(c) Liberalization of Telecommunications (third week)


Liberalization of

Telecommunications in


Pál Belényesi

27 October 2006


Economic issues raised by the liberalization of networks

 Required network (nods-transport links)

 Technical economies of scale

 Average cost of servicing decreases with the size of the costumer base

 Upfront capital investment required

 Irreversible

 Fairly considerable

 Positive demand side externalities

 Value of the product to the consumer increases with the number of total units sold in the market

Issues for liberalization

 Network industries represent strong incumbent firms

 i.e. Telecom Italia

 Choice: Turning into oligopolistic markets or maintaining natural monopolies

Water: nat. mon. INTO oligopolistic market (UK)

Energy: natural monopoly – quasi monopoly

(E.ON, Ruhrgas)

Factors that drive liberalization

 Poor performance of incumbent operators

 Technological innovation

 Business demand for advanced services at lower rates

Consumer demand for Internet services and high penetration

The ultimate goal: competitive market – consumer benefits

About the TELECOM industry

Generally: used to be a natural monopoly

Owned by the government

Offering voice services over analogue network

Network has been built over a century

Vertical integration between equipment suppliers and service providers was commonplace ( → limiting output) – Matav (Posta)

Question : Monopoly with innovation due to economies of scale and R & D or many providers/competitors?


 Preserving current status?

 Liberalizing?

 Several networks?

 Reserving a monopoly?

 Social benefits through network externalities

(universal service)?

 Recit. 8 of Directive 2002/22: examp. provide users upon request with a connection to the PTN at a fixed location, at an affordable price. (only narrowband)

What is competition in


 Like everywhere else:

Efficient allocation of resources

Technical and innovative efficiency

Fair competition

 Cost-oriented and non-excessive prices

 Provision of new services/consumer needs

 Fair interconnection (rates, services, etc.)

 BIG GOAL: cross-border services in the EU


 Provision of universal services in Europe is an utmost goal

 (i.e. defined minimum set of services to all endusers at an affordable price)

 See also Recit. 3. of Directive 2002/22, plus WTO

 Try to find the match between the substantial demand and the innovation potentials in

Telecommunications services

Historical developments

US: first license to compete in public switch long-distance services (MCI) 1969 → 1980

EU: 1987 Commission’s Green Paper on the

Development of Telecoms services

First liberalized area: „terminal equipment sector” (1988) – on the basis of Art. 90 of the EC


 Commission Directive 90/388/EEC on the competition in telecoms services (except for voice telephony!) → DID NOT WORK


 Amendment of 90/388/EEC in 1996

 Abolition of monopoly rights by 1 January


 Supply and transmission of voice telephony services INCLUDED

 Mobile communications are liberalized already in

1990, but did NOT work ( Commission Decision against Italy ) → 1996 New Directive on mobile and personal communications

 The result of the above: FULL LIBERALIZATION

Lacking liberalization – before the NEW Framework

 Wireless communications (Wi-fi)

 Provision of cable TV infrastructure

 Concern: Integrated ownership of cable and telecommunications networks

 Content regulation (ISP)

The „new framework”

 July 2003

 Tools: Directives, Regulation, Decisions, Soft

Law instruments

 Institutionally: DG Comp, DG Infsoc, NRAs

 No single regulatory authority

NRAs are independent

DG Comp: mainly with Article 90 of the EC Treaty

DG Infosoc: Important role in regulations, research and development programs

Develepments in the New


 Encourage competition

 Urge that operators are treated the same way

 Extends the scope of regulation to cover broadcasting networks as well as telecoms and cable TV networks and services.

Broadcasting content is excluded, however.

 Technological neutrality (emphasis on services)

Developopments in the New

Framework II.

 Authorizations (general) and not licenses


 Burdensome restrictions on: SMP, Scarce resources

From Regulation to Competition (also SMP)

Market analysis’ by the Member States (Art. 7 procedures)

The Directives

The overall context of the New Regulatory

Framework is set out in the Framework Directive , which describes and establishes a broad framework under which regulation of all electronic communications will occur. This Directive sets out specific policy objectives for the regulation of electronic communications networks and services. It also defines overall principles which flow through all the Directives.

The Authorization Directive describes the general mechanisms through which services and networks may be provided, including the conditions which may be applied to operators.


 The Access Directive describes how networks and services may be accessed and how interconnection between public network and service providers will be regulated.

 The Universal Service Directive considers how universal service will be protected and regulated and also addresses consumer rights.