Single Market reform of Commissioner Kroes

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Today the European Parliament published the report of the ITRE committee regarding the Connected Continent regulation proposed by Neelie Kroes, commissioner for the Digital Agenda, on September 11, 2013. The report constitutes a kind of counter-proposal to the Kroes’ attempt to substantially review the current framework for electronic communications. The result is not very good for the Commission: the Parliament intends to delete most of the proposals or to postpone them to an ad hoc reform to take place after the 2014 elections – in such a case, however,  a new proposal could not take place before mid-2016, which means approval not before 2018. In other words, it is clear that the European Parliament, despite the commitment to  vote on a first reading in April 2014, does not intend to bring the Commission’s proposal to a real conclusion under the current legislature. Nevertheless, the European Parliament is already defining the starting-point for the future review of the European Directives:

The Commission shall perform a comprehensive evaluation and review of the entire regulatory framework for electronic communications, and shall submit a report with appropriate proposals to the European Parliament and the Council by 30 June 2016 in order to allow sufficient time for the legislator to analyse and debate the proposals properly”.

Amongst the several significant changes to the Commission’s proposal brought by the European parliament, I would highlight the following:

– Dramatic reform of Kroes’ roaming proposal: instead of a system of alliences and voluntary agreement to create a kind of “roam like at home”, the Parliament intends to definitively delete roaming surcharges by June 2016;

– Deletion of the single authorisation regime & replacing it by a standardised template notification to BEREC;

– Deletion of the Commission’s veto powers – NRAs will be more than happy;

– Deletion of most controversial access rules, such as Recital 38 (on the competitiveness of the retail market in the presence of two fixed NGA networks) and the entire section on the European virtual access products (deleting both the harmonised access products and Article 18 and referring this issue back to the Commission for the Framework review);

–          Spectrum: new provisions on spectrum trading & minimum duration of all spectrum licences to be 30 years or longer (permitting also indefinite); this is impressive, by the way.

The rapporteur of the ITRE Committee, Pilar del Castillo, member of the PPE and with a long experience in the telecom sector, commented the report with a press release (in Spanish).

The committee IMCO (consumers) and CULT (culture) have rendered their opinion on the Connected Continent proposal. They are also quite critical, especially the IMCO’s one regarding the NN provisions (my next post will be about this subject). The CULT opinion is here.

Berec shakes the Commission again and rules in favour of cheaper prices for telecoms

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Berec, the European agency grouping the national telecom regulators, has rejected the serious doubts expressed by the European Commission vis-à-vis the decision of Italian regulator AGCOM to decrease the price of access to the copper network (ULL and bistream) of the incumbent Telecom Italia.

It is a second time in the recent period that Berec takes a strong dissenting opinion against the European Commission on a fundamental matter like network access: few week ago a similar negative position had been expressed also with regard to a similar case in Austria, where the national regulator, likewise AGCOM in Italy, had decided to lower network prices.

The divergences of opinion between the 2 authorities regarding the modality and the criteria to fix prices for network access is becoming a fundamental matter of policy debate. The national regulators have openly contested the scope of Commissioner Kroes, responsible for the Digital Agenda, to “centralize” such decisions and impose the price from Brussels (although within a specific  band, i.e. 8/10 Euro/m in the case of ULL) . Commissioner Kroes tried to formalize this major step into a recommendation (announced since July 2012) which would have radically altered the 2009 Framework under various aspects (discrimination remedies; copper prices; NGA development). However, the reform found strong oppositions from the side of regulators and alternative operators, and also some cold approach by governments. Kroes’ recommendation was been finally approved on September 11, 2013, however the final text has been radically watered down with respect to the initial proposal. Fact is, the pretention to impose mandatory prices, and in general to restrict the discretionary powers of regulators, has been finally dismissed.

As regards the Italian case: regulator AGCOM will be now sufficiently confident to defend its decision and eventually to negotiate an amicable solution with the Commission from a strength position. In any case, art. 7a of the Framework Directive (Directive 2002/21/EC) empowers national regulators to disregard the position of the Commission, provided that a reasoned justification is provided. This happened recently twice with German regulator Bnetz, which decided not to obey the Commission’s instruction in a couple of cases of termination prices.

The divergences between Berec and European Commission on specific national cases like Italy and Austria run in parallel with another fundamental matter of conflict, i.e. the Single Market proposal, which national regulators have criticized with a surprising strong statement few days after the announcement by Commissioner Kroes, on September 11, 2013.