The new dichotomy of connectivity and services

Technological innovation, competition and regulation shape the telecoms sector. The entry of OTT providers has one the one hand been more of the same, but on the other hand it is causing big changes. If we take a step back to see how the sector changed over the past two decades or so, this is what appears to be going
on.

First, let's look at what we have to work with:

• Telecoms is a privatised free market.
• Regulation consists of defining markets, ascribing significant market power and applying remedies (on the wholesale or retail level).
• There are two infrastructures (in most countries to at least some extent): copper (nationwide) and coaxial (regional).
• Telecoms is a scale business. The entry barrier (capex, licenses) is very high. It has a tendency towards a monopoly, duopoly or oligopoly.

In the old days, the wider telecoms market was about traditional managed services (voice, SMS, TV). There was a somewhat artificial distinction between line rental (basic charge, fixed) and a usage-based fees. Competition was inter infrastructure (copper vs. coaxial) of intra infrastructure (unbundling, reselling). A three-layer model (passive, active, managed services) could be applied. The incumbent telco was regulated, the local cable company (lacking nationwide coverage) was not. When services such as CS and CSP rose, a rebalancing in the voice market started to happen: as usage fees went down, line rental charges went up.

Today, a fourth layer is added: IP, enabling OTT services (VoIP, IM, unmanaged IPTV). Unbundling appears to be too expensive for most challengers, but OTT brings a new form of competition, at least in the services space. Infrastructure-based competition is reduced to copper (upgraded to fiber) vs. coaxial (HFC). A rebalancing is going on, as traditional managed services are being replaced by non-managed OTT services. The new distinction is between service revenues (dropping) and connectivity. Limited infrastructure competition may lead to rising connectivity prices. Especially when the infrastructure players not only see services revenues dropping, but at the same time investments must be made in NGA networks (FTTH, LTE, WiFi). Hence, they are asking for a regulatory holiday to first roll out the NGA and accept regulation at a later stage.

In the services domain, net neutrality rules are designed to protect the OTT players in order to create a higher level of competition. Looked at it this way, other regulation is no longer needed.

That leaves lots of questions regarding connectivity:

• Is two enough in fixed-line competition (copper, coaxial)? In mobile, is three enough?
• Is LTE a fixed-line replacement? Is WiFi a mobile replacement?
• Is infrastructure a natural monopoly? Is it really a utility, such as water, gas, sewer, electricity?
• Is structural separation the answer? Is regulatory symmetry needed, i.e. structural separation of cablecos as well?