Bernard Amory and Laurent De Muyter of Jones Day evaluate the European Commission’s ambitious task to create a connected digital single market, by setting out proposals that need the most urgent attention.
A New EU Commission Under Way
The new European Commission has been approved by the European Parliament. President Juncker’s campaign placed a strong focus on the European Digital Single Market. Günther Oettinger, the EU’s digital economy and society commissioner, and Andrus Ansip, vice president of the commission for the digital single market, have also been given “mission statements” that include the task of presenting, within six months, “ambitious legislative steps towards a connected digital single market”. These should be based on “a clear assessment of the main obstacles still to be removed”, possibly by “proposing new measures”. The mission statements also provide that “more ambition should be added to the ongoing reform of [the] telecoms rules”.
Ansip echoed this mission statement during his recent hearing before the European Parliament when he recognised the necessity for a “fresh approach”, “looking at the whole value chain”. He also emphasised that “there is, of course, some kind of disbalance between telecom companies and over-the-top services, and we have to find the right model and how they can act fruitfully together.” Competition law enforcement will also be fully part of this sectorial focus as the digital single market has been identified as a specific area of focus for competition commissioner Margrethe Vestager.
A shifting telecoms landscape
This political attention reflects the state of flux in which the industry finds itself today and the need for Europe to seize the opportunities of the digital revolution.
First, historic monopoly legacies are losing their significance, as new infrastructure deployment requires high upfront investments in new networks to increase capacity. Fibre is progressively replacing copper; cable has been technologically upgraded; and mobile networks are gaining access to LTE spectrum.
Second, traditional telecommunications services and revenues are now subject to heavy exante price regulation, driven by consumer protection and internal market concerns in relation to, for example, termination rates, wholesale access, roaming, etc, thereby restricting the ability of mobile network operators (MNOs) to maximise value in these markets.
Third, to capture more revenues at the service layer, operators have developed “cluster strategies” through triple and quadruple play bundled offers and/or by subsidising mobile offers (where customer switching easily occurs) with fixed revenues (where customer stickiness is greater).
Fourth, and most important, over-the-top (OTT) players increasingly offer services in direct competition with telecommunications operators, and increased bandwidth has moved customer value from the infrastructure/distribution layer (offered by telecoms operators) to the upstream internet services (content, cloud, VoIP, etc) layer (offered by OTT players).
Such evolution has led to several waves of consolidation in Europe. With the exception of European cross-border or complementary regional cable consolidation, most of this has been intra-country. These have included mobile mergers in Austria, Germany, Ireland and Norway, as well as fixed/mobile consolidation (eg, Vodafone’s acquisition of Cable Deutschland and the Orange/Yoigo merger in Spain). However, merger control tools in traditional telecoms markets have often prevented or imposed high regulatory prices for such consolidation, since the analysis is essentially driven along national boundaries. Regarding OTT services, merger reviews have led to less restrictive outcomes, given the broader geographic boundaries that allow OTT players to benefit from greater scale, and therefore offer them a stronger ability to extract value from end-users and to access key production inputs (eg, key content, connectivity, advertising revenues).
In examining the entire value chain, as discussed in greater detail below, the following points appear to be most urgently in need of attention:
eliminating regulatory asymmetry for competing services (section 1);
eliminating regulatory distortions in the value chain (section 2);
identifying and regulating new bottlenecks (section 3); and
establishing a new regulatory paradigm (section 4).
Eliminating regulatory asymmetry for competing services
OTTs and MNOs already compete, and will increasingly compete, head-to-head for various services, including messaging, voice calls, video conferencing services, distribution of content, etc. So far, the Commission has separately assessed such OTT and MNO services, as shown by its recent decisions in WhatsApp/Facebook and Microsoft/Skype. However, as competition intensifies between MNOs and OTTs, regulators will face the increasing need to recognise their competitive relationship and, therefore, the need for a level regulatory playing field.
European legislation and regulation remain focused on MNOs, thereby creating a regulatory asymmetry with OTTs. OTTs are not subject to interoperability obligations (any-to-any), whether at service level (eg, access to end-user identification and numbers) or network/technology level (eg, obligation to provide open interface, etc). As recognised by ARCEP, the French regulator that launched a procedure against Skype, OTT providers are not even registered as electronic communications services providers (and therefore escape the payment of related fees). As concerns data protection, the E-Privacy Directive, which imposes obligations such as 24-hour data breach notifications, is only applicable to telecommunications operators. Similarly, despite the original Commission proposal and calls for a level playing field for cybersecurity, the European Parliament reduced the scope of the proposed network and information security (NIS) Directive to cover only telecommunication operators, ignoring concerns at OTT layer.
