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Converging on Digital

Taking the current European reform as model, Monica Ariño puts forward three key pillars for regulatory framework reform in pursuit of convergence.

Converging on Digital

Policymakers and communications regulators around the world continue to search for the most suitable regulatory approach for the communications industry as convergence
takes hold. The European Commission published a green paper on the regulatory implications of convergence as far as 1997, and the issue has been, in one form or another, the topic of innumerable policy debates, conferences,consultancy reports, strategy papers and academic research for the best part of two decades.

It remains an ongoing challenge; convergence takes many different forms, it evolves, and businesses and consumers take advantage of it in unpredictable and varied ways, making yesterday’s difficulties irrelevant tomorrow. Convergence can mean access to the same service over multiple networks. It can also mean the progressive back amalgamation of fixed and mobile network architectures, the provision of combined services (voice, broadband and TV) as a single retail offer and the development of over the top (OTT) services, which are increasingly substitutes for traditional communications services.

These developments can challenge the delivery of wider public policy objectives such as universal broadband availability or the promotion of public interest content on connected devices. They
also question the validity of current regulatory approaches to network access regulation (for example, what is the correct market definition, who is dominant, what is the right cost allocation and approach to pricing); consumer policy (for example, how to support effective switching processes for bundles); and audience protection (for example, how best to protect audiences from harm in an online environment).
Over the next five years, European policymakers will be considering these questions in the context of some of the legislative reforms announced under the umbrella of the Commission’s digital single market (DSM) strategy2 – a vision to create a market where everyone is able to purchase digital goods and access online services regardless of their country of origin. Two key legislative reforms will be the review of the frameworks governing electronic communications networks and services, and the provision of audiovisual media services (ie. TV and video on demand), with legislative proposals expected in 2016.

There is significant momentum around these, and the rest of the anticipated DSM proposals. Most stakeholders are contributing to the debate and consultations. There is a sense of urgency in Brussels, stemming from the perception that Europe is falling behind other regions, in particular the US and Asia. This perception might reflect a simplistic view of what success looks like and what comparisons are meaningful, but it carries political weight. In some areas, barriers to online trade seem indeed unjustified, and greater harmonisation of rules would benefit business and consumers alike.

While anti-US sentiment risks clouding the debate, it is right that Europe should not be complacent, particularly given the risk of delays from its long and convoluted legislative processes. Regulatory reform to respond to (and prepare for further) convergence is needed to facilitate a truly digital economy. 


"There is a sense of urgency in Brussels as the perception is that europe is falling behind."


ImPROvEmENTs, RAThER ThAN AN OvERhAUL

Reform does not necessarily mean a complete overhaul. In fact, despite some talk from Brussels about ‘wholesale reforms’, no revolutionary ideas have been presented to date. The fact is the existing European regulatory frameworks have worked well. They identify the right consumer and citizen outcomes and establish sound regulatory principles.
But there is room for improvement. This could include a relatively straightforward simplification of some of the rules on broadcast advertising regulation, or streamlining the process of market analysis (eg. potentially greater national discretion on the frequency of market reviews). We could improve the suite of available access remedies, strengthen consumer protection and reconsider the rationale for universal service obligations and their scope and funding. Furthermore, as new converged business models become increasingly pervasive, regulators will need to be satisfied that they have appropriate powers to address competition concerns that might arise, including the appearance of new gatekeepers, particularly online.

One urgent area for attention is the extent to which regulators need and can address the consequences of oligopoly scenarios where no single firm is dominant. These scenarios might arise through market evolution or consolidation (eg. mergers in the mobile sector). In such situations, firms might, unilaterally or collectively, behave less aggressively, which could lead to poor consumer outcomes. This concern is already  recognised in the EU merger guidelines4 that contemplate the risk that concentration of a market can result in a lessening of competition. A debate on whether and under what conditions intervention might be necessary has already started in Europe, with a report published by the Body of European Regulators for Electronic Communications (BEREC) in December. While not all oligopolies will cause concern, and the threshold for intervention should be high enough so as not to stifle competition or deter investment, it is appropriate and timely to consider this question as part of the Commission’s review.

