Driving demand - Accelerating adoption: Regulator’s role
Daniel Rosenne, Chairman, Tadiran Telecom Communications Services, Israel
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Abstract
Telecom regulators play a key role in setting up the environment and conditions driving demand and
accelerate adoption of ICT services.
This short paper focuses on key issues and regulatory measures for fueling competitive forces by opening
networks for innovated and agile value added service providers and enforcing market conditions that will
allow them to compete.
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1. Overview
Regulators have a key role in driving demand and accelerating adoption of new services. The key role
could be spelled out in a rather simple message: free market forces. One should note that regulators
better refrain from shaping markets, and rather concentrate on the role of reducing entry barriers and free
market forces, allowing for innovation, supporting adoption, removing obstacles.
Competitive markets are essential to promote demand and increase growth. Competition is essential in
creating innovation, responding to real market needs and pushing down prices. Small and agile service
providers, hungry for business, mean new ideas, service and technology innovation, lower tariffs,
improved services, answers to local needs, language, and culture. These will strive and prosper only in a
competitive environment; only in an environment with low entry barriers; only if the dominant players’
oligopoly will not be able to block or crash the small players. Achieving this environment is essential for
driving demand and accelerating adoption of new services.
Competitive markets, obligation to non-discriminatory measures, prevention of market power abuse by
dominant players, are essential for growth in the telecom industry. How can such markets be created and
supported, taking into account the nature of the telecom market, with huge investments required to create
new broadband interactive services, considering the enormous size of the key players? Considering key
players are turning from bit-pipe providers to powerful service conglomerates?
Achieving competitive marketplace requires successful implementation of several regulatory measures,
such as: (a) cost based interconnect regime, the most important factor preventing market distortions that
act as barriers for competition; (b) open access, key enabler allowing new small and innovative players to
explore the public networks capabilities; and (c) net neutrality, a rather ambiguous term, meaning
limiting the public network providers intervention in services and applications provided by others.
2. Interconnection is key
It was Professor Eli Noam1 who coined the idea of “network of networks” back in the early 90’s, laying
the theoretical foundation for modern interconnection regimes, and stressing the importance of
interconnection on social and policy issues, free flow of content, universal service, privacy protection, and
the competitive forces. As Professor Noam stated, “The regulation of interconnection is therefore
becoming the paramount tool of government into the reasonably foreseeable future, replacing the
regulation of telecommunications retail pricing, the rate of return, or competitors’ entry. It provides
government with a tool for extensive micromanagement of markets”. All of this is still valid.
Indeed, the major role of the regulators is to establish a pro-competitive interconnect regime, based on
long run incremental costs (LRIC), with appropriate terms and conditions assuring non-discrimination
and fairness, preventing abuse of market dominance, promoting competition, avoiding discrimination and
assuring transparency.
One of the most far reaching examples of interconnection regulation is the May 2009 European
Commission recommendation2, calling for removal of current asymmetry between wireline and mobile
wireless termination rates3 and bringing down termination rates throughout Europe to considerably lower
level than today, approximately 1.5 euro cents to 3 euro cents per minute by the end of 2012. The removal
of this major market distortion (fixed providers and users subsidizing mobile providers) will surely lead to
increasing convergence between fixed and mobile networks, and will have a major positive effect on the
telecommunications market - and the intake of new services.
3. Open access is essential
Open Access, meaning that value added service providers may utilize public networks to provide services
without discrimination, is a major key issue for promoting competition. In an era of convergence and
consolidation, in which service providers are offering a wide array of value added services, with both
vertical and horizontal integration, value added service providers, usually focusing on a specific set of
services, find themselves facing formidable competitive disadvantages and severe discrimination, with
limited assistance from regulators.
Although today’s telecommunications market is clearly consolidated and concentrated, the market
structure debate, between consolidation and concentration versus pluralism and diversity, goes back many
years. Back in 2003, Pat Longstaff4 elaborated on the economic and technical forces at work in the
communication sector, pushing it in many directions at once, and observed that “Unfortunately,
policymakers in every country have generally been unable to decide if they want the communications
1
Eli M. Noam , Interconnecting the Network of Networks, Cambridge, Mass: MIT Press (2001).
