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EUROPEAN COMMISSION
DIRECTORATE-GENERAL IV - COMPETITION
Information, communication and multimedia
Telecommunications and Posts ;
Information Society Coordination

Dr Herbert UNGERER

Budapest, 5th July 1999
IV/C1/HU/rdu

 


The Regulatory Challenges in the
emerging Competition in the EU


Communication on the Threshold of the new Millennium Scientific Society of Infocommunications, Budapest


I would first like to present our congratulations to the Scientific Society for Infocommunications on the occasion of its 50th anniversary. Your organisation has substantially contributed to the development of telecommunications, computer science and the electronic media in Hungary in the past. It will even become more important in the future, as the convergence of telecommunications, the media and the Internet moves to centre scene of the development of society and economy, in the World as in Europe - and as Hungary moves to become a full member of the European Union.

The next years will see fundamental change and the setting of main directions, as the world's communications sector enters the new millennium. In Europe, the sector will see three seminal shifts within the next ten years. Around 2003, the first wave of accession countries will join the European Union, substantially enlarging the reach of common principles for the sector's regulation across Europe, already prepared by the Europe agreements which the European Union has concluded with a number of its neighbours to the East. Around 2005, the number and penetration of mobile users will cross over the fixed networks - and this has of course already happened in some of the lead countries in this area in Europe, Scandinavia. Around 2007 at the latest, we expect that Internet penetration in Europe will bypass the traditional telephone - and this will be the ultimate revolution of the telecommunications sector, in Europe as in the World. Already within the next few years, e-commerce transactions carried via the Internet could reach the € 200 billion level, exceeding telephony revenues.

The stock markets where communications is now at the centre of attention start to anticipate these seminal shifts. Investment bankers nearest to future market development estimate that already by 2001 the leading telecommunications companies in Europe will be valued with about 30 % on account of their mobile assets, 28% on account of their Internet assets - but only for some 40% on account of their telephone business, even if the telephone core business will still account for some 60 - 70% of actual turnover. Without doubt, this change of perceptions will start to shape substantially forthcoming privatisations and placements on the markets during this and the next year. In the new era in which we are living, it is the financial markets which do not only anticipate, but also shape markets and technologies.

The very basis of this breathtaking change has been new technology and liberalisation, which together have formed an explosive cocktail and the driver of change. The application of market principles has been decisive, in Europe as in the rest of the world. In the European Union, it has freed monopolistic markets from their constraints and harnessed competitive forces towards innovation. In Central and Eastern Europe the application of market principles is the fundamental basis of the catch up operation under way, leapfrogging the gap left by the old regimes. And this country has been at the forefront of development in this sector, as it has been in the wider political field.

 

At World level, the WTO has established basic principles for free markets in the area, and the International Telecommunications Union, under creative leadership, is instrumental in ensuring that in the process of world wide liberalisation, the cohesion in the communications sector of the developed and the developing world is not lost.

Against this scenario of dramatic change, I have been asked to explore, together with you, in these few minutes of my talk future regulatory challenges. But before doing this, let me rapidly sketch the current situation in the European Union.

As you will know, the European Union will launch a review of regulation in the sector soon and it would be unwise to take a position on this before this has happened.

I will focus therefore, from a competition point-of-view, on the starting position of the sector, which will set the reference point for any review  - and for future regulatory goals .

But I will then move on to throw some considerations of a more general nature into the debate, which, no doubt, the sector will have to examine.

Let us look at the record to date in more detail.

Let me go through the basic dates for full liberalisation.

  • 1st January 1998 - 10 EU Member States fully liberalised, and also the core date for liberalisation under commitments under the WTO agreement, by a large number of countries, in particular the EU, the United States and Japan
  • Remaining Member States :
    1st December 1998 : Spain and Ireland,
    Ireland has advanced the date by its own choice from 1st January 2000 to 1st December of last year.
    1st January 2000 : Portugal.
    31st December 2000 : Greece,
    The last two dates both fixed by Commission Decisions under EC Competition Law.
  • a number of commitments by countries of Central and Eastern Europe, both in the context of their general market reforms, and under the principles of the Europe Agreements which link a number of these countries with the European Union, as well as under WTO commitments.

