CASOPIS REPUBLICKE AGENCIJE ZA TELEKOMUNIKACIJE

ABSTRACT

This paper deals with those tasks which are most relevant in regulation in the phase of market opening of the electronic communications sector of a country. The authors describe the situation of the Serbian telecom market turning from monopoly to competition. It will be shown in which areas regulatory action is required to motivate a more intense activity of market players. Thereby, the state of competition is reviewed in terms of competition achievements that are visible so far. After this short analysis, the main regulatory goals in the transition phase are outlined and it is described which stakeholders are part of the overall process and which interest they will have. The most important regulatory tasks are highlighted and the framework under which the regulator RATEL works is described.

1. INTRODUCTION

Many countries around the world have liberalised the telecommunications sector and also privatized the previously state owned telecom operators with some success in the last two decades. Figures show that telecom market opening and the supply of services by a variety of operators has had a positive economic impact and that those markets are constantly growing.<1> Some factors which can measure the positive effects are, for example, the reduction of prices to the benefit of consumers, the growth of the sector as such, the introduction of new technologies (also supporting the general national economy competitiveness) and the attractiveness for foreign investment.

At the beginning of any liberalisation process it has to be answered how the market opening shall take place specifically. This article deals with such questions which are relevant for the Serbian market at this point in time as competition has been partly introduced but still many questions remain open which have to be decided by the regulatory authority. In a phase of moving from a monopolistic to a competitive environment the regulatory authority overseeing this process has a large number of tasks and responsibilities. Its decisions are important aspects for the competitive development of the market and decisive in order to achieve sustainable competition. This article very briefly looks at the main areas of regulatory decision making which are the key to further positive market development.

2. MARKET SITUATION

The starting point for any analysis is the market situation. Serbia left the telecommunications monopoly phase and today there are already three active mobile operators and an increasing number of Internet services providers. However, competition in fixed line telephony services which was previously called the “core” area of telecommunications has not yet been introduced. The development of the fixed sector has not yet advanced as much as in other European countries with respect to penetration in fixed telephony and broadband. Also, not all the regulatory tools which are standard in the European framework are available in Serbia at this point in time. One of the crucial questions hereby is how to introduce competition in a way that progress can be achieved relatively quickly on the one hand, but on the other hand also to have a contribution to the national economy by infrastructure based competition. The market as such comprises the following status:

The Serbian telecommunications market has developed rather slowly until recent years; during the 1990s it was practically in a stalemate position while the markets in other countries, particularly the then European Community Member States, experienced a massive roll-out of broadband and enhanced telephony services. Since then, the Serbian market turned for the better and, as of 2005, it accounted for 7.2% of the GDP share, attracted approx. 0.4 billion Euro in investments, estimates of market value went high up to 5 billion Euro, it employed 25.000 people and it generates an income of 1 billion Euro annually. All the mentioned, and publicly available, figures shall however be treated with caution, also, they were rounded up to simplify matters.<2>

The fixed telephony market encompassed the state-run Telekom Srbija a.d. as the formal monopolists till 2005. Telekom Srbija continues however to dominate that market as the sole operator of fixed telephony after the abolition of its exclusive rights. It is only recently that an alternative operator applied for a second licence- its issuance pending at the moment of drafting this article. 80% of Telekom Srbija is owned by the state-run Postal Services (JP PTT) and 20% by OTE as a strategic partner. Analysis indicates that Telekom Srbija might encounter difficulties regards its Return On Capital Employed due to high, yet slowly decaying inflation rate. The ratio of the number of fixed lines per employee, indicating the efficiency of a company, puts the company slightly above the regional average and within a comfortable EU normal range. Figures on the penetration of fixed telephony, expressed as the ratio of fixed lines per 100 inhabitants, range from 30% to 34%. Thus Serbia had the second highest fixed telephony penetration rate in the South East European region. On the downside the digitalisation rate of fixed networks reached 84% only, the share of party lines amounted to 15% and 420.000 requests for a new telephone line remained unresolved. Serbia's relatively high penetration rate of fixed lines represents by tendency a gold mine for alternative service providers; its exploitation presupposes some kind of access to the local loop, however. On the other hand, the low digitalisation rate directly hinders the introduction of broadband Internet access via xDSL. Furthermore, the unresolved telephone line requests must not be underestimated. These infrastructure based deficiencies might be effectively tackled by a universal service regime.

