Europe's telecommunications market ahead of the reform of the EU's regulatory framework

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1 SPEECH/07/485 Viviane Reding Member of the European Commission responsible for the Information Society and Media Europe's telecommunications market ahead of the reform of the EU's regulatory framework 13. Internationale Handelsblatt Jahrestagung "Telekommarkt Europa" Düsseldorf, 12 June 2007

2 Ladies and Gentlemen I am pleased to be able to speak to you at a time when the future development of Europe's telecommunications markets is a matter of the highest political priority in both Brussels and other European capitals. My services at the European Commission have just entered the final phase of preparation of proposals to reform the EU's telecommunications rules. The Commission will be sending these concrete legislative proposals (accompanied by a number of softer legal instruments) to the European Parliament and the Council of Ministers at the end of October. As you know from the broad stakeholder consultation last year and the public discussion this year, the reform of the EU's telecommunications rules will not be a cosmetic exercise but will give greater focus to the existing regulatory framework. The challenge is to create the appropriate framework for the period from The reform of the EU's telecommunications rules has 4 main objectives: First, to deregulate telecommunications markets as far as possible in places where effective competition has already been established. Second, to focus ex-ante regulation on markets where effective competition shows little prospect of emerging in the short to medium term, and to make such regulation speedier, more effective and more consistent across the EU. Third, to create a framework for allocation and use of radio frequencies in Europe that is more effective, market-oriented and competitive. Fourth, to address regulatory and market fragmentation in Europe's telecommunications markets by creating a "one stop shop" for crossborder issues. Strengths and weaknesses of the telecommunications market in Europe Ladies and Gentlemen, What is economically at stake with the reform of the EU's telecommunications rules? Information and Communications Technologies (ICT) are responsible for a quarter of total growth in Europe. The sector has an annual turnover of 650 billion euros, with electronic communications accounting for about 45% or 290 billion. ICT policy, and with it the EU's regulatory framework for electronic communications, is therefore a key element in the European Union's strategy for growth and employment. This policy was launched two years ago with the European Commission's i2010 initiative, which is aimed at creating a Single European Information Space a genuine single market for digital businesses and for European players so that they can compete with leading companies from other continents. The regulatory challenge for both European policy and national policies is to create an environment for electronic communications which promotes growth, investment and innovation and at the same time reinforces competition. The reform of the EU's regulatory framework due to take place is intended to make its impact felt on this environment. 2

3 What is the situation of the telecommunications market in Europe today? We are currently observing a large number of dynamic market developments, most of which were difficult to predict, with many new market players and services and a continuing fight for market shares in broadband, double-play and triple-play services. Since 1996 the cost of telecommunications services has on average fallen by about 30%. Generally speaking, the availability and affordability of telephone services has improved quite considerably. Consumers benefit from greater choice, innovative offers and cheaper products and services. The Commission's latest data from 2006 show that consumers continue to profit from falling prices for most communications services. In Germany, for example, the price index for all electronic communications services fell by 3% last year alone. Across the EU, the costs of mobile telephony services in particular are still falling fast by nearly 14% between 2005 and 2006 as a result of intense competition. The woeful exception being the costs of international roaming, which is why, at the Commission's behest, the EU institutions have now adopted legislation for this area that will enter into force on 30 June. Growth in the telecom sector as a whole is dynamic not only in the retail market but also as regards unbundled access to the local loop. Turnover in broadband services increased by about 8% in 2006 and multiple-play services are now used by almost one-fifth of EU households. The top performers in Europe, countries like the Netherlands and Denmark, are world leaders with broadband penetration of around 30%. It is no coincidence that these two countries also leaders in infrastructural competition. The existence of alternative operators is a key factor in this dynamism new providers now achieve a 50% market share in broadband services in the EU. In Germany, however, 20% of the total market share is based on resale by competitors via Deutsche Telekom's infrastructure, so this infrastructure continues to be essential for 70% of the total market volume and will therefore continue to require regulatory control. In Europe, competition for infrastructure covers only 20% of the market, yet it accounts for 60% of the market in the USA which historically started from a different position to Europe with its former state monopolies. Our regulatory framework in Europe, aimed at competition and based on the principles of competition law, is therefore vital if we wish to continue to achieve good and continually improving results in terms of investment, innovation and growth in Europe. The competition principle of the EU's regulatory framework Turning now to the regulatory framework against the background of this economic situation of the telecom market in Europe, I conclude first of all that the basic principles of the EU's regulatory framework, which was last modernised in 2002, have proven to be essentially stable. These principles include a market-oriented approach to ex-ante regulation and a framework that does not, for competition purposes, distinguish between technologies. Effective competition and incentives for innovative companies are decisive in order to promote consumer interests and technological progress. The possibility of ex-ante regulation is regarded as necessary as long as there are companies on the telecommunications markets with significant market power. Where such market power exists, a level playing field for new market entrants can essentially only be ensured by means of ex ante regulation. 3

