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Annual London Telecoms Conference
Warburg Dillon Read
19 - 20.07.1999

Herbert Ungerer

Thank you for giving me the opportunity at this gathering of major investors and actors in the European telecommunications sector to present some views from a European perspective on the state of competition in the sector and the future perspectives of development. It is also for myself a speech at the right time. From next month onwards, I will spend a year at Harvard to think about these issues. The event of today is therefore a welcome opportunity for myself for some stocktaking.

I will cover in this speech three issues :

  • major milestones ahead which will substantially influence the perspectives of the regulators, but also of the operators and the investors.
  • our current starting position into that future in the European Union
  • major recent developments which seem to determine the regulatory and the investment climate in the sector over the next two years or so.

I will not go into any detail of the Telecom Review which is ahead in the EU. The new Commission which has been formed in Brussels will have to look at the starting platform for this Review first, and it would be unwise , to try to outguess that process now.

However, inevitably, any Review will have to speak out on the major issues ahead which I would like to touch on.


I believe most of us here will agree on the leaders into the future :

  • Mobile
  • Fixed
  • Internet

but many would probably give different weights to these developments.

Let us look at the current situation and the figures :

  • Fixed telephony in the EU : now some 190 million subscribers
  • Mobile : 75 million, but growing at 65 %
  • Internet : 30 million users, growing at 70 % ; traffic doubling every 3 months

According to projections we will see a cross-over point between fixed and mobile teledensity by 2005, probably earlier. We should see a cross-over between Internet density and telephony in the European Union by 2007.

So the next years will see fundamental change and the setting of main directions. The sector will see at least three seminal shifts in Europe : the cross-over of mobile and fixed, of Internet and voice, and, I believe one should add, the geographical extension of the liberalised European telecommunications space. Indeed, early next decade, 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.

The Internet will then bring 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 Euro 200 billion level in the EU, exceeding voice revenues.

I should say that institutional investors and the stock markets where communications is now at the centre of attention start to anticipate these seminal shifts. Within a few years, the leading telecommunications companies in Europe are likely to be valued on a one third / one third / one third basis : one third on account of their mobile assets, one third on account of their Internet assets - but only for another one third 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.

And more and more, these new facts will also shape the mindset of regulators in Europe.

We will see a new mindset for regulators, as we have seen it for investors. And this process has already started, and is more and more reflected in regulatory and competition decisions.


You all know the basic dates :

  • 1st January 1998 - 10 EU Member States fully liberalised, and also the core date for liberalisation of access under the WTO agreement, by a large number of other countries, in particular the commitments by the United States and Japan
  • Remaining Member States :
    • 1st December 1998 - Spain and Ireland
    • 1st January 2000 - Portugal
    • 31st December 2000 - Greece
    • Ireland has advanced the date by its own choice from 1st January 2000 to 1st December of last year.
  • 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 many of these countries with the European Union, as well as under WTO commitments.

I believe that the case of Ireland deserves a special comment. 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, and in spite of at the time still unresolved access disputes between the incumbent, Telecom Eireann, and the new entrants.

We hope that this example of economic insight will be more widely seen in Europe, particularly in its Central and Eastern part.

Subsequent to full liberalisation, I believe everybody would agree that we are faced with an entirely new environment in the EU :

95% of the nearly 380 million people of the European Union now live in a fully liberalised telecomms market, with Portugal and Greece to follow suit. And this new environment is characterised by dramatic market change, and a large number of new alternative carriers.

Key elements of the new regulatory regime have been established in all Member States :

  • The basis of the new regulatory systems :
    National regulatory authorities (the "OFTELs" of this world) have begun operations in all Member States.
  • 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 must be used 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. And we apply stict criteria to defining the financial requirements of universal service, as the launching of the second stage procedure against France last week has shown.
  • Accounting systems : progress , but substantial work remains to be done
  • 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 allocation of the DCS licences has given us the second wave of growth in mobile in Europe which we are currently experiencing.

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.

We are seeing a substantial number of alternative carriers which have entered the market place. Already by mid of last year - 6 months after the full liberalisation date of 1st January 1998 - the total number of operators authorised to offer national public voice telephony in the EU was more than 200. The UK, Sweden, and Finland were still accounting for the bulk of licences, but the core continental countries were catching up . The number of operators authorised to offer international public voice telephony was near 300.

And , finally, tariffs for the consumer , the most important indicator of the objective benefits which we are trying to achieve, and of course, vital for the justification of our action with the public : 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 a tenth 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. And incumbents have shown that this dramatic change of revenue structure can be managed.

The success of the regulatory reforms was due to close interaction between and the complementary roles of general Competition Law and sector-specific regulation. And this defines the general tasks in defining regulatory relationships ahead. Working out the relationship between :

  • Sector specific
  • General Competition Law
  • EU
  • WTO
  • Internet self-regulation

Without doubt, the future forms of these relationship will be major topics of the forthcoming Review.


seen from a regulatory point of view.

The major tasks for the EU's telecom sector, as I see them, will be :

  • Examining, stock taking, consolidating, fine tuning the EU's telecom regulation : the 1999 Review
  • reconciling convergence with competition
  • accommodating the new global mergers / alliances : actors must accept more local competition in exchange of more global integration.