The full liberalisation date has been particularly advanced for all those countries which form the first "wave" of countries in accession negotiations with the European Union - Poland, Czech Republic, Slovenia, Estonia, Cyprus, and , of course this country. In fact, one would hope that full liberalisation does not wait for accession, but anticipates it. Within the European Union, Ireland may serve here as an example. Even if the Irish government had obtained a delay of liberalisation under EU law up to 1 January 2000, it chose to advance the date to 1st December of last year by its own decision, out of the insight that any further maintenance of the monopoly would severely damage the national economy and prevent rapid innovation. And this courageous move was made in the face of further privatisation and a public offering of the national operator due only a few months later.

We hope that this example of economic insight will be more widely seen, in this country and in the context of its ongoing discussions on advancing the date of full liberalisation and of ending the monopoly rights given under current concessions more quickly, as well as in other countries of Central and Eastern Europe.

Subsequent to full liberalisation, we are faced with an entirely new environment in the EU :

95% of the nearly 380 million people of the European Union already now live in a fully liberalised telecomms market, with Portugal and Greece to follow suit.

Key elements have been established in all Member States :

  • The key and basis of the new regulatory system :
    National regulatory authorities (the "OFTELs" of this world) have begun operations in all Member States. The catchword of the day is now the build-up of the regulatory systems, the focus has shifted from technology to regulation
  • Licensing : national frameworks are generally in place.
  • Interconnection : we see a significant number of interconnection agreements.
    The benchmarking of interconnection rates across the EU, established by the European Commission under both telecom regulation as well as competition law, has given some of the lowest interconnection rates in the world, with local call origination termination rates in the order of 1 Eurocent / minute. Let me make here a more general remark. Achieving fair interconnection rates is the acid test, which we will use for judging any regulatory system.
  • Universal service : schemes for financing universal service have been introduced or announced only by four Member States. All others believe that special schemes are not required at this stage. This reflects a growing general conviction that the main objectives of the sector can be achieved primarily by reliance on market forces.
  • Numbering: major progress has been made on equal access, and number portability, both due by 1st January 2000 across the EU, with some exceptions.
  • Rights of way : right to use public ways in virtually all Member States, even if problems remain at local levels in a number of cases.
  • Frequency : at least two GSM and one DCS 1800 licence, in each Member State  - and we are pleased to see the allocation of the recent DCS1800 licence in this country..
    The European Union has adopted a decision on the introduction of the third generation mobile system, aiming at licensing systems by 1st January 2000 and start of operations by 1st January 2002 throughout the EU  - and here of course, the ITU plays a decisive role in innovating a worldwide standard..

The ultimate measure of success must be market impact. Looking at the number of operators authorised to offer national public voice telephony, we see that already by mid of last year, only six months after liberalisation, more than 200 operators had been licensed across the EU.

As regards operators authorised to offer international public voice telephony : by August 1998, near 300 licences had been allocated across the EU.

And, finally, tariffs for the consumer, the most important indicator of the objective benefits which we are trying to achieve . We have clearly made progress with international call charges. International call charges have fallen substantially across EU Member States, in some cases by up to 30%. The cheapest alternative operators now offer transatlantic calls at only tenths of what those tariffs were only two years ago. The reductions have been as striking in national long distance markets in a number of Member States, in particular in markets such as Germany.

This is then the starting position. One comment :

  • We are facing future challenges for the sector in the European Union on a firm regulatory base ;
  • The market has responded. Dramatic change of revenue structures imply substantial challenges for the incumbents, but this change can be managed,

and

  • success of the regulatory reforms was due to close interaction between and the complementary roles of general Competition Law and sector-specific regulation.

We believe that the latter achievement must be maintained throughout the future developments, as one will have to work out the future relationships between :

  • Sector specific ;
  • General Competition Law ;
  • National and EU levels ;
  • WTO and ITU;
  • the new concepts of Internet self-regulation.

