As a practitioner in the field of regulatory economics, there is one (and only one) guarantee I will ever give when talking about modelling or forecasting – that I’m wrong.
Granted, I sincerely hope that I am only ever slightly wrong, but there is no magic crystal ball. If there were, all regulatory economists would be living in penthouses or yachts.
Past performance is no guarantee of future success. Or so the caveat goes with every investment transaction you make. However, the past is a useful indicator of trends and potential futures. In this article, I want to take four contemporary data points and demonstrate how they lead me to the conclusion that the telecommunications industry, globally, is headed towards a more protectionist, illiberal regime.
TL;DR – there is a school of thought (granted, potentially just a school comprising us) that the telecommunications industry is at its peak, in terms of a liberal and free-market environment. The threat of the Chinese via Huawei, fraud and spoofing, the rise of the Silicon Valley ‘pseudo-telcos’ and the inclination (deliberate or otherwise) for some States to be protectionist, will cause the market to be increasingly characterised by burdensome national regulation and higher cost of entry.
The Rise of the Chinese
One can barely go a day of reading a newspaper in any country (well, the Wall Street Journal, Globe and Mail and The Telegraph in our case) without seeing mention of Huawei and the risks of Chinese interference in our critical national infrastructure as a result.
Even the United Kingdom, with its historically liberal regime for telecommunications, has reacted to secure the removal of all Huawei equipment from its core networks – and has leveraged the fact that some operators were seduced by Huawei to pursue the Telecommunications Security Bill. That Bill, and its draft Statutory Instrument, propose some of the most prescriptive and draconian state interference in an innovative and fast-moving environment we have ever seen. We also expect it to receive Royal Assent, largely unchanged, in a few months.
As to whether Huawei is truly compromised by the Chinese government is another matter; however, they have been very successful in acquiring market share through razor sharp pricing. Highly liberal and competitive telecommunications markets are most susceptible to this – especially in the residential markets. Incidentally, if you are in the USA and are wondering whether Xi Jinping has been listening into your conversations, you can see the FCC’s publication of networks operating Huawei (and ZTE) here.
Regardless, it is clear the risks of a Chinese company operating the core of telecommunications networks has justified more draconian actions in some quarters.
Some countries are renowned for being protectionist, favouring their own homegrown enterprises over foreign-owned competitors. While France is an oft-cited example of being a protectionist state, it does provide two useful anecdotes – the lengthy fracas between their regulator and Microsoft and the recent change in their regulations to prohibit secondary assignment (or ‘resale’ in more common terms) of telephone numbers.
Ostensibly, this prohibition was not a protectionist act. It was to do with number conservation. However, it has a protectionist outcome – it requires that end-users can only contract with a bona-fide registered and recognised network in France for service. Microsoft appears to have found a clever way around this with Voxbone for Teams, by having its users contract with Voxbone for the number and Microsoft for the service – while innovative, in our opinion it may turn out to be a courageous move given the history between the regulator and the software giant.
Thankfully, the French market is not the most difficult to enter – the regulator (ARCEP)’s notification procedure is relatively simple. Unlike Italy, where your company needs a tax identification number, which necessitates its representative having a personal tax identification number, and a form of cryptographic hardware device to be issued to you to even start the notification procedure. If you think that’s bad, apply for a licence to operate in the United States; Homeland Security’s deep dive into every crevasse of your company’s leadership will have you yearning for Italian bureaucracy.
All of this, in the European Union at least, is despite a clear mandate from the European Parliament (in the form of the Electronic Communications Code and its processors) for a liberal market free from protectionism. Or at least, that’s what the trailer says.
Matters of national security are reserved matters for the member states; as are national telephone numbering plans, which means that there are plenty of levers for a nation state to pull to raise the drawbridge to foreign investment.
Absent the usually pro-free market United Kingdom as a result of Brexit, I fear the naturally protectionist voices around the EU table will become louder.
The rise and rise of the Silicon Valley telcos
Granted, Google probably doesn’t see itself as a telecommunications provider. But given that you can make telephone calls from your Google device in your home, “OK Google, call the local pizza place,” it is difficult not to include them in this definition.
Microsoft with Teams is probably closer to what a layperson would recognise as a telecommunications provider, as are your Twilios and MessageBirds of this world. But these are first and foremost software companies. The concept of a master socket on a wall, a dial-tone, bell-wires, main distribution frames, interconnection and the whole gamut of things traditional operators have grown up with, are completely alien to them.
A product like Office365 is, largely, identical whether it is sold in Belgium or Bolivia – and the regulation of these software services is not too different around the world. Variations come in consumer protection rules or on sales tax etc, but fundamentally, I have sympathy with their world view – we built something, let’s go sell it everywhere, how hard can it be?
Well, when you start wanting to incorporate telephony into your service (helpfully defined by the European Union as ‘something that uses phone numbers’), and have to do biannual statutory returns to the Slovakian regulator, in Slovak, or have to have all your directors submit to a criminal records bureau review in the Czech Republic or have a Danish national on your payroll that’s got a security clearance, it gets very hard very quickly.
This is before all of the variations in number allocations rules are considered; can the end user be anywhere in the country, or must they provide government-issued photo ID and a note from their mom proving they are in the town the number relates to?
