Regulation of M-Commerce

We first discuss some principles and directions of regulation, confine our discussion to the issues of efficient markets and trust, and describe in brief the two sets of regulation central to m-commerce, namely e-commerce directive and the newly introduced telecom package.

What Is Regulation?

Regulation in general, and also in this context, is a balancing mechanism between goals of economic profits and collective good. Its function is to promote long-term consumer welfare without sacrificing market players' interests in economic wealth.

We share this view: competition alone cannot necessarily generate optimum outcomes for consumers and other stakeholders. Here, (at least) two opposing ways of thinking about market effectiveness can be recognized: some argue that regulation is an inefficient way to intervene on markets, especially due to information efficiencies (see, e.g., Hayek, 1937). According to this controversial view, no regulation is better than a little regulation. The other, more generally accepted view is that any market needs a minimum regulation for prospering competition. In addition, there is a strong view in favor of regulation in Europe to attain consumer trust by legislative means.

OECD defines the term regulation as the diverse set of instruments by which governments set requirements on enterprises and citizens. Regulation includes laws, formal and informal orders, and subordinate rules issued by all levels of government, and rules issued by non-governmental or self-regulatory bodies to which governments have delegated regulatory powers. Regulation can be divided into three subgroups:

1. Economic regulation, which directly intervenes in market decisions such as pricing, competition, market entry, or exit. The aim is to increase economic efficiency by reducing barriers to competition and innovation.

2. Social regulation, which protects public interests such as health, safety, the environment, or other social issues. This is done by various mechanisms, for instance legislation, market incentives, or goal-based approaches.

3. Administrative regulation is paperwork and administrative formalities through which governments collect information and intervene in individual economic decisions. For instance, some players can be required to frequently pass certain kinds of information to the regulatory bodies.

It is in accordance with the OECD regulation to use governmental powers either by the government itself or by private bodies to whom the government has delegated regulatory powers.

The definition can further be widened into three arenas: regulation, self-regulation, and co-regulation. Regulation is using government powers (OECD definition). Self-regulation deals with industry's volunteer commitments (e.g., in the areas of codes of conduct or technical standards). Co-regulation refers to processes where all relevant market players (including consumers when their interests are affected) are involved. The concept of co-regulation is rather new. For the time being, the term co-regulation suffers lack of precision. Co-regulation can, in accordance with the OECD definition, be identified as a part of regulation in cases where government has delegated regulatory powers to co-regulative bodies. In other cases of regulation, co-regulation refers rather to preparatory processes where all relevant market players are involved.

Regulative Trends

We can find two main regulative trends concerning the legal framework of m-commerce and services. The first trend emphasizes the effects of convergence. All electronic communication networks and services should be governed under the same principles. The other trend emphasizes the growing importance of previously mentioned co-regulation.

Co-Regulation

One example of the co-regulatory trends can be seen in the Electronic Commerce Directive (2000/31/EC). The Directive encourages the driving-up of European-level codes of conduct. The Directive also encourages involvement of associations or organizations representing consumers in drafting or implementing codes affecting their interests. Another example can be found in the electronic communication networks and services framework directive (2002/21/EC), as it obliges the National Regulatory Agencies to consult relevant market players in all phases of decision-making procedures.

Figure 1 illustrates the growing importance of co-regulation. Earlier self-regulatory processes are replaced by co-regulative processes, e.g., in cases where consumers are involved. Governments are delegating regulatory powers to co-regulative bodies. In the area of government regulation, all relevant market players are consulted during the different phases on the regulative processes.

Figure 1: The Three Arenas of Regulation (c.f., Aarnio, Enkenberg, Frank, Heikkil , & Laine, 2002c)

Convergence

The European telecom industry has moved from national monopolies towards competitive markets. This process began in 1990. The telecommunications sector was liberalized in most member states of the European Union on January 1998, so that competing operators were able to enter all parts of the telecom market. In the emerging environment, differences between different networks and user interfaces are becoming insignificant. Therefore the principle should be that all electronic communication networks and services are covered by a common legal framework. This would also mean the gradual reducing of sector-specific regulation. In the future, when the markets are supposed to become effectively competitive, general competition legislation should be the main way to regulate telecommunication markets (Liikanen, 2000).

