Is Mobile Regulation only about draining the Mobile Phone Companies
There have been three major changes of regulatory structure for the mobile phone industry over the past 30 years…a new structure every 10 years. Next year is the 10th anniversary since the 2003 Communications Act gave Ofcom a primary duty to further the interests of citizens in relation to communications matters and…where appropriate by promoting competition. It may also be the year when Parliament gets around to considering the next Communications Act. It is timely to look at the powers and duties of Ofcom to see if they are “fit for purpose” for the next 10 years.
Current State of Play
Over the past decade Ofcom have diligently focused on promoting competition. But they have not stopped there. Together with the European Commission, they have systematically been raiding the nooks and crannies of mobile phone pricing structures that appear to be shielded from the full blast of competitive market forces. Today the mobile phone companies face a three pronged attack from the Regulators. The EU are back for another bite out of roaming charges and Ofcom has just won endorsement from the Competition Appeals Tribunal for a significant reduction of UK mobile termination rates. The long term aim of the Commission is to drive EU roaming charges down to the prevailing national rates. The Commission also want to impose cuts on the wholesale charges the mobile phone companies are allowed to charge the mobile phone retailers (like Tesco and Virgin) that have no mobile networks of their own.
What Ofcom and the Commission have not focused on has been innovation and investment in the mobile phone networks? So what has been the resulting EU and UK record of network innovation over this past decade?
The roll out of 3G networks in Europe was certainly very half hearted (compared with say Japan), the fortunes of mobile TV was not helped by there being no EU wide spectrum for it, network operators have been totally blindsided by the smartphone impact on data traffic volumes and an effective EU wide efforts for the coordinated early roll out of the new LTE networks…non-existent.
Within the EU the UK has fallen from the leading edge of new network developments (the first to open 1800 MHz networks) to a country that does not even have any operational LTE networks deployed and three out of the four network operators currently do not have the necessary spectrum to viably do so. There has also been a failure to roll out 3G coverage to match GSM coverage and 3G coverage can be patchy even in semi-urban areas.
The regulatory balance sheet of the past 10 years can be summed up… fantastically low prices – pity the networks are way behind what they could have been. Network infrastructure competition has also been in decline. Ofcom has been winning many of the legal battles to sustain full network competition but losing the war under relentless economic pressures that are driving infrastructure sharing and consolidation. It has not been an issue of competition versus investment but we have been on a path of not having enough of either.
That said the state of the mobile industry today is far from a disaster. I am not painting a picture of a burning deck. Ofcom have been doing the best job within the narrow remit that they have been given. The concern is about the future. My hypothesis is that mediocre network innovation performance in the EU and UK over the past 10 years is a product of Governments giving their regulators powers and duties over only half the picture. We may have scraped by over the recent past (just) but things look set to take a turn for the worse without radical modernisation of mobile regulation. It matters as smartphones will drive an exciting and expanding future mobile digital economy.
Draining the mobile phone companies’ Profit Pool
The problem with a singular regulatory focus on achieving falling mobile service prices over the next few years is that the Regulators are not the only cause of leakage from the mobile phone companies’ profit pool. There are at least three other serious assaults on the mobile phone company profits:
- The well respected Consultants Ovum recently claimed that in 2011 the mobile phone industry had lost 9% of their potential messaging revenues to the various Smartphone Internet enabled alternatives of Facebook, Twitter, MSN, Google Chat and Skype. This loss was 60% up on the loss in 2010. There appears to be an accelerating trend that could severely dent profits.
- The mobile is no longer just a telephone and messaging platform. The top end handset is also a computer, games machine, high definition camera and a massive mobile storage…all driving up the cost of handset subsidies to attract the best customers. The $98 billion Apple have in the bank is testimony to that.
- The tsunami of data that smart phones are generating is forcing the mobile phone companies to expand the number of base stations…the single most significant driver of operational costs. . The presence of WiFi (and storage) on smartphones will limit the ability of mobile operators to secure a mobility premium to cover those costs.
All this sits against a background where the market for new customers is saturated in Europe, the mobile phone companies have largely failed to break out of their bit-pipe role in the value chain and they are facing a serious level of new investment to roll out next generation networks.
The Next 10 Years
There is a claim by some economists that competition drives innovation. That claim is fatuous unless one couples with it what the barriers are to market entry and the risk/reward balance. Apple’s $98 billion cash pile was amassed behind a legal monopoly for exploiting the various ideas and designs Apple has patented. Europe has spent the past 30 years smashing mobile network monopolies and opening up the mobile phone service market to the full blast of competition. So that particular incentive to innovate does not exist for the mobile phone companies.
Some argue that these things are best left to market forces. Best for who? There is growing competition from other parts of the world for the investment from multinational companies that currently own most of the important mobile network infrastructures in the UK and other EU Countries. In today’s global economy countries and contenents have to work much harder to attract investment flows and a regulatory framework wired to only drive an ever less attractive prospectus has something lacking. Market forces alone have never been successful in addressing large risky network infrastructure projects.
In the past (1G and GSM mobile networks) the rewards have been substantial enough to encourage the mobile companies to take the huge investment risks in next generation mobile infrastructures…but with some evidence (from what has happened to 3G networks) of diminished effectiveness in delivering both network coverage and capacity.
The question is whether investment enthusiasm on the scale needed will hold up 5 years from now…after all the concurrent drains on the mobile company profit pools have had their full impact? Ofcom will never know whether they are sucking too much money out of the industry (via cuts in roaming or termination rates), got it just about right or not gone far enough unless they have a duty to be across the entire equation – the best national mobile infrastructure delivering the lowest consumer prices (rather than just the lowest prices). What we can say with certainty is that if the UK and Europe finds that its mobile networks are anemic, chronically congested and lacking advanced features in 5 years time …both Governments and Regulators will have absolutely no tools in the regulatory locker to do anything about it. Further there is at least a 5 year lead time to acquire the necessary new tools and use them to any measurable effect…time enough to put a country or Continent into the mobile digital economy slow lane. The “fail safe” option is not the “do nothing” option
My argument is that now is the time for a regulatory modernisation for the mobile radio industry. The current half sighted regulatory structure is not good enough. The Government and/or independent Regulator needs to have the duties and powers across the entire picture…the missing pieces being innovation and investment. Only when the Regulator has the full range of challenges of securing the best networks for the lowest consumer prices and not just the lowest prices can we be assured that they really are securing the European and National interest.