So far, it appears that the proximity of telecommunications operators, often as former public undertakings with long-standing presence in each country, has led governments to focus all regulatory obligations (eg, cooperation with law enforcement authorities, control over illegal or unsolicited content, parental control, or network security and guaranteed quality of services obligations) and taxes (eg, administrative fees, universal service financing) on such operators. However, in an increasingly convergent environment, such limitation will not be effective and might distort competition and raise discrimination issues.
Eliminating regulatory distortions in the value chain
Following the digital revolution and the fixed/mobile convergence, the value of services in the various levels of the value chain has significantly shifted in favour of OTT players. The current framework is outdated, in that it places a higher regulatory burden at the infrastructure level of the value chain, although the value has shifted to other layers of the chain. This prevents innovation and/or vertical upstream integration by telecoms operators.
Furthermore, net neutrality obligations (existing in certain national regulatory regimes and contemplated at EU level) restrict the ability of network operators to launch captive services, offer high-quality IP interconnection, monetise their subscriber base and benefit from two-sided revenue streams. These constraints ultimately prevent innovation and upstream vertical integration. Such restrictions also have implications in terms of the European single market, as network operators are prevented from reaping the benefits of their scale at European level on this side of the market, which by nature tends to be at least EEA-wide in scope.
More fundamentally, net neutrality also seems to create a contradiction with the EU telecommunications framework. Indeed, service neutrality is enshrined in Article 9 of the Framework Directive since 2009 and is to be implemented by 2016. Under this service neutrality principle, it is for spectrum users “to choose the best services to apply in frequency bands” (recital 34). Preventing network operators from choosing a two-sided model for financing their services restricts the services that can be offered. In view of the debate currently unfolding in the US, it may also be time for Europe to recognise that net neutrality issues (ie, essentially discriminatory throttling) are better left to the antitrust laws and authorities.
Identifying and regulating new bottlenecks
Various key inputs (eg, content, data, identification number, browser history, search history, e-mail addresses, data in the cloud, data in the handset) may become necessary in order for telecommunications operators to compete with OTT players for new services (cloud services, localisation services, etc). Such input may create new bottlenecks in that, through network effect, they provide advantages that cannot be replicated unless some form of access is mandated. Forthcoming legislation (eg, extended Connected Continent package, general data protection regulation, search neutrality legislation) should identify and facilitate access and portability of such inputs.
Establishing a new regulatory paradigm
The exante regulatory framework has been a useful tool in the learning curve for national regulators. However, given significant market evolutions, the time seems ripe for developing a more predictable, pragmatic and flexible framework, potentially including the following:
A cherry-picking system. The automatic notification system provided in Article 7 of the Framework Directive creates unnecessary burdens for both operators and regulators. This rigid system could be replaced by a cherry-picking system, whereby regulators decide which telecommunications markets to regulate. This would reflect the approaches promoted under competition law by Regulation 1/2003 and the current General Data Protection Regulation. To ensure EU-wide consistency, the Commission should be given the parallel power to review telecommunications markets. In this respect, the Commission already possesses this power of review for cross-European markets, although it has never exercised such power.
A more predictable and pragmatic framework. Operators benefit from legal certainty and clear, predicable rules. The decoupling system, as set out in the third Roaming Regulation, is extremely difficult and costly to implement. A much easier system to implement would be a clear roaming prohibition, provided that sufficient implementation time is foreseen. In fact, a general prohibition on distinguishing between national and EU-wide calls (for both fixed (as already foreseen in the Connected Continent proposal) and mobile) would be similar to the tariff rebalancing between national and regional fixed calls mandated by the EU in the 1990s. This would further signal a true European single digital market for consumers.
These are our proposals for the new European Commission:
rectify the regulatory asymmetry to ensure a level-playing field;
leave net neutrality issues to competition law;
identify and regulate new bottlenecks; and
consider a revamp of the regulatory framework and establish a more targeted regime, similar to the competition law enforcement regime and the regime anticipated for data protection.