David Butcher and Associates

Open Access, Incentives and Superhighway

Hon David Butcher

October 2014

David Butcher and Associates

Open Access in Asia

• Open access: – wholesale networks must interconnect with networks, many owned by

bundled (network and services) utilities

• Many ideas are hangovers from fixed line monopolies– broadband is creating a natural separation: networks - services– can incumbents be encouraged to allow access to competitors?– origin of the problem and solutions

• This presentation shows that many problems are a legacy of fixed utilities acting as monopolists

• Broadband is forcing change, understanding drivers can speed it up

David Butcher and Associates

Vertical Matrix of old telecom utilities

• Telecom companies remain a fixed line vertical matrix: exchanges, local lines, trunk lines, retail and billing,

• Conflicts are caused by two different businesses in one organisation with often conflicting objectives

VerticalMatrix

Ex-changes

Trunk Network

Local Network

Retail and

Billing

David Butcher and Associates

Vertical Organisation technology based

• Licenses followed the vertical matrix,

• Matrix was based on technologies,

• Response was to block competition,

• Infrastructure “a competitive advantage” and a barrier to competition

David Butcher and Associates

Services Bundled with Infrastructure blocked Competition

VerticalMatrix

Ex-changes

Trunk Network

Local Network

Retail and

Billing

Telecom

Ex-changes

Trunk Network

Local Network

Retail and

Billing

Broad-cast

Ex-changes

Trunk Network

Local Network

Retail and

Billing

ISP

Ex-changes

Trunk Network

Local Network

Retail and

Billing

VAS

Ex-changes

Trunk Network

Local Network

Retail and

Billing

Etc etc

Ex-changes

Trunk Network

Local Network

Retail and

Billing

Broadband separates infrastructure and servicesCreates a Platform for Competition

Bar

rier t

o C

ompe

titio

n

Monopolistic Infrastructure

Competitive Service

Competitive Service

David Butcher and Associates

Technology Neutral Licensing

Network Services

Applications Services

Content Services

Network Facilities

Began in Malaysia and Singapore Technology-neutral; service-neutral

The technology neutral framework promotes vertical separation between facilities, network, applications, and

content

Bro

adca

stin

glic

ense

Old licenses were issued based on specific technologies, and services

A particular service through a designated technology and vertically integrated for the

provision of that service

Serv

ice

Li

cenc

eN

etw

ork

Li

cenc

e

David Butcher and Associates

Different Business Characteristics mean that different investors are required

Service CompanyNetwork Company

high risk venture fundBest Investor low risk pension fund

high rateReturn low rate

highRisk low

privateInformation public

highComplexity low

shortProduct Life long

lowCapital Required high

David Butcher and Associates

PREVIOUSLY

Bundled Telecom Company Network and

Services - Barrier to competition

Service Company

Competes with new competitors

Network CompanyMarkets Network

Services to Competitors

Chinese Wall

Facilities and cable sharing - Split RetailHong Kong and UK, Australia and New Zealand – shared towers India

High rate of return

Low rate of return

David Butcher and Associates

FTH

NETCO

Secondary Cables

NETCO

M

D

F

Trunk Line

CCC-Cross connection

cabinet

Primary Cables

MULTIPLEXOR

FTH

NETCO – SERVCO Demarcation

FTH

FTH

SERVCO

DSLAM

SWITCH (Exchange)

ISP

FTH

Competitor

Competitor

DSLAM

DSLAM

David Butcher and Associates

NETCOTower

NETCO

Fiber Transmission

Mobile - NETCO – SERVCO Demarcation

SERVCOBase Station

SERVCO Antennae

SERVCO /Switch

David Butcher and Associates

Service competition on a broadband digital platform

Broadband Internet Platform

IP CORE Network / VPNs

Access

WLAN

DSLTDM

IXC

Frame/ X.25

GPRS

SCDMA

Ethernet

CDMAWCDMA

InternetTransport

IP Transit

Hosting & ContentVoIPService

Application

IP VPN

David Butcher and Associates

Separation’s Effect on Incentives

• Network Manager has an incentive to maximise traffic– An operator of a broadband network is service neutral – incentive is to

maximise revenue by maximising traffic

• Service provider has an incentive to offer quality service– A service operator’s incentive is no longer to block competition, but to

maximise the QUALITY of customer service to maximise revenue

• Regulation is simplified– Principal role of regulation is to increase transparency

