Europe’s people and economy deserve the fast lane!

A New Regulatory Paradigm for the Digital Industry in Europe

Current situation: White smoke rose over Brussels, as it were, when on 6 June 2018 negotiations over the new telecoms regulatory framework, EECC, were completed. Despite the massive changes in the digital sector over the last decade, the last time the EU made significant changes to the sector’s regulation was in 2009. Not surprisingly, in various press releases, representatives of the European Parliament and the Commission expressed their satisfaction and pride at the task accomplished in recent years. Industry and investor circles, on the other hand, initially responded to the outcome of the negotiations with scepticism or even disappointment, expressing serious doubts as to whether the package would fulfil the original, good intentions of the European Commission in the end — that is, after being implemented in national law by each of the Members States within the next 24 months. One of the objectives, clearly, was to substantially improve connectivity within the EU, in order to allow broad participation of its citizens and to move forward digitalisation of the economy. The primary aim here was to increase public welfare by utilising the socio-economic effects generated through digitalisation. Correspondingly, within the EU and beyond, public policies for awarding spectrum were to be harmonised and improved in order to avoid an unsatisfactory situation similar to that arising through the fragmented award of 4G spectrum by individual EU Member States. We recall in this context a public comment by European Commission DG CONNECT Director-General Roberto Viola, made at an event in late 2016, where he stated that 4G licensing in Europa had been a disaster. In addition, it was the European Commission’s explicit objective to create stronger incentives for investing in new, fibre-based infrastructure, in a bid to resolve the investment bottleneck that had built up around Europe’s digital infrastructure.[1] At the same time, however, the regulatory focus was to remain on encouraging competition, and any conflict of objectives between investment incentives and competition was to be avoided. So much for the fully justified intentions and the general expectations aroused as a result.

Voices from observers and consultants: As Europe doesn’t release a new regulatory framework every year, many industry observers, analysts and consultants are raising their voices to comment on the coherence and effectiveness of the new framework. Among these responses, I found Richard Feasey’s Carrot Soup an inspiring read (the title makes reference to the ‘carrot and stick’ approach in the EECC).[2]

The EECC in brief: When a critical view is taken of the progress and final outcome of the negotiations, the impression is in fact sobering for the most part. There is cause for concern that, once put into practice by regulators, the outcome achieved will fall far short of the original — justified and important — objectives of the EECC. Stated briefly, this assessment applies to four elements:

• With regard to spectrum policy, the European Commission presented sound proposals for an encompassing reform of spectrum award policies, taking into account licensing methods, the periods of use as well as the overall schedule for awarding spectrum in the Member States. Yet the legislative process has diluted these proposals to the point of inefficacy, so that no fundamental improvements are to be expected at this point. Minor progress has been achieved only in relation to the licensing term, set at 20 years or 15 years plus a five-year renewal option. With sovereignty over spectrum continuing to be seated primarily at national level and spectrum policy consequently remaining completely fragmented, the stated aim of making Europe a global pioneer in the introduction of 5G appears unrealistic.[3]
• The SMP regime has proven itself in the past and is well established, and today serves as the starting point and determinant for any regulatory measure; softening this regime has resulted in a completely watered-down mixture of elements that are contradictory in part, consisting of SMP regulation, joint dominance approaches and symmetric regulation. Briglauer W. et al. criticising that “symmetric regulation expands the current (SMP-based) regulation to a larger number of operators and infrastructure elements without the need to conduct extensive market definition and SMP analyses”.[4]
• The co-investment model had aroused hopes among its supporters that investment incentives would massively increase; this model has now degenerated into a highly complex ‘micro-managed’ system, involving so many detailed rules, sub-categories and exceptions (i.e. red tape) that it is strongly doubtful whether the system will ever actually trigger any significant incentive for additional investments.[5] We need to remember that the international investor community has for the last 15 years rated the European telecoms sector as unattractive, causing a European investment gap that has widened to as much as 150 billion euros[6] over the years. Briglauer and Vogelsang raised concerns in a similar vein and requested adjustments in the EECC towards a lower regulatory component for co-investment.[7]
• Besides the above, there remains a lack of clarity surrounding the rules for state aid and the future structure of universal service.