PILLARs Of ThE REGULATORy EcOsysTEm

In the above context, I would like to reflect on what I believe are three key components of a successful regulatory framework:

  • A focus on outcomes backed up by regulatory powers, rather than detailed rules, preserving sufficient discretion and flexibility for regulators on when and how to intervene
  • Related to this, the need for greater coordination among European regulators to maintain a consistent approach across Europe that can support the ambition of the digital single market
  • Strengthened independence of regulatory authorities.

This article addresses each of these components.

fOcUs ON OUTcOmEs, NOT OvER-ENGINEEREd RULEs

The newly adopted European rules on net neutrality are a good example of the benefits of a principles- based approach. Since 2009, regulators were empowered (but not required) to intervene in quality of service on public networks, as and when necessary. In 2013, the Commission proposed to move away from this approach towards one of micro-regulation, seeking to define which specific commercial and technical practices network operators were permitted to engage in. For instance, it singled out and tried to restrict the provision of ‘specialised services’ (one but by no means the only way to prioritise traffic); it also attempted to constrain by law the technical interaction between such specialised (wholesale) services and internet access (retail) services.

Finally, it significantly limited the circumstances in which ISPs could legitimately manage traffic, failing to recognise that network congestion is neither temporary nor exceptional, and that users might legitimately request it (eg. to block spam or filter inappropriate content). The Commission’s intention was to pre-empt regulatory fragmentation across Europe, following the adoption of national net neutrality rules in the Netherlands and Slovenia, but in doing so it sought to capture in a legally binding text what are, essentially, engineering practices. The practicality of enforcing such rules seemed rather an afterthought. Stakeholders (including industry players across the value chain) and regulators alike expressed concern that the rules were insufficiently flexible and would quickly become obsolete. The CEO of UK regulator, Ofcom, said at the time: “I fear that over-prescriptive and detailed legislation may deliver the opposite of the intended effect; not more certainty but less, not the exercise of balanced objective judgement but the pursuit of skewed, self-interested litigation. The internet is an enormously complex and dynamic ecosystem, where the law of unintended consequences looms very large indeed”. (Ed Richards, Ofcom  chief  executive  until  December  2014). Instead, Ofcom and others favoured a framework based on clearly defined policy outcomes, eg. the need to prevent degradation in the quality of internet access services, which would serve as triggers and principles for intervention common to all. This would be complemented by enhanced powers for regulators to monitor quality and to intervene when necessary, such as through the imposition of minimum quality of service or other measures – to be defined by the regulators themselves, thus leaving national regulators the flexibility to respond according to the specifics of their national markets, and avoiding pre-emptive (micro-) regulation.

An approach along these lines was eventually agreed and is broadly consistent with the open internet order adopted in the US by the Federal Communications Commission in March 2015, though the FCC’s discretion appears to be wider.

This principles-based model would work in other areas too, for example to simplify European broadcasting advertising rules. Rather than prescribing the detail of how programmes can be sponsored or products placed, the rules could focus instead on the relevant consumer protection outcomes (eg. ensuring vulnerable audiences are protected from harm, that the advertising and the editorial content is clearly distinct, that viewers know when they are being sold to, and that the editorial independence of the programme is preserved).
Regulators could then be empowered to intervene if these principles were under threat. Such an approach would better allow for innovative advertising techniques to develop, as increased consumption of IP-delivered audiovisual content (through connected TVs, tablets and other mobile devices) allows broadcasters to experiment with more sophisticated forms of advertising. If Europe is to maintain a competitive and thriving audiovisual industry, such opportunities for innovation should be supported and further encouraged.


"Ofcom and others favoured a framework based on clearly defined policy outcomes."


