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Americas Issue: Mid-September 2005
VoIP Challenges Regulation in Europe
Through their actions or inactions, regulators will determine the business of VoIP.
by Paul de Bijl and Martin Peitz
Europe’s telecom markets were liberalized in the 1990s, but the New Regulatory Framework (NRF), which took effect in 2003, has been undergoing major overhaul. VoIP, the most important IP-based innovation since the NRF’s introduction, has posed a new set of policy questions.
The EU designed the NRF to promote competition in all markets for all electronic communications services (ECS). Providers of networks and services no longer need licenses. This is in anticipation of telecom, data and broadcasting converging on one market and calls for an approach that is technologically neutral.
A cornerstone of the NRF is the process of determining which ex ante regulation is needed to tackle competition problems, such as market dominance, in established markets. Appropriate remedies must be based on obligations formulated in the Access Directive (e.g., non-discrimination, access provision and price controls).
In established markets of traditional telephony, for instance, access regulation is often viewed as an appropriate intervention, especially in the early stages of competition, when entrants are still building their networks.
In new and emerging markets, the NRF warns against inappropriate regulation that may distort competition. Clearly, applying PSTN fixed-voice regulation to packet-switched telephony could seriously hamper innovation. At the same time, regulators try to prevent foreclosure of competitors and face a substantial challenge.
Initially, regulators must address how VoIP should be classified and whether the market for VoIP services is a separate relevant market.
Broadband Penetration
VoIP is almost always implemented over broadband lines. On average, broadband users are more valuable, since they spend more on telecom and related services. Compared to traditional voice telephony, the market for broadband is more competitive.
In some countries, incumbents serve less than half the broadband market. This includes countries such as the UK, Sweden, the Netherlands and France with a broadband penetration share above the EU average.
While incumbents offer mostly DSL lines, in a few countries they also own a cable operator and offer broadband via cable modems. Access lines offered by entrants tend to be more evenly spread between DSL and other methods. At the EU level, more consumers subscribe to entrants’ DSL service than to broadband access via other means (especially cable).
VoIP Service Types
VoIP services include PC-to-PC, PC-to-phone, and phone-to-phone. Along different dimensions one can distinguish PC client-based, voice over broadband (usually provided together with fast Internet access), and services provided over a private IP network or a next-gen network such as BT’s planned 21st Century Network.
PC-to-PC communication typically does not require interconnection with the PSTN and may therefore not be seen by policy makers as an ECS, freeing it from regulation.
A basic policy issue is whether VoIP types that require interconnection with the PSTN should be classified as an ECS and therefore have to meet few regulatory obligations, or classified as a publicly available telephone service (PATS) that must comply with the obligations laid out by the Universal Service Directive.
Such obligations include the provisioning of a minimum quality level at an affordable price to all end users, requirements related to network integrity, and access to emergency numbers and numbering. Thus, the classification of VoIP services will have a big impact on providers.
In 2004, the European Commission started a public discussion to determine how the NRF should be applied to VoIP. In 2005, the European Regulators Group issued a statement arguing that the regulatory approach to VoIP under the NRF should “enable the greatest possible level of innovation and competitive entry in the market, whilst ensuring that consumers are adequately protected.”
It considers intervention still inappropriate given the premature and unpredictable stage of market development. Nevertheless, the European Commission and national regulatory authorities are in the process of deciding whether ex ante regulation as applied to VoIP is required.
As an example, Ofcom in the UK favors heterogeneous services, some of which may offer substitutes to traditional PATS. It proposes coregulation, which is aimed at informing consumers about the characteristics of a particular VoIP service.
First, at the point of purchase, consumers should be aware of the characteristics of the VoIP service they are considering. Second, at the poin of use, users should be aware of the availability of emergency calling. Such an implementation would lead to a flexible framework while trying to avoid surprises that would occur when certain features taken for granted in the case of traditional voice services are not available.
Overall, Ofcom proposes to leave it to the consumers to decide whether they want to use VoIP services as a substitute for traditional voice services (that have to meet PATS obligations), or whether they want to use them in addition to traditional voice services (in which case providers are unlikely to satisfy PATS obligations). In short, let the market decide.
Market Definition
The definition of the relevant market of VoIP services will influence strongly the set of regulations that apply. The definition of the market will determine whether VoIP offerings by incumbent operators with significant market power will be regulated differently than those of competing suppliers.
Can incumbent operators that control fixed lines leverage market power into the market for VoIP? It remains to be assessed whether sufficient competition in the market for VoIP and in related markets such as broadband Internet access and traditional telephony services can prevent competition problems from arising (e.g., excessive pricing, predatory pricing, anti-competitive bundling).
In addition, to guarantee a level-playing field, ex ante regulation may be needed. One concern related to number portability is that some incumbent VoIP services may have an incentive not to meet the proposed emergency service requirements of PATS and choose instead to be a simple ECS to enjoy greater regulatory freedom. It would appear to be possible that the incumbent could meet requests from subscribers to this service to port their numbers, while at the same time refusing to grant requests from subscribers of other ECS VoIP providers.
Accordingly, non-discrimination clauses among ECS may be required. In line with the underlying concern is a preliminary decision on market analyses of fixed telephony by the Dutch regulator OPTA, concluding that VoIP is part of the relevant markets for fixed telephony, as they concern connections as well as traffic. This implies that KPN, a provider with significant market power, may be subject to certain obligations aimed at preventing competition problems.
Continuing Challenges
Even if the classification and market definition issues will be settled soon, a lot of thorny issues will continue to challenge policy makers and regulators.
First, the dual process of the European Commission protecting the NRF from dilution, and the national regulatory authorities trying to make the best of implementing it, is complex and open to lobbying and other forces. Managing this process and steering it into a direction that is beneficial to consumers is difficult to accomplish.
Second, taking the universal service obligations prescribed by the NRF as given, shouldn’t they be applied more flexibly and within the discretion of policy makers at the national level? It may be desirable that countries decide for themselves on the regulatory policy with respect to universal service obligations that fits them best.
In any case, the road traveled by communications providers will probably consist of many unexpected twists and roadblocks. To promote incentives for consumer welfare and to innovate, regulators must strike a balance between committing to well-specified policies that reduce uncertainty in the market but may turn out to be inefficient ex post, and opting for a more flexible system in which market participants may experience unexpected changes of regulatory policy.
Paul de Bijl is research coordinator of Tilburg Law and Economics Center and a fellow of CentER for Economic Research, both at Tilburg University, Netherlands. (pdebijl@uvt.nl)
Martin Peitz is professor of economics and quantitative methods at the School of Business Administration, International University, Germany. (Martin.Peitz@i-u.de)
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