Research Notes

10 regulatory challenges that impact telecom operators and regulators

The trends of convergence have been with us for decades. While communications, content, and computing have been converging–and even the regulators of these industries–the actual regulation has not converged, and remains sector specific.  

Telecom regulators and competition authorities are challenged by these technological trends. They use toolboxes based on outdated models and assumptions. It would seem that with the emergence of Skype and WhatsApp which have singlehandedly erased 20-30 percent of the value of the telecom industry that officials would “get it”, but no. Instead they insist that the telecom industry needs even further regulation on top of the technology that has disrupted its cash flow.

Understandably telecom players ask for an even playing field with over the top providers (OTTs), but it falls on deaf ears. With unchecked OTTs, nations suffer loss of tax revenue and a 99-1 traffic distribution of their internet, in which 99% of the traffic flows to locations outside of the country.  Current business models and regulation don’t allow operators to recover the cash flow they need or to partner with local content providers to make competition with Silicon Valley giants.

Based upon our ongoing research of the telecom industry around the world and our conversations with regulators, here are the 10 biggest challenges for telecom industry.

  1. How to define dominant position. Infrastructure competition is important, but technological competition unpredictable. Who predicted the competition that mobile and cable providers would bring to the fixed DSL market?
  2. Spectrum policy. How can regulators work with a long-time horizon when it’s impossible to know whether their decisions will be correct. The level of technology will also change during the period, further complicating the analysis.  On top of that different countries have different rules, making harmonization and acquisition difficult.
  3. Lack of time. Regulators have limited time to review past decisions to see whether they were correct. The policy process rarely allows the necessary time to make informed assessments. Evidence can be inconclusive or contradictory to policy goals, and there is pressure to deliver policy implementation and results within political time frames.
  4. Lack of information. Even if the regulator has the time, there are challenges to getting the right information including the cost of data, quality of data, and access to data. Whether the regulator has the skills to assess and interpret the data is also a question.
  5. Unintended consequences of decisions. Regulators may think they’re doing the right thing, but it turns out that prior decisions have latent consequences.  Merger remedies are a key example. If A and B merge, the regulator frequent insists that C gets some kind of remedy, but actors D, E, and F get no such benefit. This is a reward that C does not deserve and a punishment to D, E, and F which now face an artificial entrance barrier. Regulators can easy distort competition in the short, medium, and long term.
  6. Role of technology. Many regulators came into their job before the digital transformation was underway.  Others have law schools which offered little instruction in technology.  If they studied economics, they probably learned about perfect competition which does not exist in the real world. As such, they are ill equipped to understand convergence and they fall back on applying traditional regulatory and competition paradigms to dynamic markets.
  7. Mastering the technical and microeconomic details of the market segments. On top of the steep learning curve about technology, regulators must also master infinite details about the difference of consumer, enterprise, and wholesale markets, and the various permutations within each of these markets. It is for this reason that regulators are subjects to Hayek’s classic information problem; they can never know, understanding, or absorb all the necessary information they need to make informed decisions.  
  8. Politicization of regulation. While authorities may claim that they want to deliver apolitical and objective regulation, the reality is that regulation is highly political.  A telecom regulator is a locus for capture and politicization where a number of actors, whether political leaders, incumbents, entrants, or activists want to influence decisions.
  9. Political leaders do not understand telecom industry and frequently undermine regulators’ independence.  It may be the case that the regulator has the right information and conclusion, but political leaders desire a different outcome and order the regulator to do what is contrary to good practice. For example, political leaders pressure regulators to lower the copper access price to appease resellers, but this removes incentive to invest in alternative infrastructure, unwittingly obviating the shared goal of next generation networks.
  10. Telecom regulator fail to calculate the value of the cooperation that state, regional, and municipal actors can bring to make building and running mobile infrastructure less expensive. Telecom operators fail to deliver almost a quarter of planned infrastructure because they can’t get the building permissions and/or rental prices for land are too high. Telecom regulators are in a position to play an important role to address these challenges but they need the political support of national and local leaders. The actors need to work together but know how to do it.

We can easily make the list longer, but these are some of the key issues. This list of challenges reflects a new world not just for operators, but for regulators whom will come under increasing pressure both from governments and activists.  Historically, telecommunications policy was made by officials who had knowledge of the area and worked closely together with national ministers with the goal to increasing competition and stimulating investment in infrastructure.  Telecom companies were in close dialogue with the national regulators and the politicians who were responsible for the telecommunications policy. The dialogue was based on facts and all parties had an understanding of the objectives which the respective parties had. It was a matter of national pride to build great telecom companies, but today, these enterprises are derided in favor of foreign OTTs which offer little to nothing in the way of tax revenue, local employment, and local development.  Moreover these foreign entities fund pseudo grass roots organization to disrupt national politics and hijack bona fide discussions. These group purport to be the voice of civil society but fight for favorable conditions for foreign corporations at the expense of national telecom firms.

Strand Consult’s report The moment of truth – a portrait of the fight for hard net neutrality regulation by Save The Internet and other internet activist shows how the numbers of responses for regulatory proceedings are inflated as advocacy organizations use global databases to influence local proceedings.  At least one-third of BEREC’s comments for the net neutrality proceeding came from the USA. BEREC itself reports of the many nations outside the EU which participated in the consultation and that foreign responses receive equal weight of citizens.  This is a troubling trend for regulators to conduct plebiscites and become accountable to foreign activists, not their own citizens.  In the US, the FCC grandstands on a number of 4 million Americans contributing to its Open Internet rulemaking, but three times that amount watched the US Presidential election on Fox News, indicative of the far greater number of Americans unhappy with the FCC’s overreach.  In any event, one quarter of the purported 4 million responses rebuked the FCC’s internet regulation.

Get a free copy of Strand Consult’s report The moment of truth – a portrait of the fight for hard net neutrality regulation by Save The Internet and other internet activists in which Strand Consult documents how cyberactivists work and who funds them.

Strand Consult conducts workshops for operators and regulators in which we review the challenges they face. We have used our analyses and experiences to teach them about what they will experience and how to handle it. To learn more about Strand Consult’s workshop concept “10 Regulatory Challenges what are you facing and how do you act this challenges”, contact us.

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