Let me then just count down some of the future challenges which the
EU will face in the sector :

  • We have still not achieved to date real competition in the local loop. Only in some Member States has cable developed into a credible alternative in some areas. We have addressed the issue with a Directive issued under EU competition law just two weeks ago, ordering structural separation of the telephone network of the incumbent and his cable activities where they exist  - but we will have to see how sustainable competition in the telecommunications market can be achieved without real unbundling in the local loop and the resulting credible competition.
  • There is the seminal shift between mobile and fixed, most obviously borne out by some recent events such as global mergers between mobile companies larger in terms of market capitalisation than many fixed operators. As I have mentioned, at current rates, mobile penetration will overtake fixed by the year 2005. This changes the fundamentals of regulation in the sector. That makes the future development of mobile a central issue. This year we will see the first 3G licences in the European Union : a large number of regulatory problems are bound to ensue, in particular in the field of access and roaming  -.
  • The integration of the world telecoms and media markets is becoming a physical reality. The new gigantic alliances and megamergers seem to be making traditional relationships, as well as the regulatory systems, which have grown up around them, go rapidly out of date.

And this leads us then to the points high up on the agenda for this year from a competition point of view .

The immediate tasks ahead are :

  • Fine tuning the EU's telecom regulatory framework : the 1999 Telecomms Review.
    The aim is to take stock of , examine, consolidate, and fine-tune the EU's regulatory framework, including the issue of strengthening it where required.
  • Convergence.
    Reconciling convergence with competition, bound to be a major issue of the coming years.
  • Accommodating the new alliances : accepting more local competition as a quid pro quo for greater integration. The issue will be how markets can be kept open when gigantic companies integrate .
  • Dealing effectively with third generation issues. A major test here will be the creation of the right investment climate for he third generation mobile systems.

Let me make here a point on mobile / fixed convergence. Given the dramatic speed at which mobile has developed during recent months, it now seems legitimate to ask : which will lead the way into the future : mobile or fixed. The answer to this question will give a basic guide to future directions for European regulation in the sector :

  • Fixed has grown over a long time period under a regime of price regulation in the local loop.
  • Mobile has grown over a very short time essentially without price regulation, leading to substantial investment incentives but also higher prices.

The major issue ahead in the immediate future will be how far price regulation will apply  - or be extended.

This will be the subject of hot debate, particularly in the context of interconnection and mobile termination charges. I expect this to become a major issue in the forthcoming review.

The basic test of the efficiency of the two approaches will be how far the two basic objectives can be reached by either of them : openness of markets and fair pricing, and investment. Only if we attain both objectives at the same time can we achieve the consumer benefits, which we are seeking. And, of course, to reach this balance will be decisive in the countries which still have to build up networks to higher density, such as in many countries of Central and Eastern Europe.

Let me also say a few more words on another central point.

While we have changed successfully the regulatory framework across the European Union and this will be followed further up by the European Commission with the 1999 Review, as well as in implementation control,

We have not changed market structures to sufficient degree. In all EU Member States incumbents continue to have a firm bottleneck control on competition in the local loop.

This means that the incumbent operators continue to rule, very largely, the local markets.

It means that the current flurry of competition in long-distance and international telephone - and the benefits for the consumer, which we have achieved - is developing on a fragile base.

It also means that in a decisive phase of new technology injection into the European market the incumbents continue to control the rhythm at which this takes place - with only the wireless option as a general alternative across Europe, and TV-Cable in a number of countries , not mentioning satellites which are subject to a number of technological constraints.

It is this concern which seems to penetrate current consultation papers on local loop and unbundling which have been launched in the European Union by a number of Member States' Regulators - with deployment of xDSL naturally tending to be the flagship of this argumentation. More generally these concerns address opening access to broadband, hidden behind acronyms such as unbundled copper, bitstream access, permanent virtual circuit access.

Behind this debate is ultimately the issue of the Internet and e-commerce. With dramatic speed, the Internet is becoming a reality in the marketplace, and our financial markets have anticipated, as I said earlier. Already now the Internet economy weighs with some 300 billion US$ in the US economy, a figure placing the US's Internet economy on the 18th place in the scale of world economies, just after the size of the Swiss GDP, and in front of Argentina.

The Internet economy has progressed in the US by 175% per annum during the last four years. If Europe's Internet economy just reaches the current US share of total GDP , Europe's Internet economy will make up for well over the € 200 billion mentioned.

By 2001, Internet penetration could well reach 20% penetration across the European Union, at the range of current mobile penetration. The value of the forthcoming Internet and e-commerce flotations in Europe will be indicative of market expectations. And it will be important for the countries of Central and Eastern Europe to catch up rapidly - both for reasons of economic development and economic integration.

