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3 November 2006

The road ahead - regulatory challenges in a converged or converging environment

Director of proceedings and executives of SITA,
Delegates present,

My input on the topic you have chosen may be separated into two broad areas:

1. defining what regulation will look like in a converged or converging market
2. enforcement and monitoring and enhancing regulatory capacity and credibility.

1. Defining regulation in a converging market

This task requires an assumption of a general sector move towards Internet Protocol (IP) networks and services or so called "Next-Generation Network (NGN) and services". NGN can be understood as broadband networks that allow integrated data, voice and video services through the deployment of IP. NGN is an umbrella term for the infrastructure that enables advanced new services that mobile and fixed network operators have started to offer while continuing to support existing services.

There is a growing body of literature on the shape of the challenges and regulatory questions that NGN regulation poses. Central to this is understanding the technical changes and issues that will inform the regulatory challenges as well as reframing the debate on regulation in an IP network and services framework; the regulatory issues are not as much about policy direction but more about ensuring that policy and regulation remove inhibiting factors affecting IP networks and services from a regulatory point of view.

There are three basic assumptions underpinning the NGN challenge:

a. The development of IP and NGN will increasingly undermine currently held rationales for asymmetrical approaches to regulation across sectors.
b. Technological development will always outpace regulators and the advent of IP networks and services is no exception.
c. The development of NGNs and an enabling regulatory framework is inextricably linked to a country's national broadband policy. It is countries that have extensive broadband penetration and usage such as South Korea and Iceland, where next generation networks and services have been able to flourish and where the critical mass necessary for the network effects associated with economic growth are most likely to be realised.

The International Telecommunications Union (ITU) Trends Report for 2006 shows a sobering reality of broadband penetration in Africa such that the continent accounts for less than 0,1 percent of subscribers worldwide. This can be partially explained by the fact that few African countries including my own have developed coherent broadband policies. Few African countries have yet to launch high speed Internet services at all and where broadband development is occurring, it is usually led by the monopoly Telco, who still controls access to its network for downstream competitors. By contrast the highest broadband penetration rate reported by the most recent Organisation for Economic Co-operation and Development (OECD) broadband study is in Iceland at 26,7 subscribers per 100 inhabitants. I cite these figures merely to assist in setting the broader policy challenges facing African regulators and policy makers in the transition to NGNs and the diffusion of IP based services in particular.

Broadband subscribers by region, 2004:

* Asia-Pacific – 41,6 percent
* Europe – 27,8 percent
* Latin America and Caribbean – 2,4 percent
* North America – 27,9 percent
* Africa – 0,1 percent
* Arab States – 0,2 percent

(Source: ITU world telecommunication indicators database)

Factors affecting IP network and service development

The numerous challenges for regulation in a converged era can essentially be split into policy and structural concerns and implementation issues. The former can be characterised as legacy regulatory questions that pertain to competition, market structure and policy absence or failure, usually with respect to broadband policy as well as regulatory capacity or ability to keep pace coupled with the ever present affordability problems. Structural market issues relating either to continued monopoly power in certain markets or as a result of vertical integration across several market segments will need to be urgently resolved by regulators to attract the necessary private capital required for investment in NGNs. Ironically, the countries that have very under developed broadband networks may however have an opportunity to leapfrog orthodox reform methods and adopt newer and more appropriate strategies for rapidly deployable, lower cost and higher efficiency networks. But these opportunities may be constrained in terms of government policies and obligations to investors and existing operators.

