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Home > Blogs > Anthony Harrington > Telecoms regulation - hidebound and heading for disaster?

Telecoms regulation - hidebound and heading for disaster?

Finance Blogger: Anthony Harrington Anthony Harrington

The tremendous strides in technology in the telecoms sector have so far conspicuously failed to be matched by anything like a parallel process of vigorous rethinking by telecoms regulatory authorities. A couple of decades ago the regulatory authorities in the US, the UK and Europe saw that the stranglehold that an incumbent fixed line operator, usually the former state owned monopoly holder in the sector, had on customers, had to be broken if the public was going to reap the benefits of a vigorous adoption of new technology, particularly in terms of mobile and broadband services and lower pricing for services.

Incumbent operators, by definition, like to keep things as they are and have little incentive for change, preferring to regard the whole operation as a huge cash cow. Regulating the sector by breaking the grip of incumbent operators, privatizing the sector where it was state owned, and facilitating competition by addressing barriers to entry, looked like an obvious way to go.

However, in a speech back in January 2012 Richard Feasy, public policy director at Vodafone, pointed out that what had been a general consensus of agreement between regulators and operators that regulation was by and large beneficial, has broken down since the crash of 2008.  Prior to the crash, operators might not have liked the fact that the regulators seemed to see the driving down of telecoms prices to the consumer as their primary mission, but they all wanted to get in on the action and so they were broadly supportive of regulatory efforts to open up the sector to competition. So what's changed? According to Feasy starting with the economic storm in 2008, the regulators have shown themselves unable to innovate to meet the new commercial realities:

"The initial reaction of policy-makers to the financial and economic crises which hit Europe in 2008 was to reaffirm the importance of the telecommunications sector for the broader European economy and establish a new set of targets for it. No serious attempt was made to ask whether the underlying policy framework was capable of delivering those targets. This was in part because Europe was already midway through a review of the sector, but also because all of the existing regulatory institutions, particularly the national regulators, were by that time heavily invested in the status quo.... Being by nature cautious people with a strong attachment to precedent and consistency, telecommunications regulators simply continued much as before."

For industry players, however, keeping on down the same path was becoming less and less viable. Years of retail price reductions, along with a squeeze on costs and commitments to shareholders meant telecoms providers were on thin margins and when the crunch came, the market simply stopped growing. The list of complaints by operators against regulators is long and growing. The list looks something like this:

  1. Despite today's call prices being at record low levels regulators keep pushing to drive prices lower, making it very difficult for fixed line and mobile telcos to invest.

  2. They are fixated on encouraging new entrants, even when it is perfectly obvious that existing players are struggling with very low margins and massive disincentives against further investment (since their return on capital is terrible)

  3. Getting lots of sub-scale players into the market does nothing in the medium term to benefit consumers

  4. The US model of running an oligopoly is much better, since it gives a proper return on capital and consumers benefit from further investment in infrastructure

  5. The regulators have no solution for enabling providers to cooperate to introduce pan regional services in an increasingly globally connected world

There are probably more - and more detailed - complaints that could be added to the list, but what it shows is that telco providers in Europe at least believe that the regulators are way behind the game and are playing by a set of rules dreamed up in the 1980s and 1990s. They need to go back to the drawing board and have a rethink that really does take the views of the industry into account.

Further reading on telecoms and on competition and innovation:

Tags: EU , fixed line operators , mobile telecoms , pricing , regulation , regulators , telecoms
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