Type: Client Alerts
In March, Ofcom announced its decision to undertake a strategic review of the telecommunications sector, having not carried out such a review since 2005. In parallel, the EU is currently reviewing regulation within the industry.
The Ofcom review On 16 July 2015, Ofcom published a discussion document on its strategic review of digital communications and identified four main policy objectives, as follows:
- Investment and innovation, delivering widespread availability of services – providing the right incentives for private sector investment
- Sustainable competition, delivering choice, quality and affordable prices – regulation that protects both competition and incentives for efficient investment
- Empowered consumers, able to take advantage of competitive markets
- Targeted regulation where necessary, deregulation elsewhere.
The EU review The EU review, which is part of the European Commission’s Digital Single Market (DSM) strategy, will focus on the following areas:
- A consistent single market approach to spectrum policy and management
- Delivering the conditions for a true single market by tackling regulatory fragmentation to allow economies of scale for efficient network operators and service providers, alongside effective protection of consumers
- Ensuring a level playing field for market players and consistent application of the rules
- Incentivising investment in high-speed broadband networks (including a review of the Universal Service Directive)
- A more effective regulatory institutional framework.
A summary of developments on key areas under review is set out below.
Encouraging investment in networks Both Ofcom and the EU Commission recognise the need for a regulatory regime that supports investment in network technology, reflecting the economic benefits of modern widely available communications infrastructure and the increasing demands on network resources. Striking the right balance between encouraging this investment and facilitating competition through regulated wholesale access (as well as protecting consumers) is crucial and will be the cause of much debate within the industry as proposals for reform are considered.
Ofcom has invited comments on its approach to price regulation for access services. To date, Ofcom’s approach has been to allow operators to recover their efficiently incurred costs for regulated access but has given investors more latitude on the recovery of costs for high-risk investments in new technologies. Ofcom notes possible options as price regulation based on risk-adjusted rates of return, shared investment models where risks and costs are shared among downstream partners and lighter touch regulation on new investments.
The EU DSM document also recognises the challenge for regulators in achieving the right balance between wholesale access regulation to promote competition and creating the right regime to encourage network investment. It notes that investment incentives may be reduced if regulated wholesale access is made disproportionately attractive.
Regulating coverage As well as supporting commercial investment in networks, Ofcom has signalled its intent to regulate to ensure the provision of services in areas not adequately supported by commercial investment. As part of its Autumn Infrastructure Report, Ofcom will outline its proposals in respect of raising the minimum fixed broadband speed, as well as the extension of the universal service obligation applicable to BT and Kingston Communications to 5Mbit/s.
Competition at a network operator level While Ofcom does not itself make decisions on the approval of mergers in the sector, the relevant competition authorities will certainly take account of its comments. Ofcom has underlined its belief that consumers are best served, in terms of quality of services and pricing, by a market with reasonable competition. Ofcom ran the 4G auction to ensure that the market consisted of at least four mobile operators providing wholesale access to other service providers. Ofcom has not accepted the argument that less competition at a network level (Hutchison’s takeover of O2 would reduce the number of mobile operators in the UK from four to three) would encourage network investment and has cited examples where such consolidation in other countries has led to price increases. It remains to be seen whether Ofcom’s concerns about the proposed deals can be addressed.
Ofcom has raised the possibility that such consolidation may necessitate new regulation in relation to wholesale mobile access for mobile virtual network operators (MVNOs). The UK has a very competitive MVNO market, but Ofcom notes that consolidation at a network operator level may affect the commercial incentives for operators to properly support MVNOs. In the meantime, MVNOs will no doubt be reviewing the terms of their MVNO contracts (particularly in relation to quality of service, access to new technologies and pricing reviews).
Wholesale fixed access – BT Openreach Providers such as Sky and TalkTalk have been calling for the separation of BT’s Openreach wholesale arm. Although Ofcom considers that its approach to the regulation of BT over the last 10 years has delivered many benefits to consumers and businesses, it recognises the need to safeguard against any potential discrimination by Openreach against BT’s retail competitors, and to ensure the provision of a good quality of service. Ofcom has outlined four potential options for future action:
- Continue with the current approach
- Strengthen the current model of functional separation
- Consider structural separation – Ofcom notes that this would be a challenging option
- Substantial deregulation and greater reliance on end-to-end competition
Network sharing Ofcom has underlined its support of network sharing arrangements in light of the potential for cost savings and improved coverage. The EU notes different approaches by national regulators on spectrum sharing as a challenge to delivering potential benefits to sharing arrangements.
OTT communications services As over-the-top (OTT) services have grown, many have been calling for greater regulation of OTT providers. Operators argue that OTT providers are competing with them for revenue but do not bear any of the costs of operating a network. Ofcom has signalled its intent to review the case for applying a degree of regulation to OTT providers who provide competing services to operators, so as to deliver the same quality outcomes to consumers.
Net neutrality A related issue is the extent to which operators may want to explore different charging structures for bandwidth-hungry applications.
Ofcom has not passed any specific net-neutrality regulation (i.e., regulation that provides for open access to all content and services to an equal service level) and has instead focused on the need for communication providers and ISPs to be transparent about restrictions that apply to customers in accessing content or applications. Operators and ISPs have also signed up to a voluntary code of practice prohibiting blocking.
However, the EU has been seeking to regulate this area for some time. On 30 June, it announced agreement of the EU Parliament, Council and Commission to new rules that would be implemented as part of the DSM reform. The rules will prohibit any blocking, throttling, degradation or discrimination of internet traffic by internet service providers, unless required to:
- Comply with law (e.g., in relation to illegal content)
- Preserve the security and integrity of the network (e.g., to prevent misuse of a network and combat viruses)
- Minimise network congestion that is temporary or exceptional
The rules will also limit the extent to which ISPs can offer bespoke enhanced service levels to content/service providers. Enhanced service levels can only be offered where sufficient capacity would remain for general internet access. Furthermore, ISPs may not charge this enhanced service as an alternative to general internet access and such enhancement must be provided as a service in addition to the basic access service.
As ever, the operation of these new rules will depend on the drafting of the legislation. Previous attempts at drafting prescriptive rules on the circumstances when ISPs can offer enhanced service levels were widely criticised.
Deregulation Ofcom identifies a number of possible opportunities for deregulation including:
- Reduced need for regulation to deliver access-based competition where end-to-end competition can be protected or promoted
- Reduced need for regulation to deliver access-based competition arising from convergence
- Accurate focus of access-based competition on a specific bottleneck allowing for deregulation of downstream services
- Effective competition in specific geographic markets allowing for deregulation e.g., leased lines in parts of London
Even where large scale deregulation is not practical, Ofcom wants to consider the scope for removing individual regulations that are no longer required, for example simplification of the General Conditions.
Pay TV BT has recently called for the Ofcom review to cover pay TV. Ofcom has ruled this out but will consider access to content as part of its consideration of the effect that bundling has on competition. It will also consider how easy it is for consumers to switch between different pay TV and bundle providers.
Next steps Ofcom invites responses to the issues raised in the discussion document. These must be sent by 5pm on 8 October 2015 and Ofcom intends to publish emerging views at the end of 2015.
The European Commission will present its proposals for regulatory reform in early 2016.
Client Alert 2015-212