The change that is underway in the regulation of mobile telecommunications networks is illustrated in the Figure 2. The analogue 1G networks were largely regulated nation-specifically, with little emphasis on competition, as the networks were ordinarily owned by state monopolies. Digital 2G networks emerged simultaneously with market liberalization and required sector-specific regulation to achieve efficient competition. Competition policy is gradually becoming more important, and with harmonization of EU legislation, nation-specific regulation is receding, in relative terms. The markets in 3G mobile telecommunication networks will be largely regulated with general competition legislation. There will be less room for political decisions taken at a national level, as the market is regulated at the EU-level (e.g., in the Authorization directive's requirement to grant a general authorization for all electronic communications networks and services, i.e., no specific licenses for each media network). To sum up, the greater the level of competition in a particular market, the less need there is for sector-specific regulation.

Figure 2: The Change in the Regulatory Environment (Aarnio et al., 2002c)

This does not, however, imply that industry-specific rules and regulations should become totally obsolete.

Regulatory Development for M-Commerce

There are two new legislative frameworks that are directly related to m-commerce: the one is the Electronic Commerce Directive (2000/31/EC), and the other is a new regulatory package (i.e., a set of directives) for electronic communication networks and services. These two collections of regulation aim to set up the trust and competitive environment for m-commerce (and e-commerce as well).

The EU Regulatory Framework for Electronic Commerce

The provisions of the Treaty are applied to e-commerce, especially the freedom to provide services and the freedom of establishment. This has, however, not been considered to be enough in promoting the growth of e-commerce in the internal market. The Commission published in 1997 "A European Initiative in E-Commerce," COM (97) 157 (CEC, 1997). This initiative includes the main policy and regulatory goals and principles for the development of e-commerce in the internal market and globally. The main policy goal is to encourage vigorous growth of e-commerce. Its key elements are:

• to provide widespread, affordable access to products and services needed for e-commerce;

• to promote a favorable business environment;

• to create a stable and predictable regulatory framework.

The cornerstone, secondary legislation in this area is undoubtedly the E-Commerce Directive (2000/31/EC), which constitutes a legal framework for e-commerce on the internal market. The directive is built mainly on the "acquis communuitaure" in order to ensure coherence with existing directives.

The directive is applied to information society services (ISSs). An ISS is any service normally provided for remuneration, at a distance, by electronic means, and at the individual request of the recipient of services.

The starting point of the directive is based on the so-called country-of-origin principle. Within the coordinated field ISS providers are under the regulations and control of the member state where the service provider is established. A member state may not restrict—as a main rule—the freedom to provide ISSs from another member state. The taking up and the pursuit of the activity of an ISS provider may not be made subject to prior authorization or any other requirement having equivalent effect. Furthermore the directive includes provisions, e.g., on general information to be provided, online contracts, commercial communications, liability of certain intermediaries, codes of conduct, out-of-court dispute settlement, and cooperation between member states and the commission. ^[3]

The EU Regulatory Framework for Communication Networks and Services

The Commission launched in November 1999 a consultation document concerning new review of the telecom regulation framework. ^[4] The aims of the review were fivefold:

1. to promote more effective competition;

2. to react to technological and market developments;

3. to remove unnecessary regulation and simplify associated administrative procedures;

4. to strengthen the internal market; and

5. to protect consumers.

The starting point of the review was that the convergence of the telecommunications, IT, and media sectors required a more horizontal approach to regulation. The fact that all communications networks, whether telecom, cable TV, or satellite and terrestrial broadcast, could carry any form of digital information (voice, image, or data) means, that regulatory policy should no longer distinguish between different communications infrastructure. It was essential therefore that any new framework treated all transport network infrastructure and associated services in an equivalent manner. The communication review made clear that the new framework would not cover services carried over that infrastructure, e.g., services providing broadcasting content.

