Research Notes

Tier 0: A new category of telecom operators is born. The reign of Tier 1 operators such as Orange, Vodafone, Telefonica, and Deutsche Telekom is over

A Tier 1 telecom operator owns a telecom network in which it is the top level operator. It hosts its own numbers and delivers voice and data services. Tier 2, 3 and 4 operators operate their own numbering systems, and they may own some amount of network, but generally they purchase access to higher tier networks to deliver services. Like other operators, a Tier 0 operator has its own system to manage users. However unlike Tier 2-4 operators, Tier 0 operators don’t not have to purchase network access to provide their services. Instead they create services through technology innovation, and the Tier 1-4 operators have to deliver the Tier 0 services for free.

Traditional definitions of competition and regulation of the telecom industries defined the market players by their size, Tier 1, 2 and so on. This definition was an easy way to understand the relative strength of the actors in the market and apply regulatory attention accordingly. The types of services were rather limited and standardized. Those distinctions may have worked in the past, but the world has changed.

The telecom industry’s challenge today is that political and regulatory forces only focus on outdated regulatory classifications and fail to recognize the technological development that has transformed telecommunications in the last generation.

Most people already recognize that the the telecom, information technology and media worlds have converged, but regulators still have to get up to speed. National telecom regulators discriminate the classic telephone companies that sell telecom services by subjecting them to strict requirements while allowing companies such as Google, Apple, Microsoft, Facebook, and Netflix to operate with free rein and without regulation to sell services that traditionally have been subject to strict government control.

In the classic model of communications,operators invested in networks with the objective to deliver a single service such as voice or video or a set of related services such as messaging, answering services, fax capability and so on. The telecom provider is responsible for all aspects of the solutions. The operator’s right to serve the public is achieved through a strict regulatory covenant and is subject to a number of obligations. For example every caller must be able to reach another. One’s phone number is portable from provider to provider. All callers can reach emergency and safety services.

The introduction of the internet and emergence of new communications devices such computers, smartphones and tablets, opened a world where new players could develop, market and sell services to compete with established providers without having to be subject to the same regulations. Companies that are born on the internet are essentially global. Their infrastructure investment is limited. They practice fiscal optimization to reduce their tax burden. They face essentially no regulatory requirements or obligations.

These new internet companies are called over the top (OTT) providers because they offer services on top of the network. They offer many of the same, if not enhanced, services as traditional providers including flow TV, video on demand, messaging, mail, hosting, and a range of national and international voice-related services. Traditional operators face the same regulatory conditions as they did in the past even though the competitive landscape has changed completely. Here is a summary of the difference between traditional regulated operators and OTT service providers.

1. Operators must purchases licenses from the government to operate. OTTs purchase no licenses.

2. Operators invest in networks to deliver services to end users. OTTs don’t invest in networks that reach end users.

3. Operators are typically required to deliver services to everyone on equal terms. OTTs can deny service to anyone.

4. Operators must provide contracts to their customers with quality of service guarantees, subject to approval by regulatory authorities. Price changes must be approved by regulators in advance. OTTs have no such obligations and typically offer a loose agreement which is subject to change at any time.

5. Operators can only serve customers within its regulated jurisdiction. OTTs can serve any user globally.

6. Operators are required to interconnect with other networks, generally at regulated rates. A call or SMS from one operator must be able to received by any other. OTTs have no interconnection requirements. WhatsApp is a walled garden where no outside SMS are allowed in nor messages allowed out.

7. Operators are required to offer number portability from other provider to another. OTTs have no requirements. If a user leaves a OTT service, he foregoes his number and data with the company.

8. The fees customers pay to operators for network services support the costs to underwrite the network. OTT services are offered without any relationship to the underlying cost of the network.

9. Operators are subject to local and national taxes. OTTs avoid paying tax by locating their operators in low cost locations and tax havens.

10. Operators are subject to strict data protection and privacy requirements for their users. OTTs practice this on a limited, generally voluntary, basis.

11. Operators must provide access to public safety services. OTTs have no such obligations.

12. Operators, because they are responsible for their networks, practice technologies to use resources efficiently such as multicasting. OTTs, which are only pass through services, have no requirements for how they design their services. Operators are incumbent to deliver competitors services regardless of the impact to its network.

There is no doubt that differences in regulatory treatment between operators and OTTs is unequal and untenable. To be sure, OTTs present a difficulty for regulators who have limited power to control foreign services that are not part of their legal and statutory frameworks. However the continued status quo which regulates established providers is essentially a punishment on those companies that invest in lcoal infrastructure, employ local residents, and pay local taxes. To add insult to injury, many misguided regulators seek to worsen the situation by applying net neutrality rules, giving OTT services even further competitive advantage. But requiring anti-discrimination rules to just one provider and not others is itself a form of discrimination.

One way to address the problem would be to create a level playing field: remove the regulations and obligations that operators face so that they can compete freely and fairly with OTTs. However few politicians and bureaucrats have the courage to remove outdated rules. Thus the only solution is for authorities to regulate OTTs, Tier 0 providers, int the same way as they regulate Tier 1-4 providers. It is time that regulators to recognize that Tier 0 providers that provide the similar services and should be subject to the same rules.

For too long regulators and competition authorities have been content to count the number of telecom providers in a market place as an example of their regulatory success. They have failed the consider the role of technology in creating competition. It is not the number of players in a market that creates competition, but the technological advances. These developments include the evolution from fixed to mobile solutions, from linear to on demand television, and managed services to OTT services, to name just a few.

It is time to update the communications laws and regulatory handbooks to reality. Tier 0 players are not just novelty providers. They have larger user bases and market capitalizations than the world’s telecom operators. The volume of voice, video and message traffic delivered by OTTs now exceeds the level of most telecom providers. The OTT share of the total revenue of the industry is increasing while they pay very little tax, support little local employment, and do not support network investment outside of their own proprietary servers and data centers. If politicians, regulators and competition authorities care about the public, they will act to ensure that all providers, whether Tier 0-4, operate with the same conditions.

Strand Consult’s report Understanding Net Neutrality and Stakeholders’ Arguments investigates the regulatory challenges posed by technological change and the emergence of OTTs. It highlights how OTTs have been brilliant to deploy public relations and develop a formidable international lobby of special interest organizations to win favorable operating conditions. Strand Consult has nothing against net neutrality rules. Indeed rules against discrimination are a good thing—as long as all providers have to play by the same rules. Net neutrality, as it is proffered today applying to just one provider, essentially enshrines an anti-competitive, anti-innovation framework. This report provides suggestions on how to create the level playing field that in the interest of everyone.

Get more information about the report Understanding Net Neutrality and Stakeholders’ Arguments, contact us today.

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