The year 2006 was marked by two significant events for the Serbian mobile telephony market; one, the then domestic and partly state-run Mobtel was acquired by the Norwegian Telenor Group which resulted in the creation of the now active Telenor and two, the Austrian Mobilkom Group purchased by auction the third licence for the provision of mobile telephony and consequently built up the Vip mobile as a green field investment. Before, the state-run Mobilna telefonija Srbije (MTS) and Mobtel controlled the market as two well established operators with little competition in between as far as consumer interests are concerned. Together, as of 2005, they reached a penetration rate of 74%. Both companies showed merely minor differences: MTS enjoyed a higher relative user share while Mobtel yielded more income. Because of the only recent commencement of operational business it is too early to draw far-reaching conclusions, though, the entrance of Vip mobile as the third operator under true market economy conditions definitely constitutes a precedence for the Serbian market. In the light of the existence of two operators having Significant Market Power, as defined by the Serbian Telecommunications Act, the market regulator bears significant responsibility in preserving an environment of fair competition, ultimately for the benefit of the consumer.

Internet access was being offered by roughly 40 providers and in addition to that there were 36 cable system operators as of 2005, not all of them providing Internet access, though. Internet penetration accounts for approx. 10% users per 100 inhabitants and 30% users per 100 households. Thus, Serbia ranks fairly low in regional comparison, however, Internet usage fees are one of the lowest in the region. There are divergent estimates concerning the penetration of broadband Internet access, basically oscillating around 0,4% for 2005. Even more striking is the low ranking regarding the penetration of xDSL access lines, accounting for 0,13% in 2006. Currently all xDSL lines are being provided by the Telekom Srbija, either wholesale bit stream or, as rather recently offered, directly to the consumers. This is the instance where on the one hand the low digitalisation rate negatively impacts Internet penetration and the responsibility for that tends to lie on the sole xDSL provider on the other hand. Measures to unbundle the local loop in combination with a general regulatory approach of fostering infrastructure based competition represent a proven relief.

3. THE REGULATORY ISSUES TO BE RESOLVED

When a monopolistic market is being opened to competition, high number of questions arise, which need to be resolved by the regulator. We present the questions and topics to be resolved and subsequently the possible positioning of the various telecom industry stakeholders (incumbent, competitors, regulator/ministry and customers) to demonstrate that a regulator must be prepared to take a decision on topics which will be debated between the stakeholders by weighing different regulatory goals (competition, prices, reasonable treatment of the incumbent, incentives to roll out infrastructure, quality of service, etc.) against each other. Our conclusion is that such a decision will rarely make everybody happy. As section 2 showed, especially the topics of increasing broadband penetration and use as well as competition in the fixed market is a major driver for policy making and addressing some of the issues identified below as a prerequisite for defining the complete regulatory field.

3.1. Interconnection and Access

-In a market with more than one operator it is required to enable end-to-end communication between customers connected to different networks. This requires the setup of an interconnection regime which clarifies the legal, commercial and technical framework for using other operator’s infrastructure. There is a number of services which are relevant for such contractual solutions. For example, there might be the obligation to provide call origination services in order to enable customers which are connected to network A to reach a customer connected to network B or to allow them to connect to a value added service which is implemented in a different network.

-Another aspect is unbundling, i.e. the possibility to introduce access competition by obliging the incumbent operator to provide unbundled local loops (or other forms of wholesale access such as e.g. line sharing, bit stream access, etc.) to its competitors. This would allow the competitors to make use of the existing network of the incumbent operator relatively quickly and to foster penetration. The debate about these topics is also related to wholesale broadband services which are dependent on the investment strategy of the incumbent operator (see below).

These examples already demonstrated the need for interconnection and access regimes and a regulator will have to face the discussion about a large number of items when trying to resolve this issue. An incumbent operator will always want to restrict access rights for new entrants, to keep his operational burden at a low level and to request full coverage of costs for access products. For incumbents, a natural starting strategy is to say that only infrastructure based competition is viable in the long run and that therefore investment is required to build such networks. These examples already show that incumbent operators are reluctant to allow more competition through interconnection and access and they will try to find technical, legal and economic hurdles to avoid or to intensify competition. Therefore, an incumbent may have to be forced to supply unbundling by regulatory means.

