European Affairs

Fall 2004

 

Industry and Technology
Nobody Wins if Wireless Technology Is Over-Regulated
By Paul Franklin

 

European policy makers see mobile, or wireless, communications technology as one of their big industrial success stories. Indeed, many believe that Europe is the global leader in wireless communications. The truth, however, is that all three of the world's main economic regions (Europe, the United States and Asia) have their own strengths and could learn something from each other, not least in public policy. Much has changed since the controversial allocation of 3G licenses in Europe four years ago - 3G is a wireless technology that promises high rates of data transmission, allowing customers to access music and video downloads as well as other services such as local information and direction-finding from their cellular telephones. European policy makers had very high hopes that 3G would be the next step in Europe's success story, and indeed they still do.

While the licensing process was not a failure, it started a train of events that led to changes in the way people looked at the progress of wireless communications in Europe. Not all the 3G licenses were taken up, although governments across Europe did collectively realize €100 billion in license fees - so the process can at least be said to have been a success for them! In some countries, such as France, 3G licenses are still unclaimed, while German operators handed back their licenses, belatedly realizing that they were not a viable business proposition. At the same time, in 2000, telecommunications and mobile technology stocks in Europe and the United States were starting a long decline, following the bursting of the dot-com bubble. The market began to question just how much value and future profits really could be derived from new cellular telephone services. That year also saw the last of the giant telecommunications and media mergers, in which France Telecom created the Orange Group, Vodafone Airtouch won control of Mannesmann and AOL TimeWarner was established.

Although the markets initially praised these unions, they changed their minds as faith was lost in the technologies and services that had promised so much. In short, the combination of the blemished 3G licensing process, the stock market crash and large-scale consolidation wiped some of the gloss from the European mobile success story.

Since then, however, wireless services have defied the doomsayers and a lot of people have been proved very wrong. Penetration of mobile technology has reached as much as 95 percent in some European markets. The average in the 15-nation European Union, before its enlargement in May 2004, was 80 percent - practically everyone in Europe now has a cellular telephone.

There has also been an explosion of instant messaging services in Europe, as well as the beginnings of new markets for wireless data transmissions. Pan-European brands for mobile services have been established across the European Union, helping the mega-mergers to realize the value they had promised. The first 3G services have arrived on the market, allowing customers to download movie and music clips straight to their mobile handsets, or to make wireless video telephone calls. The distinctions between markets for fixed, mobile, Internet and broadcasting communications have become blurred as the different technologies have taken on more and more of each other's characteristics—today's cellular telephones have nearly the same computing power as personal computers did in 2000. Europe has introduced a new regulatory framework for telecommunications to cope with all these new developments, which nobody foresaw in 2000 when sentiment toward wireless technology was so negative. The developments are creating new policy challenges, not just in Europe, but in the United States as well. Policy makers on both sides of the Atlantic must strike a fine balance between ensuring that mobile operators can continue to develop and invest in new services and protecting consumers' interests.

"Wireless services have defied the doomsayers and a lot of people have been proved very wrong"

It is important to ensure continued investment and innovation because it is now clear that wireless technologies have the potential to revolutionize society, economies and the lives of consumers. In Europe, so-called m-payment services are being developed, enabling people to pay for goods and services at the touch of a button. Governments are testing technologies to bring them closer to their citizens and improve services such as health and education.

In short, mobile technologies are providing people with new ways to communicate and do business, wherever and whenever they want, and neither European nor U.S. policy makers can afford to miss out on the benefits that these technologies can bring.

At the same time, however, regulators have a mandate to protect consumers - to ensure that they are getting a good deal and that the market functions effectively. Regulators can oblige operators to lower prices, or allow access to their networks and services, if they feel that it is in the consumer's interest. In seeking to balance the need to give consumers both innovation and value, however, regulators may run into a paradox. Innovation requires investment, and there is a risk that in their pursuit of providing consumers with value, regulators will end up depriving them of innovation. European and American regulators are facing up to this challenge in different ways.

Europeans are worried that the right balance is not being struck as regulations are extended into mobile services. European regulators have started setting wholesale prices for wireless services and are increasingly interested in imposing the same kind of regulations on wireless network operations as they do on public utilities. The trend appears to be for this type of regulation to increase.

The operators, however, are investing in new technologies and services and trying to realize a return on the investments made in 3G licenses and networks. The benefits for consumers and society could be huge. These benefits are at risk, however, because in attempting to provide consumers with value by regulating some wireless services and controlling prices, regulators risk impeding the investment necessary for the next wave of services.

Europe could learn a lot from the United States, which leaves the market to function. As a result, the American market is highly competitive, with competition not regulation providing customers with optimal value. This is not to say that U.S. regulators have nothing to learn from their European counterparts. The penetration and coverage of mobile technology is higher in Europe than in the United States. Instant messaging has experience phenomenal growth in Europe and the rest of the world, but has not enjoyed the same success in the United States. In a nutshell, the United States could learn from Europe how to develop markets and ensure that wireless technology is available as widely as possible. Europe, on the other hand, could learn from the United States to leave markets to function without regulatory interference.

There are, of course, other challenges facing European and U.S. regulators in the coming years, including how to ensure data protection in the information age. Spam is obviously a huge problem for fixed terminals, and as the mobile terminal moves closer to the fixed terminal we must ensure that consumers avoid the problems that have dogged the traditional Internet.

Another difficult question on both sides of the Atlantic is how to manage the trade-off between the need to protect national security, by requiring operators to retain data for long periods of time, and the cost to operators of warehousing and managing these data.

In sum, the challenges are numerous and complex, which means that outcomes are sometimes impossible to predict. As the events of the last four years have shown, it is hard enough for the industry to foretell the future - so what chance do regulators have? This means that regulators should as far as possible refrain from intervening in markets such as those for wireless technology, because, while competitive distortions are extremely easy to introduce, they are particularly difficult to remove. The best course is for European and U.S. regulators not to intervene unless it is absolutely necessary, and only to do so when they are sure that the benefits outweigh the inevitable costs.

Paul Franklin is Group Vice President of Regulation and Public Policy of Orange SA. He had a key role as Integration Director in the creation of the Orange Group from Orange PLC and France Telecom Mobile in 2000. He has previously served as Director of Regulatory Affairs for Energis, a UK long distance fixed telephone company, and as Senior Marketing Manager and Director of Regulatory Affairs of Microtel Communications (now Orange UK).