The Softwarization of Regulated Network Industries and Its Consequences for Costs and Competition

Advances in data and digitalisation create substantial opportunities for cost savings and enhanced competition in many network industries subject to regulation. By softwarization to mean innovations which reduce the need for hardware assets; these can be not only code, but the use of any smart asset, algorithm or economic tool across the whole value chain. The scale of the potential effect on costs of softwarization is linked to the weight of digitizable activities in the typically ‘fused’ digital and physical processes which make up network industries. Two sectors are considered. In mobile communications, the scope for digitisation and the starting level of competition are high; in electricity, both are substantially lower. In each case, the potential financial and structural impacts of such innovation are quantitatively significant. The paper also notes regulatory issues which may arise when owners of hardware networks may seek to limit the access to market of their new software competitors.

By Martin Cave^[1]

I. INTRODUCTION

The argument of this paper is simple and straightforward. It is that there are immense opportunities associated with the use of data and digitalization to achieve a combination of significant cost savings and the enhancement of competition in network industries, such as energy and telecommunications. In particular, competitive pressure in different forms can be imposed on the network component of the value chain, in many cases hitherto