4 Ladies and Gentlemen, I wish to ensure that also in future the principle goal of the EU's new regulatory framework will be to secure effective competition. At the same time, however, Brussels will this year cease to recommend ex-ante regulation on all those markets in which effective competition already exists or is clearly and sustainably taking root. This is because one of the guiding principles of the EU's regulatory framework is that ex ante regulation is necessary only until effective competition comes about on its own. Once effective competition exists, we shall cease to impose ex-ante regulation. When we present the reform of the EU's telecom markets this year, we shall demonstrate the how far the process of liberalising telecom markets in Europe has gone so far. My personal opinion is that the glass is half full rather than half empty. My view, therefore, is that by the end of the year we will be able to withdraw ex-ante regulation from at least 6 of the current 18 markets subject to such regulation this deregulation will above all concern the retail markets. I can also well imagine that we could go even further than this, but I also know very well that many market participants, and also the European Regulators Groups (ERG), which comprises the heads of the national regulatory authorities of all 27 Member States, regularly asks me not to proceed with too much deregulation at the present time, as otherwise the regulatory authorities will find it difficult to continue to do their job. So you see, Ladies and Gentlemen, that the opposition to deregulation does not always come from Brussels. My personal experience has been that there is quite a lot of populist talk about deregulation in the Member States, but as soon as this is on the agenda, the Member States back down. I intend nevertheless to keep to my plans despite the opposition there is and to allow a large number of the markets currently subject to ex ante regulation to be governed by general competition law. I am also doing this because I believe that deregulation will enable us swiftly to achieve more competition on the remaining markets across the EU by means of more targeted, more effective and more focused regulation. Indeed, in some sub-sectors of the market more intensive efforts are needed, especially for the wholesale broadband market and the question of access to "next generation networks". Our first, basic finding is that timely regulatory action in these is decisive. Today, competition works best in markets where the EU's regulatory framework has been implemented, market analyses have been carried out and remedial measures have been taken quickly and in a competent manner by independent national regulatory bodies. Our second finding is that companies with significant market power must not only be timely but also be effective and appropriate. If the national regulatory bodies are not sufficiently independent and do not have adequate decision-making power to order remedial action to be taken, or if the remedial action taken is not appropriate, not sufficiently well thought out or not based on a sufficiently well-founded market analysis, the result is a weakening of effective competition and a lack of coherence within the EU. If they are inefficient in this way, the national regulatory bodies not only delay competition but also impede the competitiveness of Europe's telecom companies. 4

