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Fixed-Mobile Substitution and Lessons for Broadband

Fixed-Mobile Substitution and Lessons for Broadband. Aniruddha (Andy) Banerjee Vice President, Analysis Group Eighth ACCC Regulatory Conference The Evolution of Regulation Gold Coast, Queensland, Australia July 26-27, 2007. Agenda. What is Fixed-Mobile Substitution (FMS)?

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Fixed-Mobile Substitution and Lessons for Broadband

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  1. Fixed-Mobile Substitution and Lessons for Broadband Aniruddha (Andy) Banerjee Vice President, Analysis Group Eighth ACCC Regulatory Conference The Evolution of Regulation Gold Coast, Queensland, Australia July 26-27, 2007

  2. Agenda • What is Fixed-Mobile Substitution (FMS)? • Trends in FMS • Substitution and Complementarity • The Enigmatic and Elusive Cross-Price Elasticity • Market Definition/Antitrust Policy Implications of FMS • FMS in a Broadband World

  3. What is Fixed-Mobile Substitution (FMS)?

  4. Background: Evolution of Telecommunications Wireless Networks Wireline Networks Wireline Networks Internet Backbone Television Broadcast and Cable Networks Now Before

  5. Background: Evolution of Telecommunications Now Before Fixed Voice Triple Play Data Fixed Voice Quad Play Video Mobile Voice

  6. Telecom Competition: Tale of Two Strategies Fixed-Mobile Substitution (FMS) Mobile Fixed Mobile Operator Strategy: Displace

  7. Telecom Competition: Tale of Two Strategies Fixed-Mobile Convergence (FMC) Fixed Mobile Fixed Operator Strategy: Integrate

  8. Nature of Substitution in FMS • Network access vs. usage (calls, minutes of use) • Price and non-price (lifestyle, mobility) drivers • Technological factors (leapfrogging) • Different types of economic substitution • “Cut the cord” (ex post, access and usage) • strict usage substitution • “Straight to mobile” (ex ante, choice of service)

  9. Trends in FMS

  10. Fixed and Mobile Growth Source: ITU

  11. Fixed and Mobile Growth: Contrasts Developing Country Example: China, India, Indonesia Developed Country Example: United States Source: Telegeography, FCC

  12. Evidence of FMS: Empirical Research • Mixed evidence of substitution (FMS in access or usage) and complementarity • Complementarity findings • Early years of mobile telephony • Developed countries • Substitutability findings • As mobile telephony has grown over time • As cross-network externalities have diminished • Developing countries, now in developed countries • Mobile is substitute for • fixed long distance (usage) • second fixed lines (network access)

  13. Substitution and Complementarity The Enigmatic and Elusive Cross-Price Elasticity

  14. Three Questions About FMS “Evidence” • Are FMS trends sufficient to draw conclusions about • economic (relative price-based) substitution? • state of intermodal competition? • Can econometric studies reliably determine whether fixed and mobile • are substitutes or complements? • remain so over time? • How should findings of FMS inform policymaking in • voice-only context? • triple or quadruple play context?

  15. Substitutes and Complements: Commonly Accepted Diagnostic • Cross-price elasticity of demand between two goods X and Y • Percent change in demand of one given percent change in price of the other • Positive cross-price elasticity → substitute • Negative cross-price elasticity → complement • These statements are only true for Hicksian, not Marshallian, measures of the cross-price elasticity

  16. Problem of False Positives: Complements Could Actually be Substitutes! • Correlations of stocks can be misleading • if fixed and mobile stocks both rise → complementarity? • Not necessarily in some circumstances • rising incomes lead consumers to buy more of both with no change in relative prices • marketing campaigns boost first-time consumers of both fixed and mobile even though existing consumers don’t switch • strongly downward-trending prices for fixed and mobile create parallel surges in demand • total bill effect (when telecom demand is separable)

  17. Problem of False Positives: Complements Could Actually be Substitutes! • Fixed and mobile access are • apparent complements in developed countries, even though usage may be substitutes • apparent substitutes in developing countries, even though usage may be complements or unrelated • No natural experiment to permit reliable resolution of this problem

  18. The Cross-Price Elasticity Problem • Notoriously hard to determine even in best of circumstances • Especially so (as in telecom) when • prices remain stable over time (regulatory reasons) • move in unison (competitive or technological reasons) • Only Hicksian (compensated) cross-price elasticities reveal “true” substitutes or complements, but harder to estimate • Marshallian (uncompensated) cross-price elasticities more commonly used, but can provide opposite inference from Hicksian elasticities

  19. The Cross-Price Elasticity Problem • Only Hicksian cross-price effects are always symmetric; Marshallian cross-price effects need not be • Although Hicksian cross-price effects are symmetric, corresponding cross-price elasticities need not be • Marshallian cross-price elasticities may indicate “substitute” in one direction but “complement” in the other • Even when Hicksian and Marshallian cross-price elasticities agree in sign, they are usually different in magnitude • Because cross-price elasticities are asymmetric in magnitude, may be important to know in which direction the relationship (substitute or complement) is stronger

  20. Market Definition/Antitrust Policy Implications of FMS

  21. Three Impact Areas • Product market definition and granularity • Product market definition from the policymaker’s perspective • story of intermodal competition • Complementarity of network access and usage demand in granular markets • regulate or not regulate mobile termination charges?