On the other hand the competitors will want to have the highest possible flexibility for interconnection access in order to be able to get connected to any technically feasible point. They will also demand different types of access and they will want to have the possibility to climb the ladder of investment (ladder of infrastructure competition), i.e. to have a choice from a high number of business models to find the optimal start and path of development.

Furthermore, they will request a strict cost oriented price regulation to be levied upon the incumbent operator to ensure that they can receive a sufficient market share for their services which also takes the risk of investing into account.

Consumers also play a role in the whole picture. They strive for a higher variety of choice of operators, different technologies, lower prices, etc. To that end, unbundling and interconnection are of vital importance.

The national regulator is faced with this debate between the incumbent and its competitors and he has to eye at the consumer and the overall development of the country. He has to weigh the different interests of operators and to come to a fair and reasonable solution. He has to take into account previously invested amounts, the interest for a quick take up of competition (which speaks in favour of service based competition), the long term interest of the national economy, the goals of sustainable infrastructure competition and consistent regulation over time. Therefore, his concepts have to be oriented towards long term goals.

3.2. Spectrum management

Whereas interconnection and access play a vital role in fixed network regulation independent of whether they refer to narrowband or broadband telecommunications, voice or data communication, the wireless industry/branch also needs rules according to which to play. It is required to set up a stringent and modern spectrum regulation framework including the development of spectrum policy for the future allocation of spectrum for telecommunication services. This also encompasses spectrum trading and spectrum re-farming as a major issue. Again, one can expect that incumbents, competitors, consumers and regulators to have different positions. The interest of the incumbent operator is mostly triggered by the fact that he was previously the owner of all spectrum and may not have used it efficiently. Therefore, he may be forced to return spectrum to be allocated to other users who can start services in a competitive manner. The incumbent could have the incentive to hoard spectrum and not to use it but to try to withdraw it from competitive use.

A solution to make more efficient use of spectrum can be seen in an obligation to introduce spectrum trading and spectrum re-farming from an operational point of view. Due to the fact that mobile technologies may substitute fixed technologies rather quickly these measures could serve to make spectrum available in markets where it is currently needed. It would increase flexibility in the market for those who have exit and entry plans. It does not necessarily solve the hoarding problem unless the allocation for incumbents was limited in time and the spectrum becomes available again.

The position of incumbent operators in spectrum regulation depends very much on the degree of integration between the fixed network operation and the mobile operation. In situations where incumbents have previously divested from mobile operations and have setup separate mobile companies, the argumentation with respect to integration is of lesser importance.

From the point of view of competitors, the high degree of flexibility for using spectrum mainly for broadband access is again one of the most prevalent goals. Flexibility thereby means that they want spectrum trading and spectrum re-farming to be in place in order to act flexibly on the market. This also refers to the licence conditions regarding coverage, usage and the terms that apply to them. Moreover, they are striving for affordable spectrum prices.

Spectrum regulation is one of the areas where customer benefits can be seen directly. Depending on the way spectrum regulation takes place, new services will be introduced and can serve to the benefit of the consumer, either in mobile telephony broadband wireless access or other applications.

The regulator has to find fair and reasonable solutions and to provide the market with the spectrum needed. Not only operators shall not hoard spectrum but regulators shall not assemble too much spectrum which is unused either. On the other hand, the regulator will also want to find a fair price for spectrum and therefore should not throw too much spectrum to the market at the same point in time.

3.3. Intermodal competition

A third important aspect is the development of an integrated approach to multiple service platforms such as triple play in order to strike a fair balance between different service providers and different network operators relaying on different types of technologies (DSL, Cable, FTTX, Wireless Access). This question is in the heart of discussion between different technologies which shows the overlap (intermodal competition). Whereas we see telecom operators moving from narrowband telephony via broadband Internet connections to the supply of IP-TV, we also see the opposite direction, as mainly cable TV operators extend their broadband content services to Internet broadband and finally to voice communications. Although strong investment is undertaken in cable networks, investment in optical fibres in the telephony access network (next generation access, VDSL, etc.) remains strong as well. In this respect, it is difficult to differentiate between incumbent operators and competitors. Both types of operators (Telco’s and cable operators) are incumbents in their field, but they are also moving in the direction of becoming competitors in the different field. In both directions they will want to ensure that there are transparent and non-discriminatory rules for access to the respective market.

