elecommunications Policy, Vol. 22, No. 3, pp.
197205, 1998
In December 1997, the European Com-
mission published a Green Paper on the
regulatory implications of the conver-
gence of telecommunications, media
and information technology sectors.
The article starts with a look at the con-
sultation process, and goes on to dis-
cuss some of the substantive issues
raised. Without repeating material
already evident in the Green Paper
itself, it attempts to clarify the differ-
ence between Community and national
approaches to regulation. Some ideas
on the basis for national regulation are
then explored, as are notions of the
balance between the application of
competition rules and sector-specific
regulation in a converged environment.
Q 1998 Published by Elsevier Science
Ltd. All rights reserved
The author is with the European Commis-
sion, DG XIII, 200 rue de la Loi, BU9 01/
86, B-1049 Brussels, Belgium. Tel: #32 2
296 3822; fax: #32 2 296 9009; email:
bernard.clements@bxl.dg13.cec.be. The
views expressed are entirely those of the
author, and do not necessarily represent
those of the European Commission.
1
European Commission, Towards an In-
formation Society Approach, Green Paper
on the convergence of the telecommunica-
tions, media and information technology
sectors, and the implications for regulation,
COM(97)623 final, Brussels, 3 December
1997.
Continued on page 198
( 1998 Published by Elsevier Science Ltd. All rights reserved
Printed in Great Britain
0308-5961/98 $19.00#0.00
PII: S0308-5961(98)00007-X
The impact of
convergence on
regulatory policy
in Europe
Bernard Clements
This article provides a brief commentary on the European Commissions
Green Paper on the regulatory implications of the convergence of telecom-
munications, media and information technology sectors and develops some
ideas on regulation in the new environment.1 The Green Paper was pub-
lished on the eve of the full liberalization of the telecommunications sector,
and just a decade after publication of the landmark 1987 Green Paper which
started that process.2 Whether the Convergence Green Paper will prove to
be as seminal as its predecessor remains to be seen, but it does promise to
open a new chapter in the development of regulatory policy in Europe,
a development which by its very nature will go beyond the confines of the
telecommunications sector itself.
The process
Green Papers are consultative documents aimed at eliciting views from
interested parties on policy issues prior to the preparation of proposals for
Community legislation. Such papers may thus stop short of taking posi-
tion, and instead set out the relevant policy options in as neutral a manner
as possible. However, the underlying purpose is to signal the need for
change in the face of technological and/or market developments, and this
is indeed the case in the Convergence Green Paper. Its thesis is that
convergence challenges traditional notions of regulation, implying the
need for a new approach. What that approach should be lies at the heart of
the debate.
The debate initiated by the Green Paper is likely to be lengthy and
occasionally challenging. Regulation of the audiovisual sector is an area
where questions of national culture and language merit particular atten-
tion, and where deeply held views exist and are often passionately ex-
pressed. It should therefore elicit considerable interest and a wide range of
views; an early indication was the number of people who accessed the
197
The impact of convergence on regulatory policy in Europe: B Clements
Continued from page 197
2
European Commission, Towards a Dy-
namic European Economy, Green paper
on the development of the Common Market
for telecommunications services and
equipment, COM(87)290 final, 30 June
1987.
3
http://www.ispo.cec.be/convergencegp.
198
document on the Commissions Internet website3nearly 3000 within the
first two days of its posting.
A further sign of the importance accorded to the Green Paper was the
unprecedented backing it received from four Commissioners. Jointly pro-
posed by Martin Bangemann (Industry) and Marcelino Oreja (Audio-
visual and Cultural policy), and with the agreement of Karel Van Miert
(Competition) and Mario Monti (Internal Market), the Green Paper was
adopted by the Commission unanimously at its weekly meeting of 3 De-
cember 1997. Agreement across such a wide spectrum of policy responsi-
bilities was a result of the collegiate system which governs decision making
at the Commission. Although work on the Paper was initiated within DG
XIII (Telecommunications), intense consultations were carried out with
other Directorate Generals. in order to ensure that a balanced view of the
issues would prevail. DG X (Audiovisual policy) played a particularly
important role in these consultations, but significant contributions were
also made by the Legal Service, DG I (International relations), DGIII
(Industry), DG IV (Competition), DG XII (Research), DG XV (Internal
Market) and DGXXIV (Consumer protection).
A five-month period of public consultationlonger than the usual three
monthshas been included in the schedule to allow for the widest possible
range of views to be submitted. Public hearings have been organized and
written submissions invited. Appropriately, this is the first Green Paper in
which a part of the consultation will be conducted via the Internet;
contributions may be sent by e-mail and will be posted on the ispo website.
A Communication to the Council and European Parliament will be
prepared at the end of the consultation period. The Communication will
summarize the main findings and will, if appropriate, make proposals for
further action. This was the pattern of the previous Green Papers, includ-
ing the 1987 Green Paper, the 1991 Satellite Green Paper, the 1993 Mobile
Green Paper and the 1993/4 Infrastructure Green Paper. All these gener-
ated subsequent EC legislation, although it is obviously too early to say
that the present document will have the same effect. The difference here is
that the Convergence Green Paper deals with an emerging and thus
uncertain market situation, unlike its predecessors which addressed clear
anomalies in the marketplace, most of them arising from the existence of
de jure monopolies or operators with special rights.
The need to start the debate now
So why was it decided to embark upon such a wide-ranging policy review so
soon after the adoption of the battery of legislation which paved the way for
telecommunications liberalization? And in the midst of a number of initiat-
ives surrounding the Information Societythe Single Market transparency
mechanism, difficult proposals on media ownership, a draft directive on
copyright, and a successful updating of the elevision without Frontiers
Directive? After all, any document hinting at fundamental reform of the
regulatory environment risked undermining these current initiatives and the
implementation of adopted measures within Member States.
To digress for a moment on this last point, many of the current
initiatives were seen as peripheral to the core substance of the Green
Paper, and care was taken during the inter-service consultation to ensure
consistency where necessary. The paper defines its scope early on as
concentrating on the converging sectors themselves (telecommunications,

