Regulation and digital transformation: 10 key points for regulators to consider

Friday 2 February 2018

Traditional telecom regulation will not be able to adequately respond to many of the challenges associated with digital transformation. Here are 10 key points for regulators to consider in thinking about how to deal with those challenges.

 
 
 
A Series of Articles on Some Key Concerns for Middle East Telecom Regulators

Regulation and digital transformation: 10 key points for regulators to consider

By Michael Hennessy

In previous articles prepared for our upcoming workshop ‘Best Regional Practices for Middle East Regulators', we looked at issues related to the residual market power held by some telecom operators, the emergence and impact of competition from over-the-top Internet-based (OTT) providers, and the need for more resources to address privacy and security that are presented by digital transformation. It seems clear that traditional approaches to telecommunications regulation will not be able to adequately respond to many of the challenges associated with these changes, including the achievement of national information communications and technology (ICT) goals, and the global and often unregulated competition provided through transnational corporations of unprecedented scale and scope.

In the United States, the Federal Communications Commission (FCC) has begun a process aimed at unleashing investment and innovation across ICT. The FCC is taking the approach of decreasing regulation of telecom operators rather than increasing regulation of digital providers. Conversely in the EU, more aggressive regulatory approaches are being taken to address transnational competition: strong mergers and acquisition enforcement that consider dominance in key digital markets (data, online advertising) and very aggressive interventions like the General Data Protection Regulation (GDPR) which are intended to protect consumer privacy and security.

Trade may become a major factor in influencing future regulatory strategies. The world's largest digital providers are either American or Chinese [1] and the impact of these transnational entities on the economies of other countries will increasingly influence how different countries regulate or deregulate in telecommunications. From a trade perspective, there is much at stake for other countries in creating the right models to limit the negative impacts of disruption on their pursuit of domestic ICT agendas. 

Balance of trade in digital services may explain, in part, the emergence of very different approaches to digital trade and regulation. On the one hand, you have the United States [2] which favors less regulation of operators, and on the other hand, you have  countries such as Indonesia which has introduced draft regulations to impose detailed domestic regulation of OTTs [3]. Regardless of the nationality of the digital competition, new approaches to domestic regulation and policy will be required in order to address broader issues of dominance, privacy and security due to the emergence of digital transformation of global scale.

 

Many of the basic principles of regulation such as the promotion of competition will still anchor policy. However, increased in competition from global providers like Amazon, Tencent, Facebook or Google, may still not justify full deregulation of national operators if these operators exercise SMP in some lines of business. For instance, in the Middle East and other regions, there is still evidence in some countries of SMP; particularly as it applies to incumbent operators. The main area in telecom where SMP remains a concern is in the area of access, due to its bottleneck characteristics. To date there is little evidence that global OTT providers are competing at the access level. Therefore, regulation may still be required to protect consumers from being over-charged or underserved and to equally ensure that such SMP is not being exercised in an anti-competitive way that unduly limits choice and hampers investment and innovation.

 

Conversely, where digital or OTT providers have the ability to compete in  downstream retail markets, there would seem to be little reason to regulate operators, particularly on an ex ante or tariffed basis. As long as digital providers are not blocked or impeded from competing in downstream markets, why dedicate resources to continuing to regulate operators in those lines of business? Continued regulation in such circumstances may only limit opportunities for national operators to innovate as well as  reducing the effectiveness of national broadband investment and the ICT strategies that rest on a broadband platform.

 

An open internet approach increases competition from OTT players and can accelerate forbearance from some types of regulation for telecom operators. At the same time,  the need for a more level playing field between OTTs and operators, particularly with respect to local laws, taxation, dominance, privacy and security, is likely to result in increased legal and regulatory obligations for previously unregulated OTTs [4] at a national or regional level.  A justification for requiring global competitors to operate under the laws and regulations of national/regional jurisdictions is laid out in a Wired UK video interview with EU Competition Commissioner Margrethe Vestager [5]. The interviewcovers a number of emerging issues for domestic authorities addressing taxation, dominance and trade issues around tech giants.

A more level playing field does not mean that OTTs must  be regulated with respect to rates or economic terms and conditions simply because traditional operators with SMP may still be regulated. The preferred solution should be to forbear from economic regulation of operators wherever it can be demonstrated that operators cannot abuse SMP in retail markets. Such increased forbearance may promote competition and innovation, both of which are critical for achieving the benefits of an ICT strategy.

Digital competitors are clearly seen as more innovative than regulated entities.  However, the massive scale and scope of these unregulated competitors may also pose a threat to local economies due to market power arising from control of critical elements underlying a digital economy.  Today, global OTTs have achieved much huge levels of scale and scope and market power when it comes to social media, advertising, and control of data. Thus, it is not unreasonable that local jurisdictions should address the potential for abuse of SMP by digital providers, (such as Google being fined in the EU for abuse of dominance in search), in the same way that it is not unreasonable to require such digital entities to contribute to the local economy (ie. taxation) as any local business must contribute. Moreover, if privacy and security are critical issues that require regulation to protect consumers and critical infrastructure, it makes no sense to focus only on local operators when unregulated digital providers and equipment vendors may be contributing to growing vulnerabilities in infrastructure and equipment (ie the IoT).

