Net Neutrality: The current and proposed position in the EU - the third in a three part series

In an ‘always-on‘ age where demand for high-speed, high capacity internet continues to increase, governments and regulators around the world are faced with the challenge of how best to satisfy that demand whilst guaranteeing that access to the internet remains ‘open‘ to all users. A number of countries have already adopted specific net neutrality rules; others – including the EU as a whole – are poised to do so.

Come 30 April 2016, we will for the first time have a specific EU net neutrality framework. The framework will be embodied in a regulation (the Draft Regulation)(1)  and so it will be immediately applicable in all Member States without the need for separate national legislation. Or at least that’s the idea. As we will see, there are certain areas – particularly around ‘innovative‘ or ‘specialised‘ services – where further guidance will be needed.

The Draft Regulation will be an important development for the entire communications industry, whether telecoms operators and internet service providers, content and app developers, or other forms of service provider that make use of communications networks to deliver their services. It will also affect all of us as users of online services. So where will your particular business in the communications supply chain sit in the new EU order? What are the risks and pitfalls going forward? We discuss these questions in this and two subsequent articles.

In this third article in our series, we look at the various competing stakeholder interests regarding the Draft Regulation, the steps to finalisation of the Draft Regulation, and what the Draft Regulation might mean for players in the communications sector now and in the run-up to the net neutrality rules entering into force on 30 April 2016.

In the first article in this series we look at how the Draft Regulation defines (or attempts to define) net neutrality, and in the second article we discuss particular issues around the Draft Regulation.

1. How might the next stage fare? Who wants what? And why?

By way of reminder, after months of debate and several rounds of trilogues, the Parliament and Council reached agreement on a so called ‘compromise‘ text of the Draft Regulation, on 30 June 2015. The Council published a version of the text that confirms the Council’s position (at first reading), on 23 September 2015. The text is substantially the same as that agreed on 30 June 2015, with some fine-tuning and linguistic corrections. The text was formally adopted by the Council on 1 October 2015.

There are still several steps to go before the Draft Regulation can enter into force. Importantly, the text will need to go before the full European Parliament for a vote. It is expected that this will take place at the end of October 2015, with the Draft Regulation entering into force three days after its publication in the Official Journal.

Although the main text is not expected to change significantly during the final legislative stages, there may be some ‘fine-tuning‘ of the recitals. If this is correct, what this might involve and what the final version will look like depends on how strongly the differing sections of the communications industry are able to voice their concerns and convince their national MEPs to champion their cause.

The large telcos and ISPs

Large telcos and internet service providers (ISPs) have an obvious interest in maintaining flexibility to manage the configuration and flow of traffic on their networks – for example, through permissible traffic management measures and to enable revenue generation through commercial deals.

The increased prevalence of over-the-top services and the recent wave of market consolidation in local telecoms markets in a number of EU Member States may exert further downwards pressure on operators’ margins. Any squeeze in operators’ margins has a clear knock-on effect regarding available funds for reinvestment into the network.

Telcos and ISPs have repeatedly cautioned on the potential negative impact that the EU’s net neutrality rules could have on their ability to continue to fund future investment in their networks – something they argue could and should be off-set through enabling them to charge entities like Netflix to prioritise their traffic under so-called paid prioritisation or ‘fast lane’ deals.

App and content developers

Conversely, smaller app and content developers insist that full and open access to the underlying networks is critical if they are to have a chance of getting into the market.

This group of stakeholders has fought hard for strong net neutrality rules which would constrain telcos’ and ISPs’ ability to enter into bespoke commercial deals that might see only the more developed, cash-rich owners getting their content to market. This has largely been achieved under the Draft Regulation. They fear their hard-fought position could however, be undermined if during the final legislative stages, the EU allows national regulatory authorities (NRAs) too much flexibility in their interpretation of ‘innovative‘ or ‘specialised‘ services, so that there risk being a free-for-all when it comes to defining these services.

2. Net neutrality in the context of the EU electronic communications market

Setting aside the individual interests of the various opposing groups and taking a longer term view, it is clearly not in either group’s interests, or that of end-users, to have second class telecoms infrastructure or for innovation to be stifled. Some critics query whether the proposed net neutrality framework in Europe is necessary at all, and if so whether it strikes the right balance to enable the competing interests to be accommodated.

The EU needs to ensure that it has the right competitive environment. This includes incentivising infrastructure players to continue to invest and to avoid a regime which lacks flexibility to react to the pace at which the technology is developing. The Commission is very mindful of the difficulties ensuring that regulatory frameworks keep up with the rapid pace of technological development, and is conducting a number of public consultations in this area.

Tension in US/EU relations in the technology arena remains. In the last few years, we have seen the Commission’s repeated attempts to investigate the businesses of US entities such as Google. Next on the horizon is the Commission’s consultation on the regulatory environment for platforms and related technology, published on 24 September 2015, with possible rules in the sector now earmarked for 2016.

The Commission has also recently announced, as part of its overall Digital Single Market strategy, a public consultation which will evaluate and review the current EU regulatory framework for electronic communications networks and services. This could pave the way for the Commission to adopt rules to extend regulation out to newer forms of technology and services which do not fall squarely within the existing regulatory regime.

