In July, we launched the series entitled EC White Paper, where we present Telefónica’s contribution to the public consultation on the White Paper. As a result of this consultation, the Commission will present a legislative proposal, the Digital Networks Act , which will determine the future of the European Union and the telecommunications sector in the next decade through a new regulatory framework.
The first post looked at the proposed future for the telco sector, the second post looked at the new challenges facing the new Commission. The third addressed the Internet imbalance and the fourth post dealt with the issue of access regulation. In this fifth post we looked in depth at whether the regulatory model limits innovation in the telco sector.
The impact of regulation on innovation
It is generally accepted and known, both in academia and by entrepreneurs, that regulation limits innovation. At a theoretical level, the economist Israel Kirzner describes how regulation distorts the competitive process in ways that are undesirable for society, mainly by inhibiting innovation in those aspects that it limits. From the business world, prestigious figures such as Eric Schmidt (former CEO of Alphabet), Peter Thiel (founder of Paypal) and Satya Nadella (current CEO of Microsoft) have expressed their concern in this regard.
Innovation and regulation of digital networks
One of the most insidious aspects of regulation is its unintended consequences. Rules that seem to pose little constraint on entrepreneurial activity become tremendous obstacles when the environment and society’s preferences change.
At the same time, many of the effects of regulation are not visible, since what they have caused is the inhibition of creativity, and no one will ever know what no one created because their conditions were regulated.
In the context of the review of the EC White Paper on digital networks, it is worth recalling these lessons, which make it necessary not only to be cautious about establishing new regulations that interfere with the market, but also to go further and even consider eliminating obsolete rules in view of the current situation. In the European Union, it is proving to be very easy to introduce new regulations into the market, but virtually impossible to remove them once they have become outdated and obsolete. However, these obsolete regulations continue to interfere in unexpected ways with the innovation of actors in the sector.
Effects of Open Internet Regulation
In the telecommunications market, for example, we have the Open Internet Regulation (OIR-Open Internet Regulation) which, on the pretext of ensuring network neutrality, de facto prevents operators from managing the network to adapt its use to the demands of its users at any given time.
From the outset, the academy warned about the effects that Net Neutrality rules would have on the innovation of telecommunications operators but this has only recently become apparent. The most striking case has been, and still is, the prohibition of zero-rating services to users, a consequence of the Court of Justice’s interpretation of the regulation. No other jurisdiction has banned this type of service, which is clearly beneficial to users.
Moreover, at present, many operators’ efforts to innovate and exploit the potential of 5G networks are greatly hampered by the uncertainty surrounding OIR.
No one wants to be the first to jump into investments that may later be devalued by a restrictive interpretation of the regulation. The most prominent example is network slicing, a technique by means of which virtual networks can be created adapted to the very specific needs of both companies and end-users. Network slicing is hardly visible in Europe, but already making a lot of noise in China and the United States.
The aforementioned regulation was adopted in a context in which it seemed that telecommunications operators could act as gatekeepersof the information society. Almost 10 years later, the situation has nothing to do with the one that supposedly justified that regulation, and it is other players who have set themselves up as such.
This is very serious for the future of the sector, as it would limit the potential to make profitable the investments made in spectrum, equipment and technological and commercial development, and also for European society and its companies, which would be relegated to a second division compared to other regions, as they would not benefit from the technological advances offer by 5G and network slicing.
In this context, the European Commission should develop more flexible OIR Interpretation Guidelines tailored to the needs and realities of the digital ecosystem, with the aim of ensuring the legal certainty necessary for innovation in the development of commercial proposals that take advantage of the full potential of 5G and network slicing. This is in line with the guidelines adopted by the UK regulator OFCOM.
Effects of ePrivacy Regulation
If these are the effects of an outdated regulation such as the OIR enacted almost 10 years ago, it is easy to imagine the devastating effects of a 22-year-old regulation, adopted in a context in where the existence of what we now call gatekeepers was not even imaginable.
But that is the case of the ePrivacy Directive, which imposed strict limits on what telecoms operators could do with their customers’ data in order to provide innovative services. All companies, both telecoms operators and those in the digital ecosystem, have to comply with the General Data Protection Regulation, or GDPR, adopted in 2016. In addition, telcos have to comply with additional privacy obligations imposed by the 2002 ePrivacy Directive. This dual regulation of the telecoms sector affects the global competitiveness of European companies vis-à-vis their international counterparts, and vis-à-vis companies in the digital ecosystem, only required to comply with the horizontal regulation of the GDPR-.
The e-Privacy Directive imposes restrictions that limit the flexibility and use of metadata, crucial for innovation in smart grids, 5G services, and Internet of Things (IoT) applications. According to the GSMA and Connect Europe, the current e-Privacy rules emphasise strict consent, limiting the ability to process data that could be used in innovative and secure ways.
Specifically, Open Gateway provides a way for operators and developers to collaborate in creating innovative services through open and shared interfaces. However, the e-Privacy Regulation requires explicit consent, without allowing for other justifications as the GDPR does, which means that operators must limit access to certain data or ask for authorisation each time they wish to share information with external applications. This limits the potential of Open Gateway as a platform for experimentation and agile development of new applications, as the process of obtaining consent can be complex and discourage the use of Open Gateway solutions, slowing down innovation.
The collection and analysis of user data allows telecoms operators to personalise their services and optimise the customer experience. However, e-Privacy compliance restricts the possibilities to exploit this data. European telecoms face greater barriers to innovations in advanced personalisation services, such as the use of artificial intelligence or in IoT, such as predictive analytics for infrastructure maintenance or energy resource optimisation, where access to real-time data is key to their operation.
In addition, the need to comply with e-privacy rules through extensive and often costly data processing procedures can deter new players from working with telecoms operators, as red tape slows down the development process and increases costs. This puts European telecoms at a disadvantage compared to other, more flexible markets where developers can quickly test and deploy advanced digital services without the same regulatory barriers.
In this sense, the sector requires the elimination of this lex specialis -ePrivacy-, which only applies to the European telecoms sector, so that it is only subject to the horizontal regulation (GDPR).
In short, one of the priorities of the future Digital Networks Act should be to encourage innovation within the telecommunications sector ,in the context of the recommendations of the Letta y Draghi reports,. This means ensuring that obsolete regulation does not have unintended consequences on the functioning of the telecommunications market, limiting the capacity for innovation and without generating appreciable benefits in return. It is therefore urgent for the European Commission to repeal the ePrivacy directive and to develop guidelines for the interpretation of the RIA to improve the legal certainty of new services based on 5G and network slicing.
Europe has no time to lose; innovation does not wait, and it will develop in regions whose regulatory regime does not limit it. Do we want Europe to be a driver and beneficiary of innovation?
In the next post we will go into more detail on spectrum and band allocation.
