Sunday 5 February 2012

Contents of module

Section 6: The Regulator’s Role

Introduction

This section deals with the role of the regulator and some of the most important issues faced.

In some countries2, there are strong general pro-competition laws and thus telecoms regulators in those countries need fewer additional powers. In other countries the general pro-competition laws are weaker or even non-existent, in which case telecom regulators need relatively greater powers if they are to do their job effectively3.

Barriers to Effective Competition

In order that a regulatory body can operate effectively, it must be aware of the barriers to competition that exist. Generally they are the result of one company, known as the ‘incumbent’, having built up an extremely strong market position as a result of its monopoly position.

If competition is to be introduced, a clear understanding of the advantages that the incumbent holds must be appreciated so that appropriate correctional measures can be taken.

Most of the advantages can be covered under three main headings:

  • Dominance Advantages
    Where a company has developed as a monopoly over many decades in a lucrative industry such as telecoms, whether it was as a commercial organisation or was state-owned, it is normally large and rich. Its sheer size and depth of financial resources make it almost impregnable. That, in itself, makes it difficult for any newcomer to compete.

    Its dominance is not just in terms of size and financial strength, however. Telecoms has a vertically integrated structure, which means that the different segments of the industry are closely inter-related. For example, a company with control of the local network is in a position to dictate the nature of the traffic that passes through its network. So dominance does not only relate to size and finances; there is a structural component too.

    Other advantages enjoyed by the incumbent operator include customer awareness and brand recognition. These have been built up over decades and, from a marketing standpoint, give the incumbent a considerable basic advantage.
  • Control Advantages
    Control advantages arise from the incumbent’s ownership of information that other companies would need to have if they are to compete on an equal footing. Such information includes technical knowledge of the network and a database of customer details.

    Information on the numbering system is particularly important. Certain numbers (e.g. freephone numbers) are highly valuable because many major companies have built their marketing strategies around them. The incumbents usually claim that these numbers are their proprietary information and cannot be used by potential competitors. The companies want to keep their numbers but the numbers are tied to the incumbent. That view, if allowed to prevail, makes the introduction of fair competition very difficult.

    A similar issue arises with number portability, the process by which a customer can change operator without the disincentives of having to change telephone numbers. Incumbents tend to argue that the numbers that they have assigned to their customers is intellectual property that they own and no one else can use. Again, if such a view is allowed to prevail, the introduction of competition is inhibited.
  • Structural Advantages
    As mentioned above, the incumbent enjoys substantial advantages of a structural nature. The size of its network, and its intimate knowledge of that network, are invaluable.

    As an illustration, when a new telecoms operator wishes to pass calls to the incumbent, there must be a situation established where the two networks interconnect. Making such arrangements involves numerous issues of a technical, financial and informational nature. It is very easy for the incumbent to keep stalling on these arrangements.

    This issue of interconnection between the incumbent and its fledgling competitors is one of the most complex of all issues in the introduction of competition facing the telecoms industry.

Analysing the Extent of Competition

To perform their tasks effectively, regulators must have some methodology to assess the extent of competition in a market to decide whether any action needs to be taken.

Analysing a market for this purpose is particularly difficult in telecoms because of its pace of change. Evolving technologies, the increase in the number of players and market size are just three of the rapidly changing factors that regulators must consider in their analysis.

Generally, a market analysis is conducted as a two-stage process:

  • Defining the Relevant Market
    A company may hold a dominant position in one market but not in others. For example, an operator with a virtual monopoly over local calls may not be dominant in the country’s international, mobile or data markets.

    Also, regulators should not overlook emerging trends, especially that of convergence. Many services that used to be considered as distinct are increasingly related. Some examples are:
    • telecommunications and broadcasting;
    • voice transmission and data transmission; and
    • the means of delivery and the content delivered.
    As a result, regulators may need to work with regulators in other industries, or possibly with a regulator with a wider or more general remit.

    Regulators must define the markets that need to be regulated and the types of licence required, according to the country’s needs.
  • Assessing effects on competition
    Regulators also must assess various effects on competition, which include:
    • Market shares over time;
    • Position and number of competitors;
    • Entry barriers;
    • Pricing and profitability;
    • Excess capacity and so forth.

Specific Telecoms Issues

There are two particularly difficult issues that regulators usually have to address when introducing competition to the telecoms industry:

  • Interconnection
    In many countries, interconnection is left in the first instance to commercial negotiation between the operators concerned. Where no commercial agreement is possible, the regulator generally steps in.

