Embracing the digital economy

Keynote address.

I am most grateful to you for inviting me to give the keynote address at this important CMA conference on Embracing the Digital Economy. I think I was invited for two reasons: as the founding Chairman of Ofcom, a role I stepped down from just over four years ago (and the CMA was kind enough at that point to make me a lifetime fellow of the Association); but also in my new role as Chairman-Designate of the new Competition and Markets Authority (the other CMA) which we are forming by bringing together the Office of Fair Trading and the Competition Commission. In my remarks this morning, I want to range quite broadly but the common theme in what I say is the importance of ensuring, as the digital economy develops in all sorts of exciting and unpredictable ways, that we sustain effective and open competition.

First a personal note. Few people have the privilege of creating a new organisation from scratch. Fewer still get two goes. It was a great privilege to be the founding chairman of Ofcom, and despite the strictures on the regulator in the conference blurb (“more evidence-based than forward-looking”, to which I will come) it must have been judged a success otherwise I wouldn’t exactly ten years later have been asked to have another go. Key is getting the right Chief Executive: Stephen Carter was formative in the creation of Ofcom, and Alex Chisholm, formerly the Irish communications regulator, is being similarly so in the creation of the Competition and Markets Authority. And then the next key element is to bring together the very talented and professional group of people working in this area to form high-performance teams – I think we achieved that at Ofcom and Alex and I intend to repeat the trick at the CMA taking the talent pools of the OFT and Competition Commission. We are progressing rapidly in its creation: the Enterprise and Regulatory Reform Act 2013 is now law, the Board will be announced quite soon, we are in the process of bringing together the senior executive team, we come into legal existence in October and assume our powers next April.

As you can imagine, there is much to do. We are required to be more timely in the conduct of competition policy, to deploy resources more effectively in the unitary authority while respecting the independence of Phase 2 decision-making, to play a stronger leading role in the application of competition policy in the regulated sector, to enforce anti-trust to better effect, to cooperate with other key players to ensure effective consumer protection, and to be a stronger single voice for competition and consumer protection both at home and overseas. All of these things we will achieve.

Four years is a long time in the fast-moving communications sector, so my claim to expertise is fast fading. But as an observer and user, I would note that convergence , much vaunted in the past, is finally upon us with a vengeance. We are starting to enjoy ubiquitous, very high speed, mobile connectivity, and this will continue to develop. It will bring huge changes to our lives, but we are only at the beginning. To draw the parallel with electricity, that first enabled us to do what we did before more cheaply and efficiently, then it allowed a whole new range of products and services to do old thing differently and to do wholly new things, and then it changed how and where we lived our lives. That journey took nearly a century. We are at the beginning of a similar journey with modern communications, and although it may well happen much faster it will still roll out over an extended period. It is forming new communities of interest, not geography, which has significant social and political consequence.

Digitisation is disrupting business models and leading integration of the value chain, in ways superbly analysed by Professor Valletti of Imperial College in his Beesley Lecture of last year. What the long term structure will be remains uncertain. Will the combination of network effects, economies of scale and scope, superstar effects, particularly with globalisation, lead to very large, vertically integrated businesses? And will that in turn lock out the smaller niche players to the detriment of competition and innovation? Who knows the answer to that – I most certainly do not, but I make two points. First, these type of developments pose very hard questions for regulators, whether sectoral or competition or both. Where network effects are strong, there is an inherent tendency towards monopoly or oligopoly, often characterised by a tipping point. Does the regulator intervene early to prevent a market tipping into monopoly? That may well be seen as heavy handed, and will be prone to the possible error of intervening in markets that would not have tipped. Or does one intervene late once the tipping has occurred, in which case how does one untip a tipped market? Or does one sit back and rely on the inherent dynamism of this type of technology driven market where monopolies can and are toppled by technological inventiveness – witness IBM, possibly Microsoft and others? Answers on a postcard please to my CMA, or rather, since such issues usually span national boundaries, to the European competition authorities.

It is also worth noting the growing range of these issues. Currently the issues raised by digitisation are most relevant in the communications sector. But the advent of 3D printing, still very much in its infancy, will in time spread digitisation to many other product markets, dramatically changing market structure in the way that is happening in communications.

What we are also observing is the clash of business models and the crash of regulatory structures. It was always a concern to me as a regulator that the way in which broadcasting was regulated was wholly at variance with the way telecoms was regulated, and within telecoms the varied ways that fixed line, mobile and cable were regulated. Those differences were a legacy of the very different ways that these delivery modes emerged historically. It seemed obvious that over time there would need to be regulatory convergence. But because of the stark differences in regulation and business model, it was equally obvious that change would have to be evolutionary. Progress has been slow, if not glacial. The intriguing question is what is needed to achieve the jump or discontinuity that we know periodically characterise evolutionary processes – the regulatory tipping point, if you like.

One of the themes of today’s conference is the transition to superfast broadband – how and when? This is a different challenge to that which Ofcom faced at inception. We inherited the old monopoly infrastructure, much of it built in public ownership but passed to private, BT ownership. The challenge was to open this up to effective competition. I well remember my first meeting with Christopher Bland and Ben Verwaayen (respectively the then Chairman and Chief Executive of BT), at the time when I was the only person in Ofcom. A few months before, I had published a policy paper (written jointly with Professor John Cubbin, a colleague at City University, and now a colleague again as a panel member at the Competition Commission) which argued that structural separation of BT should be considered very seriously. You will understand that this added a certain frisson to the meeting. I opened up by saying three things. First, that I had had a brain transplant, so that Ofcom would look at everything with an entirely fresh mind. Second, that the very public rows of the kind between Vallance and Cruikshank should not recur: we will have our differences and argue them hard, but we should recognise that both sides are professional and to be treated with respect. Third, that Oftel had something between 150 and 300 interventions into the business of BT so that BT management could scarcely move; yet these interventions were not achieving the key public policy objective of effective competition. We had no scale competitors to BT, only a host of small, fragile businesses wholly reliant on the regulatory drip-feed. There had to be a better way.