5 The national regulatory authorities are the focal point for the implementation of EU regulations which are based on a completely decentralised concept. As a Luxembourger, I strongly believe in the principle of subsidiarity and am firmly in favour of decentralised solutions. However, the effectiveness of the regulatory authorities is crucial to how quickly and effectively competition can be created in the telecom markets. At the moment there are very marked differences between the 27 authorities in Europe, especially as far as the speed and effectiveness of their action is concerned. Delays in taking remedial action seriously damage competitive operators. If the national regulatory authorities' decisions can be systematically challenged, for example, and under domestic law these proceedings can lead to decisions being deferred and in some Member States this is unfortunately the case then regulatory action is held up. Such a legal situation results in the maintenance of the status quo which favours the incumbents. A further problem complicating the application of the EU's present legal framework is that not all the national regulatory authorities are totally independent. Our legal framework will only function if all 27 Member States have strong, impartial regulatory bodies. These should be independent not only from interference by the dominant market players but also from government pressure. They must be free to discharge their duties. They must have the proper resources they need and sufficient numbers of personnel. They must be stable as institutions. And they must be able to enforce remedial action that imposes certain behaviour on operators. Above all, the sanctions available must be designed in such a way that they act as a deterrent. The as yet non-existent single market in telecommunications On this note, I wish to come to the key point of the reform of the EU's legal framework: the European single market which is as yet non-existent from a regulatory viewpoint in blatant contradiction to the technological and economic development of the telecom sector. The increasing 'Europeanisation' of the markets can be seen not least in the increase in operators doing business transnationally and in cross-border company takeovers. During the last days, for example, I have met the directors of Telecom Italia and Telefónica and again noted the two companies' enormous interest in cross-border business. The telecom sector especially is a sector in which the European single market should enable costs to be saved and efficiency to be increased by means of economies of scale. This would be in keeping with consumers' constantly increasing interest in communications services whose availability is not limited exclusively to the territory of a particular country. It may be that this long-term trend towards cross-border business is not yet as noticeable in large Member States such as Germany as it is, for example, in my own home country of Luxembourg. But even Germany, the world's leading exporter, will surely have seen that this is not just a European trend but a worldwide, long-term development which will become considerably more significant by From 2010 on, the EU's new regulatory framework for the telecom sector must therefore provide answers to the increasing need of companies to do cross-border business and of consumers particularly business customers to have crossborder services. 5

6 This is not about one institution or another gaining further power, but about providing an appropriate regulatory response to the challenge of the Europeanisation and globalisation of markets. It is about creating balance between the need for binding decisions, on the one hand, and the need to take account of special national features, on the other, on the basis of efficient interplay between the national and European decision-making levels. In Europe today we see an extremely wide range of regulatory framework conditions in the individual national markets for electronic communications. In so far as these differences are due to different market situations, there may be nothing wrong with this. But why are similar markets so often regulated in such different ways? Why do some national regulators allow price differences of more than 120% between established operators and new market players when establishing termination rates, while regulators in other Member States do not allow such asymmetry? Why does bitstream access provision take three years longer to be made mandatory in some Member States than in others? Why does one Member State opt for "regulatory holidays" for the regulation of new broadband networks, while others are trying to separate networks and services? Different political preferences and the very different degrees of effectiveness of the regulatory authorities produce such a lack of coherence. This can lead to distortions of competition between the Member States which may be felt in particular by companies operating across borders. For these companies, this lack of coherence imposes costs due to red tape and prevents them from achieving the economies of scale in the European market which some of our world trading partners achieve. Given the commercial uncertainties associated with convergence between broadband, triple play, fixed network and mobile telephony, and expansion of the glass fibre network not to mention IPTV, VOIP, mobile television, Web2.0, and all the other network developments any additional regulatory uncertainty must be minimised as far as possible and it must be ensured that the EU's legal framework is applied uniformly and in a predictable manner in all the Member States. Do we perhaps ultimately need a new type of European facility, a "one stop shop" which works together with the Commission and the national regulatory authorities in order to ensure better coordination and more agreement on mandatory remedial measures and lower market entry barriers in the telecommunications markets? Do we actually need a "European Networks Agency"? This is one of the options we are currently examining in order to create a level playing field for European telecommunications companies. New instruments for overcoming the main network access bottlenecks In addition to ensuring the further Europeanisation of telecom rules, we must during the reform of the EU's legal framework also ask about new instruments for more effective regulation. The EU's present legal framework promotes a gradual climb up the "investment ladder", which starts with service-based competition and ends with infrastructurebased competition. The figures in the Commission's 12 th report on the implementation of the EU's legal framework for telecommunications show a high increase in turnover not only in the reselling the incumbent's network capacity but also in the fully unbundled local loop sector. This means that alternative operators are extending their networks to the main infrastructure interfaces of the established operators. 6