4
In 1978, Gordon Moore, the founder of
Intel, predicted that the number of transis-
tors on a single chip, and computing power,
would double every 18 months.
The impact of convergence on regulatory policy in Europe: B Clements
audiovisual media and IT) rather than on the broad spectrum of economic
activity which the Information Society, enabled by convergence, will
doubtless influence and transform.
On the central question of timing, the stakesand the costs of doing
nothingwere simply too high to put the matter on the back burner while
todays problems were being sorted out. Mounting evidence of conver-
gence had been provided by the emergence of new multimedia servi-
cesmost obviously by the Internetand by the increasing capability of
modern networks to carry both telecommunications and broadcasting
services. Neither did there appear to be any slow-down in the advance of
digital and software technologies, whose application to the different sec-
tors forms the basis for convergence. On the contraryMoores law,4
already revised to take account of the acceleration of computer processing
power, was now being applied to the speed of developments in software
technology. At the same time, Internet services were becoming more
sophisticated by the day, and providers of Internet radio and video
services, with innovations such as streaming and push technologies, were
knocking on the door of the broadcasting market.
Of equal concern was the risk that individual Member States would
see the need to act quickly with what they perceived as appropriate
regulation for the new services, either on the basis of meeting legitimate
public interest considerations or with a view, perhaps motivated by such
considerations, to extending existing regulation forward into the new
environment. Germany had already enacted new legislation and dis-
cussions were well advanced in the UK and in France. Unless concerted
efforts were made to bring things together at a European level, there was
a real risk that diverse national legislation would lead to further frag-
mentation in a market which increasingly depended on global reach for its
success.
Why convergence poses problems for regulators
These events were already starting to have a profound effect on the behav-
iour of market players and on the very structure of the marketplace. There
appeared to be a shift in the nature of industry concentration, from one
based on horizontal mergers to those involving increased vertical integra-
tion, as operators sought out alliances which would enable them to acquire
the broad set of skills needed to address new markets. Apart from enabling
todays market players to extend their current activities to new areas,
convergence will also encourage the arrival of new players exploiting niche
markets. The Green Paper suggests that this stage of industry convergence
could be the bridge between what is already happening at the technology
level and what will eventually occur at the level of services and markets.
The Paper further argues that this process is blurring the frontiers
between traditional sectors such as telecommunications, media, broad-
casting, audiovisual and computingsectors which are currently regu-
lated separately and differently, or in the case of IT, not at all. The more
these developments made inroads into traditional markets, the more they
threatened the neat divisions which regulators had drawn around those
sectors. The dilemma posed by convergence therefore is what regulatory
regime, if any, will be appropriate to the new environment.
This is not an easy question to answer. An instinctive response might be
to create a new category of multimedia services for which a suitable
199
The impact of convergence on regulatory policy in Europe: B Clements
regulatory framework could be devised. Such a dedicated approach may
not be feasible; the increasing overlap between new and existing services
could make for discriminatory treatment of similar services, thereby dis-
torting the market. It could also be unresponsive to the rapid develop-
ments so characteristic of these sectors. On the other hand, if a regulatory
approach cannot be developed in isolation of current frameworks, there is
a danger that existing regulation might be extended inappropriately to the
new environment. One solution might be to take a completely fresh
approach, with provisions for migrating from todays regulatory frame-
works to a future unified regime.
The converging services are expected to expand the overall information
market, and in doing so, to provide opportunities for the creation of
economic wealth and employment. Facilitating convergence will be of
crucial importance to the development of Europes media and commun-
ications sector, and of the Information Society as a whole. For the
opportunities provided by convergence to be fully realized, they should
not be hampered or constrained by inappropriate regulation. Any regula-
tory regime should be such as to provide market conditions which attract
investment in new services, and at the same time provide sufficient protec-
tion for the consumer.
Failure to address the regulatory implications of convergence at an
early stage could therefore maintain the current regulatory barriers, intro-
duce market distortions and inhibit growth of the new market. Worse still,
it could threaten European competitiveness in an increasingly global
marketplace, and lead to the loss of opportunities for economic growth
and employment creation.