The essential concern is whether the future system of regulation will ever function at a practical level, as it will be based on the parallelogram of forces hinging on SMP regulation, symmetric regulation, universal service and state aid — without clear distinctions between these base points and without any clear definition of the interdependencies amongst them. A clear definition of the base points of this parallelogram would provide the foundation, as it were, for the regulatory framework. To stay with this image, the parties in negotiation over the EECC appear to have planned the framework in great detail while failing to lay a solid foundation.

EECC: a missed opportunity? Viewed in this way, the EECC as it is taking shape is likely to emerge as a ‘missed opportunity’ for Europe, threatening to fall far short of its original objectives. This will most likely lead market participants to adopt a ‘wait-and-see’ attitude, as many stakeholders speculate that shifts in this parallelogram of forces, for example through increasing state aid or other components, or as a result of the particular interpretation of the rules by the NRA concerned, could result in more favourable investment conditions for them. In view of this situation, it is perfectly valid to ask how we will respond to this wait-and-see attitude among market participants and investors. In a blog post published a week before the negotiations were completed, I advocated going back to square one of the whole process, starting instead with a clean slate and putting in place a clear, flexible and highly simplified regulatory framework.[8] Although such an approach — admittedly a drastic move — plainly has no chance of implementation in the realm of realpolitik, there is something to be gained from reconsidering matters at this point.

It won’t be that bad. Or will it? In the meantime, some are playing down the issues, arguing along the lines of ‘things are never as bad as they seem’. Some observers point out that the regulators’ most important and proven tools — market analysis and SMP regulation — will probably continue functioning as we know them to in the next few years, as it will take some time before the EECC is implemented in all Member States and is felt in the real world of markets. Others wish to remind us that ‘in a few years a lot is going to happen in this industry, and nobody really knows what will be important then’. However, the thing that could really affect the regulatory situation once the EECC is implemented in the Member States would be the impact unleashed by an initiative in certain EU countries to introduce symmetric regulation based on joint dominance assessment — despite the dubiousness inherent in the method — thereby changing the face of the market. During the trialogue negotiations, several Member States strongly advocated enrichments of the ‘regulatory toolbox’ through the addition of new methods such as joint dominance assessment and symmetric regulation.[9] These regulatory tools are to be made available as a sort of measure of last resort, equipping NRAs with an effective means of proceeding against suspected cases of ‘tight oligopolies’. To nonetheless see something positive in this regulatory measure, you could refer, somewhat euphemistically, to what in the end amounts to the fact that no requirement for cost-based access to cable networks has been specified in the EECC;[10] it is, however, more than doubtful whether this will ultimately mean a real boon for the investment climate. This conclusion is all the more likely when it is considered to what degree NRAs vary in how they view issues and to what extent they are inclined to make use of such regulatory tools. This makes for a ‘regulatory toolbox’ that is full to the brim, which entails an excessively large margin of discretion for NRAs; it can consequently be expected that the EU, instead of converging towards a Digital Single Market (DSM), will instead drift apart to become what is, in effect, a completely fragmented arrangement of individual national markets.[11] While this may chime with the political mainstream buzzword of ‘subsidiarity’ in the EU’s current debate on fundamental principles, it is clearly a move away from creating a DSM.

Progressive vs. conservative regulators: The pitfall in this development arises from the fact that it will more than ever depend on each of the NRAs as to whether a climate favourable to investment prevails in their jurisdictions or whether the opposite is the case, that is, they simply maintain the status quo. Progressive NRAs will realise the potential good that can be achieved for the market and investments by observing a regulatory ‘hands-off’ policy to some degree under ex-post supervision, and they will have the courage to experiment. Conservative NRAs will be tempted to stick to ‘tried and tested’ formulas based on principles going back to the time when markets were liberalised and will interpret the rules more restrictively. This overall picture in Europe will not be favourable to creating conditions for driving additional investments on a large scale in Europe.

