Ruling the New and
Emerging Markets in the
Telecommunications
Sector
Challenges: The Emergence
of Next Generation Networks
ITU, Geneva, 23 March 2006
Ort, Datum
Autor
Christian Wey
(DIW Berlin & Technische Universität Berlin)
Outline of my Presentation
1. On the Road to the Information Society
1.1 New Services and Products
1.2 Next Generation Networks (NGN)
1.3 New Infrastructures & Investments
2. Challenges for ex ante Regulation
3. Lessons from Dynamic Competition Theory
4. Regulatory Options for New & Emerging Markets
5. Summary
1 On the Road to the Information Society
1.1 New Services and New Products
Many new products, services and applications
i) Communication
- individual communication (e.g., voice over IP)
- mass communication (e.g., triple play)
ii) Information services, information goods & e-business
…with effects on business models, international trade, and with that,
on overall social welfare
…but also „other“ positive effects for the society, e.g.:
education, transparency, democracy, participation etc.
1.2 Next Generation Networks
Terminals
Networks
- PC
- Mobile
- Digital TV
- Music Players
- Videoconsoles
- Emerging Platforms
- DSL
- 3G/UMTS
- Cable
- PLC
- Satellite
- Wireless
- Fibre
ITU: „A Next Generation Network (NGN) is a packetbased network able to provide services including
Telecommunication Services and able to make use of
multiple broadband, QoS-enabled transport technologies
and in which service-related functions are independent
from underlying transport-related technologies. It offers
unrestricted access by users to different service
providers. It supports generalized mobility which will allow
consistent and ubiquitous provision of services to users.“
Applications and
Content
- Advertising
- Music
- Education
- Triple Play
- eFinance
- Multimedia Services
- Movies & TV
- VoIP
- eCommerce
- Games
1.2 Next Generation Networks: Convergence
Multimedia Services
…
Television
Internet
Telephony
Television
Internet
Telephony
Control layer
IP-based network
Evolution from multiple separate networks (each optimized
for one service) to a unified IP-based multi-service network
1.2 Next Generation Networks: Potentials for Market Development
Convergence 1:
Different access technologies provide similar
services/application
 Potential for strong access competition
 Services remain dependent on access operator
Convergence 2:
Services are provided over different infrastructures
 Potential for platform (NGN) competition
 Platforms offer access to all kinds of services
 Potential for more independence of service providers and
users from particular access infrastructure
1.3 New Infrastructures
Realization of the Information Society depends on
a) investments into new infrastructures,
b) diffusion of accesses to new infrastructures,
c) convergence and inter-operabiliy
(„everything over IP“)
New infrastructures:
- upgrading of „old“ telephone networks
(from copper to fiber, DSL, CableTV)
- IP infrastructures
- wireless local loops
- UMTS in wireless telephony
1.3 New Infrastructures: Access Technologies and NGN
–
–
–
–
–
–
–
DSL / advanced DSL, e.g., vDSL
Hybrid Fiber Coax, e.g. Cable
Ethernet in the first mile (EFM)
Passive Optical (FTTx)
Powerline Communications
Fixed Wireless, e.g. WiMax
Mobile Wireless, e.g. UMTS, HSDPA
– Investments into NGNs
• Transmission networks, e.g. passing fibre
• Network equipment, e.g. softswitches
• Migration of legacy Operating Support Systems
• Premises, e.g. BT geographically restructuring the network
nodes
2 Challenges for ex ante Regulation
A pro-active regulatory approach since liberalization to foster
competition:
a) asymmetric regulation of the former monopolist,
b) access regulation,
c) termination and interconnection,
d) more recently, unbundling and resale regulation,
e) prices and tariffs typically cost-based (or, price caps).
Underlying philosophy : „investment ladder“, which presumes
a) ex monopolist will preempt entry,
b) to make competition work, force service competition,
c) by asymmetric regulations imposed on ex monopolist,
d) then, backward integration will occur, which results in
e) infrastructure based – i.e., effective – competition.