All of these services, which in many cases are excellent and interface with other productivity software in use in businesses seamlessly, are an existential threat to traditional carriers. The traditional landline is becoming a legacy, especially in younger demographics in favour of their mobile – which increasingly is not used for traditional voice and text message functions either.
In the business world, the traditional desk phone is encountering competition from telephony integrated in your office suite, or soft client on your computer (or even your smartphone).
Some of these traditional carriers are state-backed (even in the liberal UK market, British Telecommunications plc enjoys a multi-billion pound Crown Guarantee on its pension fund), unionised, or investing heavily in that country’s fibre infrastructure. Or all of the above.
The entry of some Silicon Valley upstarts, poses a threat. Without getting into the very complex debate of ‘net neutrality’, some weight is placed by some regulators on the ‘freeloading effect’ – i.e., concern that over-the-top providers can profit from the investment in infrastructure by others and enjoy an unfair advantage. In some cases, an effectively regulated monopoly can deliver benefits to consumers. I have no doubt that is the theory which supports the reasons you see state-licenced monopolies in placed like St. Helena and the Falkland Islands – although by many accounts, it has not worked in practice.
In any event, there is an incentive to provide some form of protection for those companies that are digging duct to remote places – places where there is no other commercial incentive. I always use the example of “Who is going to lay fibre to the crofters on the Isle of Skye?”, but the sentiment applies just as much to the rural Mid-West of the USA as it does to Scottish Islands.
However, given it is highly unlikely that many jurisdictions will outright endorse the retrograde step to state-owned or state-sponsored monopolies, that leaves them with pulling other levers to achieve their policy objectives.
Fraud, spoofing and other forms of general maleficence.
We’ve all had a spoofed text or call, impersonating someone so as to defraud us. Fraud perpetrated by way of telecommunications is a massive industry – multi-billion dollars annually. I’ve heard $38bn and can believe it.
Of course, old-school telecommunications running on TDM were still susceptible to this – but it’s just an awful lot easier to do on modern-IP networks; these are the very same modern-IP networks that massively lower the cost to enter a market and reduce price to consumers. Heck, even I can do it – in fact, I once sent a spoof-text (purporting to be from his wife) to a Detective Chief Inspector in the Metropolitan Police to demonstrate just how easy this is.
The US and Canada have reacted with CLI Authentication – the SHAKEN/STIR system coming into place presently. The UK is consulting on implementing something (keeping in mind our opening sentence – we don’t think it’ll be the same as in North America, it’ll likely be a digital signing attesting to the authenticity of the CLI by the network injecting it into the signalling).
Given government and consumer focus on the nefarious activities of scammers, as well as continuing frustration with constant robo-calling, we can see initiatives to authenticate telephone numbers cropping up all around the world.
Of course, it would be nice if the International Telecommunications Union tried to implement some form of standard, but I think the best you might get are a handful of standards and countries picking from a short-list (and invariably tweaking a little). Too diverse set of standards complicates the equipment in core networks – if vendors such as Ribbon have to maintain different code branches for each country, it magnifies risk and cost – this is not a point lost on many regulators, in fairness to them.
Bringing it back together
I’ve talked about four data points;
- The threat posed by Chinese (or, tomorrow, who knows, maybe Russian?) influenced core network vendors and state-intervention to secure networks;
- Protectionism and the natural inclination (or even deliberate act) by some Governments to favour their own industries;
- The rise of the pseudo-telcos like Microsoft and Google et al; and
- That modern-IP networks, which lower barriers to entry in telecommunications and promote competition, are more easily (but not exclusively) able to be used by malicious actors for nefarious intent, and Governments are moving to implement safeguards.
This means, I think, the glory days of the 2010s boom in telecommunications, where the UK enjoyed the existence of more than 450 separately registered electronic communications networks (an effect seen in other countries) is coming to an end.
This is going to cease to be a market where anyone can spin up an instance of FreeSwitch on a Raspberry Pi and call themselves a global carrier. Compliance requirements (under the guise of national security) are going to become increasingly more onerous, technical requirements (under the guise of preventing fraud) will become more onerous and these may be vehicles that some countries use to protect their favoured incumbents from the new kids on the block from Silicon Valley.
Even the traditional reseller model is under threat; the withdrawal of the WLR system in the UK means the many hundreds or more of resellers that were able to purchase directly from the regulated monopolist (BT) and sell to end users, will end. They will have no choice but to either unbundle exchanges and deploy their own networks or resell someone that has. In other national contexts, the providers of such resold services may find themselves subject to the same stringent regulations as the networks – this is already the case with the authorisation regime in many EU countries, and the UK’s Telecommunications Security Bill pigeon-holes them all together.
The timescales to achieve true recognised carrier status in a country vary – presently, it is presumed in the UK for anyone, and you do not have to even let the regulator know you exist until your turnover is £5m, or you want your own number ranges. In Ireland, it’s an on-line submission that takes 10 minutes. The USA can be two years; others are in between (or just impossible with existing exclusive licences, such as St Helena).
We would suggest that if your plans include international expansion, or you have expanded already ‘under the radar’, or you are a business in the Microsoft/Google/Twilio mould of Communications Provider as a Service, now is a good time to take stock of what the world could look like, and perhaps start adapting for it, today.