Session 8
Regional Seminar on the economic and financial
aspects of telecommunications Study Group 3
Regional Group for Latin America and Caribbean
(SG3RG-LAC)
The regulation applied to broadband in
a convergence world
Antonio Garcia Zaballos
July 2010
Santo Domingo, Dominican Republic
Contents
1.
Introduction: Description of the
market
2.
When regulate?
3.
The ladder of investment
4.
The regulation of broadband in Next
Generation Network (NGN)
5.
Alternative access technologies:
Cost comparison
2
6.
Benchmark: UK, Spain and Austria
7.
Recommendations
1. Introduction:
Description of the market
3
Introduction: Description of the market
•
•
Demand
Increasing
Focusing on areas with greater population density and better economic
conditions
Focused on bundling offers
Customer segmentation (heavy internet users vs soft internet users) and
fixed to mobile substitution effect
•
•
•
•
•
Supply
•
—
—
•
4
Based on cable operators and ULL
Focused on specific geographic areas
Competition in terms of prices is harder in those areas where exists a
infrastructure based competition
Service based competition:
So far only in the areas where the cable is operating
In near future, the service based competition will depend on the NGN
deployment and the preasure executed by the cable and the mobile
operators
Increasing importance of mobile broadband
Introduction: Description of the market
The broadband market presents very heterogeneous competitive conditions,
because alternative operators focus their investment effort and the deployment of
their infrastructure, especially in those areas where it is attractive to invest,
according to demand and socioeconomic conditions.
5
Introduction: Description of the market
• In general, alternative operators have decided to go for the ULL to offer
differentiated services. The increased presence of alternative operators in the
switches of the SMP Operators is provoking more aggressive offers and
greater range and variety of services.
• The possibilities of differentiation offered by the ULL has stimulated the
subscription to bundles of services.
• The ULL, like cable, is focused on certain geographic locations where
economic and demographic conditions are attractive. It is precisely at these
locations where major operators (SMP) are losing market share
Service based
competition
6
vs
Infrastructure based
competition
Introduction: Description of the market
Heterogeneous conditions exists from the demand side due to the different
sociodemographic conditions and the population density throughout the country
Distribution
of telecom
switches
taking in
account the
economic
and
sociodemogr
aphic
conditions
These variables are responsible for a different return on investment and hence the
level of development of new infrastructure, so it's logical for operators to deploy
infrastructure according to return maximization criteria so that, the deployment is not
uniform across the country.
7
Introduction: Description of the market
70%
10'500'000
60%
10'000'000
50%
Líneas cablemódem
9'500'000
Grupo Telefónica
40%
9'000'000
30%
Acceso Indirecto
8'500'000
20%
mars.10
janv..10
nov..09
sept..09
juil..09
mai.09
mars.09
janv..09
nov..08
Total Banda Ancha
sept..08
7'500'000
juil..08
0%
mai.08
Bucles Desagregados (total. +
comp.)
mars.08
10%
8'000'000
The evolution of the broadband market in Spain could be motivated primarily by
the evolution of urban areas characterized by broadband penetration
significantly higher and where, therefore, market saturation is more evident.
8
2. When regulate?
9
When regulate?

The existing level playing field competition in the broadband market shows that there is no
homogeneous conditions across the country, so that, there are specific areas with
different competition level due to the existence of alternative infrastructure which
provokes the appearance of new product and services with specific offers.

Therefore, it makes sense to analyse the market competition in markets where the
geographic scope is not national. By doing so:
10
o
The regulatory policy could be better adjusted to the competition level across the different
areas of the country.
o
The appearance of new commercial offers better adjusted to the customers
requirements would be possible.
o
No ex ante obligations would be imposed in those areas where a infrastructure based
competition exists so that, is the market itself the one who regulates.
o
It would be encouraged the efficiency in the production processes so that more
investment and a variety of product and services as well as an increasing price competition
would be expected.
When regulate?
