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Written by Dr Steve Unger

Regulating the digital sector

Steve Unger looks at the history of telecoms policy and the role of regulation vs competition.

Circuit board

How to regulate the digital sector has become a pressing policy question around the world, including here in the UK, with the recent publication of the Furman Review on competition in digital markets and the Government’s Online Harms white paper.

One of the first reviews ever carried out into an electronic communications market was the review into the operation of the electric telegraph carried out by Frank Ives Scudamore and published in 1866. It identified the following concerns:

“1st. That the existing charges for the transmission of messages are too high, and tend to check the growth of telegraphic correspondence
2nd. That under the existing system there is often very great and vexatious delay in the transmission of messages, and much inaccuracy in the rendering of the same
3rd. That many important towns, and even whole districts are unprovided with facilities for telegraphic communication”

These same three concerns – high prices, poor quality of service and limited availability – have featured prominently in many investigations in the subsequent 150 years.

In 1866 the solution adopted was to nationalise the provision of electronic communications, in order to eliminate what Scudamore referred to as ‘wasteful competition’.  That experiment lasted over a hundred years, until 1982 when the BT network was transferred back into the private sector. The reasons given for privatisation - that it would deliver “stable prices, improved efficiency and a higher quality of service”1 - closely mirrored the original rationale for nationalisation.

To this day we are still looking for an answer to these concerns, suggesting perhaps that there is no perfect answer.

I’ve spent much of my career worrying about competition in telecommunications, in particular how to address concerns arising from the enduring dominance of incumbents such as BT. Last year I stepped down from the Board of Ofcom, the UK’s communications regulator, where I had started considering how to apply the lessons learnt promoting competition in traditional communications markets to online platforms.

Of course, there are many differences between telecoms networks and online platforms, and I do not start from a position that the type of detailed regulation which applies to the former would be appropriate for the latter. But it is usually sensible when looking at a new problem to ask what lessons can be learnt from experience.

The first lesson is the post-Scudamore one that it is generally much easier to identify a competition concern than it is to fix it.

The second lesson then relates to the choice that is sometimes necessary between promoting competition and using direct regulation to deliver desired outcomes. This choice is at the heart of much of the current debate about online platforms. In traditional telecoms, it’s a debate which has played out for almost 40 years, since Stephen Littlechild (a leading architect of the economic regulation of privatised industries) wrote2 shortly after the privatisation of BT that:

“Competition is indisputably the most effective means – perhaps ultimately the only effective means – of protecting consumers against monopoly power. Regulation is essentially a means of preventing the worst excesses of monopoly; it is not a substitute for competition. It is a means of ‘holding the fort’ until competition arrives.”

However, telecoms regulators have ended up “holding the fort” for very much longer than was originally expected. The lesson I take from this is that we should avoid a theoretical debate about the respective roles of regulation and competition in relation to online platforms. A degree of pragmatism is needed when considering what models of competition are likely to be sustainable, and under what circumstances some form of regulation might be appropriate.

This emphasis on pragmatism leads to a third lesson, that regulation must be designed to be effective in practice. It needs to go with the grain of the market, whilst addressing specific consumer harms in a targeted manner. These goals might be dismissed as obvious, but the history of telecoms regulation in the UK is again instructive:

  • For more than a decade after BT was privatised policy makers prioritised the creation of ‘network competition’. Companies were encouraged to enter the telecoms market and build their own networks in order to compete directly with BT. However, that model of competition turned out to be unsustainable, due to the scale economies intrinsic to telecoms networks. Most of the companies that tried to compete with BT on that basis went bust (including the company that I was working for at the time ☹).
  • Towards the end of the 1990s policy makers turned to an alternative model of ‘access-based competition’. They accepted that a telecoms network is to a certain extent a natural monopoly. Instead of promoting the construction of alternative networks, the focus switched to ensuring effective competition between different companies delivering services over the same underlying network. As part of this process we created Openreach, to ensure that the operator of the underlying network did not discriminate between different retailers.
  • In 2015 I was responsible for leading Ofcom’s most recent review of digital communications. A key conclusion was that whilst the retail competition enabled by Openreach had delivered benefits, the lack of competitive pressure on Openreach was a concern. It meant that the service delivered by Openreach, as a monopoly supplier of wholesale services, was too often ‘equally poor for everyone’. We decided we needed to encourage more competition to Openreach and made several changes to the regulatory framework to make this type of network competition more sustainable than it had originally been.

In summary, the last few decades of telecoms policy has been a voyage of discovery. During that voyage we have tried to understand which parts of the market are capable of sustaining competition, what model of competition is most likely to deliver good consumer outcomes, and how to regulate what’s left in a manner that is targeted and effective. I don’t think we’ve done a bad job, but it’s also important to acknowledge that we have not always got it right.

So lesson number four is the need for a degree of humility.

In my next post, I consider how we might start applying these lessons to online platforms.


Footnotes

[1] The Future of Telecommunications in Britain, Statement in the House of Commons by the Secretary of State for Industry, 19 July 1982
[2] Regulation of British Telecommunications’ Profitability, Report to the Secretary of State, Stephen Littlechild, February 1983

  • About the author

    Dr Steve Unger, Affiliated Researcher

    Steve Unger was until recently a Board member of Ofcom, the UK regulator responsible for digital communications. He had various responsibilities, including setting regulatory strategy for the UK, representing the UK in international negotiations, and leading Ofcom's technology programme. He spent a brief period as ...   Learn more

    Steve Unger