  22. Product Market Definition and Granularity

  23. Market Definition: Policymaker’s Perspective • Policy issues: • Relax/repeal regulation of incumbent fixed network? • Evidence of sufficient (intermodal) competition? • Who/what belongs in the relevant economic market? • Key indicator: • Demand substitution, e.g., positive (and “healthy”) cross-price elasticity • Market definition questions: • Single economic market for all voice? • Separate markets for fixed voice, mobile voice?

  24. Case: AT&T Wireless/Cingular Merger 2004 • FCC’s issue: • Fixed voice belongs in market for mobile voice? • Mobile voice belongs in market for fixed voice? • BellSouth testimony in favor of merger: • In 2004, no evidence that fixed voice constrains mobile voice pricing, does not belong in mobile voice market • FCC’s decision: • Agrees with BellSouth • limits relevant market to mobile voice providers only • finds sufficient competition in that market • approves merger

  25. Case: Deregulation of BellSouth’s Fixed Voice Services 2004 • State regulator’s issue: • Mobile voice belongs in market for fixed voice (intermodal competition)? • BellSouth testimony in favor of deregulation: • Strong evidence that • mobile voice constrains fixed voice pricing • FMS • mobile voice belongs in fixed voice market

  26. Case: Deregulation of BellSouth’s Fixed Voice Services 2004 • CompTel/ASCENT testimony opposing deregulation: • If fixed voice does not belong in mobile voice market (citing BellSouth testimony in AT&T Wireless/Cingular merger), then opposite also true (argument of symmetry of cross-price elasticities) • Confusion of symmetry of cross-price effects with that of cross-price elasticities! • State regulator’s decision: • Reject claim of symmetry and arguments based thereon • Favor direct evidence of substitution • Grant deregulation with conditions

  27. Access-Usage Complementarity: Regulation of Mobile Termination Access Monopoly • Problem: • In Calling Party Pays (CPP) countries, unregulated mobile operators enjoy termination access monopoly • High mobile termination charges (MTC), particularly detrimental for fixed-to-mobile (FTM) voice calling • Possible policy responses: • Direct regulation of MTC • Receiving Party Pays (RPP) • Bill and keep

  28. Direct Regulation of MTC In favor: Regulators in many CPP countries (UK, Japan, Australia, New Zealand) Not much cross-network externalities left to lose, given high penetration rates Pass-through of lowered MTC reduces cost of FTM calls Increases FTM call volume increases demand for mobile subscribership (access-usage complementarity effect) Effective with or without “waterbed effect” Opposed: Many economists High MTC enables subsidies to mobile network access Increases mobile subscribership Generates greater FTM calling (access-usage complementarity in opposite direction) What if lowered MTC are not passed through into retail FTM calling prices? “Waterbed effect”exists MTC profits competed away Unsubsidized access may suppress mobile subscribership

  29. Direct Regulation of MTC • Can it be effective? • Clearly, an empirical issue • Access-usage complementarity • Cross-price elasticity between demand for FTM calling and demand for mobile network access • Does complementarity exist in both directions (symmetric in sign)? • How strong is the complementarity (symmetric in magnitude)? • Can pass-through of reduced MTC into retail FTM price be assured and monitored? • What are the indirect costs of regulation and monitoring relative to bill and keep?

  30. Direct Regulation of MTC • Can be shown that the following matter: • Own-price elasticity of demand for mobile network access • Cross-price elasticity of demand for FTM calling with respect to MTC (which affects FTM price) • Number of mobile subscribers (network externalities) • Volume of FTM calls (call externalities) • Effective price (net of subsidy) of mobile network access • Profit margin from mobile network access (can be negative if subsidized)) • Profit margin from terminating FTM calls (can be zero if MTC set at cost)

  31. FMS in a Broadband World

  32. Broadband Access • High-speed, packet-based access to voice, data, video services • Definitions (based on speed of access) vary • Broadband delivered over fixed (wireline, cable, powerline), mobile, and satellite systems

  33. Broadband Technologies: Examples Fixed Systems DSL Cable modem Power line Fiber (FTTH/FTTP) Mobile Systems Fixed wireless (LMDS) Wi-Fi (UMA) Wi-Max HSDPA (3G+ successor to GSM) EV-DO (3G successor to CDMA)

  34. FMS in Broadband • Important developments • IP-based service provision • Need for higher-bandwidth access networks • Fixed systems • VDSL • GPON (control and intelligence shifts to edges of network) • Mobile systems • Wi-Fi (WLAN) and fixed and mobile WiMax • Picocells (enterprise customers) and femtocells (SOHO) • Consequence: New substitution opportunities • fixed vs. fixed wireless • fixed vs. mobile • fixed wireless vs. mobile

  35. FMS in Broadband: Policy Implications • Service definition • Electronic communication (triple or quadruple play) vs. voice, data, or video individually • Imperfect, but close, substitutes develop under the service level (e.g., voice, email, text messaging, social networks) • Impetus for deregulation or regulatory re-direction? • Competition based on access rather than service (commoditized) • Consumers have greater access/service options and control • Terminating access monopoly in CPP countries dissipates • Network externalities resurgent as consumers become originators and storers of content • Danger that continuing ex ante regulation can pick winners and losers among technology platforms

  36. Contact Information • Aniruddha (Andy) Banerjee, Ph.D. • Vice President, Analysis Group, Inc. • 111 Huntington Avenue, 10th Floor • Boston, MA 02199, USA • Tel: +1 617 425 8222 • Fax: +1 617 425 8001 • abanerjee@analysisgroup.com • www.analysisgroup.com

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