7 If we look at the next generation networks being set up by established operators, especially fibre optic networks, the mere installation of a new technology or new infrastructure cannot eliminate existing access obligations. The Commission is therefore opposed to "regulatory holidays" for NGNs. This is why the Commission launched Treaty infringement proceedings against Germany at the beginning of the year under 9a of the German Telecommunications Act. In view of Germany's continued refusal to adjust this new provision to the requirements of EU law, the Commission will adopt a decision this month to refer the matter to the European Court of Justice. Regulatory intervention must be reduced as soon as competition becomes effective, but not in order to suit the infrastructure investment strategies of the incumbents. Such "regulatory holidays" can (if at all) only be of any benefit in the short term, but they impede competition permanently, damage competitors and disadvantage consumers. "Functional separation", however, could become a new remedial measure under European law. Function separation, as is being tried out in the United Kingdom and now being considered in Italy too, is a model which has many variants. Functional separation would allow for non-discriminatory network access without changing the situation as regards network ownership in my view this would be a good way of combining investment security and the principle of competition. With functional separation, as with telecom regulation, you obviously must not consider all European countries to be the same. Functional separation will be out of the question in countries where effective competition for infrastructure already exists. But where effective infrastructural competition has little prospect of taking root over the medium to long term, national regulators could, in close agreement with the Commission, make use of this new remedial measure. I am also open to consider taking account of regional and local differences during market analysis. Simplification of frequency regulation I mentioned at the beginning that the simplification of frequency regulation will also be a major feature of the reform of our legal framework in the EU. The frequency spectrum is a vital resource for a large number of rapidly growing and mostly highly innovative services together already worth more than 200 billion in annual turnover in the EU. This is equivalent to 2% of gross domestic product (GDP). However, there is currently not enough available radio spectrum to meet the growth in demand. During the reform of the EU's regulatory framework, I shall be proposing changes to allow more flexible use to be made of frequency. Most of the frequency spectrum used for electronic communications should in future be treated in accordance with the principles of technology and service neutrality. If appropriate, these user rights should also be designed so as to be tradable in order to promote the market in rights to the use of frequencies across the EU. Better coordination of this critical resource at EU level would substantially improve the overall efficiency of frequency use and therefore be an effective "compressor" to produce more innovation and growth of wireless telecommunications. At the same time, this would make better and cheaper services available to consumers. 7

8 However, the fact as far as frequency management is concerned is that we face a highly fragmented regulatory situation in Europe: more than 27 national regulatory authorities today decide what a particular frequency band may or may not be used for. In most cases they also determine the technology which may be used and often numerous other details too. This is not a very satisfactory situation in a sector which forms the basis of a substantial part of the European economy. In my view, frequency management is therefore a prime candidate for "better regulation". We must urgently reduce regulation in this area to the minimum necessary. In addition, users should be free to decide for themselves what services and technologies to use. Moreover, it must be ensured that the minimum regulation necessary is implemented in a uniform and consistent manner throughout the EU. These two considerations form the basis of our proposal for improving frequency management in Europe. We have an obligation to the people of Europe to ensure that in future they continue to have available the best wireless services that can be produced. A new study carried out on behalf of the European Commission shows that decisive steps towards more effective frequency management in all EU Member States could generate up to an additional 0.1% growth in gross domestic product (GDP). A functioning internal market is the best way to strengthen companies and consumers I should like to conclude by drawing attention to a few encouraging figures which show that we are making progress in Europe as regards the Lisbon targets and are strengthening our competitive position globally. The clear economic growth of 3% which we achieved in 2006 the strongest economic expansion in six years is continuing, and it is forecast that nearly 9 million new jobs will be created across the EU as whole during the period In the field of electronic communications, the annual level of investment in the EU has already risen since 2003 to 47 billion euros in 2006, with further growth of 5% compared with The EU countries which saw the highest GDP growth in the last 10 years (Finland, Ireland, Sweden and the United Kingdom) have made greater investments in ICT and focused these investments more closely on research and technological innovation. In addition, these countries have proactively undergone innovative processes in other economic sectors, in particular the services sectors. In network-based economic systems, effective competition promotes investment and innovation. By reforming the EU's regulatory framework for the telecommunications markets, the Commission wishes to strengthen competition in electronic communications in areas where progress so far has been slow and to ensure that the EU legislation continues to be designed in such a way that the sector can adapt to market changes. Our eyes will be focused on completing the European single market for telecommunications companies and consumers. A functioning single market with more than 500 million consumers is Europe's greatest strength in the age of globalisation. This is our capital and we must exploit it to the full. 8