Affordability remains a critical issue. The importance of a nexus between broadband policy and IP network development cannot be overstated. All communication services in Africa generally tend to be high or higher than in those countries with more mature markets. The very fact that new IP services can be run over NGNs and that there may be savings from IP network topologies, does not change the economics of supply and demand. Generally in low competition markets prices are higher and usage is more limited inhibiting further economies of scale that would drive prices down. The big policy, structural questions need to be addressed to ensure that they facilitate broadband growth, outside of silo services, like Asymmetric Digital Subscriber Line (ADSL) which are then protected through legacy rate regimes distorted interconnection frameworks and access restrictions. As such it is worth restating that in order for consumers to begin to reap the benefits of NGN services, greater attention needs to be paid to creating competitive environments. (This has particular relevance in the GovTech forum to issues of municipal broadband and the responses by municipalities to try and address broadband communication costs. A trend that is replicated in many jurisdictions; note Toronto Hydro's latest initiative to use streetlamps to place infrastructure for a broadband network in the city of Toronto that will have a commercial element to it).

In regard to competition, in the South Africa context it is important to note the benefits provided by the licensing approach contemplated in the Electronic Communications Act (ECA). Ad hoc regulatory intervention is unlikely to bring down communication prices in South Africa in a material manner unless one changes the entire cost structure of the business and the sector. This is not plausible. The speedy introduction of more facilities based competition will be the best regulator of price for the sector. The ECA envisages a situation in which the two public switched telephone network (PSTN) providers can effectively become full scale mobile telecoms operators.

With regard to the implementation issues, a number of challenges arise from various related questions that need to be answered going forward:

1. In a managed liberalisation model common to so many African countries the first question affecting IP networks and services is whether to legalise new services and for countries where already legalised, what aspects of these new services require regulation? As with all regulation, enforcement questions also arise.

2. How much regulation is necessary, when is it appropriate and how should it be effected to best create an enabling environment? For example, should IP network development be regulated or allowed to evolve organically? Will the organic model ensure that capital investments are protected, or is regulatory oversight required? Or will opening markets simply induce appropriate risk assessed investment?

3. In terms of what to regulate should one for example distinguish voice including Voice-Over-Internet Protocol (VoIP) as a service still needing to be treated with a distinct set of policy, legislative and regulatory provisions?

4. In terms of sequencing, is it more urgent to address legacy competition issues to prevent entrenching already unfair advantages in the market? Is it just incumbents that might need regulatory oversight or new entrants as well and if so, to what degree?

Setting aside for a moment the question of adequately regulating the dominance of incumbents many of these challenges emanate from an attempt to regulate new services in a legacy fashion which gives rise to numerous possible questions.

For example: Is consumer interest regulation required ensuring fair pricing and quality of service or can regulators abandon this objective if markets are fully competitive? How should numbers be allocated? Or interconnection regulated, if at all? Where broadcasting has traditionally attracted a more interventionist regulatory approach than telecommunications, at least with respect to content, how should regulators approach Internet Protocol Television (IPTV)? Can or should we regulate content in a converged "always on" world where content delivery models are entirely different from what we have known? Are platform independent approaches to regulation possible? And importantly how is the public interest to be promoted in the context of this rapidly evolving IP enabled communications environment?

Breaking down some of those challenges, I offer some of the main ones, but caution that the list is not exhaustive. We know that IP network and services are in an evolutionary phase and regulators are beginning to grapple with some of the questions. No one yet has the answers except that it is imperative that regulators "get the framework right" which also links to the issues of credibility, reduction of investment risk and increased certainty.

Licensing

Licensing is a regulatory mechanism used to control access to a market and to stipulate rights, responsibilities and obligations for licence holders. In the IP network context, it is clear that countries need to move away from service and technology specific licensing which restricts the way in which technology is used and can prevent operators from benefiting from economies of scope. This requires a shift away from traditional vertically integrated licensing towards more horizontal licensing that better reflects the technical and logical separation of the core, access and service layers on NGNs. Where national policy has not yet matured organically regulators and policy makers need to consider classes and types of licences to be used and whether this will require a new set of licensing criteria and conditions to be developed or whether existing ones will suffice. Simply reforming the law in this regard is not enough; the actual implementation of the licence terms and conditions must create the enabling environment the policy seeks to achieve.