 ThE NEEd fOR REGULATORy cOORdINATION

A model based on outcomes rather than detailed behavioural rules presents some risks. It could increase regulatory fragmentation across Europe, seemingly undermining the goals of the digital single market. It could also provide opportunities for regulatory arbitrage or forum shopping in areas where European companies operate under a country of origin principle (such as broadcasting, e-commerce and data protection). This principle requires companies to comply only with the rules of the country in which they are established; some may choose their base to circumvent higher protection standards elsewhere.
The Commission is right to tackle the differentiated treatment of digital goods and services when such differentiation is discriminatory (eg. charging different prices for otherwise identical online transactions depending purely on the geographic location of the buyer) and to incentivise further cross-border commerce, for example easing administrative and regulatory barriers.
However, in some cases, regulatory differences between jurisdictions are legitimate and will inevitably remain. For example, in the audiovisual sector, the European framework only sets out minimum content standards for broadcast services because it recognises that there are enduring cultural specificities (countries can and have gone beyond this in their national legislation).

In telecoms, despite harmonisation at EU level, national markets maintain different characteristics – not least as a result of network topology and services that are mainly local in nature. And historic differences in the way countries use spectrum mean that it is impractical to move to a world in which all countries use all frequencies in the same ways.
As a result, differences in implementation exist and will remain.
The scope and benefits of harmonisation are therefore more limited in practice than the Brussels rhetoric might imply. In fact, as convergence continues apace, detailed rules will fail to keep up with what is not only a highly complex area, but one that moves very rapidly. If Europe wants a regulatory framework that can sustain the test of time, it needs to accept the reality and confines of the single market aspiration. The focus on (harmonised) outcomes should be accompanied by a greater effort to deliver consistency of national implementation across jurisdictions by the national regulators themselves.

Such cooperation is no longer the luxury of those with time or resources. In some areas, cross-country coordination mechanisms are already enshrined in European law. For example, BEREC operates a formal process of peer review of its members’ decisions on market analysis (market definition, identification of significant market power and design of remedies), in cases where the Commission has expressed concerns about the course of action proposed by the national regulator. Individual members are required to take utmost account of the opinion of their peers – and justify when they depart from it.
Such a mechanism could also be considered as a way to enhance the operation of the Radio Spectrum Policy Group (RSPG), which advises the Commission and which at the moment limits itself to the compilation of best practice reports. On the content front, it should be possible for the European Regulators Group for Audiovisual Media Services (ERGA, the new regulatory network for broadcasting
regulators) to provide assistance and guidance on the implementation of applicable rules. The time needed for discussions and preparation of reports is significant, and the difficulties in reaching consensus should not be underestimated. Nevertheless, such networks remain the best mechanism to increase the consistency of approaches across different jurisdictions to deal with similar problems and provide the right complement (and sometimes the necessary checks and balances) to the Commission’s harmonisation efforts.

INdEPENdENcE IN sTATUTE, ANd bEyONd

The digital single market strategy recognises the need to ‘enhance’ the role of European bodies where member states’ authorities are represented, such as BEREC or the RSPG, but provides no detail of this may mean in practice. Beyond that, it hardly explores issues of regulatory governance, except for a timid reference (in the supporting working
document, not in the main strategy), to the need to review the independence of media regulators in Europe.
This is an area where clear and robust principles could usefully be set out at European level – and in fact the European framework already establishes explicit regulatory independence requirements for some sectors. For example, in telecoms, the Framework Directive7 requires member states to guarantee the independence of the national regulatory authority (NRA), ensuring they do not seek or take instructions from any other body and limiting the grounds for dismissal of the head. It requires NRAs to have separate budgets that should be published.