That was the seed that grew through the Ofcom Telecoms Strategic Review into the creation of Openreach and functional, or operational, not structural, separation. To BT’s credit, they ran with this, trusting that this would allow Ofcom subsequently to deregulate, which we did, increasing rolling back the regulatory interventions that Oftel had put in place. The result was a much more dynamic market for first generation broadband that served us well in subsequent years.

Now we face a different challenge: how to incentivise the investment in next generation very high speed broadband. There are many issues to be debated around this, and you will be doing that during today. You will not be surprised to learn that for me, as Chairman of the Competition and Markets Authority, the key issue is how to incentivise that investment in a way consistent with maintaining an open and competitive market. We must not see the market re-monopolised, and then have to go through the same painful process as with first generation broadband of opening up a monopoly network to competition. This is, of course, a challenge not just in communications, but also in other infrastructure sectors such as transport and energy. We need to find a way to incentivise new investment from the future profits to be earned in a competitive, open business environment, not from the prospect of future monopoly profits.

Another important theme at this conference is that of protecting the digital economy. The internet and digital communications have hugely empowered us and enabled us to find faster and at lower cost the goods and services that best meet our needs. The ready availability of information and the ability to process it efficiently has transformed our access to knowledge and the research processes that improve our understanding of the world around us. Even if we discount much of the hyperbole, there is still much to marvel at. And increasingly well-informed consumers strengthen competitive markets, helping economic growth and innovation. However, there are also things that should worry us. High on my list is the significant number of households who are not digitally connected, whether refuseniks or others. This is an issue by no means confined to the old. As the benefits of the digital economy cascade, so will the inequities unless we find ways to ensure universal access and usage. And the children of the digitally excluded carry the disadvantage into the next generation.

Next is the rise of internet based scams. We are all familiar with the stream of emails promising riches that may seem absurd to many but lure the naive, too often the vulnerable and disadvantaged. What may be less familiar is the way that the internet has allowed the long-standing wide boy rip-offs, selling shoddy goods from a local lock-up, to morph into nationwide scams, sometimes still run from a local lock-up but sometimes more organised. This represents a challenge for those of us engaged in consumer protection to tackle - a key part of the work of my CMA and our key partners in that enterprise such as Trading Standards, Citizens Advice and Citizens Futures.

Next is the risk to the digital economy that major and systematic scams and misinformation lead to a loss of confidence in online information and trading. Those engaged in enforcing online security in the ongoing arms race against online crooks have to keep ahead.

And the integrity of the online system is crucial. The integrity of the core infrastructure must be invulnerable to attack. Our dependence on digital communications to keep our economy working will mean that it must be made robust against attacks that wound it seriously. We need lots of redundancy to make sure the lights stay on.

If we can find effective issues for tackling these issues, then that will serve consumers and businesses, for both benefit from a fair and open environment for trading. I know that the BCS has argued that the regulator has put too much emphasis on serving the interests of consumers and citizens (its primary statutory duty) at the expense of businesses. I will not enter that debate, except to say two things. First, in my mind, small businesses face very similar issues to the ordinary consumer, and the regulator should have, and I believe has had, regard to that. Second, the statutory duty is to have regard to the interests of citizens and consumers, both present and future. Healthy businesses, small, medium and large, are the means of delivery of benefit to future citizens and consumers. So Ofcom’s focus on citizens and consumers never meant bearing down on, or neglecting, business. The Competition and Markets Authority will focus on making markets work well for consumers, including deterring anti-competitive behaviour. But that also works to the benefit of business, provided they are acting appropriately and within the law. And we will need to ensure that our competition-oriented work is based on consumer realities – not-spots and confusion pricing as well as competitive spectrum portfolios.

A major anxiety is whether regulators can respond fast enough to fast moving business and technology developments. One thing that the Competition and Markets Authority is required to deliver by the new Act is more timely competition processes, and that can only be to the good. But I return to the barb in the conference blurb – the criticism of Ofcom that it is evidence-based, not forward looking. As Chairman of Ofcom, I always believed that regulation should be both evidence based and forward looking, and I doubt whether that has changed. Indeed, even though as a former economic forecaster I recognise how hard it is, I do not see how one can be usefully forward looking without being evidence based. But we should recognise that this is not just a matter for the regulator, but it also necessary for the appeals bodies, whether the courts or the CAT, to be forward looking. And we should recognise that it is frequently businesses themselves that lead to delays and lack of ‘forward-lookingness’, through their entirely legitimate, but sometimes economically and socially destructive, recourse to litigation. We need merely think of the huge delays in rolling out the 4G spectrum.

Returning finally to consumer protection in a narrower sense, we should also monitor closely the rise of big data and the set of issues surrounding the increasing collection, processing, trading and use of consumer data for commercial ends. This will undoubtedly prove to be an increasingly important source of competitive advantage, as well as consumer benefit. But I have no doubt that regulators will need to watch carefully to make sure it does not become an increasing source of consumer detriment.

To conclude, you will be addressing today many issues crucial to the development of the digital economy, and that is a tribute to the important work of the Communications Management Association. The increasing centrality of digital communications to our economy, society and polity is an inexorable trend and a great force for progress. We are in a very exciting period where technological advances are transforming the way we live. Few of us know the end destination. Even for oldies like me, who will not arrive at that destination unless modern medicine works miracles, just embarking on the journey is exhilarating.