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How to ensure that regulation is fit for purpose in a fibre world

By Barney Lane, director of regulatory affairs, Colt Technology Services

I would like to say a few words about the regulatory regime, it suitability for today and its fitness for the future. In doing so, I would like to start with two propositions.

Firstly, regulation is one of the main drivers of the shape of the communications industry. Its impact is fundamental. Regulation determines the cost of what we buy and the price we sell it at. It determines the returns we can make on our investment. It determines how much choice we have as customers. And it determines the extent to which competitors can differentiate their products.

Secondly, how to transform an entire country’s communications infrastructure to fibre is first and foremost, a question of public policy. Regulation can only work within the limits of the problem it is trying to solve. When that problem changes, regulation becomes out of date. When regulation becomes out of date, it becomes the goal of public policy to understand this, understand why it is and understand what can be done about it.

The idea of a competitive telecoms market started in the 1980s. It went through a number of twists and turns before, broadly settling, in the 1990s and early 2000s around the idea of serving the public interest by making the market more competitive. In this aim, it has become very successful.

Most markets in the UK are highly competitive. This is true whether you are looking at voice, broadband or business connectivity. Most people, regardless of where they live, have the choice of multiple broadband, business connectivity or telephone services. Against its EU peers, the UK has been particularly successful in achieving these aims.

Nowadays, the market has moved on and the problem that regulation needs to solve has changed. In a nutshell, the problem facing us today is: how do we get more investment in fibre? Now is the time to consider whether today’s approach to regulation is the right one for this purpose. It seems to me there are three options.

Option 1 is to broadly leave things as they are. This is not a stupid suggestion. The evidence suggests that while we are not doing spectacularly well, we are not doing spectacularly badly either. Why upset the apple cart? The law of unintended consequences says that it is almost impossible to fix something without breaking something else.

But there are several problems with this view. First of all, it is singularly unambitious. Problems such as fibre ‘not spots’, the lack of any roadmap beyond fibre to the cabinet, and the appalling state of connectivity options available to SMEs and in key locations such as business parks and city centres would go unaddressed. In other words, we would proceed at the same leisurely pace as we are today and that’s not really good enough.

People who propose little or no change remind me of the episode of “Yes Minister” where the minister asks everyone from his wife to his chauffeur, “how do you think I am doing?” Each time, the response came back, “the general view is that you are doing alright”. Each time, his face fell.

But more than this, leaving things as they are, is likely to make some issues worse. In the UK, regulation is mostly about ensuring that competitors have access to a wholesale version of what the incumbent sells at the retail level. That’s fine in a static market. But when the product set is changing, regulation can only play catch-up. Given the three yearly cycle of regulatory Market Reviews, it means that the competition can never beat the incumbent, it can only match where it was three years ago. Under this scenario, we can only expect the competition to retreat.

Option 2 is to deregulate. There are some arguments for this. It can be argued that an active regulatory regime increases the perception of risk around investments, so a less regulated firm will invest more than a more regulated firm. Proponents argue that most of the investment has been done by incumbents, so it’s best to leave it to them.

Again, there are several problems with this point of view. The first is that even the strongest adherents don’t argue that a monopoly is the best solution. It has only been tried in markets with significant amounts of infrastructure competition, such as the US. And even then, evidence of its success is patchy. Broadband prices are typically much higher in the US than in Europe.

Option 3 is to change the approach to regulation to focus on incentives to invest in infrastructure. Full structural separation – a move advocated by many – may or may not be part of this solution. According to this approach, you refocus regulation on the fundamental source of the problem, which is the high cost of laying physical infrastructure, and focus on making efficient use of what’s already there, and there is a lot.

You would not completely dispense with existing regulation but it could be significantly simplified. Today’s regulatory model is an “active first” one. That is, you start by looking at what wholesale products need to be out there to allow competition. My so-called Option 3 flips that around, into a “passive first” model. You start by looking at how to ensure the most efficient use of existing infrastructure, for the deployment of new fibre.

This is the model that Colt favours. Colt has invested around £5 billion in fibre infrastructure around Europe. This is our core business and we want to do more of it. We have built 42 fibre networks around Europe, but only one of them is in the UK. On the face of it, this is surprising given our origins as City of London Telecom. Yet most of our investment has been in countries that in some way, shape or form have focused on opening up access to infrastructure.

Nobody is pretending that Colt – a small provider of high-end business connectivity solutions – is the answer to the UK’s fibre investment problem. We can be part of it, for sure. But the key point is that open access to infrastructure would allow a multitude of small, niche players to invest in geographies and products that the incumbent has ignored, or at least failed to prioritise. The model would allow small and some not so small providers to invest, grow and be part of the solution.

In concluding, I would like to return to my original propositions. The first was that regulation is one of the main drivers of the shape of the communications industry because it determines the price of what we buy and what we sell. Any outcome can to a large extent be traced back to the way the market is regulated. It follows that a transformation in how the market behaves is very unlikely to be possible without a transformation in the way it is regulated.

The second proposition was that the transformation of the UK’s infrastructure is more the domain of public policy rather than regulation. The point here is that regulation can only provide the solution to the specific problem it has been set up to solve. When the problem changes, the solution needs to change, and this is unlikely to be achievable within existing parameters. As it stands, regulation is mainly designed to get more competition in the market. But today, the problem is more about how to transform the UK’s infrastructure.

Without in any way wishing to over-simplify what is undoubtedly a complex problem, the following approach stands to reason. When the problem is about the infrastructure, the solution needs to be about the infrastructure. And in particular in ensuring that existing infrastructure is open to players such and Colt and others, wishing to deploy fibre in the UK. That is the basis for the “passive first” approach to regulation that we propose.

This article was originally presented at NextGen15 in London on 5 November.

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