In India, the Telecom Regulatory Authority of India's (TRAI's) consultation has found that PSTN operators appear to be migrating to IP based transport leaving the access part of the network (historically narrowband) unchanged. Regulators need to ensure through licensing and other enforcement mechanisms that the introduction of new networks by incumbents does not have the unintended consequence of blocking competition from new and smaller players. As mentioned earlier, however, a facilitative broadband policy environment is critical for IP based networks to flourish, as full NGN transition is highly dependent upon the success of alternative technologies such as cable television (TV) and WiMax. As such access to the local loop through unbundling to avoid the duplication in the access network is a regulatory necessity.

Numbering

Numbering allocation has historically been aimed at fixed and mobile traditional networks. In the IP environment with multiple service offerings most notably VoIP, new market players and VoIP providers must have access to numbering resources. At the same time numbering, naming and/or addressing schemes will need to encompass legacy, transitional and NGN services and associated directory services will need to be developed. This is critical for users of those services to have any connectivity and communicate with users and subscribers of any other network. While a number used to indicate geographic location, VoIP services now allow for "virtual" numbers. This enables persons living in one area to be assigned the dialling code of another to enable calls to appear to be "local" in origination. Regulators will have to review their numbering plans to ensure that it can support new resources while ensuring the interoperability of new and existing services and emergency services. This may also necessitate a potential specific number allocation scheme to differentiate IP telephony from PSTN numbers. Finally, attention will have to be paid to telephone number mapping (ENUM) developments as its eventual maturation will require national implementation.

Spectrum assignment

Spectrum challenges emanate from the fact that incumbent operators have preferential access to frequency spectrum for the provision of fixed, fixed-mobile and mobile services. Spectrum is limited and many of the key assignments have already been made.

IP allows alternative technologies like WiMax and high speed broadband Internet access over wireless connections. As WiMax can be used over long distances, this technology is an effective last mile solution or alternative for broadband to the home. Such technology also facilitates a digital divide bridging opportunity in low density areas where technical and economic factors make broadband deployment very challenging. It also allows fixed broadband access in urban areas where copper quality is poor or absent. Policy makers and regulators must ensure that legacy assignments do not hamper the introduction of new services and entrants.

In South Africa various new players are seeking to offer WiMax services on a national scale. Other licensed operators such as the under serviced area licensees and the new national fixed line entrant licensed in 2005 require access to the 800 MHz band (822 – 830 MHz - channel 65) for the deployment of non broadcasting services, essentially, Code Division Multiple Access (CDMA). The regulator is currently undertaking a public process to assess the viability of new operators sharing this band for non-broadcasting purposes with the incumbents in the band. At the same time the process is mindful of wanting to encourage innovative applications without causing harmful interference to other services co-existing in the same spectrum.

Consumer issues and protection

As with traditional circuit switched networks, IP networks and NGN migration is not likely to change the need for regulatory oversight to ensure adequate consumer protection. Issues that will require attention but are not limited to quality of service, emergency services, location information, rights and presence management, portability, operators' liability, privacy and security. Some specific risks are posed to interoperability by the development of new services on a competitive and proprietary basis, risks that existing telecoms with a large share of the Internet access market could degrade quality so that real time services and applications do not work adequately over the Internet in trying to retain voice traffic on the PSTN, various risks to privacy, call tracing for unlawful purposes and fraud.

Some regulators are beginning to grapple with these challenges as they arise. Others have embarked on a broad consultative process to ensure that the issues are addressed in advance of full NGN migration.

The Office of Communication (OFCOM), like TRAI have also acknowledged the importance of a co-regulatory approach with regard to consumer issues, and British Telecoms (BT) have already undertaken to participate in a new body which could address these issues on an industry wide basis. Ultimately consumer issues need to be kept central to any approach to IP network and services migration. Keeping consumers well informed on the migration process at all times, allowing for public participation and attempting to meet consumer needs will assist greatly. In the interim regulators and policy makers must give detailed attention to the quality issues for Internet access, e.g. ADSL contention ratios and appropriate Quality of Service (QoS) parameters need to be defined.

