The Main Regulatory Issues Within the Industry and Their Impact Upon the Legal Marketplace in 2007

01 March 2007

Mark Verbiest, Group General Counsel,

David Knight, General Counsel, New Zealand and

Debra Blackett, Assistant General Counsel, Group Competition and Regulatory, Telecom New Zealand Limited

Technological Convergence 

There is a distinct likelihood in many jurisdictions for an increasing disjuncture between technologically based regulatory law and rapid technological convergence. 

Convergence is a key competitive focus for the industry and is driving further industry consolidation to enable operators to supply bigger and better packages to their customers. A recent example is AT&T’s acquisition of BellSouth, which was allowed by the FCC subject to extensive conditions. The merger gave AT&T control of Cingular, BellSouth’s wireless joint venture, allowing it to offer quadruple play packages of fixed, mobile, internet, and television services later this year. Industry commentators expect that other traditional US telecommunications operators will follow with similar quadruple play packages in an attempt to mitigate fixed-mobile convergence and to compete with triple play (fixed, internet, television) packages offered by cable operators. 

Convergence creates significant interplatform competition and in doing so raises issues about access to content and third party media services, among other things. The European Framework was specifically designed on a technologically neutral basis and is well placed to address this. Elsewhere, poor co-ordination between broadcasting regulation, telecommunications regulation, and competition law will raise issues about the ability of those regimes to address converged markets. It also raises the risk of treating non-traditional competitors, which are not subject to industry-specific regulation, preferentially in emerging markets for converged services. 

IP Networks 

Similar challenges for the law will arise from the ability of existing access based regulatory regimes to address next generation all-IP networks. Incumbents and access seekers are all seeking regulatory certainty before making highly significant investment decisions. Few regulators have addressed this issue more than tentatively at this stage (exceptions are OPTA, the Dutch regulator, and BNETZA in Germany). 

Incumbents will not invest until they know the regulatory conditions are right for a reasonable rate of return. Access seekers are nervous about stranding exchange-based assets and the viability of business cases based on connections-per-exchange rather than connections-per-cabinet. This issue also impacts on incumbents’ business cases and is likely to make universal coverage even less economically attractive. 

Next generation networks involve magnitude economics for both access seekers and incumbents. They require a multiplication of access points for access seekers, who are consequently asking for deeper and more extensive regulation. Incumbents are querying whether a network that does not yet exist should require ex ante regulation and are seeking at least a ‘regulatory holiday’ to provide a measure of certainty over the initial rate of return on their investment. 

The European Commission has refused to allow regulatory relief on the basis of its belief that competition rather than regulatory relief drives investment, while the US experience with fibre suggests that regulatory relief can in fact motivate investment. The EC has talked about potentially allowing relief in ‘emerging markets’ but experience suggests that establishing a market as in fact ‘emergent’ is difficult in practice. 

The issue for regulators is to ensure that investment in next generation technology occurs and that they do not build unsustainable business cases for access seekers or impose overly burdensome universal service obligations that may jeopardise that investment. 

It is likely that IP networks will be less similar to one another than historical PSTN networks. Regulators should accordingly ensure the continuation of interconnection on reasonable terms. However, they should refrain from making decisions that will prefer particular technology or otherwise steer technological development. 

Spectrum 

Spectrum allocation is a major issue in all key industry jurisdictions this year. In the US, the dynamic competition between traditional telecommunications operators and cable players is likely to be replicated in the wireless sector, although at this stage, less than 1 per cent of broadband services are provided over wireless networks. The FCC’s first auction of advanced wireless services (AWS) spectrum rights in 2006 saw spectrum largely go to wireless firms. However, a significant block of licences was also purchased by a consortium of cable companies backed partly by Sprint. 

Although US operators may choose how they use AWS spectrum, it is likely that it will be used primarily to provide 3G services and future fixed-mobile convergence offerings. Compared with the saturated European market, there is still scope for growth in the US mobile market, which will be promoted by the introduction of third-generation features as mobile companies update their networks. 

AWS spectrum is also expected to contribute to the deployment of WIMAX across the US this year. Significant investments in WIMAX as a 4G platform suggest that it is seriously considered as a realistic disruptive technology that may afford competitors an opportunity to enter the industry on a low capital investment platform. 

Spectrum allocation is also a key issue for the European Commission over the coming year, along with facilitating less, more focused regulation, and promoting an optimal balance of competition and investment. 

The EC views spectrum allocation as an opportunity for a competitive intervention to reduce initial barriers to entry and the consequent need for ex ante regulation of access to spectrum. It is also viewed as an opportunity to release up to E200 billion into the EU economy, providing a significant boost to its international competitiveness with key US and emergent markets in China and India. 

Measures to achieve this will include technological and service neutrality in allocation, spectrum trading in selected bands and a common pan-EU authorisation process. The European Commission will also ensure that it does not take a view on preferring any particular technology. The Commission is also looking to centralise the 25 separate systems for regulating spectrum across the EU. 

Separation 

Following the operational separation of BT in the UK, the European Commission is considering whether to require functional separation of incumbent telecommunications operators across the EU or to continue to allow NRAs to evaluate the case for it on a national basis, while the US has seen considerable reconsolidation 20 years after full structural separation. Policy issues around separation will be a significant part of 2007’s regulatory agenda in many jurisdictions. 

Which are the Most Active Jurisdictions at Present? 

Outside Europe and the US, a large number of jurisdictions are also likely to experience significant regulatory activity this year. Moves to break down the telecommunications monopolies that abound on the African continent are gaining momentum. Notable mentions include Botswana’s moves to partially privatise its incumbent telecommunications operator and the Nigerian regulator’s introduction of a unified licensing regime which removes all segmentation of mobile and fixed services. 