Regulatory independence matters: first and foremost, because it provides regulatory predictability and supports investor confidence, but also because it avoids the risk of decisions being taken (or being perceived to be taken) for political purposes. It requires:

  • Regulators’ governance arrangements to be free from political influence (including the provision of the necessary safeguards in the processes for the appointment/removal of their heads)
  • Regulators to have a transparent process of decision-making protected from political or industry interference, accompanied by sufficient investigative and sanction powers, security of funding and budgetary autonomy
  • Regulators to have clear public accountability (for example, through parliamentary committees and courts).

In the audiovisual sector, there is no independence requirement at EU level. When the relevant European directive was last reviewed, European governments rejected the Commission and Parliament proposal, resulting in a less than ideal compromise of an indirect and general reference on the need for ‘independent’ regulatory authorities to cooperate (thereby assuming they are independent – which is not necessarily the case, and certainly not to the degree that would be desirable).


"Regulatory independence matters for predictability and to avoid politics."


Since the directive was adopted, the question of independence of broadcasting regulators has gained an increasing profile in Europe and been the subject of a Commission study looking at best practices, several regulators’ meetings, academic research, and a formal Commission consultation in 2013. This was also the subject of the first public statement by ERGA, which specifically asked the Commission, as the initiator of legislation, to identify “common characteristics that any independent regulator in our sector should be equipped with”.

It is very likely that the Commission will resurrect the proposal this time around. It remains to be seen whether political consensus can be achieved – and what this will mean in practice, given both the power of the media in opinion forming, and the risk of political influence. But to fail to make progress would be deeply unfortunate, given the essential role the media play in enabling healthy democracies. A clear political backing for regulatory independence, enshrined in European law, would have a strong impact both within and outside European Union borders. Normative recognition is, however, only the first step. Regardless of how robust the statutory framework is, independence remains an intangible concept – one which is difficult to measure and one which needs to be fought for every day. This is why, as has been widely documented, a ‘culture of independence’ and transparency are critical if the system is to function well.
Different European countries have different legal traditions. No amount of rules can replace the need for a value system that recognises and respects the regulator’s independent function. Therefore, we will need complementary supporting actions, such as increased coordination between the EU and others (such as the Council of Europe and the Organisation for Security and Cooperation in Europe), on concrete actions promoting a culture of independence in practice and the informal exchange of (good and bad) experiences between regulators.

The challenge is handling what are regular, inevitable and indeed desirable interactions with government without fear or favour. This issue becomes more important as the lines between policy and regulation continue to blur, and as the complexity of the sector requires an ever greater degree of technical input into policy decisions.

POLIcy ANd REGULATION: wALkING ThE LINE

Given the importance of regulatory independence, some might ask whether it is appropriate for regulators to depart from purely technical and enforcement work into the realm of policymaking, including making choices about the best way to achieve specific political objectives. We have seen this in the UK, and it is an aspect of the sector review launched by Australia’s Department of Communications. At European level, and as
sector-based regulatory networks grow stronger, we can expect them to play an increasingly active role in advising on policy development, which will keep this issue in the spotlight.
The fact is, the separation of 

policy and regulation can be somewhat artificial. While legislative frameworks can draw a clear delineation between the functions of government, regulators and competition authorities, in practice the line
between policymaking and regulation is, and will continue to be, blurred. The complexity of the sector means governments might turn to the regulator for advice.
In the past Ofcom has contributed to a number of public policy debates at the request of the UK government, such as on broadband universal service, public service broadcasting and media plurality. In practice, what is needed is an open dialogue between regulator and government in the pursuit of public policy goals.

If the regulatory framework evolves, as advocated above, towards one that is based on outcomes and principles, rather than detailed rules, coupled with greater flexibility and tools for regulators to intervene, such interaction will increase in some areas. Regulators will need greater flexibility at the point of implementation, and may have to make ‘policy’ choices alone, or as part of a wider regulatory network. It is important for regulators to build trust in their relationships with government and consult widely to ensure that decisions continue to be based on evidence and are in line with public policy goals. Ofcom has found that productive interaction with government is essential to secure independence in practice. 


"We can expect regulators to play a more active role in advising on policy development."


 

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