13 September 2013

No free lunch for telecom operators – an H+K analysis of the EC proposal for a new telecoms package

In September the European Commission presented its proposal for reforming the European telecom market. Under the banner ‘ConnectedContinent’, the legislative proposal will aim to unify this fragmented market. For stakeholders, the reform will bring with it new regulatory challenges and opportunities in equal measure. Read our analysis of how it may impact your organisation’s strategic interest.
No free lunch for telecom operators – an H+K analysis of the EC proposal for a new telecoms package

Liberalisation in 1998: where do we stand in 2013?

In his State of the Union speech at the European Parliament on 11 September 2013, José Manuel Barroso, President of the European Commission emphasised the need for a true internal market for the telecommunications sector. On the same day the European Commission adopted a total revamp of the current telecom rules under the labelling “Connected Continent.” The new package takes the form of a Regulation instead of a Directive, which means no need for additional rules for transposition by Member States. In short: one should not have different rights, rules or prices throughout Europe.
The full liberalisation of the sector took place in 1998 with a regulatory framework that was mainly focused on universal service and access to services and networks. Meanwhile, the sector has undergone significant changes in a triple play environment with blurring lines between infrastructure, service and content providers. A series of legislative updates has taken place but a truly internal market for operators and consumers does not seem to be in place yet, thirteen years after the full liberalisation of the sector. Indeed, the current European market for electronic communication services is still very fragmented and far from being a “one-stop-shop” area. Operators need to comply with national authorisation schemes, frequencies for mobile and satellite use are auctioned at national level with no synchronisation of procedures and timings between the EU-28, regulation takes place at national level with unsynchronized remedies among the EU-28, a single European consumer area is still far from reality.

Europe used to be the frontrunner in mobile connectivity but now faces a significant gap in terms of broadband penetration and connectivity compared to other continents. A recent study from Ecorys for the Commission showed that, if the internal market for electronic communications were completed, the EU's gross domestic product could grow by up to 110 billion euros a year.
European industries operate in a cross-border environment and need a seamless service provision across the EU-28. So, liberalisation in 1998, global connectivity in the digital age in 2013?

Background on the newly adopted package

The new legislative package follows up on these existing rules and aims to create a true single market. The Commission argues that all Europeans should be able to enjoy new innovative high quality services. At the same time, investments in next generation infrastructure need to speed up. The right regulatory environment is a crucial contributing factor for a dynamic and competitive market. It must provide the right balance of risk and reward for those prepared to invest. The availability of high quality networks and services is essential for the growth of the economy with a large number of industries that rely on communications connectivity.