A major change to an agreement between Telekom and Vodafone in 2006 now allows their jointly owned cellular operation, Vodacom, formerly restricted to serving five African countries, to expand into all African domestic markets other than Kenya and Egypt. This could see the sector transformed by the emergence of a true pan-African mobile operator, perhaps providing a solution to the lack of cross-border roaming services. 

The convergence of fixed and mobile networks and services will remain the central issue in African countries as the dominance of the mobile telephony market continues across the continent. Mobile phones constitute around 80 per cent of all African telephone subscribers, a higher ratio than any other continent, which looks likely to raise network capacity issues as demand on mobile lines continues to raise congestion issues. In South Africa, there will be interest in the performance of the first competitive fixedline telecommunications operator, which began in August 2006 after years of delay.

The unbundling of Morocco’s local loop will continue into 2008 under regulatory monitoring, enabling the Moroccan incumbent’s two competitors to begin offering fixed line and internet services. Telecom Egypt, the sole current international call provider will face competition with the issue of two international call licences by the National Telecommunications Regulatory Authority (NTRA), which delayed the issue to allow Telecom Egypt to prepare for a loss of revenue. NTRA is also pushing ahead with its second phase plans to introduce regulation for wireless broadband access. 

Some degree of competition and private ownership is also now in play, or being introduced, in most Middle Eastern countries. Bahrain and Jordan are the most advanced in the process. The blocking of VOIP in the United Arab Emirates looks set to continue due to a desire to protect the country’s incumbent telecommunications providers. Saudi Arabia is likely this year to issue its second fixed-line licence, to mobile operator Etihad Etisalat, together with a third mobile licence.

In Asia, the year should yield longawaited first 3G licences for china in preparation for next year’s Beijing Olympics, and India. Changes in India have seen duties and tariffs on telephone services rationalised and restrictions on foreigners eased, with foreign firms now permitted to own up to 74 per cent of their Indian subsidiaries. 

Great uncertainty still surrounds China’s developing regulatory framework, with major telecoms legislation still to be enacted or drafts to be publicly released. Taiwan’s new regulatory body is continuing its review of the country’s entire telecoms regulatory regime, with the first change likely to be further relaxed regulations. 

South Korea is making progress in deregulation, with government plans to allow big telecom operators to bundle voice and internet services at discounted prices this year. This is a major change for the country’s telecom market as until now, only small companies have been permitted to discount package services, while dominant telcos faced additional restrictions to keep the industry competitive. 

While mobile telephony in Latin America continues to develop, fixed-line telephony remains generally monopolistic. The major exception to this is Mexico, where the impact of last year’s market shake-up will continue to flow through with the implementation of the regulator’s convergence agreement, dealing with fair competition between telecommunications firms and cable operators in terms of interoperability, interconnection, and number portability. Telmex – privatised but still heavily dominant – will face a challenge from cable company Cablemas, which was issued local telephony concessions for 13 Mexican cities in the latter part of 2006. 

Brazil is seeing regulatory developments in the form of preparations for 3G spectrum licensing and a WIMAX frequency band auction, while Columbia’s telecoms sector has seen increased market liberalisation and privatisation following a free trade agreement with the US last year. 

How does Your Company Go About Hiring Outside Counsel Both Locally and Internationally and What are the Qualities You Are Looking for? 

Telecom New Zealand has significant business operations in New Zealand and Australia and has offices and conducts its international business in the US and the UK. In addition, Telecom New Zealand’s international business requires legal advice from the many jurisdictions it operates its wholesale business in, including jurisdictions in Africa; South, Central and North America; Europe and Asia. 

In order to better manage the diverse legal function and, in part, to control cost, Telecom New Zealand restructured its entire legal function, moving from a heavy dependency on external advice to building the largest and most significant in-house legal practice in New Zealand. 

Telecom New Zealand was primarily seeking a more intimate and ingrained relationship between the business and the day-to-day commercial realities it faced and the ability of the legal advice it received to thoroughly understand and reflect those realities. 

Alongside the concomitant consolidation of the legal marketplace in New Zealand, this presented a further challenge to external legal providers. High quality external advisers responded by changing their model of engagement to one of partnership rather than dependency. Real partnership is a much more significant relationship than simply solving specific legal issues or working on specific projects together. The partnering relationship operates at a premium when development of both teams is shared and the teams grow together in a cultural as well as a professional sense. 

Rather than seeing the in-house model as a threat, successful external providers focus on the benefits that they can add to the relationship. External advisers bring to the relationship the advantage of working in multiple industries with a range of clients and can provide a more comparative, arm’s-length view of the legal issues facing the business; internal advisers are often better placed to provide the lead on environmental, strategic and technical issues. The qualities that have stood out among our current key advisers during this period of change are the ability to move and grow with us during this period of change and to adjust the way they interact with us. 

Telecom New Zealand is the largest publicly listed company in New Zealand and has one of the largest legal budgets in the country. This means it can be very selective and demanding in terms of the legal advice and advisers it chooses and typically ensures that its advisers are completely conflict free. Outside of New Zealand the company is more circumscribed in terms of the advisers available to it. 

Because it has long-standing offices and operations in both the USA and the UK, Telecom New Zealand has built up long-term and trusted relationships with a small number of top tier firms in both jurisdictions. This allows conflicts to be kept at a minimum, although the fast moving and converging telecommunications markets means that conflicts are becoming more frequent and harder to resolve. 

The growing propensity towards conflicts in its international operations has led to Telecom New Zealand developing relationships with smaller boutique and niche providers where the company’s business and personnel are well understood. We anticipate this will be a growing trend for incumbents operating outside of their home jurisdictions.

It is not possible to buy entry into Who's Who Legal

terms and conditionscontact us