The digital transformation is real and there is a common view that more investment in ICT, including in advanced broadband, is a prerequisite for nations pursuing economic and social growth. National ICT agendas extend well beyond traditional telecommunications policies to include matters of foreign investment, skills, development, taxation and subsidies. However, an efficient telecommunications policy regime can support ICT objectives by promoting elements such as competition, choice and innovation.

Various jurisdictions are struggling with many of the challenges around the digital transformation. In thinking about how to deal with those challenges, here are 10 key points worth considering for telecom or converged regulators:

1.   There is no commonly held view amongst countries on how to manage digital trade, and absent multi-lateral agreements through bodies like the WTO or GATS, there is a risk that interventions to regulate digital providers will become battlegrounds in digital trade wars. [6]

2.   Governments should consider revising the legal powers of telecom regulators to include authority over the internet networks since, from an infrastructure perspective, telecom and internet networks are increasingly indistinguishable.

3.   Regulators must have a legal requirement to forbear from economic regulation wherever competition is deemed sufficient to protect the interests of users. Innovation is a critical element of any successful ICT strategy and where competition already exists, unnecessary regulation is likely to limit innovation.

4.   Where operators still have SMP, regulators are justified in applying timely ex ante remedies to address threats to competition and must have the authority to impose sufficient fines to effectively curb anti-competitive behavior. As competition increases, forbearance should be considered, although ex post requirements to punish cases of undue preference or discrimination may still be necessary.

5.   While matters of taxation are usually beyond the authority of the regulator, the government should give regulators the authority to impose license fees on any providers of telecom services including OTTs and resellers or MVNOs, particularly to help fund enhanced regulatory activities.

6.   Regulators or other defined agencies dealing with privacy and security of data must have the authority to levy sufficient fines and/or penalties on businesses to enforce compliance with measures to protect consumers and business users from unauthorized use of personal/private data and from data breaches. [7]

7.   Telecom regulators should have a primary or at least a supporting role to play with respect to security around telecom /internet infrastructure and the IoT, including powers to require standards and protocols for devices/sensors attached to the networks. Additionally, governments should consider whether vendors should pay a certification fee to cover the costs of monitoring compliance to such standards and protocols.

8.   Regulators or competition authorities should revise market definitions for substitution to ensure that vertical and/or horizontal mergers in telecommunications take into account substantially increased competition from transnational digital competitors.  In the case of takeovers by digital giants that may lessen competition in domestic or regional markets, the impact of global scale and scope in areas like social media, data and advertising should be examined.

9.   Regardless of whether net neutrality is left to the market or regulation is imposed, either regulators, competition or consumer authorities must have power to adequately punish behaviors that are unduly preferential and that block or otherwise hinder an open internet and prevent users from accessing the legal applications or content of their choice.

10. In order to allow local broadcasters, creators, producers and distributors to benefit from video streaming, regulators should ensure there are enforceable mechanisms adopted, such as website blocking, to prevent content piracy. [8]


1. 7 of the top 10 publicly traded corporation in the world by market cap in early 2017 were ICT giants from the US or China (slide 324) with market caps above $300 billions https://www.recode.net/2017/5/31/15693686/mary-meeker-kleiner-perkins-kpcb-slides-internet-trends-code-2017
2. The GSMA issued a comprehensive proposal for reduced regulation aimed a promoting innovation across ICT that reflects current FCC thinking https://www.gsma.com/publicpolicy/wp-content/uploads/2016/09/GSMA2016_Report_NewRegulatoryFrameworkForTheDigitalEcosystem_English.pdf
3. Indonesia has proposed a very detailed, traditional style of regulatory licensing and obligations to ensure compliance of digital competitors to local rules https://www.aicasia.org/wp-content/uploads/2017/10/2017-OTT-Matrix-with-USABC.pdf
4. European Commission fines Google €2.42 billion for abusing dominance as search engine by giving illegal advantage to own comparison shopping service http://europa.eu/rapid/press-release_IP-17-1784_en.htm
5. The EU Competition Commissioner video covers a number of issues from taxation, to M&A activity and abuse of dominance https://www.youtube.com/watch?v=S4Qmvx-C4bE
6. 2018 academic paper that sets differences in approaches to digital trade, the reasons behind different models pursued by China, the US and EU and categorizes different baskets of digital services https://www.ictsd.org/opinion/started-the-digital-trade-wars-have-delineating-the-regulatory-battlegrounds%20
7. 2017 report outlining various country/regional approaches to cyber security https://cybersecforum.eu/en/2017-global-cybersecurity-policy-challenges-highlights/
8. This article by a leading Canadian copyright lawyer addresses why certain website blocking to prevent content piracy is not incompatible with an open internet http://www.barrysookman.com/2018/01/19/support-for-creators-pirate-streaming-and-the-value-gap-my-op-ed-in-the-globe/
To discuss these topics and more with the author of this article and your regulatory colleagues from across the Middle East region, attend the Neotelis' Best Regional Practices Workshop for Middle East Regulators to be held in Dubai from 04-08 March 2018. For more information, please see the brochure on next page, visit our website at www.neotelis.com/ser-p/en_Best_Regional_Practices_Workshop_for_Middle_East_Regulators_march_2018 or contact Neotelis at training@neotelis.com.
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