The communication review proposed a series of policy objectives for national regulators to follow in the new regulatory framework:

• to promote and sustain an open and competitive European market for communications services;

• to benefit the European citizen; and

• to consolidate the internal market in a converging environment.

The commission issued on July 12, 2000, six proposed legal measures that will make up the new electronic communications regulatory framework. Figure 3 shows the original starting situation for ambitious simplification and clarification of the former regulation.

Figure 3: Simplification and Clarification of the EU Regulatory Framework (Liikanen, 2000)

From the viewpoint of m-commerce the key elements of the regulatory package are as follows:

The Framework Directive ^[5] is central to the new regulatory package, containing the common provisions that underlie the other measures in the new framework. It covers all forms of electronic communications networks and electronic communications services (convergence of networks). It contains the new definition of undertaking with significant market power (SMP), on which regulatory obligations can be placed to guarantee effective competition. The new definition is based on the competition law concept of dominance. The competition policy also gives rise to two new concepts for sector-specific regulation. There are "collective dominant position" and definition of "closely related market." The application of those definitions is likely to have an impact on the mobile business.

The directive obliges regulators to consult widely on all their important decisions. It also seeks to introduce a 'single market reflex' via a transparency mechanism. This has two important provisions: it obliges regulators to consult other national regulators on proposed measures before they are adopted; and it allows the Commission to require an NRA (National Regulatory Authority) to amend or withdraw a draft measure in certain circumstances.

A majority of the regulatory measures and obligations that the authorities have at their disposal are aimed only at undertakings with significant market power. Therefore the process of enforcing SMP regulation is of utmost importance. Significant market power is always defined in relation to specific markets, on which the SMP undertaking "enjoys a position of economic strength, affording it the power to behave to an appreciable extent independently of competitors, customers, and ultimately consumers" (Framework Directive 2002/21/EC, Article 13). The process of enforcing regulation on SMP is as follows:

First, the commission issues recommendation on relevant product and service markets and guidelines on market analyses. Next, the NRA must carry out analyses of the markets as soon as possible of the date of adoption or revision of the recommendation. The NRA must take into consideration the Commission's recommendation and guidelines. In accordance with the market analyses, the NRA determines whether the market in question is subject to effective competition or not. If the relevant markets are trans-national, the market analysis must be organized jointly with the NRAs of the member states in question.

Now, if the relevant markets are interpreted to be effectively competitive, no sector-specific measures are imposed or maintained. If the relevant markets are not subject to effective competition, the NRAs must define one or more SMP undertakings. The NRAs can then impose or maintain sector-specific regulatory obligations on SMP undertakings in order to generate effective competition on the relevant markets. The specific measures are defined in the directive package, and the NRAs exercise wide powers in using them.

The commission has a power of veto over NRA decisions in the following situations: (1) the definition of the relevant market when the national decision differs from the aforementioned market definitions of the Commission's Recommendation; and (2) whether or not the undertaking, individually or collectively with others, holds significant market power. The Commission can also prevent specific regulatory measures having an effect on trade between member states or being incompatible with the Community Law.

Throughout the whole process the national authorities shall also consult relevant market actors affected by the decisions in a co-regulatory spirit.

The Access Directive ^[6] provides a framework to stimulate competing network infrastructures and interoperability of services. By access we mean making available the facilities and services needed to provide electronic communications and services. The directive maintains the 'primary interconnectivity rule', according to which all operators have both the right and the obligation to negotiate interconnection. It specifies a set of regulatory obligations (including nondiscrimination, cost-oriented pricing, access to specific network elements for other operators and service providers) that regulators can impose on SMP operators to guarantee fair competition. It provides continuity with the existing framework by maintaining existing obligations, but by requiring regulators to review them against the new framework once it is in force.