Market included in the “old” Recommendation
(February 2003)
1. Access to the public telephone network at a fixed location for residential customers
2. Access to the public telephone network at a fixed location for non residential
customers
3. Publicly available local and/or national telephone services at a fixed location for
residential
4. Publicly international telephone services available at a fixed location for residential
users
5. Publicly available local and/or national telephone services at a fixed location for
non-resid.
6. International telephone services publicly available at a fixed location for nonresidential
7. Minimum set of leased lines
Markets considered in the “new” Recommendation
(December 2007)
1. Access to the public telephone network at a fixed
location for residential and non residential customers
Three criteria test:
1.Presence of high and non transitory barriers to entry.
2.market structure which does not tend towards effective
competition within the relevant time horizon .
3.insufficiency of competition law alone to adequately address the
market failure(s) concerned.
8. Call origination in the public telephone network at a fixed location
2. Call origination in the public telephone network at a fixed location
9. Call termination in individual public telephone networks at a fixed location
3. Call termination in individual public telephone networks at a fixed location
10. Transit services in the public fixed telephone network
Three criteria test
11. Wholesale provision of unbundled access to provide broadband and voice services
4. Wholesale network infrastructure access at a fixed location
12. Wholesale provision of broadband access
5. Wholesale broadband access
13. Wholesale market for leased line terminal segments
6. Wholesale market for leased line terminal segments
14. Wholesale market for leased line transit segments
Three criteria test
15. Call access and origination in public mobile telephone networks
16. Voice call termination in individual mobile networks
17. Roaming
18. Broadcasting services for the delivery of content transmitted to final users
11
7. Voice call termination in individual mobile networks
EC Regulation
Three criteria test
NGaN
When regulate?
I. MARKET DEFINITION
II. MARKET STRUCTURE
Are there elements to consider
the existence of dominance? Yes
No
Typology of ex ante
remedies:
End
III. DOMINANT POSITION
Is there a dominant position?
Yes
No
Analysis of individual
dominant position
Is there an individual
dominant
position? Yes
• Price control: Cost
based vs reasonable
prices
Analysis of joint
dominant position
Is there a joint
dominant
position?Yes
No
No
• Accounting separation
• Carrier selection and
preselection
IV. ANALYSIS OF THE RESULTS
Is there effective competition? Yes
No
It is enough with the
Competence Law
Yes
No
Necessity of
Regulation
12
The existence of
competence is due to the
current regulation?
No
End
Yes
• Guarantee the access to
the network
• Non discrimination and
transparency
• Functional separation
When Regulate?
Indirect effect which depends on the importance of effects 1 and 2
Introduction of the
regulatory policy
Effect 1
Impact on the
wholesale market
Effect 2
(+)
Impact on the
retail market
(=)
Investment
% of incomes used for
investment
Impact on the GDP
Impact on the
employment rate
13
Impact on the revenues
Consumption
decission at
wholesale and retail
Economic
environment
3. The ladder of
investment
14
The ladder of investment
Bitstream
access
ULL
Op. Tradicional
Un incremento de precios del
servicio mayorista de acceso
indirecto reduce la demanda de
este servicio, aumentando las de
cable y ULL
Mayorista
ULL
Mayorista
Cable
Network
Servicio
Mayorista 1
Efecto 1
Direct
Constraints
Servicio
Mayorista 2
Mercado Mayorista
Una subida del precio
mayorista debilita la
capacidad de competir en el
mercado minorista e
indirectamente hará disminuir
la demanda del servicio
mayorista
Efecto 2
Minorista
s/ ULL
Minorista
s/ Cable
Minorista 1
Minorista 2
Minorista 3
(*) Fuente: “Market Analysis in the presence of indirect constraints and captive sales”,
Journal of Competition Law and Economics, 1-29
15
Indirect
Contrains
The ladder of investment
• The availability of wholesale access alternatives for the
commercialization of retail broadband services makes the incumbent facing
a direct restriction on their prices of bitstream and have little incentive to
increase them, for two reasons:
Wholesale
Market
- Due to the impact on revenues from the migration to other wholesale
alternatives as for instance ULL.