Structure of the Green Paper

In an interrogative style that tries to avoid being conclusive about future
trends, the Paper opens with a description of current technological and
market developments. It suggests that convergence is clearly evident today
only in terms of technology, and to some extent in the activities of
companies pursuing mergers and alliances in order to address the new
markets. But like the alliances themselves, the new markets appear to be
far from certain. In its second chapter, the Green Paper gives examples of
how things might develop, by looking more closely at supplier strategies,
and by assessing demand-side developments in the changing patterns of
consumption of services and in the potential convergence of consumer
devices in the homethe PC/TV or the TV/PC. The second chapter also
sketches the political background of the Information Society by looking
macro-economic and business impact, employment effects and the rel-
evance of Community R and D programmes.
In assessing the regulatory consequences, the Green Paper takes the
approach of identifying actual and potential barriers to convergence
(Chapter III), and of suggesting ways in which these may be overcome
(Chapters IV and V). This approach differs from that which might be
followed at a national levela Community approach is determined by the
objectives of the EC Treaty such as promotion of an Internal Market,
undistorted competition and trans-European networks, or the mainten-
ance of a high standard of consumer protection. Barriers to convergence
would be deemed to be barriers to achieving such Treaty objectives
applied to the converging sectors, unless it could be demonstrated that

200
 The impact of convergence on regulatory policy in Europe: B Clements
a particular national (and otherwise restrictive) measure were in pursuit of
a public interest objective consistent with the Treaty and proportional to
that objective.
Existing barriers identified include access restrictions (to users, to net-
works and to content), currently high prices for telecommunications servi-
ces and EU market fragmentation. Among the potential barriers are
market entry and licensing restrictions, frequency spectrum allocation, the
existence of multiple regulatory bodies, and varying approaches in Mem-
ber States to the achievement of public interest objectives.
In examining the impact of barriers identified in the preceding chapter,
Chapter IV considers first whether certain features of convergence create
new challenges for regulation. It suggests that there could be problems of
inconsistent regulation of essentially similar services based on the underly-
ing infrastructure used to deliver them. Globalization is also seen to be
a major problem, with the attendant risks of side-lining national regula-
tion and arbitrage of domestic markets. The challenges posed by conver-
gence to scarcity-based regulation in the face of increasing abundance, to
regulation based on distinctions between public and private communica-
tions, and to the current complex institutional structures for regulation are
also discussed. The chapter then goes on to examine approaches towards
key issues in the economic and public interest regulation in the context of
the barriers previously identified, and concludes with a discussion of
relevant international issues.
After a discussion of the principles to be applied to a future regulatory
environment, the final chapter identifies three options for the transition to
a new regulatory environment. These follow closely the approaches refer-
red to at the beginning of this article:
Option 1Extend todays structures forward on an incremental basis to
cover new services.
Option 2Create a category for new services and regulate them separ-
ately from audiovisual and telecommunications services, for which the
current regimes would remain in force.
Option 3Progressively introduce a new regulatory model to cover all
services.
The Green Paper avoids taking positions on these options, although the
reader may be persuaded that the third option is the one which will
minimize regulatory discrimination and market distortion in the con-
verged environment.

Community versus national approach to regulation

A Community approach, while complementing national policy measures,
looks at regulation from the standpoint of removing barriers to the
creation of an internal common market for goods and services, and to