The Authorization Directive ^[7] aims to simplify administrative controls on market access for operators and service providers. It requires the use of general authorizations for all electronic communications networks and services (with separate rights of use for spectrum and numbers).

Universal Service Directive ^[8] sets out the rights of users and consumers in the field of electronic communications networks and services. Universal Service in telecommunications refers to a set of services, which should be available for all—despite their geographical location—an affordable price. Mobile connections are not as such included in the scope of universal service, but the directive creates a process for reviewing the scope of universal service obligations.

The Data Protection Directive ^[9] updates the current directive (97/66/EC) to ensure it is technologically neutral and to extend its scope to all electronic communications networks and services. It creates a possibility for operators to undertake further processing of traffic data, for the purpose of value-added services, with the consent of the subscriber or user. It states that location data available to mobile operators may only be used with the consent of the subscriber, and providing subscribers and users with a simple means temporarily denying processing of their location data. The directive gives subscribers the right to determine whether they are listed in a public directory and what personal data appears in such a directory. It prohibits 'spam' (unsolicited commercial e-mails) except where subscribers have 'opted in'—i.e., they have indicated that they want to receive such e-mails for direct marketing purposes.

The new legislative package involves some changes in the member states' possibilities to grant licenses for the use and allocation of radio spectrum frequencies.

The "Last Mile" Regulation ^[10] does not deal with the mobile networks, but wired telephone connections. The regulation provides a legal base to enforce unbundled access to local loops of operators having significant market power by December 31, 2000. The price for unbundled access to the local loop must be cost oriented, so long as competition is not sufficient to prevent excessive pricing. Operators must publish a reference offer for unbundled access to local loop, including prices, terms, and conditions. This transparent pricing requirement is substantial, as it may spread before long to mobile networks, as well to improve interconnectivity of networks, or to boost competition between services (e.g., by allowing to open SIM cards for competition).

^[3]In addition to the e-commerce framework directive, the EU has passed a lot of secondary legislation dealing with e-commerce: Directive on the protection of individuals with regard to the processing of personal data and on the free movement of such data (95/46/EC); Directive concerning the processing of personal data and the protection of personal privacy in the electronic communication sector (97/66/EC); Transparency Directive (98/48/EC); Directive on distance selling (97/7/EC); Proposal for a directive on the distance marketing of consumer financial services, COM (1998) 486; Political agreement in Council (Internal Market Council) 27.9.2001; Directive on a community framework for electronic signatures (1999/93/EC); Directive on the harmonization of certain aspects of copyright and related rights in the information society (2001/29/EC): Council Regulation (EC) No. 44/2001 22.12.2000 on jurisdiction, and on the recognition and on the enforcement and judgments in civil and commercial matters; Proposal for a directive on the patentability of computer-implemented inventions, COM (2002) 92 final; Regulation (EC) No. 733/2002 22.4.2002 on the implementation of the .eu Top Level Domain.

^[4]CEC (1999) drew on the key messages of a series of consultations, reports, and independent studies, in particular the Communication on the Convergence of the Telecommunications, Media, and Information Technology Sectors; the Communication on the consultation on the Radio Spectrum Green Paper; the Report on the development of the market for digital television in the European Union; and the fifth report on the Implementation of the Telecom Regulatory Package.

^[5]Directive on a common regulatory framework for electronic communications networks and services, "Framework Directive" (2002/21/EC).

^[6]Directive on access and interconnection of, electronic communication networks and associated facilities, "Access Directive" (2002/19/EC).

^[7]Directive on the authorization of electronic communications networks and services, "Authorization Directive" (2002/20/EC).

^[8]Directive on universal service and users' rights relating to electronic communications networks and services, "Universal Service Directive" (2002/22/EC).

^[9]Data protection directive in the electronic communication sector. Common Position agreed 21.1.2002, 2000/0189 (COD).

^[10]Regulation on unbundled access to the local loop. Regulation (EC) No 2887/2000, 18.12.2000.