- Due to the loss of market share in the wholesale market in favor of the
vertically integrated operator
The existence of vertically integrated operators (cable/ULL) introduces
an indirect constraint at wholesale price level:
Retail
Market
16
• The demand of those ISP´s who use the bitstream could decrease in
favor of the wholesale services provided by the operators who own
infrastructure.
• The SMP Operator so that, would not be able to retain the market
share of these ISP´s due to the access alternatives available at the
marketplace.
The ladder of investment
Asturias
26%
La Coruña
Lugo
32%
34%
Pontevedra
33%
Orense
32%
Leon
29%
Zamora
29%
Salamanca
32%
Vizcaya
26% Guipúzcoa
37%
Alava
Navarra
34%
Palencia
45%
32%
Huesca
La Rioja
Gerona
Burgos 34%
Lérida
43%
51%
34%
50%
Barcelona
Soria
Zaragoza
Valladolid
49%
42%
44%
31%
Segovia
Tarragona
46%
57%
Guadalajara
Teruel
50%
Avila Madrid
40%
49%
Castellón
Cantabria
27%
Ciudad Real
40%
Badajoz
Córdoba
43%
Huelva
24%
Sevilla
43%
Cádiz
32%
Málaga
51%
28%
Cuenca
38%
Toledo
40%
Cáceres
Jaen
42%
Granada
47%
Valencia
24%
Albacete
14%
Murcia
35%
Baleares
48%
Alicante
34%
Almería
43%
Tenerife
69%
Las Palmas
71%
Ceuta
Melilla
Rangos de cuotas
0%
17
35%
45%
100%
4. The regulation of
broadband in Next
Generation Networks
18
The regulation of broadband in Next Generation
Networks
Principle of minimum intervention/regulation
RETAIL
Regulate at wholesale level rather than at retail
Access to BA
Encourage investment and innovation
Effective competition
Yes
Without ex ante obligations?
No regulation
Regulation applied to emerging markets?
Analyse the competition level at retail market
NO
Regulation should have a minimum impact on the
market conditions
WHOLESALE
Principle of harmonization across EU Countries
4.
ULL
5.
Bitstream mayor
The ex ante remedies shouls be moderated and
be adjusted to the competition problem
Yes
Effective competition taking in
account the ULL obligations?
NO
•Regulation of ULL
•Regulation of bitstream
19
•Regulation of ULL
•No regulation of bitstream
The regulation of broadband in Next Generation
Networks
Should the services
provided under a NGN
infrastructure be regulated?
Can they be considered as
innovative services?
20
Which
regulation?
- Cost Based
- Reasonable
prices
?
The regulation of broadband in Next Generation
Networks
The imputation test requires the fulfillment of the following expression:
Other aspects to consider:
p ≥ w + Cnet + Cretail
•Difference between offer and promotion
•Specification of a methodology of analysis and information requirements to periodically check the possibility for other
operators to retort the SMP offers/promotions
21
5. Alternative access
technologies: Costs
comparison
22
Alternative access technologies: Cost comparison
% Hogares
100%
Zonas presencia redes fijas
90%alternativas
Tecnologías
inalámbricas
80%
Sin banda ancha
70%
Brecha
Digital
60%
>5.000 hog./ mun.
50%
>2.500 hog./ mun.
40%
0%
10%
20%
30%
>150 hog./ mun.
40%
50%
60%
70%
Zona de muy baja penetración en BA
80%
90%
100%
% Municipios
The decision on applying a infrastructure based competition vs a service based
competition will depend on the possibility of having alternative networks.