Security risks, privacy and law enforcement

The PSTN and mobile network is a closed network with controlled security and privacy. IP based VoIP is open architecture where vulnerabilities, threats and risks for communication security exist in various network elements.

These networks thus pose particular security challenges requiring special measures. In the current global political climate this may also require a reconsideration of the arrangements for State lawful surveillance and many countries make network and services licences conditional on those networks being surveillance enabled. Possible questions include where and in what form should interception of communications be undertaken in multi proprietary standards service architecture with dynamic, indeterminate routing? How should the costs implications associated with these requirements be dealt with? This cost implication is more acute in IP based networks, which unlike circuit switched, do not have a dedicated path through the network. Monitoring and surveillance on these networks may require additional costs and investment in special equipment which can also serve as a barrier to entry.

Emergency Services

Emergency priority services which are supported in the PSTN environment are critical for obvious reasons and cannot be compromised in the new IP or NGN environment.

The main challenge in the IP space is the nomadic nature of VoIP. There is no certainty about locational data which is essential to the accurate response for emergency calls where the person is unable to convey that information. Geographic numbers convey information and are used for routing such calls to the nearest "emergency centre". With VoIP there may well be a complete separation between the provision of the voice service and the transport of the voice data. There is at least currently no way of conveying location information about the user calling an emergency service between internet service providers (ISPs) and VoIP providers. However in the future technical solutions like that of Intrado are expected to emerge and be able to convey data about static, mobile and out of area numbers. Regulators will have to consider the types of provisions that have to be made to ensure accurate location information.

2. Enforcement and monitoring and enhancing regulatory capacity and credibility

Ultimately many of the challenges going forward require significant skills and human capital at the policy, law making and implementation levels. As is generally the case the role of the regulator and the role of the market have to be carefully balanced. Regulation must be used to bring certainty but if it is premature or prescriptive it can pre-empt the role of the market in determining the shape and form of competition. On the other hand intervention that is too little or too late, can result in their being no competition at all. Efficient and effective market development may not in all cases require new policy interventions or national regulatory intervention at all. Some policies may just require some modification while others may require new and targeted policy decisions. As is the case generally with telecommunications reform, the sequencing and degree of reform is critical.

The persistent problem of attracting and retaining skilled personnel is a key issue in the context of NGNs. This can only intensify under the pressure to effectively and efficiently regulate IP networks and NGNs. Many of the existing personnel within regulatory bodies are accustomed to neat lines between telecommunications, broadcasting and spectrum management. Convergence has presented enormous challenges for this silo organisational design.

More than ever, regulatory agencies remain skill incubation centres for the sector and we all face major skill losses to industry. Rather than delve into the complex nature of this problem, it may be more worthwhile to highlight the increased importance of knowing what skills reside in-house and how to effectively use public consultations and other regulatory resources to top up information gaps. Even where human resource (HR) constraints are absent some regulators appear to be hinting at greater co-regulatory approaches with stakeholders based on the common interest held in addressing the problems and challenges at hand. Regulators also need to be mindful of the fact that the full migration to IP based networks and services can create some concern for operators and service providers in terms of business models and operations. The regulator needs to ensure that any such transition is as smooth as possible with clear forward-looking interconnection regime and adequate industry involvement.

Examples where joint consultations, including joint industry working groups are under construction include OFCOM which has established "NGN committee"; TRAI in India has also proposed to establish "NGN Expert Committee (NGN eCo)". This is in no way an abdication of oversight responsibilities but ways to manage better the complex regulatory challenges NGNs pose. These forms of co-operation allow the regulator to engage and better understand business models, drivers and propositions and how best to avoid regulatory induced failure.

Beyond NGN deployment, it is important for regulators to have watching briefs of international developments particularly regarding standards and numbering. There are also limits to national legislation in an environment where there is separate service, network and access provision.