But does the EU debate on net neutrality really matter, particularly for players with no or little EU connection? It is important that multinational players in the communications industry do not get fooled into thinking this is a purely EU problem, that impacts only those companies with established bases in Europe, or looking to do business in Europe. This is a global issue. Several jurisdictions outside the EU (such as India, and an increasing number of Latin American countries) are also in the process of drafting net neutrality legislation (or likely to do so shortly), and some are looking to the EU rules as a possible template. Whether or not this is appropriate or desirable, given the economic and demographic differences between these countries and the EU, is another issue – but one which should not be ignored by entities with business operations in these regions.

3. So if not net neutrality rules, then what?

Critics of the EU’s proposed net neutrality rules have pointed out that NRAs have, for some years, been able to impose specified Quality of Service (QoS) levels on telcos and ISPs regarding roll-out and performance of their networks. However, very few NRAs have put this power to practical use. So surely Europe should use the imposition of QoS as a first step, before going for adoption of a formal net neutrality framework? The recently launched Commission consultation on the Needs for Internet Speed and Quality Beyond 2020 might be a good place for those wishing to steer regulation in this direction to start; so it is important not to miss the 7 December 2015 deadline for submitting views.

Similarly, if the real concern is to ensure a level footing for new start-ups, some argue that there is a well-developed competition law framework at both EU and national level that could be used to address relevant competition concerns (for example, abuse of dominance by larger, household brands).

However, market definition in technology markets is never straightforward as the Commission’s platform consultation (referred to above) will confirm. Additionally, there is generally agreement among competition lawyers that abuse of dominance case are particularly difficult to run. The relevant rules have often shown themselves over the years to be ill-equipped to deal with situations that fall short of dominance. But so what? Critics of strict net neutrality rules argue that regardless of merits, the position struck under EU competition law rules is after all a deliberate policy choice that has long been taken at EU level as to what the appropriate level of competition should be, and not a gap that should be plugged by net neutrality rules.

4. What can we hope for in the remaining legislative stages for the Draft Regulation?

Those familiar with the EU legislative process know that even when a deal looks set, finalising it can still throw-up its own challenges. Discussion and finalisation – which might include further work on the all-important recitals – should not be underestimated. Recitals are often where the real action lies, containing valuable pointers as to how individual NRAs should approach any vague or ambiguous terms in the main body of the text. So any changes or fine-tuning will be important.

So what would be a good result? Ultimately it depends on who you ask. Whatever it might look like, one hopes that there will be sufficient scope and flexibility embodied in the final result to enable telcos and ISPs, together with new content and app developers, to come up with creative service offerings. The current list of examples – IPTV, high definition videoconferencing or healthcare services like telesurgery – is a useful starting point but should be seen as just that.

NRAs should have sufficient flexibility (and courage) to be able to react swiftly to technology developments and reach their own views on what ‘enhanced quality of service‘ (an important criterion for innovative or specialised services) might look like as regards their own national market.

Further guidance on how NRAs might approach this tricky area is certainly needed. An approach that effectively ‘blacklists‘ anything which is not on the current list of examples, or places an unduly high standard of proof that effectively restricts expansion of the current list of examples, seems undesirable from both the perspective of telcos and ISPs and innovators trying to get their new services to market.

At the same time, leaving too much of the detail to NRAs with the possibility of widely differing approaches between Member States could risk undermining not just the net neutrality framework, but also the EU Commission’s longer term vision for a single European telecoms market and Digital Single Market strategy.

5. What can we expect to occur in finalising the Draft Regulation?

One thing is certain: there is still a fair amount of political wrangling to come, so those engaged in providing services within the communications sector need to continue to lobby for their interests to be heard before Parliament’s vote at the end of October 2015.

If reports are anything to go by, it seems we can expect a strong Dutch contingent to continue to push for a stricter approach, and possibly even try to obtain some form of ex-ante regulatory authorisation process for low cost or sponsored (i.e. often referred to as zero-rated) connectivity.

In response, we might see the UK and Germany opposing any further advances that could impact on big business’s flexibility to offer differentiated services although certain MEPs, including from the German Socialists & Democrats Party, have recently been quoted as stating that further initiatives against zero-rating are urgently needed, especially in the wake of increasing vertical integration of companies.

6. What does it mean for the various stakeholders (for example, ISPs, app developers)?

Telcos and ISPs need to take stock and re-assess their current network configuration and traffic management protocols, and whether these will comply with the much stricter position in the Draft Regulation. Additionally, they will need to consider whether current commercial deals will comply with the new rules, and if not, start negotiating and thinking about the cost of getting out of those deals. Unlike other rules (such as the abolition of roaming charges that feature in the same document as the net neutrality rules), there will be no transition period for businesses to acclimatise. There is also an important public relations aspect to this, so it is important for telcos and ISPs to educate consumers about possible changes to their services, why this is happening and when.

Content and app developers will also need to reassess their commercial arrangements and see if these are still appropriate and whether there are any overly restrictive deals that can be set aside post 30 April 2016.

It is easy to see that the Draft Regulation is never going to be welcomed by all. And perhaps the biggest achievement is simply getting some sort of framework in place.

(1):- Proposal for a Regulation of the European Parliament and of the Council laying down measures concerning open internet and amending Regulation (EU) No 531/2012 of the European Parliament and of the Council of 13 June 2012 on roaming on public mobile communications networks within the Union, whose text was agreed on 30 June 2015.

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