Customers will want to have the benefit from different technologies and would like to see real infrastructure competition. What would be important to them is also that the direct communication is possible meaning that the any-to-any communication is ensured by respective regulation.

The regulator has to deal with the fact that telecommunications and e-media/content regulation may be very different and not always treated within the same authority. This increases the requirements for coordination between different responsible authorities. Furthermore, the regulator will have to deal with issues of investment. He will have to make sure that investments can be undertaken and that there is no regulatory danger to these investments. Again, it will be very important to ensure fair competition between the infrastructure based model and the service based model.

As has been demonstrated above, there are only three major issues in which recent developments in telecommunications markets and telecommunications regulation cause a significant challenge to regulation. Incumbents, competitors and consumers will have different views on what is required and how they want to move on with market liberalisation. Therefore, regulator will have to review these positions very carefully and assess what is the best approach.

Serbia has commenced formally on the path to liberalisation of the telecommunications market with the adoption of the Telecom Law in April 2003, but its implementation started with establishing the independent regulatory authority (RATEL) at the end of 2005. The subject of regulation under the new law are those companies that have the status as an operator enjoying SMP. As in majority of SEE countries<3> Serbia also adopted the regulatory framework in compliance with “1998 EU package”, which consists of rather simplistic criteria for definition of an operator with SMP (e.g. for Serbia: at least 20% of market share) and predefined remedies that should apply automatically to all operators with SMP. Since in the last decade the telecommunications industry has been characterised by changes in every aspect including technology changes (e.g. IP-networks, NGN networks etc.) it seems to have been more appropriate to implement the “2003 EU regulatory package” as soon as possible. Current EU regulatory package gives more flexibility to the regulator for imposing remedies specific to national markets. With adoption of current EU regulatory framework RATEL will have all tools available that represent a standard in EU member states.

However, also under current legislation there is enough space for improvement of the market regulation. RATEL already designated Telekom Srbija as an operator with SMP and imposed remedies (to meet all reasonable requests for network access, special tariff regime, provision of leased lines, non-discrimination, cost orientation, transparency, prohibition of cross-subsidisation) (Cullen International, 2007). On the other hand the RIO has not been published yet. In order to intensify competition on the market, current legislation should be also changed so that RUO becomes compulsory with various forms of unbundling (wholesale access products), which will enable all kind of business models of alternative operators. Furthermore, there are some additional aspects, where regulatory issues are at stake and which will have to be taken care of, such as:

-the development of a strategic plan to foster the introduction of information on telecommunication technologies (ICT) with a strong impact on investments and on broadband infrastructure and the availability of such infrastructure to residential and business users

-the development of the regulatory strategy for IP-interconnection and IP-networks in order to take account of the modernisation of existing networks and investments in the past but also the benefit from modern technologies

-the definition of forward looking numbering plan including the introduction of ENUM and other addressing issues

-a clearly defined voice over IP and voice over Internet regulation.

The issues mentioned above give an overview on the most recent and most important topics that need to be taken care of in the telecommunications regulation in the changing environment that just recently opened up to liberalisation. It remains therefore to the parties in Serbia to discuss these items and to find solutions. Wherever disputes arise (this is very likely in recently opened market) solutions will have to be found by the regulator as a result of weighing the arguments of competitors, incumbents and consumers.

The authors believe that a certain regulatory trigger has to come from the market in order to initiate a discussion. The Serbian telecom operators are currently going through the early phase of competition – with respect to the fixed network. In such a phase long proceedings are normal as all parties involved at first want to try and test out the legal system. Once this has been done and completed, the interest will refocus on the substantial matters of the debate and the regulator can perhaps move from the role of decision maker to that of a moderator. For the time being, RATEL’s role will be to foster market forces in the fixed network in order to increase penetration and to achieve a higher broadband usage.