Can co-investment provide an investment boost? Great expectations have arisen around the principle of co-investment, which it is hoped will trigger a quantum leap in additional investments. However, in view of the highly complex rules defined for co-investment, both investors and co-investors will be exposed to several massive uncertainties:

• the need for projects to be approved by the NRA as a prerequisite for regulatory forbearance;
• the rights of access-seekers not involved in co-investment projects and the impact of such rights on those projects;
• the practical implications of the ‘double-lock’ safety mechanism involving the European Commission and BEREC[12] and the rulings to be expected from the two institutions based on their varying interests.

When taken in their entirety, it is obvious that these factors do not help improve investment certainty, so that it appears doubtful whether this model will result in any significant increase in willingness to invest.

The 5G challenge: There is a global race underway to deploy 5G networks and services that promise to fuel an exponential increase in digital opportunities and possibilities – the next Industrial Revolution. Until now, the introduction of a new generation of mobile technology came with improved features for connecting people faster and virtually everywhere: from voice telephony (with 2G) to first-generation data capabilities and broadband communication with enhanced speed and capacity (with 3G and 4G). 5G will be different, however. It is about connecting everything – people with people, people with ‘things’ (physical goods) and things with things. And these connections will enable communication at unprecedented speed and transmission capacities and without perceivable delay (‘latency’). These features are the ingredients for ‘the Internet of Things’ (IoT), Industry 4.0, autonomous driving and remote health applications, including remote surgery.

The ability to swiftly and effectively transform a traditional economy into a digital economy has become the key driver for a country’s global competitiveness. This is the reason why governments all over the world have begun to recognize the importance of 5G, some of them faster, others slower. That is why the 5G race is crucial for a country’s future and prosperity. As in every race, the relative speed among the contenders marks the line separating leaders from laggards. This is a wake-up call for governments to get as much  of the right spectrum as possible out there as rapidly as possible, at favorable terms! Imagine that in a 5G ecosystem the number of devices (including handsets) to connect everything with everything and everybody will increase tenfold, and the number of base stations will multiply by ten as well. Average revenue per user (ARPU) will at the same time increase only little – if at all. New infrastructure owners such as municipalities and utilities are coming into play, which makes the ecosystem even more challenging. This unprecedented complexity makes it doubtful whether traditional methods, including certain kinds of auctions, are still appropriate and efficient tools for awarding spectrum.

Reminder from the past: After the unsuccessful attempt in 2012 to update the legal framework by adopting the TSM,[13] the European Commission again proceeded to present a variety of models for modernising the legal framework, and finally proposed the EECC in 2016 as draft legislation for a complete reform. Now, after lengthy negotiations with all 28 Member States under six-month council presidencies, each with its own differing priorities, and under massive pressure by lobbyists from various quarters, only a modest outcome has been achieved. That is not the fault of the European Commission but is mostly due to the extremely complex legislative process practised in the EU.[14] In any case, this sobering insight should give cause for thought and for rethinking our approach.

Rethinking regulation: At this point, therefore, it is worth stopping for a moment and considering the options for responding to the threat of a wait-and-see attitude in the market and the resulting paralysis in market development. In the worst case, a situation could arise in which Europe consistently fails to produce a convincing investment story and does not manage to close the investment gap (or does so only partially), while its ambitious connectivity goals are met, if at all, by only some of the Member States, with competition suffering in the meanwhile: a truly disastrous outcome. Such a scenario would be further aggravated by the fact that the situation would have to remain in place for years, because it had already just been changed — albeit inappropriately!

The digital sector progresses at the speed predicted by Moore’s Law,[15] generating up to now a constant flood of innovations and applications that in many cases are disruptive. This fact would seem to make it obvious that a legal framework based on the previous regulatory regime and the EECC can nowadays no longer contribute anything substantial towards developing infrastructure, encouraging additional investments or digitalisation. It is becoming increasingly clear that there is a widening gap between regulation and the speed with which the sector is evolving. In Europe this is aggravated by the fact that NRAs are drifting apart in their regulatory practices and that BEREC, as it is currently structured,[16] is apparently not able to control these centrifugal tendencies. What would be the alternatives to the existing, ex ante form of regulation, which is intricate, highly prescriptive and based on the principle of ‘more of the same’? To contribute to the discussion on rethinking regulation, here are a few practical proposals which might be worthwhile considering when implementing the Code (EECC) in national legislation:

