Telecoms emerged from an era of government ownership and control to an industry that stressed privatisation, liberalisation and competition. The government was in the way and, in most places, it got out of the way. You can’t turn back the clock: the era of national telecoms policy, price ceilings and profit controls is over. Or is it?
Professor Eli Noam, head of the Columbia Business School’s Institute for Tele-Information, argues that the pendulum may already be swinging back, and that this might be what the industry (and, more importantly, the communities it serves) needs. As someone who has been studying the structure of the industry since the 1970s, he has seen the benefits of deregulation; but in 2010 he published a paper called “Regulation 3.0 for Telecom 3.0”, setting out the need for a new regulatory regime that would look much more like the government-control era than the free-market boom of the 1990s.
But this future hasn’t arrived yet (and the recent debates on net neutrality show that opposition to Regulation 3.0 will be strong). So, five years on from his paper, does Prof Noam still believe that Regulation 3.0 will happen?
“Yes,” he says, “Not in the spirit of ‘I told you so’, but just that I don’t see how the last five years have changed the general direction of the industry. There will be another downturn down the road.”
A lot has changed in the industry since 2010, but the only significant trend that was not predicted in Regulation 3.0 is the rise of cloud economics. But that, if anything, makes the structural problems he identified even more acute. So, if Telecom 1.0 was the era of the incumbents, and 2.0 was the era of deregulation, what does he see as the differentiator of Telecom 3.0, the era that we enter now? He identified four pressures on the the market:
Instability has increased. The fixed costs of building a network only increase in comparison with the marginal cost (and revenue) that the carrier can make from providing service. Therefore, in a downturn, there is an incentive to oversupply, leading to wild swings in price that wipe out new entrants. The result: concentration of market power, and increased risk for investors. Noam writes of investors “cheering a competitive market structure, raising their valuations to the blue sky while quoting Joseph Schumpeter, [but] they now realise that they were the ones being creatively destroyed.”
A tendency towards monopoly or oligopoly. A competitive market which offers increasing returns to scale, but which is subject to economic cycles, becomes a winner-takes-all market in which large-scale former incumbents are often most likely to survive.
Telecoms as national asset. Noam points out the the 2.0 era didn’t pay much attention to concepts like universal service, because that would discourage new entrants. But telecoms, like the roads or the railways, is now part of any national industrial policy.
The separation of access and service. The larger part of the return on the investment in infrastructure may accrue to the OTT providers in future.
In the most advanced economies, Noam argues, this creates a tendency to consolidate, as most, to a “2.5” domestic market in any region: one dominant fibre provider, one dominant cable provider and a limited number of wireless networks - often sharing infrastructure to offset cost of investment - that cannot compete for speed sufficiently to carry the most advanced applications (other economies may have 1.5 or 0.5 provision).
Therefore, in 2010 Noam wrote that “the time has come for a grand bargain” between regulators and the regulated, in which concentration can be tolerated if it delivers services that help government policy.
That doesn’t mean a return to a one-size-fits-all regulatory structure, but it does mean that many governments may choose a carrier as a “national champion”, for example; it also means that some regions will develop more public-private partnerships and offer subsidies for R&D. The price would be universal service guarantees, cooperation with government industrial policy, or net neutrality.
“Telecoms in recent years has been an amazing success story,” Noam adds, “But it has created an essential industry with natural monopoly characteristics... For some people deregulation is a religion. We should start to look at this more pragmatically.”