2
European Commission recommendation of 7 May 2009 on the Regulatory Treatment of Fixed and Mobile
Termination Rates in the EU (2009/396/EC), available at
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:124:0067:0074:EN:PDF
3
The asymmetry between wireline and mobile wireless termination rates is very large (mobile wireless termination
rates are in general more than 10 times as high as wireline termination rates), and are the result of different practices
for mobile wireless and wireline regulation, especially regarding costing methodologies.
4
P. H. Longstaff, The Communications Toolkit: How To Build and Regulate Any Communications Business,
Cambridge, Mass: MIT Press (2002).
2
sector, and the industries and firms in it, to move towards concentration or toward diversity… In general
governments see concentration as good when larger entities create economic efficiencies of scale and
scope. Concentration will increase the industry’s competitiveness with other industries from other
countries. Concentration has been encouraged or, at least, ignored when it enables an industry to
develop a new product or service that can compete with another product or service that currently hasn’t
much competition and may be perceived as too expensive… Governments thus see diversity as good,
because it means continuation of the competitive struggle, lower prices, and the possibility of new
products and services…..In other words, although most governments embrace diversity to promote
competition, they are nevertheless willing to allow concentration if that would enable companies to
survive a competition they are in danger of losing….Paradoxically, some concentration can promote
diversity, and too much diversity will promote concentration”.
One should realize the importance of open access, especially in today’s consolidated markets, as the
small, agile, innovative and hungry for business value added service providers were in the past the main
innovators of new ideas and services. However, in the modern mobile, broadband and converged world,
they almost disappeared.
Telecom regulation models are essentially based on the key principle of equivalence. This ensures that all
players have equal opportunities to access and use public networks, and service providers having
market power in ways that can affect competition must adhere to rules assuring effective and
sustainable competition. In modern times, with bundling, convergence and a wide array of services, the
implementation of this principle is completely off track in many countries. Limiting the power of the
small players is bad news for competition, and pursuing open access creates the right balance between
concentration and diversity, and is the basic ingredient allowing the existence of value added service
providers, so important for innovation, competition, creativity, and accelerating development of new
services.
4. Net neutrality is crucial
Net neutrality refers to a network open to carry every form of information and support every kind of
application. Net neutrality deals with a central concern, the power held by access providers - wireline,
cable and wireless providers - to select, price or differentiate among information streams passing
through their networks. Enforcement of net neutrality is considered essential for achieving competition
and market development.
Although the net neutrality concept goes back to the telegraph days, it was Professor Tim Wu who
popularized the term in several important papers published in the last decade5, predicting that
“Communications regulators over the next decade will spend increasing time on conflicts between the
private interests of broadband providers and the public’s interest in a competitive innovation
environment centered on the Internet”. At the time, Professor Wu considered network neutrality as an
Internet issue, in terms of neutrality between applications, as well as neutrality between data and QoSsensitive traffic, and proposed legislation to deal with these issues.
The concept developed further in recent years, dealing with wireless net neutrality. It was again
professor Wu, in a paper published two years ago6, who pointed out practices of mobile wireless service
5
Tim Wu, Network Neutrality, Broadband Discrimination, Journal of Telecommunications and High Technology
Law, Vol. 2( 2003), 141-178, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=388863
6
Tim Wu, Wireless Carterfone, International Journal of Communication 1 (2007), 389-426, available at
http://ijoc.org/ojs/index.php/ijoc/article/viewFile/152/96
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providers in several key areas, including: (a) Limiting devices and application: exercise excessive
control over what devices may be used on public wireless networks; (b) Future crippling: force
technologies such as “walled garden” Internet access and block, cripple, modify or make difficult to use
features such as call timers, WiFi technology, Bluetooth technology, GPS services, advanced SMS
services, Internet browsers, easy photo and sound file transfer capabilities, e-mail clients and SIM card
mobility; (c) Discriminatory broadband services: broadband 3G offerings with bandwidth and
contractual limits that bar routine uses of the Internet, such as downloading music from legitimate sites
like iTunes, using VoIP, use of sited like YouTube, etc.; (d) Applications stall: imposing excessive
burdens and conditions on application entry in the wireless application market, under a “walled garden”
approach to application development.