These issues will without doubt form the environment within which market restructuring and investment will take place in Europe in the sector.

Fine tuning the EU's telecom regulation will mean :

  • reviewing the EU framework as such : the ONP legislation, but also making the whole framework more transparent and simple
  • generating convergence between national regulators on basic market concepts
  • reconciling convergence of markets with the maintenance of competitive structures
  • third generation issues : particularly creating the right conditions for deployment of 3G systems, but also of multi-media

We need clarification of concepts between regulators in Europe. We have to find convergence of concepts concerning :

  • the treatment of service providers vs infrastructure providers. If there is differentiation which "dose" of infrastructure is required to qualify for the status of infrastructure provider.
  • The SMP concept (Significant Market Power) : to which operators to apply. Or in clearer terms : How far should traditional telecom regulation expand, as markets converge ; or, how far should that range shrink;
  • The future treatment of mobile

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 of the sector as a whole :

  • 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 and even be extended - or how far it can be reduced as competition grows. Impact on investments will be tremendous.

So the crucial question in mobile is :

  • bring down prices by competition, or the threat of application of competition rules,
  • extend price regulation.

Again, this will be an issue in the forthcoming debate. We have completed in Spring - successfully - the Mobile Interconnect Proceeding which we had initiated against 45 mobile operators in Europe. This was a pre-emptive strike to demonstrate that :

  • prices can be brought down by competition
  • the use of competition rules where required to stop anti-competitive practices

Any extension of fixed network regulation into the mobile sector will need very careful reflection, as to its effects on investments, innovation and market expectations.

The basic approach should not be more regulation, with all its impact on investment, but creating the right competitive structures.

Mobile / Fixed Convergence is a case in point which is becoming of major importance in Europe, as the new offerings enter the marketplace :

  • how to ensure the advantage of integration
  • keeping markets open.

It is the latter question which should be the crucial regulatory test and which it is anyway in any competition case.

That leads me to make a more general 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 by 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 telephony - and the benefits for the consumer, which we have achieved - rests 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 most countries , not mentioning satellites which remain subject to a number of technological constraints.

Cable can help. It is a key component of Europe's future communications infrastructure, and as many here will know, it has been a focus of our action over the last few months - and, of course, is now in the focus of investors.

The new EU Cable Directive, adopted under EU competition law after a lengthy consultation process three weeks ago, opens new investment perspectives in Europe.

By itself, the Directive only orders legal separation of an incumbent's cable network from its telephone network where it owns both in the same area - as is the case in a number of key countries in Europe. But the Directive will trigger more. It has the potential to amplify the current investment rush in the cable field in Europe - and prepare Europe for the broadband Internet of the future.

And the Directive also initiates a new approach to the future regulation of the sector in Europe. For the first time its application is made subject to a competitiveness test in the local loop. Once competition itself offers a sufficient check on the incumbents behaviour, Member States can claim - and the Commission will examine - forebearance of application of the separation requirement - an in-built sunset provision, and a concept which will find wider attention in general in future EU regulation.


all of them trigger major market restructuring, both between new entrants, as well as between incumbent carriers, and this will amplify further. The European Union Treaty is aiming at the economic integration of Europe - and therefore we have a basic positive attitude towards market restructuring and new alliances or mergers. However, we cannot sacrifice competition for more market integration, be it between different sectors or across countries. This would be a zero-sum game, and in nobody's longer term interest, and certainly not generate sustained market growth and investment.

Therefore, screening under competition rules is a must :

  • Article 81 (former Article 85) : anti-competitive agreements
  • Article 82 (former Article 86) : abuse of dominant positions, including unfair pricing and refusal of access and interconnection
  • Merger Regulation : check on market power

All market participants are well advised to build these constraints firmly into their strategy and business plans.

The Commission will strengthen its scrutiny with the launching of Sector Inquiries into competitive conditions under EU competition law in the sector.

A first enquiry is due shortly, as early as Autumn, concerning the investigation of critical segments in the telephony / mobile market, such as the persistently high roaming charges but also addressing the issue of the local loop.

Behind our concerns to keep market structures open is ultimately the Internet. The Internet is at the centre of the future revolution.

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 Euro 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.

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 .

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 positions 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. And this is borne out by current national consultations and recent announcements. 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

Again, 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.

A 1999 focus therefore will be the unbundling of the local loop, and the conditions attached to it. We have said this earlier this year, and this seems to confirm itself, as cases come up and decisions are taken.

In all this, we should keep a clear goal in mind. The aim must be to allow development of market structures which lead us

  • towards a lighter regulatory regime

We must avoid

  • extension of more regulation into the major growth areas

and, instead, learn the lessons of mobile and the Internet :

  • develop telecom regimes towards Internet and e-commerce.

Ultimately, it is the investor who creates markets, and not the regulator. This also defines the 1999 goals for competition which will be main themes in any EU policy, as it may emerge from the Review :

  • break up bottlenecks
  • open new opportunities for mobile, cable, Internet
  • attract investment into future infrastructures

and, of course, the overriding aim

  • augment consumer benefit and social well-being.


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