generally ensuring that the provisions of the EU Treaty are implemented.
A national approach might additionally envisage that certain matters of
public interest be assured by the regulatory environment.
Regulation is concerned with ensuring that market outcomes conform
broadly to public policy objectives. Such objectives generally relate (i) to
the efficient allocation of resources and (ii) to wider political goals which
may or may not be met without regulatory intervention. These wider goals
are aimed more directly at serving the public interest, and may be strictly
economic in nature (such as the equitable distribution of resources or

201
The impact of convergence on regulatory policy in Europe: B Clements
consumer protection) or less tangible, relating to education, morals, cul-
ture and democracy. Meeting public interest objectives may involve a de-
parture from optimal economic outcomes, implying a net regulatory cost.
Where the net costs and other secondary effects of regulation are excessive,
the measures in question should be weighed against alternative ways of
achieving the same end. Governments have sometimes ignored dispropor-
tionately high secondary effects, for example in maintaining unregulated
monopolies to ensure universal service.
Economic efficiency and public interest objectives thus form two funda-
mental and complementary sets under which the likely performance of
markets can be judged and for which specific regulatory criteria can be
developed. Identifying regulatory criteria in this way allows any corres-
ponding measures to be clearly targeted to meeting defined objectives,
thus minimizing possible distortionary and secondary effects on the
market.
Realizing public service goals also contributes positively to consumer
welfare, which may be expressed in terms of the price consumers pay for
services on the one hand, and the overall quality of those services on the
other. Competitive markets generally lead to optimum pricing, taking into
account the need for trade-offs between static and dynamic efficiency in
markets where there are substantial costs associated with innovation.
There is a prima facie case for intervention, either through regulation or
the application of competition rules, if there are deviations from such
optimum pricing. Competitive markets may not however automatically
provide for all public interest requirements, and the need for safeguards to
be built into the regulatory framework must be examined if there are
demonstrable risks that such requirements will not be adequately met by
the operation of market forces alone.
Regulatory intervention is therefore justified where the market fails to
meet public policy expectations. Defined narrowly, market failure is an
concept used to describe inefficient outcomes. But insofar as general
economic welfare is advanced by public interest goals, the concept can be
extended to cover also outcomes which deviate from these goals. This
broader definition of market failure not only recognizes the link between
the economic efficiency and public interest objectives, but is also consistent
with a light-handed approach to regulation. It assumes that the market is
given first refusal to provide for the public interest and that ex-ante
intervention is exceptional rather than routine.
Many industry observers take the view that as convergence lowers entry
barriers and eliminates capacity constraints, the number of market players
makes the provision of audiovisual services a business like any other, to
which the rules of the marketplace should apply. They would also argue
that a market-oriented approach is consistent with the declared intentions
of governments to invite private capital to form the basis of establishing
the infrastructures of the Information Society. According to this view,
incentives to attract that investment can only be provided by allowing the
normal risk-reward relationship of the marketplace to function unhin-
dered by excessive government involvement.
Others would argue that certain key features required for market-based
solutions are not yet applicable to audiovisual services, notably the oppor-
tunity for the user to choose freely from all potential services on the basis
of their perceived individual price/benefit. They would argue that the
economies of scale inherent in mass media communications (low marginal
cost of reproduction, public good characteristics) will create entry barriers

