How OTT competition is challenging traditional regulatory models

Tuesday 5 December 2017

Transnational giants offering OTT services are transforming telecommunications. What should regulators be doing about it?

A Series of Articles on Some Key Concerns for Middle East Telecom Regulators
 
How OTT competition is challenging traditional regulatory models
 
By Michael Hennessy
 
At the start of 2017, 7 out of the top 10 corporations in the world were tech/internet-based giants from the US and China1. These transnational giants compete using application-based services and massive global user networks over the top (OTT) on the Internet, and they are transforming telecommunications. In 2017, Facebook alone reached over 2 billion active users world-wide. Together, Facebook and its sister companies WhatsApp and Instagram have more subscribers than many of the largest telecom operators (AT&T, Verizon, Vodafone, Telefonica, Orange) all combined2.
 
A common regulatory proposition has been that "greater reliance on market forces is the most efficient way to achieve policy objectives such as lower prices, increased choice and innovation". OTT services seem to deliver on these objectives. However, many regulators and network operators are increasingly expressing concern with these transnational networks, leading to calls to block, tax and/or regulate digital competition.
 
 A principle argument against unrestricted digital choice has been that OTT services, often offered for free, are eroding core operator revenues (voice, messaging) that are needed to reinvest in critical broadband/ICT infrastructure. A second related argument has been that while network operators often remain heavily regulated, larger digital competitors have virtually no obligations.
 
That said, achieving policies supporting ICT investment is not necessarily incompatible with also stimulating competition, consumer choice, and innovation.
 
The first argument of revenue erosion may have some legitimacy in emerging markets where core revenues are critical to support increased investment in deploying/extending networks such as LTE. However, in more advanced markets like the Middle East, the question must be asked as to why increased data revenues from greater use of digital services are not more than sufficient to offset losses in voice and messaging. Perhaps, issues such as the abuse of significant market power (SMP) by dominant operators or inefficient pricing of broadband access may be a more immediate threat to sustainable growth and competition than the threat raised by OTT.
 
The second argument of asymmetric regulatory obligations may have more legitimacy. Transnational disruptors are not subject to the same obligations as local operators within sovereign states. This lack of accountability is not limited to telecommunications. Governments are increasingly grappling with issues of lost tax revenues and non-level playing fields when it comes to digital competition from numerous other global players ranging from Uber, to Airbnb to Netflix.
 
While certain jurisdictions have resorted to blocking some OTT services, this practice can undermine key regulatory objectives such as consumer choice and innovative business transformation. Yet, it remains legitimate for individual countries to intervene either directly or through regulators where national sovereignty, (economic, social or cultural), is considered to be at risk. As a first step, some governments are beginning to consider/impose taxes on revenues earned within the local economy. This assertion of local jurisdiction in matters of taxation, if successful, could in turn create precedents for national telecom regulators to then justify regulation of OTTs.
 
However, most telecom services offered by operators at the retail level can be, or already are, replicated by larger digital competitors on an effective and sustainable basis. In such circumstances, attempts to apply economic regulation to OTTs or to operators may impede competitive innovation. Choosing instead to encourage competition by permitting operators more freedom to compete might be a better approach. Perhaps, before resorting to traditional approaches like ex ante regulation (tariff approvals etc.) for OTTs, it may be more effective to reduce the regulatory burden on operators to allow them greater flexibility to innovate, diversify and compete without having to first ask for regulatory permission.
 
The idea of deregulating more of the telecommunications market, moving from ex ante to ex post oversight, does not mean the end of regulation, but it could mark a way towards the right regulatory model to increase innovation to achieve ICT objectives. Within such a model it remains appropriate for policy-makers to ensure that all players in local economy pay their fair share of taxes, to protect consumers from abusive practices, to ensure that privacy and security objectives are met by all economic actors, and to regulate where there is evidence of significant market power (SMP) being abused by network operators.
 
Some of the issues related to this possible regulatory shift will be addressed in more detail in future articles. These articles will cover preventing SMP in the access market, IoT and related issues around security and privacy, and shifts to new models of regulation considering increased digital competition, convergence and the evolution to ICT-based economy.
 
References:
 
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, visit our website at www.neotelis.com/ser-p/en_Best_Regional_Practices_Workshop_for_Middle_East_Regulators_march_2018.
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