• Like any other system practised for decades, the ex-ante regulatory system, along with its stakeholders, has long since taken on a life of its own, even to some extent being constantly on the lookout for suspected ‘competition issues’ and thus new matters requiring regulation. This process leads, as a side-effect as it were, to the ex-ante regulatory system becoming set in stone. It would be worth considering which serious and sustained competition issues require ex ante regulation today. It would also be very helpful to give thought to new responsibilities for regulatory authorities.[17]
• ‘Regulatory sandboxes’ — encourage more experimentation and consistent deregulation of new fibre-based infrastructures funded completely through contributions from private investors.
• A model of co-investment ‘reloaded’: Joint investments in FTTH and access to such infrastructure could be released from regulation and made subject to agreements under private law and to ex-post supervision. This would quickly reveal how willing market participants and investors really are to make investments, while regulatory authorities or anti-trust authorities could step in and stop any abusive conduct.
• Learn lessons from the countries leading in fibre rollout in Europe and elsewhere.
• Unleash the full potential of utilising existing passive infrastructure (such as cable ducts, poles and fibre) from energy utilities and support cooperation models between telecom operators and energy utilities. The wide-spread availability of backhaul capacity from energy utilities can also serve as an accelerator for a faster and more efficient 5G rollout. Open Fiber (OF) in Italy is a perfect example of such a cooperation which has the potential to leapfrog the fibre laggard Italy in the European top tier.[18]
• Wholesale obligation in cases where public funds play a role in network rollouts shall be based on commercial terms under ex-post competition oversight.
• The increased complexity of a 5G ecosystem calls for a new approach to awarding spectrum. While such an approach may in certain jurisdictions come too late for awarding spectrum in the 3500 MHz band, this option should nonetheless be seriously considered for awarding additional bands, like mm-wave spectrum at a later point in time.
• With regard to the regulation of certain OTT services,[19] the existing regulatory framework already provides for options that, through exercising restraint and pragmatism, would allow a level playing field to be set up for those services that are considered as real substitutes for traditional services. In the event that a detailed evaluation of the situation revealed actual substitution, appropriate regulation of some such services could be quickly and pragmatically introduced even now.
• Finally, if the decision-makers in the EU are not set on abandoning the plan to create a Digital Single Market (DSM), there will be no way around expanding the scope of the European Commission’s executive powers and developing BEREC to become a European regulatory authority. The alternative would be for Europe to prolong its state of national particularism and effectively give up all claims to leadership in the digital world.

To avoid the paralysis that threatens to bring ‘digital Europe’ to a halt, it would be worthwhile to give full consideration to proposals such as the ones outlined above.

Dr. Georg Serentschy

Managing Partner

Serentschy Advisory Services GmbH

Acknowledgments: The author is grateful for helpful contributions from regulatory insiders and insightful discussions with prominent individuals from the regulatory and public policy communities.

[1] In COM(2018) 98 final of 14 February 2018, the European Commission expressly pointed out the need to close the investment gap (see p. 9).

[2] I particularly like this quote from the article: “Carrot Soup is an odd title, but it is intended to reflect the tendency of European Commission proposals to lose some of their coherence during the legislative process, leaving us with a murky ‘soup’ from which we need to extract the best morsels”. https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnxmZWFzZXl3YWxlc3xneDoyZDUxNGI1MjBlZmUwZjA0

[3] Recently, a prominent non-European industry representative commented to me, perhaps with some exaggeration, that Europe’s ambitions to take over 5G leadership were completely unrealistic, claiming instead that, as far as 5G supremacy is concerned, Europe was currently engaged in competition with the US and several Asian countries in a ‘race to the bottom’.

[4] The European Electronic Communications Code: A critical appraisal with a focus on incentivizing investment in next generation broadband networks, Telecommunications Policy (2017), http://dx.doi.org/10.1016/j.telpol.2017.07.011

[5] What is actually referred to here are additional investments beyond the minimum investments which, having always been made in the past, will continue to be required.