All this discrimination and application/devices crippling, common in many countries, by both wireline
and mobile wireless service providers, is the major obstacle for development of new services, novel
applications, and innovative business models, halting service adoption, hindering market development
and blocking economic growth. Even the likelihood of such discrimination is enough to deter investment
and funding, crippling the economy.
5. Israeli experience - some examples and questions
Israel is an interesting “case in point”. A country with 7.4 million population and 1.7 million households,
with a US$ 27,200 GDP/capita, has 9.3 million mobile phones (126% penetration), 35% with broadband
wireless capabilities, on four competing networks, 3.2 million fixed lines (43% penetration), 1.7 million
broadband Internet connection and 1.5 million multichannel TV subscribers (cable and satellite), 88% of
households.
Much like the rest of the world, the Israeli telecom market has evolved dramatically since the early 1990s
as the industry was deregulated, opening segment after segment to competition. Leveling of the playing
field led to a decade of competition, innovation, rapid price declines and high adoption rates.7 Market
growth leveled off towards the mid-2000's driving carrier consolidation, competition subsided and market
reached status quo, with price levels stabilizing and adoption levels leveling off.
Today, Israel presents technology literate, competitive and vibrant telecommunications market, bustling
with various services and enjoying fairly high adoption by end users, ranking Israel on the top of many
usage charts globally.
Broadband penetration and adoption in Israel is a good example of the merits of pro-competition
measures. Recognizing the market power of the dominant access providers and the negative effect it could
have on the rather diversified Internet market, Israel was one of the few countries where “structural
separation” was chosen, rather than the more common “accounting separation”, in order to prevent crosssubsidies and noncompetitive practices in the broadband Internet access market, resulting in simple
regulation and enforcement. Since 2001, Bezeq (the incumbent wireline provider) and HOT (the cable
company) are regulated by “structural separation” rules, limiting them to provide access services only
(connecting broadband customers to Internet service providers), assuring open access and net neutrality.
7
Daniel Rosenne, Liberalization of Markets and New Regulatory Framework: The Israeli Case, MEDA conference
paper (2001), available at http://www.moc.gov.il/sip_storage/FILES/8/378.pdf
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Israel broadband Internet customers actually receive two bills - one for the access services, the other from
the Internet Service provider (ISP).8
The result of this rather strict pro-competitive regulation was rapid market adoption and growth of
broadband penetration, which grew from 2000 lines in 2001 to current 1.7 million lines. The high
adoption pace is demonstrated in figure 1.
1,800,000
1,685,000
1,579,000
1,600,000
Total
1,422,000
1,400,000
1,230,000
1,200,000
ADSL
990,000
1,000,000
963,000
800,000
1,005,000
892,000
650,000
600,000
800,000
680,000
650,000
Cable
Modem
616,000
530,000
400,000
430,000
207,000
2,000
430,000
340,000
200,000
220,000
38,000
150,000
0
57,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
Figure 1: Broadband Internet growth in Israel
Source: companies’ reports
Consistent with the need to promote new services and innovation, the expansion of the structural
separation regulatory measures to new areas was avoided. Israel has adopted a “hands-off” regulation
policy in many areas, as evident in the mobile wireless services, were service providers enjoy rather high
degree of freedom in providing new services, setting tariffs, etc., however, compared to the high adoption
rate of fixed broadband Internet, the slow growth of non-voice revenues over mobile wireless networks is
rather astonishing - in a fairly wealthy technology savvy country, with high rates of wireless penetration,
one of the first countries to introduce commercial 3G services (in 2003), the adoption rate of wireless data
services is fairly low in comparison to other countries, as demonstrated in figure 2, showing that although
Israel is high on the charts showing wireless penetration and ARPU, it is rather low on the parameter of
non-voice revenues as a percent of total revenue.
