Over-the-top: let’s not kill the goose that laid the golden egg

The European Commission would like to see a more digital Europe and more telecoms network investment, but the term “level playing field” sends mixed messages.  For some it means more regulation of internet services, potentially killing demand for enhanced networks — and thereby killing the goose that laid the golden egg.

Some telecoms network operators have argued that over-the-top services have undermined service revenues, jeopardised investment and play by unfair rules.  Other operators see it differently, welcoming increased demand for network access.  For example, the chief executive of UK mobile operator EE has said the growth of mobile-messaging services like WhatsApp isn’t a threat as the sector’s growth is driven by data-hungry consumers.

Put simply, is demand good or bad, and should we regulate more or less in response to competition from over-the-top services?

Demand is good, provided your business model and pricing are aligned with the source of demand.  The rate of growth of mobile and over-the-top communications applications caught many by surprise, and ate into legacy voice and SMS revenues.  Regulatory headwinds didn’t help.

Growth in over-the-top services has been rapid not just because such services were cheap or free, but because they included new features valued by consumers.  They introduced features such as the ability to work over Wi-Fi, device interoperability, presence, photo and video sharing and ways of contacting people without the need for a phone number.  

An operator making good returns from voice and SMS, and seeing limited data growth, would have little incentive to build out a 4G network.  Yet alongside the loss of legacy service revenues was an opportunity to monetise data demand.  Operators are now pursuing this opportunity — restructuring tariffs and investing in network quality, capacity and coverage.  Data demand rather than voice and SMS drive investment in broadband access.

Turning the clock back to the turn of the century, we can see in retrospect what happened when operators invested in spectrum for 3G ahead of the revolution in mobile and over-the-top.  Without new applications additional spectrum had little value.

So demand is good.  But not only is demand growth good, it is essential to avoid declining revenues.  The reason for this is that a combination of technological progress, spectrum reallocation and increased utilisation of data networks is driving down unit costs.  Without growth in data demand, mobile industry revenues will decline.  Like Alice in the Red Queen’s race, the industry has to run to stand still.  

That leaves the question of regulation.  Over-the-top services have increased competition; that surely argues for less, not more, regulation.  Over-the-top applications are also more interoperable than legacy services in some respects, in particular their ability to work across device and network types, including Wi-Fi.  This interoperability has contributed, for example, to the European Single Market by allowing consumers to bypass cross border and roaming charges, and to utilise richer forms of communication.

The regulatory burdens on network operators do need to be reviewed to see whether they still serve the public interest in an altered market.  Where obligations may be considered desirable, for example, in relation to ubiquitous coverage and emergency calling, efficient funding approaches should be considered — either tax funding or implicit funding via reduced auction receipts.  

Networks and applications are complements.  Let’s not kill the goose that laid the golden egg.  Instead, let’s all focus on leaving as much space for innovation as possible by both network and application providers.

Brian Williamson is a Partner at Plum Consulting who specialises in telecommunications, radio spectrum and internet related policy issues.  His work on Internet policy includes “The internet – the new helping the old”, and “All about that app” both published in 2015; prior studies include “Over-the-top – hindering or helping achieve European Digital Agenda goals?” and “The open internet – a platform for growth.”