2 Challenges for ex ante Regulation
First, new realities in telecommunications markets impact on all sorts
regulations:
i) Economic regulation
• Network access (->Focus of this talk)
• Interconnection
• Service access
ii) General interest regulation
• Protection of critical infrastructure
• Legal requirements
• Emergency calls
• Consumer protection
• Universal Services
iii) Standards and technical regulation
2 Challenges for ex ante Regulation
Challenge is to achieve many goals with a limited set of instruments:
1) Assure efficient use of existing networks by access,
interconnection etc. regulations
2) Provide an investment friendly environment
3) Counter new monopolization of markets
2 Challenges for ex ante Regulation
Tradition approach builds on
- natural monopoly picture
- takes infrastructure mainly as given
- assumes persistent monopoly position of incumbent,
- biased towards competition in complementary markets
What are the effects of this approach for firms’ investment
incentives?
 Depends on which infrastructures we consider:
i) “essential” parts of the network
ii) infrastructures which is complementary to essential parts of
the network
2 Challenges for ex ante Regulation
Cost-based access regulation applied to new infrastructures has
direct effects on investment decisions (timing and type):
1) reduces the expected profits of the investing firm and
2) It also reduces the incentives of competitors to undertake
investments
(this holds even when access regulation comes not immediately:
i.e. regulation creates an option value of waiting for competitors)
=> Access regulation is likely to reduce incentives to invest into
infrastructures
3 Lessons from the Dynamic Competition Theories
– Innovations and dynamic efficiency
• Temporary monopolies are part of dynamic competition in a world
with substantial risks and uncertainties
• Catch-up competition is necessary to ensure dynamic efficiency
– Vertical relations between telecom markets
• Consumers derive utility from telecom services – not from inputs
• Demand for access depends on services/applications
 High uncertainties and high stakes
 Coordination problems reduce the incentives to innovate and to
invest in new markets / networks (coordination implies delay)
 Even in the absence of regulation, underinvestment is likely:
Complementarities between investments
Not internalized user surplus
 Ex ante access regulation further reduces expected payoffs and
hence is aggravates the problem
4 Regulatory Options for New & Emerging Markets
Option vary from commitment to ex post regulation to a direct transfer
of existing ex ante regulations new networks
But #1: Experience with light hand (purely ex post) approach is not
encouraging and also theoretically problematic:
- e.g. NZ or experiences in other network sectors
- with strong network effects incumbent‘s have strong
incentives to deter entry (interconnection problem)
But #2: No experience with complete transfer of ex ante regulations to
new networks
 Intermediate solutions are being discussed
4 Regulatory Options for New & Emerging Markets
Regulatory options are inspired by the non-discriminatory nature of the
Internet
i) Openess
ii) Net Neutrality
4 Regulatory Options for New & Emerging Markets:
Openess
– Access network open for information providers
– Non-discrimination as to transmission of content and
applications
•
•
•
•
Technical standards
Access (physical layer)
Protocols (transport and control layer)
Pricing („a bit is a bit“)
– Right to attach any non-harmful appliance to the network
Open Access obligations for NGNs
Service providers
Competing NGN
Competing physical
network infrastructure
Incumbents NGN
Incumbents physical
network infrastructure
Source: Cf. Ofcom (2005)
4. Regulatory Options for New & Emerging Markets:
Strict Net Neutrality
Government should prescribe that now and forever the owner of
the access network must not restrict the ability of its end user
customers to access specific content or to running specific
applications.
- exclusive focus on service level (where innovation is indeed
impressive)
Problems:
- neglects synergies from integration
- neglects the infrastructure investment problem
-
4. Regulatory Options for New & Emerging Markets:
New Separation Options
Restrictions on vertical integration
– Separation of access and backhaul/backbone networks
•
•
•
Not feasible for all networks, e.g. cellular networks, therefore possibility
of competition bias
Termination market power problem persist, therefore separation may
not yield the results envisaged
Restricted integrated service provision
– Separation of physical, communications protocol and
service/application layer
•
•
•
Physical layer needs similar regulation as integrated networks
May be counterproductive to the extent that profits at the different levels
are necessary for the returns needed
May make product development more difficult through coordination
requirements across different layers
4. Regulatory Options for New & Emerging Markets:
Non-replicable assets approach
Identify new bottlenecks
–
–
–
–
If there are non-replicable assets, then regulate access
Time?
