THE POWER OF THE INVISIBLE HAND
“In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so,” stated Adam Smith in the Wealth of Nations in 1776¹. Regarding telecommunications, the first condition has held since the introduction of telegraphs and it continues to hold: voice services, broadband and TV are all highly advantageous to the public. However, the competition is far from free or general. Many of these markets are still dominated by a few strong players.
Telecom network business is characterized by high upfront investments and sunk costs. These have created high entry barriers and led to natural monopolies. To prevent the monopolists from charging monopoly prices the regulators have imposed a wide range of price regulations, such as cost-oriented pricing and price ceilings. While price regulation has its merits it fails to cure the real problem, lack of competition. Price regulation focuses on network sharing and efficient use of capital but does not encourage investments in new infrastructure. In fact, price regulation may even discourage network investments and thus strengthen the natural monopolies². The expected market development not only asks for but also provides a chance for reversing the course of regulation.
Fixed broadband operators are upgrading their networks to fibre, mobile operators are expanding to new frequency bands and terrestrial TV operators are switching to DVB-T2 and high definition. All in all, the telecommunications market is undergoing a number of potentially disruptive changes. This provides the regulators with ample opportunities to promote platform competition. For example, the shift from copper to fibre enables building of parallel access networks especially in city centres and other densely populated areas. Technological shift can thus mean a shift from natural monopolies to competition. Similarly, the digital dividend with the recently allocated second digital dividend³ open more than 160 MHz of fresh frequencies in the sub-1 GHz band to mobile operators. This provides an exceptional possibility to move from oligopolies to real competition. Finally, the switch to T2/MPEG4 technology in terrestrial TV gives room for new entrants in terrestrial TV market. The regulators should seize the opportunity before all these new assets are captured by the current oligopolies.
Introduction of the current price regulation schemes two decades ago was the fundamental first-aid to cure market failures. However, today’s market development complemented by technological disruptions asks for new remedies. Now is the perfect time for the regulators and policy makers to reverse focus from use of capital and intra-platform competition to creation of capital and inter-platform competition. The invisible hand of the competitive market is likely more powerful than any regulative measure can ever be.
¹ “Adam Smith (1723-1790) was a Scottish philosopher and economist who is best known as the author of An Inquiry into the Nature and Causes of the Wealth Of Nations (1776), one of the most influential books ever written.” http://www.adamsmith.org/adam-smith
² Price regulation often fails to recognize all the risks included in the network investments that leaves the regulated network owners without full return for their investments. On the other hand, regulation provides the network lessees with a risk-free option to enter the market. In sum, the regulation discourages investment by both incumbents and new entrants.
³ WRC-12 allocated the 700 MHz band to mobile (in ITU region 1) in February 2012. The allocation comes into force only after WRC-15. The first digital dividend, i.e. the 800 MHz band, has already been assigned to operators in a few countries.