202

5
Open Network Provision (ONP) which
also subsumes EC harmonization policy in
telecommunications.
6
EC Competition Law in the Telecommuni-
cations, Media and Information Techno-
logy Sectors, Herbert Ungerer, Fordham
International Law Journal, 19(3) February
1996.
The impact of convergence on regulatory policy in Europe: B Clements
to new service providers if market forces are not effectively restrained.
They would also express concern that such an approach does not do
justice to the legitimate concerns of governments in giving proper empha-
sis to matters of national public interest, maintaining that to do so would
ignore the uniquely powerful nature of audiovisual broadcasting and the
need to ensure continuation of its essential cultural and political role in
society.
The roles of competition law and sector-specific regulation
The balance between ex-ante sector-specific regulation and the application
of a posteriori competition rules was a recurrent theme of the debate
leading to the full liberalization of telecommunications services and infras-
tructure. At that time, there was general consensus that an increasing
dependence on competition rules, accompanied by a progressive reduc-
tion of ex-ante regulation, would be a feature of the post-1998 environ-
ment.
The application of competition law and regulation in telecommunica-
tions is a comparatively recent phenomenon in Europe. As in the US,
where antitrust legislation played an important part in opening markets,
early EC measures focused on introducing competition in the presence of
incumbent monopolies. The main purpose of regulation then was to
provide a framework for sustainable competition through a known set of
rules on open networks and through harmonization of the diverse tech-
nical and commercial environments surrounding the sector in different
Member States.5
One of the key roles of regulation, therefore, was to create a stable set of
conditions and a climate of legal certainty for potential investors. The high
sunk costs and modest returns which characterize investment in network
infrastructure made this a prerequisite for market entry in the face of
dominant incumbent players. The maturity of the market and financial
strength of the incumbents allowed regulation to take on a strong role
without jeopardizing incentives for new investment.
In the context of convergence, regulatory stability will also be essential
in ensuring that the risks encountered by investors are limited to those
inherent in addressing the associated embryonic markets. It has already
been noted that convergence tends to exacerbate the uncertainties of the
marketplace, in terms of both the timing and the ambiguities it introduces
as to applicable regulatory definitions. Any new framework would have to
address both these aspects, otherwise uncertainties over the regulatory
process will add significantly to the risks of investment in new markets.
The more competitive the market, the less likely the need for regulatory
intervention, and viceversa. The implication here is that competitive mar-
kets bring about the most efficient use of resources and optimize producer
and consumer welfare, and that these are the primary objectives of govern-
ments. An extreme example of relevance is the almost complete absence
of regulation in the information technology sector. IT markets
have developed in an open environment dominated by large global
players, in which competition law has played an important part.6 Regula-
tion may therefore be regarded as a surrogate for competition, and should
therefore:
f be as minimal as possible in order not to distort the process of economic
optimization, but sufficient to prevent dominant players from inhibiting
market entry through anti-competitive practices;
203
The impact of convergence on regulatory policy in Europe: B Clements
f avoid as far as possible trying to shape future developments (for
example, by avoiding regulation which favours one outcome over an-
other); instead, it should concentrate on removing existing barriers to
market development.