In this regard, the economic as well as the socio-demographic conditions will be key
for guaranteeing a co existence of fixed and mobile infraestructures which eventually
will contribute to increase the playing field competition according to the customers’
consumption decisions
23
Alternative access technologies: Cost comparison
Comparativa de tecnología para espacio urbano
50,00 €
FTTH
FTTX
HFC
WIMAX 15 Mbps
Coste Mensual por usuario conectado
45,00 €
40,00 €
35,00 €
30,00 €
25,00 €
20,00 €
It can be observed that when
deploying NGNs in urban areas with
high penetration rates, the FTTH
solution is the most suitable.
Nevertheless, when the speed is <
20 Mbps, the results show that
WiMAX is much profutable that FTTx
solution
15,00 €
10,00 €
1%
11%
21%
31%
41%
51%
61%
71%
81%
91%
Penetración del servicio
Comparativa de tecnología para espacio rural
100,00 €
FTTH
VDSL
HFC
WIMAX 2 Mbps
Coste Mensual por usuario conectado
90,00 €
80,00 €
70,00 €
60,00 €
50,00 €
40,00 €
30,00 €
20,00 €
10,00 €
1%
11%
21%
31%
41%
51%
61%
Penetración del servicio
24
71%
81%
91%
In the case of rural areas, it can be
observed that the provision of BA
services with WiMAX is more
inexpensive access technology.
In this regard it is important to point
out that nowadays there is an
increasing
debate
in
Europe
concerning the public vs the private
investment.
6. Benchmark: UK,
Spain and Austria
25
Benckmark
26
7. Recommendations
27
Recommendations
1.
2.
3.
4.
5.
6.
28
The reality proves that no homogeneous conditions exists in the broadband market
across the country. In fact, NRAs could identify particular areas where a infrastructure
based competition exists due to the existence of cable and mobile operators.
The existence of indirect constraints at the wholesale level, constitutes by itself a
mechanism to guarantee that the incumbent operator is not willing to increase the
prices of the wholesale service (specially bitstream) because of the effects that it might
have on the market share at both, the retail and the wholesale level.
An SSNIP due to the effect that it might have on the demand of ISPs could have an
impact on the revenues.
The existence of access alternatives as ULL and mobile executes a direct constraint
which disciplines the behavior of the SMP Operator.
The investment associated to the NGN deployment is leading the European
Commission to open the debate on how the risk premium should be captured in the
regulated wholesale prices (real option theory).
Since there is not homogeneous conditions across the country, the NRAs in the market
analysis might consider a geographic scope smaller to national.
Antonio García Zaballos
Fernando Huerta
Antonio García Zaballos is PhD in Economics at Universidad Carlos III de Madrid.
Currently he is senior advisor to the Global ICT Department of the World Bank and
expert to the International Telecommunications Union (ITU).
agz@profesor.ie.edu
Móvil: 617 66 87 60
Areas of expertise:
•Telecommunications
•Regulation
• Strategy
Academin Background:
• PhD in Economics,
Universidad Carlos III de
Madrid
•PDD IESE business School
•Higher Education en
Administración de Empresas
en Heriot-Watt University
(Edinburgh)
•Bachelor degree in
Business Organization at
Universidad de Salamanca
29
Dr. García Zaballos was Head of the Cabinet for Economic Studies and Regulation
(GEER) at Telefónica España, and was also Deputy Director at CMT, the Spanish
telecoms regulator, where among others he was responsible for market analysis and
economic issues applied to the estimation of the cost of Universal Service
Obligations (USO), Fixed-Mobile convergence, regulatory policy applied to bundling,
regulatory policy applied to retail and wholesale services and auditory of cost
accounting models. He has a broad experience in economic consulting applied to the
telecom sector in countries as: Saudi Arabia, Dominican Republic, Guatemala, Costa
Rica, Argentina, Latvia, Bulgaria, Poland and Albania.
Additionally, Dr. García Zaballos is a professor at Instituto de Empresa Business
School and University Carlos III in Madrid, where he teaches telecoms economics
and applied finance at the Global MBA and the Master in Industrial Economics.