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The Issue of Market-Initiated Competition in Telecoms

Paul Budde

Many political discussions are taking place all over the world about how to best stimulate national or provincial telecommunications infrastructure investments against the background of current market dynamics. In this context the question often revolves around whether there is a market failure and, if so, does the government have a role to play here to address the matter, or can it be left for the market to sort out.

Issues such as market regulation and government intervention have traditionally led to lengthy and often heated discussions between the left and the right side of politics, with the latter generally objecting against government intervention, or at least seeking to limit the role of government.

But, interestingly, in analysing the current political telecommunications debates around the world we don't necessarily see that predictable political divide. There are several countries in Europe where leftish parties are opposed to government intervention — for example, in establishing national high-speed broadband networks; and in situations like this opposing conservative parties often argue for certain levels of government intervention in order to get new digital infrastructure implemented. Similar discussions are taking place the other way around where the left is in favour and the conservatives oppose.

In following these debates it is observed that this often has far more to do with the level of knowledge of the politicians involved in the debate, rather than with their political persuasion.

Wherever you go, the level of ignorance that is on display is very much along the same lines, completely independent of the countries and the politicians involved.

In general, those against any form of intervention point to:

  • The mobile networks and the level of competition there; and the growth of mobile broadband, leading them to question the need for fast fixed broadband infrastructure.
  • The lack of customer demand for higher-speed broadband — so why should a government become involved in something the people don't want or need. They then also point to their telcos, who are not investing because of that absence of demand.

On the other side of the debate, again independent of political colour, we see politicians arguing for government-led initiatives in order to stimulate the growth of high-speed broadband. These people take a more visionary approach and argue that our complex society and economy requires a robust and high capacity infrastructure for a large range of services, from e-commerce, to e-health, to e-education and sustainability. The term 'digital productivity' is often used by this group, as well as the need to stimulate innovative to create new growth and new jobs.

The underlying problem: lack of competition

In these debates those who see the need for high-speed networks are now increasingly questioning the level of telecoms competition available to their citizens, especially at a consumer retail level since the market is rapidly shifting from access to applications and services. Many regulators have been pointing to this problem for a decade or so. When they realised that telecoms price regulations failed to deliver the competition outcomes they had envisaged they began to talk about the structural problems in the industry.

Over the last two decades we have seen many mergers and consolidations in this industry, and this has led to a situation where we now have a great deal fewer choices and alternatives in telecommunication services and service providers than was the case 10 or 20 years ago. Regulatory structures based on wrong premises have produced greatly reduced choice and variation in the market, particularly in the USA. Because of market liberalisation and self-regulation the regulator there (the FCC) often doesn't end up disciplining bad behaviour; and at the same time their regulations are actually constraining innovation by requiring highly bureaucratic and expensive processes to be followed for the purpose of entering the market. This is making it impossible for smaller companies to participate; and larger companies also have problems.

This is the reason Google doesn't offer voice over its FttH networks in the USA. The process involved is so cumbersome that even Google does not want to take these regulations on and instead it simply relies on its customers to use VoIP services to make their calls (or use their mobile).

This regulatory complexity in turn limits the options that are available for companies to differentiate between services, and in an undifferentiated market the only way to get increased value is to consolidate, to reduce overheads and to reduce pricing pressure from competition. This is exactly what we see happening in the telecoms market of all the developed economies — they are all offering 'me-too' services, not only in fixed but now also in mobile.

Of course, complex regulatory regimes are loved by the incumbents. They have 30 years of experience in how to gameplay the regulator and over those years they have spent billions (yes, billions) of dollars to lobby for the existing rules, which favour them — rules that have grown so complex that they are the only ones who understand them. These incumbents want to keep the system as is because they know they will be unable to survive on a levelled playing field, where customer demand has moved away from access to applications, services and even devices. Most have already missed the boat to transform their organisations in order to embrace the totally new social and economic environment that has been established by the disruptive forces in the industry.

We watched what happened when the internet came along, and even more so when the smartphone arrived. The telcos had no idea what hit them and have since been relegated to pipe operators (both in fixed and mobile markets) with all of the new extra value-add going to those players coming from outside the traditional telco world — a truly disruptive process. There is no indication whatsoever that the traditional telcos or ISPs will now suddenly become the innovators once true high-speed broadband networks become available. The incumbents are so afraid of new players such as Apple, Google, Facebook, etc, that they are limiting their investment in new infrastructure to a minimum — in their words because: 'others are going to have a free ride on our networks'.

They are unable to use their financial and engineering advantage to turn that into a business advantage. Even there, where FttH networks are in place, the level of innovation from the telco service providers is shocking. It is all about 'me-too' products, with the level of innovation restricted to variations in speed and price offerings.

So to those politicians in favour of a market-led development of high-speed broadband, the question is whether we really do have a free market. Certainly a real free market is not supposed to work this way!

That is why conservative politicians who actually do understand these issues are as interested in addressing them as their opponents on the other side of the political divide who also understand the issues.

Those ignorant of all this, whether of the left or the right, are the ones who have the greatest problems with developing policies (government intervention) to address these issues.

It is not necessarily the case that the free market would not be able to provide the choices that it was supposed to. Most of the time it is bad government policy and unwise regulation that has caused those choices to disappear, and the incumbents to become lazy and arrogant and stall innovation, which in turn stimulated the disruptive environment in which the telcos now find themselves.

The medicine that is needed now to resolve this situation is very bitter indeed. The usual regulatory bandages that have been applied over the last two decades are no longer available — they no longer work. Structural changes are needed. Britain started with this, Australia went perhaps the furthest with its structural separation of the incumbent, while other governments, such as Singapore, Malaysia, New Zealand, Netherlands, and Sweden, sit somewhere in the middle. However, at the same most other governments still have to make some of these hard decisions.

It is these same countries, as well as many others, whose governments are recognising the need for policies that will see the deployment of high-speed infrastructure such as FttH — not for telecoms purposes but for the assistance that national digital infrastructure can give them in addressing the complex social and economic challenges their countries are facing.

By Paul Budde, Managing Director of Paul Budde Communication. Paul is also a contributor of the Paul Budde Communication blog located here.

Related topics: Access Providers, Broadband, Policy & Regulation, Telecom

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