But this potential can only be realised if customers can be reached in more efficient manners - and this will mean broadband. There are new technologies opening new avenues, well on the mind of everybody here : wireless cable is one, UMTS / 3G technologies is another .

But one has to keep figures in mind. In the European Union, fixed telephony now reaches some 190 million subscribers ; mobile some 75 million though growing steeply; Cable some 40 million.

We strongly promote the mobile alternative, such as our insistence on the liberalisation of mobile across Europe and the commitment to the 3G systems have shown. We favour divestiture of cable networks across Europe, where they are still not separate from the incumbents to free their innovation potential. We will push for more wireless cable licences.

But one must also recognise that in the short term there is no alternative to phone penetration. And our countries positioning on the world's Internet market - which will require new forms of access by Internet users - will be decided during the next three years, and cannot wait for the next ten.

This puts unbundling of the incumbent's networks on the top of the agenda in the EU, both at the national as well as at the European level. But there are also more general reasons resulting from the requirement to maintain, and develop, Europe's competitive market structures.

The future is based on the convergence of markets : convergence of national markets, leading to regional and global alliances and mergers, currently on our agenda ; convergence between fixed and mobile, with new offerings entering the market during this year in a number of Member States and which are being checked against EU-competition rules, as complaints are launched by competitors.

But while much of the convergence debate has centred on the telecom / media convergence, we are also facing a much more general challenge from convergence : the new Internet and e-commerce markets which will link together telecoms / logistics / distribution and financing. One may expect a wave of new mergers and acquisitions in these fields, as customers will want to have fully packaged offerings - serviced end-to-end, out of one hand, both in Western Europe, as well as in the Central and Eastern part of the continent.

Actors will have to understand that while market restructuring is required, it will only be acceptable, if competitive structures are maintained in the process - the basic goal in EU competition law. A much larger degree of unbundling will be necessary as a required corollary condition. This will make the unbundling of the local loop  - full access to the subscriber line for competitors at reasonable rates - a central issue in any multi-operator environment.

There is a continuing debate about an alleged intrinsic conflict of objectives. Unbundling of the local loop is said to take away the incentive for developing and investing in infrastructure. While much will depend on conditions - and to get them right is one of the objectives of the current consultations, I believe we can rely on the working of the market. While unbundling is required to reach the customers nation-wide, all operators will feel also the need to balance this dependence on the incumbent and the regulator with a substantial "dose" of infrastructure of their own. The market will help to determine the right balance, which everybody will have to define in the end for himself, according to his business strategy and the risk, and degree of dependence he is willing to take.

There is an essential point to this debate : without unbundling it is difficult to see how convergence, and a resulting increase of market power of those now holding bottleneck positions, can take place without weakening substantially competition. And I believe this would be contrary to the basic belief that liberalisation and competition must be the basis for sustainable investment and efficiency of communications structures.

Let me then conclude.

The move into the future of converging markets can only be made on the basis of liberalisation and wide openness for new actors. No monopolistic enterprise can develop these markets just by itself. Others are needed. But all will benefit.

This future must be based on the build-up of strong regulatory structures and competition authorities. This is true for this sector, as for others and it is a condition to link smoothly into the market structures, which have been built up across the European Union.

This country has shown an excellent record in building up, during this decade, its telephone network, both fixed and mobile. It has progressed substantially by liberalisation. But more can be done. We are looking foreward to the result of current developments.

The positions on issues such as voice via the Internet or interconnection and unbundling, and, of course, on advancing the date of full liberalisation will be major signposts.

With now common beliefs in the basic approach to the sector, the links which have been established between the operators of many countries in Central and Eastern Europe, and operators of the EU, foremost in this country, and the close communality of political interests, best expressed by the desire of many of these countries to join the EU, with this country far advanced on negotiations, I believe that we have now a common telecommunications agenda on the continent. We have also a common communications destiny, as we enter the new millennium. Telecommunications and the Internet will be key structures in furthering economic and social integration, and the telecommunications sector will be a central component in the re-building of the Balkan states devastated by war, where the European Union, alongside other institutions and nations will play a central role. We will need modern communications structures to progress the continent together. And this needs analysis, dialogue, strong regulators and determined competition authorities, and, above all, the willingness to advance reforms.

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