The proposed new rules in a nutshell

For the operators: 
  1. One-stop-shopping: Introduction of an “EU passport”: operators wanting to provide services in several Member States must currently be authorised in each of them. The new package eliminates national conditions and facilitates a one-stop-shop approach. Operators of electronic communications networks and services can operate and provide their services throughout the EU-28 regardless of their location or the place of the consumer. Industry should welcome this call for consistency and the removal of red tape. 
  2. European wireless space: Introduction of consistency between the different national radio spectrum assignment procedures. The focus should be on greater predictability for cross-border operators regarding spectrum availability in the EU-28 without diverging national assignment conditions.  Radio spectrum is a public good and an essential resource for the internal market for mobile, wireless broadband and satellite communications. The proposed coordinated framework for assignment of harmonised radio spectrum should be welcomed, as it creates legal certainty and predictability, better business planning at cross-border level and it contributes to build a European wireless space. 
  3. Easier wholesale products for fixed networks: Introduction of harmonised conditions and features across the EU when operators with significant market power are obliged to offer competitors access to their networks. A number of other regulatory measure prescribe common criteria for assures service quality connectivity. Industry should probably need to evaluate the effectiveness of the increased regulatory ex-ante rules in light of a lighter regulatory approach. Regulatory intervention should be limited to situations where market functioning fails. 
For the users: 
  1. Gradual shift towards borderless pricing. The end of roaming charges for end-users? To some extent yes. Incoming call charges while travelling in the EU should be banned from 1 July 2014. Companies can also introduce “Roam Like at home” plans, the price of which will be driven by domestic competition. Alternatively, customers will be given the option to choose a separate roaming provider who offers cheaper rates (without having to buy a new SIM card). Finally, companies cannot charge more for a fixed intra-EU call than they do for a long-distance domestic call. For mobile intra-EU calls, the price could not be more than €0.19 per minute (plus VAT). In setting prices, companies could recover objectively justified costs, but arbitrary profits from intra-EU calls would disappear. These new measures do not call for a single euro-tariff. Diversification among operators remains possible. These new rules clearly foster a borderless call and data usage pattern for the European consumers. The operators may however question the impact of such regulatory stringent interventions in revenues and margins. The cream-skimming thereof may lock the appetite for investment and innovation and may also have an effect on domestic pricing that could increase. 
  2. The EU-28 borderless consumer better protected. The package contains very detailed rules on new rights for consumers. Operators will have to comply with harmonised contract clauses and trade practices. Some examples: the right to plain language contracts with more comparable information, greater rights to switch provider or contract, the right to a 12-month contract if you do not wish a longer contract, the prohibition of longer minimum durations than 24 months, the right to walk away from your contract if promised internet speeds are not delivered. The new rules pertain also to facilitating change of provider. Improved switching rules promote market entry and competition between electronic communication providers and allow end-users to choose more easily the provider which best meets their needs. For sure, all this contributes to the creation of a European consumer space. However, the information requirements that operators will have to mention in the contracts are very detailed and regulated at EU-level. Some of the new requirements will need additional investments in IT systems and customer service. It is questionable whether some of the proposed level of details to be provided in customer contract should be regulated at EU level and not be left to commercial freedom. 
  3. “Net neutrality”: the draft Regulation includes an obligation on providers to ensure unhindered connection to all contents, applications or services accessed by end-users, regardless of the cost or speed of their internet subscription. This obligation is qualified by the provisions on enhanced service quality (Article 23) – which have been criticised by some stakeholders as threatening net neutrality. One of the most criticised provisions allows content providers to agree deals with internet providers to assure a certain quality of service. While creating a new revenue stream for providers, thus stimulating investment in network infrastructure, this provision also risks to crystallise the significant position of some internet giants which could broker advantageous (yet potentially expensive) deals with internet provides, thus threatening new market entrants and innovation. 
For the Member States and national regulatory authorities: 
The package contains a number of institutional rules with respect to roles and powers of national regulatory authorities, their sanctioning powers and rules on the Commission's power to adopt delegated or implementing acts. There will not be a European regulator for the   sector.

A better stimulus and climate for cross-border investments and growth?

Currently not a lot of players are able to offer pan-European connectivity. A national patchwork of networks and services continues to exist. Network competition at domestic level is not taking up significantly. On balance, the proposed rules seem to facilitate pan-European investments for network operators, service and content providers, equipment manufacturers and users. However, the proposed cream-skimming of roaming charges and of the premiums of intra-EU calls, combined with continued price regulation for access to copper networks, may lock the appetite for investment and innovation for network operators. The new rules on consumer contracts will certainly imply additional costs for adaptations to network and customer service systems. The question remains if such far going harmonisation in the “European consumer space” is really necessary and wanted ?

Next steps

The Commission proposals will now be discussed by the European Parliament and the Council under the ordinary legislative procedure. The vast reform of the current rules, together with the proposed new rules on data protection, will be a source of major scrutiny by policy-makers and stakeholders. Commissioner Kroes expressed her hope to finalise the new telecom package before the European elections in May 2014.
The new rules have a heavy impact on the telecoms industry. Investments in systems need to be re-evaluated, and the consumer benefit will be scrutinised. Issues such as net neutrality will certainly become one of the core discussion areas. We expect the European Parliament to spend the last month of its legislature discussing the overall policy line and devote some attention to net neutrality issues. The strong consumer lobby in the digital sphere (which has already been evident in EU-level discussions on IPR enforcement and ACTA, data protection and privacy) could complicate the debate, with MEPs wary of alienating grass-root consumer groups immediately before an election.
Early indications suggest disquiet with the Commission’s concept of net neutrality. The reaction of network operators is also likely to be challenging, but it is still awaited. Such complications make the adoption of the whole package by this legislature highly unlikely.

Related contacts :

Joost Vantomme
Senior Advisor Public Affairs

email: joost.vantomme@hkstrategies.com