Any asymmetric measures aimed, for example, at assisting new entrants

7
Regulation 4069/89.
8
European Commission, Notice on the Ap-
plication of the Competition Rules to Ac-
cess Agreements in the Telecommunica-
tions Sector, COM(96)649 final, Brussels,
10 December 1996.
establish themselves in the marketplace would need careful justification, as
well as clear criteria for their phasing-out. Asymmetric measures inevi-
tably involve second-guessing the market, and many would question the
role or ability of governments to involve themselves in this sort of gamble.
It has been noted that one of the effects of convergence has been to
precipitate alliances and joint ventures between market players in the
same or different parts of the supply chain. This has led to a measure of
industry concentration which could have adverse consequences for com-
petition if left unchecked. Both horizontal (within the same part of the
supply chain) and vertical (between different parts) concentrations are
relevant, but vertical integration is of particular concern if combined with
horizontal dominance. In such cases, a dominant player could use market
power in one element of the value chain to foreclose the market-entry
possibilities of others. A typical example would be where the common
ownership of content and distribution networks, combined with exclusive
distribution and dominance in content ownership, effectively prevents
other network operators having access to the market.
The main question here is whether structural problems of this kind are
best dealt with by applying competition law, or whether they can be solved
through suitable ex-ante regulation. A further question is whether conver-
gence merits a different approach from that already employed in relation
to other dynamic sectors.
With regard to the first, assessment of the anti-competitive nature of any
particular structure having a Community dimension is usually made by
examining the relevant markets in order to determine precise foreclosure
effects. These involve the application of Articles 85 and 86, and the Merger
Regulation,7 which together have both ex-ante and ex-post aspects. The
Merger Regulation, in particular, is an ex-ante instrument through which
the potential impact on competition of a given concentration is assessed.
Article 85(3) fulfils a similar function for collaborative ventures.
On the second question, beyond the increased tendency towards con-
centration already mentioned lies the difficulty of defining relevant
markets when convergence is continually shifting the goal-posts. The
Commission has included guidelines on market definition in a recent
Notice on the application of competition rules to access agreements in
telecommunications.8 These refer to demand substitution, supply substitu-
tion and potential competition as the three determinants of a given
market, with the first of these as the main tool used to assess relevant
markets in the application of Articles 85 and 86. Since convergence is not
yet a demand-driven phenomenon and has mainly supply-side character-
istics, the effect of applying existing guidelines in respect of Articles 85 and
86 will therefore be to maintain current market divisions, which could
result in a generally positive view of cross-sectoral collaborative ventures.
The evaluation of mergers under the EC Regulation, in which supply
substitutability is of most relevance, could take into account the dynamic
nature of convergent markets. In turn, this could lead to a view that
dominant positions are transitory, with a similarly positive view of rel-
evant concentrations. On the other hand, it could be argued that as

204
 The impact of convergence on regulatory policy in Europe: B Clements
convergence takes hold, what was dominance or even de facto monopoly
in one sector (for example, digital satellite television), will become competi-
tive provision in the converged environment as other avenues of distribu-
tion, dominated by other players, become available. Internet television
springs to mind in the example cited.
A positive view of concentration at an early stage of market develop-
ment may also provide the best chance of that markets eventual success.
Taking the same example, a single digital television platform may be all
that the market can sustain at the outset. Convergence could then be
a self-correcting mechanism for acquired dominance in that field, as
alternative methods of delivering similar services become available.
The application of competition rules to structural concentration in the
converging sectors thus appears to be an appropriate mechanism to
address problems of excessive market power, since:
f it is consistent with the need to assess each concentration on case-by-
case basis;
f the criteria appear to favour a positive view of concentration, consistent
with an approach aimed at providing incentives for new investment.
Those who consider convergence as presenting opportunities for greater
economies of scale and scope leading inevitably to greater concentration
will see the favourable application of competition law as a weakness in the
system. They would promote either a tougher approach on the part of
competition authorities, or a stronger role for sector-specific regulation.
Such regulation would be aimed at addressing the behavioural problems
of market players seeking to exploit their structural advantages. This
would point to a complementary approach to handling sector concentra-
tion, in which appropriate specific behavioural regulation supports the
application of Treaty competition rules to structural problems in the
marketplace.

205