How can we unleash the digital economy?

Amid the many aspects of our lives and economies that are currently being transformed by ever-wider penetration of ever-faster internet, there is one sector where change isn’t happening quickly enough: the policies which govern the companies that connect us to the internet.

It was two or three decades ago that many countries set up regulators to navigate the transition to competitive markets as they moved their telecoms providers from public to private sector. Then, connectivity through landlines was as much of a natural monopoly as electricity cables or water and gas pipes.

Today, the telecommunications industry is more competitive than most other regulated industries. Innovations in the development of cable, mobile and fibre networks have ended the natural monopoly by making it easy to replicate the old fixed line infrastructure. Evolving business models have blurred the lines between providers of connectivity and providers of the content and digital services that are delivered using that connectivity. Likewise, traditional telecommunications regulators are ill-equipped to solve the most pressing, complex issues of today like privacy, which often involve several stakeholders.

Regulatory bodies are aware of these challenges and have started trying to adapt, but conversations with industry leaders reveal growing concerns that the transition towards an improved regulatory environment has stalled.

Policy-makers should recognize the evolving and converging nature of the entire value chain. Companies that provide the same service should not be treated differently due to their regulatory classification. Many policies that shape or constrain online digital services – such as new rules on data, privacy and security, regulations on machine-to-machine communications or “internet of things” businesses – have ramifications that extend well beyond the telecommunication sector. Policy-makers must broaden their perspectives to understand the impact of policies and regulations on the entire value chain.

Even when policy-makers transcend sectors, the industry leaders we interviewed agreed that there are two further ways in which mindsets towards policies and regulations still need to change.

First, where competition exists, regulators should think more “ex-post” than “ex-ante”, more “principles-based” than “rules-based”. It’s true that in some areas, such as spectrum management, detailed ex-ante rules continue to make sense. Companies making investments need predictability. But to encourage experimentation and innovation in infrastructure, setting out principles and intervening efficiently after the fact is arguably a better approach.

These principles should be based on, and aligned with, the wider principles of competition and consumer protection laws that apply more generally. As the resemblance between telecoms and the more naturally monopolistic utility sectors diminishes, so does the justification for treating the telecoms sector as more in need of regulatory micromanagement than any other competitive sector.

Second, policy-makers need to identify the appropriate geographical level for specific regulation – a need that is more acute in some regions than others. In Europe, for example, while there may be no need for a single European regulator, the European Commission could nonetheless take more rapid and detailed actions within its existing powers to unify Europe’s regulatory framework.

Issues that require more international harmonization include the fragmented allocation of spectrum in different countries, and the privacy, security and portability of data stored in the cloud. Other issues, such as fixed infrastructure, would benefit more from local experimentation, enabling national regulators to learn from each other’s best practices around the world.

Across all the issues discussed above, there is scope for best-in-class regulators to serve as an example for others. Many countries in Europe, for example, could learn from how the US Federal Communications Commission (FCC) has effectively promoted both consolidation and spectrum as basis for competitiveness and network investment over the last decade.

The digital economy is one of our best hopes for boosting the global economy – at an annual growth rate of approximately 10%, it is outstripping most other sectors and by 2016 will account for 5% of GDP in the G20 states. We need to regain a sense of urgency about transitioning to a regulatory regime that can help to unlock its full potential.

This blog post was based on interviews with Manuel Kohnstamm, Senior Vice-President and Chief Policy Officer, Liberty Global Plc, Netherlands; and Carlos López Blanco, Global Head, Public and Corporate Affairs, Telefonica SA, Spain.

The report Delivering Digital Infrastructure: Advancing the Internet Economy is now live.

Image: A stock broker’s fingers feverishly key in the day’s proceedings on a computer keyboard, at a brokerage firm in Bombay May 19, 2004. REUTERS/Sherwin Crasto