Sturdy framework essential for digital revolution

Need for managing and implementing the structure efficiently as digital services reach across a wider spectrum.

A consumer looks at the website of the Aereo internet television service on a mobile phone in New York. Richard Levine / Demotix / Corbis

The digital revolution is calling existing regulatory frameworks into question and disrupting multiple sectors. In Beirut and Dubai, people can use apps such as Uber or Careem to book rides and avoid conventional taxi services. In other cities, however, taxi drivers have protested because these digital services deprive them of business. Some companies have turned to the courts to deal with digital start-ups. In the US, broadcasters won their case against Aereo, a digital start-up that retransmits television signals, forcing it to suspend its service.

Regulators find themselves forced to grapple with these disruptive forces in a manner that will foster both innovation and fairness. In developed economies, where the communications markets and providers are sustainable and the industry can efficiently serve new markets, regulators can afford to focus on the telecoms sector.

In emerging markets, such as the Middle East, where the vibrant digital markets have less depth in terms of their suppliers and local human capital, regulators have to be proactive and focused on digitisation, which is the mass adoption of connected digital services by consumers, enterprises, and governments. For regulators this means adjusting the existing regulatory framework to provide ongoing oversight and monitoring of critical information and communications technology (ICT) and digital markets.

In the Middle East, focusing on digitisation makes sense because of the importance of ICT to the economic development, the widespread use of digital products by consumers and changes in the sector.

Several Middle Eastern countries have identified ICT as a driver of development and an enabler of economic growth and diversification. Most GCC governments regard ICT as one of the key components of their national development plans.

In a similar fashion, their citizens have enthusiastically adopted digital technology. The UAE has the highest penetration of smartphones per capita in the world. Five years ago, broadband penetration in Saudi Arabia was less than 1 per cent. Today, broadband is widespread in the kingdom.

The ICT sector has developed rapidly in the region. It has gone from focusing on infrastructure and basic connectivity to promoting a broad range of digitisation-related services. These include cloud computing, apps and smart meters.

ICT companies have evolved. Once mostly licensed telecoms operators, ICT is now a complex ecosystem including apps providers and device manufacturers. The difficulty is that the Middle East’s ICT sector is often weak on the supply side, with the notable exception of telecoms operators. Too much of the Middle East relies on imported ICT skills and too often the level of human capital is insufficiently developed.

Policymakers are adapting to these changes. Middle East regulators are moving their focus from establishing a liberalised, competitive marketplace to developing an innovative and economically vibrant ICT sector. As they rethink their regulations, however, they will also have to recognise that experience shows that as a country becomes more digitally sophisticated, so the less impact regulation has.

The three key areas that regulators generally look at and that require a focus on digitisation are: market efficiency, scarcity management, and safeguarding customer welfare.

• Market efficiency involves identifying then regulating those areas of ICT that could fail. In the Middle East, this means monitoring and getting involved to safeguard the markets created by the growing use of such digital services as e-health devices and apps, areas where failure can have catastrophic results for patients. Similarly, in the Middle East regulators may allow preferential treatment for local companies, along with incentives and the creation of favourable pro-innovation to build up a strong local base of ICT suppliers.

• Scarcity management seeks to drive market efficiency through methods to most effectively allocate scarce resources, such as the spectrum. In the Middle East, this involves closer control to maximise spectrum availability for licensed services. Similarly, regulators could ensure that there is a proper balance between scale and market efficiencies in spectrum trading.

• Safeguarding customer welfare involves moving away from using price as a key measure of consumer welfare. Instead, regulators should look at other indicators such as quality of service, data security and the protection of consumer privacy. In an era of massive hacks of consumer data, regulators should mandate digital security policies and practices. These will set norms for how companies use customer data and protect customers.

As they rework the rules that govern the ICT sector, regulators will need to absorb three major regulatory lessons of recent years.

First, innovation drives regulation, and not the other way around. In the US, the increasing commercial use of drones has led the aviation authorities to announce the phased introduction of drones into US airspace.

Second, regulators need to intervene if non-regulated activities could have a detrimental effect on consumers. This is why some countries are looking at regulating ride-sharing apps because they worry about safety, fares and insurance.

Third, non-regulated activities create risk in regulated markets. The 2008 financial crisis stemmed in part from a lack of transparency in derivatives trading and issues in proprietary trading.

Regulators are unlikely to be able to anticipate innovation and they should not seek to dictate its course. They can, however, promote an innovative and robust ICT ecosystem, and protect broader national interests, by focusing on the digitisation that now permeates the economy.

Bahjat El Darwiche and Milind Singh are, respectively, partner and principal at Strategy& (formerly Booz & Company)

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