What's Next in EU Regulation
Profit in telecoms has often been as result of pleasing regulators as much as paying customers. Our many non-European readers may be unfamiliar with the interesting shifting dynamic of the European regulatory scene. Traditionally, national regulators have retained most of the regulatory levers; there is no real European equivalent of the relatively powerless state Public Utilities Commissions in the US, but the relationship between the states and the Feds is mirrored by that between the national governments and the European Union. Despite this, the politics could hardly be more different.
The first three years of the current European Commission (the EU's executive branch) have been marked by unexpected activism on the part of its regulators, especially in telecoms and anti-trust. Many observers had expected that the Barroso commission would be marked by conservatism and slow decision making, as the commissioners struggled to get their confirmation hearings complete at the European Parliament. Parliamentary objections looked like they might hedge much of the activity of several commissioners; two appointments were turned down flat, and Competition Commissioner Neelie Kroes was forced to promise to recuse herself from a very long list of issues due to her conflicting interests, which included directorships of every significant company in the Netherlands and a few others besides.
Amid all the fuss, you'd have been forgiven for thinking that Viviane Reding would turn out to be a reasonably uncontroversial steward of the union's Directorate-General for Media and the Information Society; certainly no-one was particularly incensed at the Luxemburgish journalist's appointment. However, neither conflicts or obscurity held them back; Kroes and Reding have probably been the most visible and effective of the commissioners, and their confrontations with the telecoms and IT industries have been positively bruising.
So far, as well as the anti-trust cases with Microsoft and Qualcomm, we've seen radical intervention on roaming charges (with further action on data roaming to come), market access, unbundling, and now radio spectrum. The DG Media and Information Society is one of the world's most aggressive authorities on the issue of spectrum refarming; it wants to grab back and relicense the entirely of the UMTS Extension (2.5GHz) band, and to make a start on reopening the GSM 900MHz bands for possible use with 3G and beyond. It's also keen on structural separation in the fixed world, although it's much less so on muni-fibre (you ask Amsterdam).
This gap in what looks like a very Telco 2.0 regulatory policy is explained by the Commission's strong commitment to free markets. The EU is often considered to be "technocratic", "socialist", or "dirigiste"; this is an artefact of US/UK misperception. The founding texts, going back to the 1957 Treaty of Rome, explicitly ban state aid to private industry and declare the free movement of goods, services, labour, and capital, as well as the freedom to establish a business anywhere in the union, to be rights. Hence the scepticism with which it regards cities setting up as telcos.
On the spectrum issue, this misperception is currently leading to an unnecessary conflict with the UK regulator, OFCOM, over the exact details of the proposed relicensing of the 2.5GHz band. In a succession of policy papers and consultations, OFCOM has made it very clear that it is keen to reuse this spectrum subject to technology neutrality, that is to say that it will not be dedicated to any particular radio air interface. Instead, OFCOM wants to establish a set of rules based on radio-planning criteria that will prevent different technologies from interfering with each other.
The Commission, however, is keener on establishing a pan-European spectrum allocation for new wireless technologies, by which they mean first and foremost WiMAX. At the moment, the WiMAX spectrum position is still far from ideal; although 2.5GHz is in use in North America, the allocations are fragmentary and only two companies have contiguous nationwide spectrum, Sprint-Nextel and Clearwire. 2.5GHz bands have been reserved for WiMAX in developed Asia, but in Europe there is no such consensus; Germany has allocated 2.3GHz and the UK 3.6GHz. Reallocating the UMTS Extension band, left open by the increasing certainty that not only did the carriers overpay for spectrum but they also hugely overestimated their needs, is a major opportunity to create a world standard at 2.5GHz.
Of course, that's precisely what those technocratic planners in Brussels did with GSM and UMTS, and the precedent is much in their minds. There is much to be said for European harmonisation; even more for harmonisation around a policy already in use in Asia and North America. But the kicker here is that there is much less to argue about here than a lot of people think.
"Technocratic planning" of GSM created a spectacular boom in competitive and entrepreneurial activity; much of which was predetermined by decisions taken in the planning process, such as provisioning lines to SIM cards rather than handsets and sticking to 900MHz. Equally, a harmonised 2.5GHz wireless broadband allocation worldwide would have all the same advantages, whether or not WiMAX is the one net to rule them all; if the radio noninterference rules can be shown to work, there's a lot of scope for a meeting of minds here.
On the other big issue, structural separation, it looks like every regulator in town is aligned; only Germany's Federal Networks Agency (BNetzA) may still be weak on this crucial Telco 2.0 issue, being still inclined to let Deutsche Telekom keep competitors off its planned VDSL deployment. OFCOM, and DG Media & Information Society, are no doubt watching BT's fibre deployment in Ebbsfleet very closely; 2008 may be the year of separation in Europe, as the so-called "northern alliance" (the UK, Ireland, Holland, and the Nordic countries), most of the new member states, Italy, and possibly France are likely to line up for structural separation whatever the Germans say - telecoms is, after all, one of the EU's issues covered by qualified-majority voting.
There's also the prospect of a single European Telecoms Market Authority instead of the current situation where responsibility is shared between the EU and the national states. For reasons well made clear at that link, this would probably be a very bad thing; the ETMA would be an uneasy and inelegant hack, jammed between the Commission and the Parliament in a very dubious constitutional position. The proposal must be read as part of the Commission's traditional desire to centralise and "communitise" as many policy fields as possible.
What does this all mean for operators and their suppliers? A historic ability to manage the relationship with the 'home' regulator will be of less value. Your lobbyists will be just one team among many with considerably more divergent interests. Your business model needs to be one that succeeds in unfavourable regulatory conditions over which you have little control. We would therefore rate BT or FT's survival chances above those of players in markets where structural separation and forceful regulation have yet to take such deep hold. Verizon and AT&T may have got a holiday with their vertically integrated fibre plans, but don't think you can copy that model over here; Deutsche Telekom and the BNetzA are looking very lonely indeed.