Telecom regulation in the European Union Nokia Government Relations policy paper Background A spectre of lack of investments is haunting the telecom sector in Europe. The European Union (EU) had a lead in mobile technology in the 1990s but has since fallen behind in investments in networks. Despite EU’s leading role in standardization and development of LTE, in 2012 EU’s share of global LTE (4G) investments was 6%, compared to 47% in USA, 27% in South Korea and 13% in Japan. Investments in connectivity boost economic growth, particularly under the conditions that exist in Europe today. The symptoms are evident. The European telecom sector is suffering from a downward spiral in revenues and earnings, combined with heavy competition on prices, with a detrimental effect on investments in network deployments. The leading markets, such as the US, South Korea and Japan, are witnessing an upward spiral in revenues and earnings, combined with healthy rates of investments and competitive dynamics focused on differentiation with quality, performance and coverage of networks rather than prices. Data consumption is growing all over the world, and unlike the EU, the leading regions are able to monetize the growth in data. In the leading regions high demand feeds new investments and incentivizes early trials of most advanced technologies. This generates more demand and investment – speeding up the spiral and improving access for all citizens, including the currently underserved. The price per GByte in the leading markets is typically less than in the EU while the overall spend is more. In other words, the consumers in the leading markets love the service they get at a lower unit price, consequently consuming much more of it. There is no unanimous understanding about the root causes for the downward spiral in EU, but too much time has already been spent in looking for culprits. Whatever the reasons may be, we should acknowledge that Europe is facing a systemic problem to which system level solutions must be found. EU level policy and regulation are the best available leverages we have at hand. Nokia’s beliefs Investments are urgently needed in Europe and investments can be boosted by reforming regulation. For years, the regulatory paradigm in telecom sector has been about heavy regulation of prices and infrastructure. The downward spiral necessitates a shift in paradigm. Nokia believes that boosting investment is the right regulatory paradigm for this moment in time in Europe, providing the best available leverage, in particular at times of economic hardship and following a financial crisis. Boosting investment requires a large-scale shift to volume based pricing, where operators in Europe are able to monetize growth in data. Page 1 © Nokia Government Relations policy paper 2015 Policy makers and regulators should accept and encourage volume-based pricing. This means embracing a shift in regulatory thinking: the sign of an effective competition in the market for electronic communication services is not how much consumers spend in total but rather how much they get for what they spend, i.e. the price per GByte and the quality (coverage, reliability etc.) of connectivity are more important indicators than the absolute price per subscription per month. The value chain in the sector has changed since the regulatory framework was adopted. Traditional telco services can increasingly be replaced by less regulated Internet services as networking moves towards an all-IP world. An overhaul of the regulatory regime is needed to reflect the changing value chain. Policy makers should revisit the balance between ex ante and ex post regulation. The market in general is better in setting prices and allocating resources than the visible hand of ex ante regulation. Interventions should be mainly reserved for protecting the market mechanism. Market consolidation can have dynamic effects and boost investments under the conditions that exist in Europe today. In the absence of letting the market find an optimum market structure, even heavier competition on price can ensue, strengthening the negative spiral. With the emergence of billions of connected devices, which we call the programmable world, we are going to see a multitude of new innovations. Some of these innovations, such as self-driving cars, require quality characteristics such as reliability or low latency rather than high bandwidth. They will also require much more analytics and big data capabilities. A lot of networking will move in to the telco cloud. Consequently, we are going to see more horizontal agreements to share parts of network intelligence capabilities amongst operators. The regulatory framework should be prepared for this new reality. Net Neutrality legislation that allows for innovation in the value chain with specialized services under the appropriate safeguards will be crucial for the competitiveness of the European ICT sector and a necessary condition for societal innovations such as remote health care or self-driving cars in the next generation of mobile networks called 5G. Specialized services, together with proper traffic management, incentivize optimum capacity rollout and increase investments in networks and contribute to an upward spiral of increasing economic activity. More harmonized, affordable and easy-to-trade spectrum is a fundamental prerequisite for European competitiveness. Better coordination across Member State is a beneficial target. Recommendations for policy makers  Policy renewal should go beyond the proposal for Regulation for Single Market for Telecoms. A larger overhaul is needed, with boosting investments as the overriding policy goal.  Accept and encourage volume-based pricing models. Focus on price per unit of data as measure of effective competition rather than the absolute size of monthly bills.  Move away from detailed regulation of infrastructure and prices toward simple and symmetric (applying to all sectors in the value chain) rules focused on transparency and quality of service.  The historical dichotomy between electronic communication services and information society services should be narrowed, primarily by deregulating the former.  Markets should be allowed to consolidate e.g. from four to three operators per member state if it boosts investments. To this end, horizontal merger guidelines should be reformed and merger specific dynamic effects on investment in networks should be added as a criterion.  Improve the legal certainty and flexibility of sharing networks or selected network elements (related to competition law, data privacy / cross-border data flow, national security etc.). Page 2 © Nokia Government Relations policy paper 2015  Legislation on Net Neutrality should allow innovation at all stages of the value chain by offering specialized services, many of which have not been invented yet.  Harmonization of timetables and license durations for new spectrum should continue. In particular, Europe should be harmonized in allocating and assigning spectrum for mobile broadband in the 700 MHz band and when deciding the long term future use of the UHF band below 694MHz.  Fair and reasonable coverage obligations especially for low bands such as 700 MHz can provide access for the underserved and boost the overall uptake of services.  Spectrum auctions can be an efficient, market-based mechanism for assigning spectrum but auctions should not be used for purely fiscal targets.  License durations should be a minimum of 25 years to support the most efficient use of spectrum by means of spectrum trading and by incentivising continuous technology upgrades.  The investment required for open standardization in telecoms is premised upon innovators obtaining a fair return on their investment in R&D embodied in standard essential patents (SEPs). In order to preserve the incentives to continue this investment, access to injunctive relief for SEPs cannot be diminished without introducing an alternative mechanism which facilitates efficient SEP licensing. For further information, please contact: Kristo Lehtonen, Head of European Policies, +358 40 8032638, kristo.lehtonen@nsn.com Leo Baumann, Head of Nokia EU Representative Office, +32 475 690 955, leo.baumann@nokia.com Julia Jasinska, Head of Trade Policy and Regulatory Affairs, +32 471 910 548, julia.jasinska@nsn.com On the Internet: http://networks.nokia.com/governmentrelations Page 3 © Nokia Government Relations policy paper 2015