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01.07.2016.

E!Sharp |  The Digital Economy: Still regulating from the analogue era

Over the last 20 years, computing, communications, and content have come together in a process of convergence. Many think this is a coming together of equals, but it is not. The computing component wins over communications and content.

But these industries are still regulated as if they are in silos, meaning that some industries have more or less regulation than the others with which they compete. Some get to innovate while others don’t. Consumers are thus deprived of innovation from more actors in the ecosystem, as well as the competition that emerges when more actors are allowed to participate.

Investment in telecom infrastructure matters for many reasons. It creates the physical infrastructure for information and communications technology, provides a stable vehicle for savers to put their money for retirement, and it fertilizes the digital ecosystem, which has positive impacts for workers, startups, and technologies.

In 2003, the EU counted for one-third of the world’s private investment in telecommunications infrastructure; today it’s less than one-fifth. The EU had six handset manufacturers accounting for half of the world’s phones; now there are none in the Europe anymore. The EU had a continental agreement on the 3G/UMTS standard which became the global mobile standard, but 4G eclipsed 3G, and now the EU is racing to catch up with the US and Asia. There is a hope that the EU can win again with 5G, a wireless technology that is as fast as fiber, but that is unlikely as the EU faces a gap of €100 billion to realize the vision.

Much damage has been done to consumers by regulators and competition authorities under the premise of controlling prices. Europeans enjoy low mobile prices, not because of regulation, but because of technological development. WhatsApp and Skype offer free SMS and long distance. This forces operators to bundle their services; getting free voice and SMS is increasingly common with mobile internet packages.

What regulators have succeeded to do with a decade of access regulation, essentially regulated reselling of network service, is to reduce the incentive for investment. EU Regulators have deterred the rollout of fibre because of artificially low copper prices. This is a signal to the market that reselling copper access is more attractive than investing in next generation wireline technology, namely fibre to the home (FTTH). It’s no surprise that three-quarters of wireline broadband subscriptions in the EU are digital subscriber line (DSL), a broadband service over copper. Moreover the countries with new FTTH deployments are Spain, Portugal and Norway where copper prices are flexible.  

Competition authorities make it worse by deterring the mergers that operators need to get a business case to invest in networks. Mobile providers thus are required to maintain 75 percent redundancy in their operations rather than investing in new networks.

There is no better illustration of convergence that the fact that internet companies are bigger and more profitable than the telecom and cable providers that deliver them. Google, Apple, and Facebook each have over 1 billion users. The market caps of these companies are larger than most EU member nations. Netflix with 80 million customers in 190 countries is larger than any cable company in the world.

The EU should encourage the participation of all parts of the ecosystem, but instead it adds rules which make partnerships more difficult. Denmark and The Netherlands demonstrate how net neutrality policy works in practice. Both are similar countries with advanced, competitive broadband markets and high digital adoption. The Netherlands imposed a hard net neutrality law in 2012 and has seen the rate of its locally made startups decline. The country is an innovation-free zone because actors are afraid to try anything for fear of being fined. In Denmark however, where self-regulation has worked since 2011, the rate of locally produced mobile apps has not only increased, but they have been exported to other EU countries.

Unlike The Netherlands, the Danish model allows the freedom of the actors to partner in the digital ecosystem to serve consumers with the most innovative products at lowest cost. This should be the norm in the EU, but it’s not. Google and the groups it funds, a pseudo-consumer lobby called Save the Internet, are working to ensure that upstarts can’t challenge the search giant. Tell BEREC not to make the implementation rules for net neutrality any worse than they already by sending comments to the forthcoming public consultation. The EU needs all the innovation it can get from all sectors.

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