How do we explain this paradox? What went wrong? Could it be that the common discriminatory
practices, mainly limitation of open access and abusing net neutrality, by consent of the Israeli regulator,
delay adoption of new services? Is it possible that the high level of consolidation and the absence of
innovative value added service providers have a negative impact on the rate of adoption of data services?
If strict open access and net neutrality rules will be adopted and enforced, will we see a positive change in
adoption rate of these services?
8
It should be noted that Bezeq and HOT subsidiaries may become Internet Service providers (ISP). The structural
separation rules require that the there will be no discrimination in service and tariffs between service provided to
these subsidiaries and other ISP’s.
5
One should also ask a different question - in the case of the broadband Internet, if instead of the drastic
structural separation, a more subtle solution would have been adopted, such as true implementation of
open access and net neutrality, could better adoption rates be achieved? After all, the structural separation
prevented the access providers from exploiting the benefits of convergence, bundling, economies of scope
and scale.
Non voice revenues [%]
Wireless penetration [%]
ARPU [US$]
Figure 2: Non-voice wireless revenues, penetration and ARPU in Israel - worldwide comparison
Source: Bank of America Securities Merrill Lynch Global Wireless Matrix 2Q09
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6. Summary and conclusions
Healthy and innovative competition can develop even in countries where monopoly providers control the
access networks, providing telecomm regulators actively seek appropriate regulatory measures to assure
competition in services and applications.
Competition is essential for high adoption rate for new services. Only competition can reduces prices and
create market innovation and agility, necessary to drive demand and accelerate adoption of
telecommunications services, compelling adoption to local culture and market needs.
Regulators have an important and critical role in driving demand and ensuring adoption of new services,
mainly - create competitive environment, assure level playing field to all service providers, large and
small, promote investments, deter discrimination, free market forces..
This short paper presents key ideas for the appropriate regulatory measures, including: (a) cost based
interconnect regime; (b) open access; and (c) net neutrality, and present some examples demonstrating
the effects of these measures.
The Israeli experience demonstrates the positive and negative effects of the regulatory measures on the
adoption rate of new services. However, it should be emphasized that the rather drastic measure of
structural separation, proven effective in the Israeli broadband case, is definitely effective and simple way
to implement open access and net neutrality, but is a barrier to convergence, and such measures should be
implemented only in extreme situations, when less drastic measures will not provide reasonable result.
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Biography
Daniel Rosenne
Chairman, Tadiran Telecom Communications Services, Israel
Daniel Rosenne is Chairman and board member of several Israeli High-Tech companies, and provides consultancy services to
governments, telecommunication operators, manufacturers and investors’ community, in various telecommunications strategy,
regulation, management, business, operations, technology and engineering issues.
Mr. Rosenne served as Director General of the Ministry of Communication from 1997 to 2001, responsible for all aspects of
telecommunication regulation, achieving major enhancement of competition and growth in the Israeli telecommunications
services sector, accomplishing key amendments to Israeli Telecommunications Law and introducing spectrum auctions.
Before joining the Ministry of Communications he founded and was President and CEO of Bezeq International, Israel’s
incumbent international service provider. His previous experience includes positions as Corporate Vice President for Technology
and Business Development at Tadiran Telecommunications Ltd. and Vice President for Engineering and Planning at Bezeq, the
Israel Telecommunication Corporation Ltd. He served for 25 years in the Israel Defense Forces, retiring with the rank of Colonel.
Mr. Rosenne holds a B.Sc. degree in electrical engineering from the Technion - Israel Institute of Technology, Haifa, Israel
(1969) and an MA degree in business administration from the Hebrew University of Jerusalem, Israel (1984).
Contact information: Office +972 77 523 1004 rosenne@atglobal.com
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