While this can make regulation much more difficult, it will also lead to the increasing offering of services from one location to users anywhere in the world and increases in cross border consumption of services from an operator in one country to consumers in another. National and even regional legislation where it exists may be inadequate and may need to be addressed.

Greater co-operation with other regulators and placing these matters on the agenda of regulatory associations will also be of great importance.

Finally, it is not only the regulator and policy makers that face these challenges. New challenges exist for incumbent fixed and mobile operators and new entrants. The latter's challenges are very similar to the ones the regulator faces but also challenging for the new entrant and ISP is going to be the degree and intensity of competition on and between layers. IP networks provide the opportunity for third parties and service providers to develop and provide value added customer services over the networks owned by other operators. As such the separate transport, control and application layers also enable different operators to compete with each other in different layers.

As these layers should be open, competition is likely to be fierce, providing great consumer welfare benefits and opportunities to innovative service providers. But a clear and fair, transparent and well implemented ex ante competition regime will have to be in place for new entrants to be guaranteed timely entry to the market. Quantum is unpredictable at this stage but there will also be increased additional costs for compliance with specific consumer focused issues such as QoS or security requirements for emergency services and lawful interception.

These may serve to be prohibitive for smaller players. Finally, there is always concern by providers that a rigid and inappropriate application of current regulations may limit consumer benefits.

It's a challenging time for mobile and fixed incumbents who see both threats and benefits to IP network and services migration. There may be savings and efficiencies in the architecture but mobile operators for example, who have invested considerable sums in third generation (3G) licences, are also threatened by the potential of VoIP voice substitution. Users of 3G networks can now use mobile phone to make voice calls using Skype (to Skype subscribers) at the cheaper data rates. This will particularly affect the high price international roaming business under review in many jurisdictions. This presents a dilemma for the regulator/policy maker, whether to focus on protecting the investment of the mobile operator and delay cost saving innovations for consumers or to allow wireless enabled mobile VoIP to flourish? And these questions are particularly pertinent for regulators and policy makers in developing countries where the choice is often between defending a government owned telco incumbent (for financial and social reasons), and the distributive policy aspiration of making cheaper communications available to a wider number of people particularly in rural areas.

It is still unclear how telecommunications networks will develop at a technical level over the coming years, but it is clear that IP migration and ultimate full NGN transition represent a logical commercial development for all operators as they increase efficiency, facilitate service and pricing innovation and allow for lower backbone transmission costs.

In conclusion let me make the following remarks.

All of us here accept the reality that we that we have to function in an increasingly globalised digitally networked economy. A world in which at the touch of a keystroke we are able to traverse vast distances between us, crossing borders and closing time zones by the transmission of information, data and images in a matter of seconds. Our ability to communicate and to be in touch is almost instantaneous and ubiquitous.

What this means is that if we are to be a leading nation in the knowledge economy in a globalised world we have to be up to it, up there and competing against the best in the world.

It means that we have to overhaul our capacities as a nation in the various arenas of policy and regulation, infrastructure, human capital development, industrial enterprise, research innovation and development and public and private sector investments in Information and Communication Technologies (ICT). What is needed is nothing short of a revolution in ICTs to make South Africa a winning and leading nation amongst the world's best.

This challenge is a task that falls on the shoulders of every one of us who are here, and also those who are not here and are at home. We have to mobilise the passion and commitment of a massive array of forces both within government and in the private sector and in the general populace as a whole. We will have to assemble a critical quantum of social forces, develop a mass momentum of consciousness and activism amongst the masses of our people and generate a higher level of awareness and consciousness of the need to participate in the digital economy and to be connected within a broad movement of "information technology (IT) for all". It is this critical force that must be the vanguard and lead an IT revolution in South Africa.

I have raised my hand and thrown my hat in the ring. The question is, will you join me? Judging from the vibes that I pick up from the buzz of your three-day conference I have no doubt that you will!

I thank you!

Issued by: Department of Communications
3 November 2006
Source: Department of Communications (http://www.doc.gov.za/)