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The Layered Playing Field

· June 23, 2015

Recently Politico reported on Deutsche Telekom CEO Timotheus Hottges calling for “free competition” while reporting the company’s strong financial results, reliable dividend and strong free cash flow. But “free competition” in what? Mobile telephony?

Deutsche Telekom (DT) spokesman Philipp Blank clarified that “What we want are open platforms and inter-operability” apparently a reference to messaging applications such as WhatsApp, Apple’s FaceTime, Skype and Viber. DT wants such apps to be made interoperable with SMS. These demands have also been made by Telefonica and coincide with the European Commission’s recent release of the Digital Single Market strategy. Both companies want the European Union to bring about a ‘level playing field’.

Is this a good idea?

Rather than think about a level playing field, something the firms above have called for, a better way to approach this debate would be to think about a layered playing field.

Aficionados of the Internet know that there are seven layers in the Internet (the OSI protocols). These start at level 1, the physical layer such as sockets, and make their way to level 7, the application layer. Each layer has different characteristics, but each level needs to be able to talk to the other layers otherwise the Internet would not work. This ‘stack’ reminds us that all Internet activities are not the same. The market dynamics, and therefore regulation, are also not the same.

As we have written previously here at DisCo what constitutes an insurmountable bottleneck in certain layers, may not in other layers. Previous telecoms rules have mixed measures to introduce competition where there are bottlenecks that cannot easily be circumnavigated (e.g. the last mile) with consumer protection measures. The rapid rise of online services and applications means that some of these measures may no longer be necessary.

Others however, are. Telecommunications services depend on a number of scarce environmental resources. Radio spectrum is a good example as it is limited and its use is controlled by government. Digging up streets is also controlled by government. Building last mile telecoms networks requires tremendous amounts of capital.

By contrast, developing and marketing an application such as Skype requires no access to government controlled resources and can be done at much lower cost. WhatsApp was famously a company of some 50 people when it was acquired by Facebook. It had outmanoeuvred much wealthier rivals such as Skype, Facebook and Google to get to that position and at a fraction of the cost. These services are also considerable drivers of demand for next generation broadband services, without which there would be no investment case for such infrastructure and services.

New messaging market entrants come along all the time. A quick look at the usage figures for popular messaging apps is illustrative:

WhatsApp (founded 2009) – 800m users

Skype (founded 2003) – 300m users

Snapchat (founded 2011) – 200m users

WeChat (launched 2011) – 500m users

Blackberry Messenger – 91m users

As Benedict Evans notes, switching is also very easy given that each smartphone messenger app can access the address book and photos on the phone and there are no space limitations. The key features of interoperability are performed by the smartphone operating system.

SMS usage is down over the last few years but still constitutes a major means of communications. The Open University reports that “90% of people in the world send a text message every day”. This would put the combined users of the SMS system at around 6bn users. Additionally, people exchange “messages” via email and increasingly photo-sharing apps like Snapchat.

So given these market dynamics do we have and do we need interoperability?

Interoperability is often a good thing and makes particular sense where is there is a dominant system and where market entry is problematic. In these situations interoperability enhances customer benefit and innovation. But this does not seem to be the situation here with numerous competing systems and easy market entry.

To return to Deutsche Telekom, it is suggesting that messaging applications should interoperate with SMS. There seems to be little need for that if competition and innovation are your goal. Perhaps more importantly it has also missed the point that Internet-based messaging apps are actually more interoperable than SMS.

Users of an application such as WhatsApp are able to send messages not only when on the mobile phone network. They can also send when on Wi-Fi.

Users of Skype or Viber can make calls and send messages over Wi-Fi from a mobile phone, from a tablet and from a PC/Mac, including over a fixed line.

SMS cannot do this. One mobile operator’s SMS service connects to another, but to a very limited range of networks and terminal equipment. Should we mandate SMS function on other devices and over Wi-Fi? Should we mandate that SMS be interoperable with an enterprise IT system provided by a company like IBM?

Both of these would seem to be regulatory overkill. Something that I think many agree we should avoid. Policymakers working on the Digital Single Market should focus on smart regulation, evaluating where bottlenecks do and do not exist in 2015. By doing this, and not being drawn to the complaints of vested interests, policymakers can deliver a dynamic Digital Single Market that nourishes all players in the value chain that are prepared to invest and compete. They need to aim for a layered playing field.

European Union

DisCo is dedicated to examining technology and policy at a global scale.  Developments in the European Union play a considerable role in shaping both European and global technology markets.  EU regulations related to copyright, competition, privacy, innovation, and trade all affect the international development of technology and tech markets.