How do we know the non-replicable network parts?
Even after having identified non-replicable assets, there may
be no monopoly power problem from the consumers
perspective
– Incentives of competitors are not taken into account
4. Regulatory Options for New & Emerging Markets:
Regulatory Holidays
Self-commitment of regulatory authority not to intervene in order
to provide investment incentives a for monopolist
– Taking account of uncertainties and incumbents investment
incentives
– Specifying the appropriate time period is difficult
– Commitment problems: how to deal with openly
anticompetitive practices
– Does not explicitly take into account dynamic competition:
the fact that after some time ex ante access regulation steps
in creates an option value for competitors which delays
dynamic investment competition
4. Regulatory Options for New & Emerging Markets:
Market based and contingent regulation
Elements of such a procedure
i) Is there a new market created by network investments?
- if no, then regulation
- note: it takes some time after this can be decided
ii) If there is a new market, then a regulatory holiday should come
- to reward investments
iii) Then it has to be evaluated whether effective competition comes
- if competition is increasingly emerging, then no access
regulation (this entails longer run tendency tests)
- the perspective of no regulation and the longer run perspective
give incentives to invest also for competitors
Conditional Regulation of New Markets
After a years:
„New market“?
yes
After b years:
Competing
infrastructure?
yes
Growing market
shares
yes
Forecast significant
Market power?
no
After c years:
After d years:
After e years:
significante market
power?
no
No regulation
no
no
no
yes
yes
Allocate to
existing market
Regulation
Regulation
Regulation
Regulation
4. Summary
The Liberalization Process in Perspective
„Intensity“ of Regulation
Monopoly and ex
ante Regulation
Danger of overregulation
No effective
competition
State-owned
monopoly
Effective Competition
and competition policy
1996 2006
20??
Time
4. Summary
– Dynamically efficient regulation of “new markets” must
consider the incentives to innovate and to invest:
• on the incumbent’s side and
• on the competitors’ side
– Vertical structures involve coordination problems and imply
that “new markets” need time to develop
– A short run market power test (as SMP) is not appropriate in
the early stages
– Regulation should depend on the longer-run tendency
towards competitive structures
– Vertical integration may help to ease coordination
– A fully liberalized approach may fail because the threat of
regulation deters the incumbent from using re-monopolization
strategies
4. Summary
Challenges for regulation in the near future
1) Facilitate the creation of important alternative access networks
-
E.g.: Spectrum Policy (for radio broadcast and wireless access): make large
amount available; encourage efficient use (abstain from imposing artificial
restrictions on licensees, build out requirements etc)
2) Keeping the threat of regulation while abstaining from premature
intervention
-
Be aware of creation of option value for competitors
Open access is advisable if a single provider of broadband access will have a
monopoly…
Openness in the form of non-discrimination as to content may become a
problem
3) Market definition and concentration based on market power tests
-
How to separate new markets from (regulated) old markets?
Complementary products (pricing is very different to standard markets)
Bundling of services
4. Summary
Challenges for regulation in the near future
4) How to implement structural openness through separation?
-
Access – switch – switch-to-switch connection
Physical layer – communication protocols – service layer – application layer
Is such a separation meaningful / possible?
Should be studied seriously – but technical progress / investments …
5) How to deal with (social) service regulations?
-
VoIP (emergency calls…
Universal services…(how pays how?)
6) Role of the state in promoting investments/diffusion
-
What lessons can be learned form subsidy programs?
7) Promotion of an open layered structure to retain option for
effective ex post regulation?
-
but there are already strong incentives for standardized network equipment and
operating support systems…