[6] Estimates vary depending on the source but are between 106 and 150 billion euros. In the study entitled Five Priorities for achieving Europe’s Digital Single Market (October 2016), BCG arrives at the figure of 106 billion euros. https://etno.eu/datas/publications/studies/FINAL_BCG-Five-Priorities-Europes-Digital-Single-Market-Oct-2015.pdf

[7] DigiWorld Economic Journal, No 106, 2^nd Q. 2017, p. 143.

[8] http://www.serentschy.com/uropean-electronic-communications-code-eecc-back-to-square-one-contribution-to-the-discussion/

[9] After DG COMP had indicated no willingness to relax the joint dominance threshold, Dutch NRA ACM apparently made use of the option of a ‘eased burden of proof’ under the new SMP guidelines to identify joint dominance, as presented at the WIK SMP workshop on 27 March 2018. ACM is expected to notify the market analysis for M3a/M3b in late 2018.

[10] The wording of the EECC in this context is “fair and reasonable terms”.

[11] To respond to this risk, the ‘double-lock system’ was introduced to Art. 59 for the case referred to here (and to Art. 74 for co-investment). This means that application of such a regulatory measure by an NRA can only be blocked joi2ntly by the European Commission and BEREC. Yet this does not really improve matters, as these two institutions pursue differing sets of interests. Rather, this example strikingly demonstrates the extent to which the EECC has become entangled in regulatory ‘micro-management’ — in this matter as well.

[12] ‘Double-lock system’ means that the European Commission and BEREC can jointly override the NRA’s approval for a specific co-investment project. Yet this does not really improve matters, as these two institutions pursue differing sets of interests. Rather, this example strikingly demonstrates the extent to which the EECC has become entangled in regulatory ‘micro-management’ — in this matter as well.

[13] The European Commission’s Telecoms Single Market (TSM) Regulation originated from seven separate initiatives aimed at modernising the entire legal framework for regulating electronic communications. Of those seven initiatives, only two became law, namely the Net Neutrality Regulation and the Roaming Regulation.

[14] It should also be mentioned here that the frequently bemoaned slow pace of the EU’s legislative process is largely due to the principle of democratic participation as practised in this process. It would be worthwhile, in any case, to give thought to ways of streamlining and accelerating the legislative process while maintaining democratic participation, or to consider whether a flexible framework, controlled by principles and involving ex-post supervision, might be more appropriate for the digital sector.

[15] Moore’s Law — actually not a law but an empirical observation — states that the storage capacity and processing speed available in integrated circuits double every 18 to 24 months.

[16] We should remember here that the European Commission’s original proposal for the EECC also included further developing BEREC towards becoming a European agency. The majority of Member States opposed this plan vehemently, while BEREC insisted, like a mantra, that it was ‘rooted in the independent NRAs’. BEREC thus took itself out of the game, so that now there is no possibility of overcoming the centrifugal tendencies mentioned above that inhibit a Digital Single Market.

[17] It could be very worthwhile to utilise the expertise gathered by NRAs and to diversify their activities by adding new responsibilities, related for example to digitalisation, or to monitoring internet access quality and ensuring high ‘quality of experience’ for the user.

[18] Open Fiber (OF) recently granted a 3.5 billion euro project financing for its Italian fiber optic network: https://www.reuters.com/article/us-italy-open-fiber-financing/open-fiber-granted-3-5-billion-euro-project-financing-for-italian-fiber-optic-network-idUSKBN1KO229

[19] A relevant legal precedent in this context is the dispute between Google and the German Federal Network Agency (BNetzA), after the BNetzA had classified Google Mail as an electronic communications service (ECS). The case is currently before the ECJ pending a ruling. This is a noteworthy case from the perspective of the EECC: if the BNetzA does win the dispute before the ECJ, it could actually turn out to be a pyrrhic victory, since Google Mail is an OTT-1 service (according to the BEREC definition in BoR (16) 35), while under Art. 20 of the EECC such services, as ‘number-independent interpersonal services’, are not subject to registration but only to reporting requirements. In other words, OTT-1 services, while generally falling under the EECC, have to meet fewer obligations. Correspondingly, we can expect some NRAs to require the ‘big’ OTTs (‘the usual suspects’) to submit a security plan, yet, with no registration required, not all OTTs will be effectively enrolled, so that this provision, lacking consistent enforcement, will remain largely a cosmetic measure.