    However, there is considerable scope for variation in this, both in the time that is allowed to elapse before the regulator becomes involved and in the actions taken thereafter.

    With respect to the timing, there are conflicting pressures involved. The incumbent, negotiating from its position of strength and with little appetite to make any agreement that will reduce its dominance, usually wishes to string the process out. The new operator, with the imperative of gaining cash flow quickly to repay the cost of building its network, will want to reach a speedy conclusion. However, it needs to reach an agreement on terms that do not cripple its prospects for profitability.

    The regulator is under pressure too. The public interest usually dictates that a satisfactory resolution is reached at the earliest possible opportunity.

    With respect to a regulator’s actions once it needs to become involved, these can range from imposing a solution unilaterally to simply acting as a mediator.

    Imposing a situation unilaterally involves close study of both operators’ business documents, many of which will be complex and confidential, then making a decision on the merits of the case. It takes a brave regulator to do this, knowing that the decision will upset at least one of the companies involved. On the other hand, acting as a mediator may not be particularly useful in any realistic timeframe, bearing in mind that the companies had failed to reach a compromise earlier. Of module, whatever action is taken the regulator must work within the powers that are available.

    Generally regulators take a position between the two extremes.
  • Numbering Schemes
    It is noted above that incumbent operators frequently claim that customer numbers are their own property and cannot be used by competitors. Such an argument, if allowed to prevail, essentially eliminates any possibility of introducing number portability and is therefore anti-competitive practice.

    Most regulators have now taken the position that customer numbers are a community resource and not the property of the operator. As a result, they have taken over the responsibility of administering the system themselves.

Further Issues

There are two further issues that need to be addressed:

  • Overlap of Jurisdictions
    Where separate regulators exist for different industries, there is always the chance of overlap between their jurisdictions. With telecoms, the most likely area of overlap is with broadcasting. This is particularly so given the convergence of the two industries.

    Potential conflict is not just with broadcasting, however. Since telecoms is now an important feature of many industries, the possibility of overlap elsewhere is quite high. One example is with the building industry. As part of its remit to foster competition, a telecoms regulator might wish to impose conditions on landlords forcing them to provide the facilities in their buildings to enable their tenants to access multiple services. This requirement impinges on building regulations and the existing building laws.

    In such circumstances, close co-ordination between the two regulators is required. Even with such co-ordination, any changes are likely to take time, particularly if a change in the law is required.
  • Misleading or Deceptive Conduct
    Naturally, misleading or deceptive conduct is to be deplored in any industry. In telecoms it often arises from newly established players trying to make an impression in an industry where a monopoly had previously existed. Exageration and deception often arise in such a situation, especially with regard to misleading advertising.

    The problem for a regulator is, first, in defining what is meant by the term and, second, in making judgements in cases where such conduct has been alleged.

De-regulation or Re-regulation

The alert reader may have noticed an apparent anomaly in the attempts by countries to introduce competition. While the aim is to de-regulate so that an open and free telecoms marketplace is established, this involves setting up a new set of regulations.

This is, indeed, the case. In many countries regulations are being established to take the place of previous regulations that impeded the development of competition. In other countries, where there were no regulations at all, some are being established.

Thus, at least in the short term, many telecoms industries are being re-regulated, not de-regulated. In other countries telecoms is being regulated for the first time.

There are two parts to the explanation of this apparent anomaly:

  • the regulatory measures being introduced normally only apply to regulation of the dominant operator (e.g. to prevent it using its dominant position to stifle competition); and
  • it is intended that, once competition is in place and starting to grow, the new regulations will be progressively lifted.

Thus, the new regulations are intended to be an interim measure to manage the transition from a monopoly to a free market.

Case Study

In his presentation to the World Trade Organisation (WTO) in June 1999, under the title Regulatory Framework for Telecommunications in Hong Kong Mr Wong, Hong Kong’s Regulator, listed OFTA’s key responsibilities. Many of the responsibilities he refers to are not just relevant to Hong Kong but are common to Regulators elsewhere.

Further Reading

One of the most active and powerful pro-competition bodies is the Federal Trade Commission in the US. A comprehensive account of that body’s role and the activities it undertakes are to be found on its website.

Regarding number portability, telecoms users in Hong Kong can retain both their fixed line numbers and their mobile numbers when they change operator. A considerable amount of information relating to number portability, including the cost, the operators’ licence conditions and a code of practice, is to be found on the OFTA website.