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Access regulation and incentives for investment in alternative broadband infrastructure*

Harald GruberPresentation for

REGULATION AND COMPETITION SEMINAR SERIES 07

UPF, the Comisión del Mercado de las Telecomunicaciones (CMT) and the Barcelona Graduate School of Economics

Barcelona, 17 December 2007

*The opinions expressed are of the author and need not necessarily reflect those of the EIB.

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Outline

• Sector overview

• Fixed line access regulation

• Investment incentives

• Alternative regulatory scenarios

• Conclusion

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Past drivers for investment and growth

• Technology– Cost reduction– Performance increase

• Regulatory change– Liberalisation– Changes in market structure

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EU Commission, 2007

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EU Commission, 2007

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EU Commission, 2007

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EU Commission, 2007

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Fixed line market

• Slow revenue growth:– Pressure on tariffs– Switch to flat fees– Fixed-mobile substitution

• Pressures on profit margins• Increasing role of data/broadband revenues• Customer access as key revenue source• Persistence of ex ante regulation

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Fixed line broadband regulation

• Bottleneck in local loop access• Regulatory remedy: open access at cost based

prices:– Service based competition: bitstream, resale

– Facility based competition: Full LLU, shared access

• Asymmetric access regulation of DSL (unbundling) vs. cable modem

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EU Commission, 2007

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Ladder of investment theory

• Short term goal of service based competition– Resale– Bitstream

• Long term goal of facility based competition– Shared access– Full local loop unbundling

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EU wholesale access line availability

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03

20

04

20

05

20

06

Full ULLShared access

Bitstream access

Resale

0

5000

10000

15000K

lin

es

European Commission, 2007

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EU DSL wholesale access types

European Commission, 2007

0%

10%

20%

30%

40%

50%

60%

2003 2004 2005 2006

Facility based

Service based

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Investment incentives

• Increasing investment profile for new entrants.

• Investment effect on incumbent uncertain

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New entrants' market shares in EU

0%

5%

10%

15%

20%

25%

30%

35%

2002 2003 2004

Lines (DSL)

Investment (fixedlines)

Source: EU Commission, LE

Investment ladder without investment?

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Issues for future investment incentives

• Does next generation access (NGA) require less investment or are investment incentives diminished?

• Is unbundling complement or substitute for new entrants’/incumbents’ investment?

• Incentives for alternative platforms seem reduced (see Waverman et. al, 2007)

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Role of facility based competition in driving NGA investment

• There is empirical evidence (for US) that inter-platform competition has significant positive effects on diffusion of broadband

• Change in regulatory approach in the US

• Evidence for positive relationship between investment and platform competition

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Shares of broadband access types in the EU

0%10%20%30%40%50%60%70%80%90%

2003 2004 2005

DSL

Cable modem

Other

Source: European Commission

EU is moving away from platform competition

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European Commission, 2007

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Vertical separation as remedy for SMP

• Additional tool proposed: functional separation: separate business units within company

• Analogy with UK, but BT created Openreach on voluntary basis

• Ofcom: no relevance for investment incentives

• Is it creating investment incentives?

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Source : ARCEP, OTA

Evolution of full unbundling

0500 000

1 000 0001 500 000

2 000 0002 500 0003 000 0003 500 000

janv-05 juil-05 janv-06 juil-06 janv-07 juil-07

France

UK

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Reservations about functional separation

• Risk of monopoly & persistence of ex ante regulation

• Risk of irreversibility• Investment incentives:

– does not internalise market interdependencies– hold up problem– lack of incentives for quality

• What is the prospect for infrastructure competition

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Further issues

• Functional separation may not be enough• Structural separation: creation of distinct legal

entitity with different ownership structure • Case of eircom: voluntary structural separation

driven by financial rating considerations• Unclear whether solves lack of investment issue

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Alternative scenarios:Duct sharing model

– Ducts represent more than half of cost for new network (no need for duplication)

– Network (active and passive) represent about one sixth (could be duplicated)

– Scope for platform competition

ducts

customer equipmentand connection

in-building cabling

Fiber network

Source: France Telecom

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Alternative scenarios: Unregulated platform competition

– Possible where at least two platforms (DSL+cable) exist already

– Example of the Netherlands

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Share of broadband platforms

0%

20%

40%

60%

80%

100%

Other

Cable

DSL

Source: OECD

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Alternative scenarios: Regional regulation

– Regional regulation: regulate only areas with single platform

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Platform competition

• May not be feasible to the same degree for all EU countries because of absence of cable networks

• Look for alternatives, e.g. radio based technologies– Wimax– HSDPA

• Scope for issuing spectrum licenses (digital dividend)

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South Korea: Broadband access, by type

0%

10%

20%

30%

40%

50%

60%

70%

2002 2003 2004 2005

DSL

Cable

Other

A counterexample

Source: OECD

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Cost comparisons

• FTTx investment/subs. in the order of € 1100-1500

• DSL investment/subs. for triple play €200-500

• So investment for NGA are potentially very large

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Regulatory challenges

• Encourage more investment• What to do with countries with single platform ?• Consider non-uniform regulation across EU?

– Mandatory unbundling (possibly limited time horizon) for countries without alternatives to DSL

– Deregulation in countries with platform competition

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Investment patterns

Invest

Not Invest

Incumbent New entrant Incumbent New entrant Incumbent New entrant

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Conclusion

• Regulation has strong effects on investment behaviour– Incumbents– New entrants

• Regulation should not represent a permanent claim on incumbents assets

• Stimulation of facility based competition