• Parties that do not join– miss lower cost transit and better quality, there fore an incentive to join– coercive comparison an annual report on the quality of service in each

participating country will apply pressure to join

David Butcher and Associates

Changes with Separation

• Incentive to block is removed– Infrastructure not competitive advantage – barrier to competition ended

• Incentive to Maximise Traffic– An operator of a broadband network is service neutral – incentive is to

maximise revenue by maximising traffic

• Incentive to Offer Quality Service– A service operator’s incentive is no longer to block competition, but to

maximise the QUALITY of customer service to maximise revenue

• Simplification of regulation– Principal role of regulation is to increase transparency

• Parties that do not join– Miss out on lower cost transit and better quality

David Butcher and Associates

Case: Mongolia Huge space small population –priority to serve at low cost

David Butcher and Associates

Mongolia

• Widely dispersed small population, legacy copper– fibre chosen solution

• Policy recommendations:– netco-servco split (largely implemented) – sale of service business – should qualify to join superhighway

• Implementation– politician blocked a license for govt mobile company – hindered sale– too many staff and too much debt loaded onto the network company– no new capital– business is now managing towers for private mobile companies– high quality private city networks

David Butcher and Associates

Cambodia

David Butcher and Associates

Cambodia – fibre squeeze

• 2007 priority completion of fibre network– Cambodia squeezed - high MB charges Thai and Vietnam operators– Japan and China offered financial support if a legal framework in place– Minister rejected opportunity to join submarine cable– Unable to comply with conditions, support lost– Fibre from Vietel, Private Chinese operator and Telecom Cambodia– 11 operators – at least one abandoned by owners– Internet exchanges introduced

• 2014 Awaiting Legal Framework– market is restructuring - one operators abandoned by owners– ties between Vietnam and Cambodian operators– internet access remains expensive

David Butcher and Associates

Bangladesh – Law Change

• Extraordinary success story – in <9 years, Bangladesh increased subscribers from aprox 1 million, to

78 million (July 2011) an increase of 18 million in that year.– mobile operators achieved 98 percent demographic and 90 percent

geographic coverage– the largest single contributor to the government budget– “Digital Bangladesh Policy” private investment in fibre to the home

• Backtrack– widespread idea licenses were issued cheap (ignoring investment)– led to a major change in regulatory direction 2080– adverse impact on investment– efforts to mitigate – BTRC seeking amendments

David Butcher and Associates

Adverse Impact of Regulation Y by Y investment

49 46 89 84 119

264

795873

1106

1280

526.68

-1000

-500

0

500

1000

1500

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

US$

US$ million annual

$ change - 2009an estimate

2 period movingaverage

Source:AMTOB - AT Capital Research compiled in Bangladesh Telecoms Sector, AT Capital Research

David Butcher and Associates

Myanmar – New Licenses

• Government of Myanmar decided to increase competition by issuing two new mobile licences– A transparent process set up – International advisers were appointed– +9 groups expressed interest– Some proposers failed to meet the technical specifications – eliminated– Successful bidders Telenor and Ooredoo

• Process added great credibility to the government decision making• Other ministries want to copy process• Internet service remains weak and competition required

David Butcher and Associates

Summary

• Superhighway should be designed to create incentives to join and incentives to provide good service

• Decision making should as far as possible be technology neutral• Recognise the dual nature of the telecommunications business:

facilities management and customer service• Use the “force of coercive comparison” to encourage slow partners

to join• Make maximum use of technically and regulatory compliant existing

infrastructure