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Open Access – an Alternative to Functional Separation in Telecoms?

Open Access – an Alternative to Functional Separation in Telecoms? Ernst-Olav Ruhle Wolfgang Reichl Jörg Kittl SBR Juconomy Consulting. 27. October 2009, Manama. The challenges and the regulatory tools in telecom policy today. Fostering investment Safeguarding competition ….

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Open Access – an Alternative to Functional Separation in Telecoms?

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  1. Open Access – an Alternative to Functional Separation in Telecoms? Ernst-Olav Ruhle Wolfgang Reichl Jörg Kittl SBR Juconomy Consulting 27. October 2009, Manama

  2. The challenges and the regulatory tools in telecom policy today • Fostering investment • Safeguarding competition • … The challenges • Classical remedies (access obligations, cost-orientation…) • Functional separation • Open access • … The regulatory tools

  3. Outline 1 Functional separation Functional separation as a regulatory remedy Functional separation and Investment incentives Pros and cons 2 Open access Open access – what is it? Open access models and policy Pros and cons 3 Comparison of concepts

  4. Functional separation • Existing remedies (access obligations and other remedies) attempt to assure non-discrimination by imposing rules on a designated (SMP)-operator. Non-discrimination by imposing rules • These remedies might not be sufficient to prevent discriminatory behavior by a vertically integrated operator. Shortcomings of regulating behavior Full equivalence through regulating incentives • Therefore, functional separation seeks to ensure “full equivalence” of regulated wholesale products.

  5. Evolution of EU regulatory framework Regulatory Frame- work 1998 New Regulatory Framework 2002 Telecoms Package 2010 • Market opening • Regulating SMP in 4 markets • SMP triggers remedies and ex-ante obligations • Market analysis and regulation of SMP in 18 markets • Toolbox with remedies (trans-parency, non-discrimination, access, price regulation and accounting separation, carrier selection) • Reduction to 7 markets • Functional separation as new remedy Motivation for separation • (Non)-discrimination • Overcoming bottlenecks • Modularization through technological advances Why? Dimensions of separation • Degrees of separation (accounting, functional, structural) • Segmentation (access, wholesale, retail) • As remedy or voluntarily How?

  6. Common position adopted by the Council (46) The purpose of functional separation, whereby the vertically integrated operator is required to establish operationally separate business entities, is to ensure the provision of fully equivalent access products to allow downstream operators, including the operator's own vertically integrated downstream divisions. Functional separation has the capacity to improve competition in several relevant markets by significantly reducing the incentive for discrimination and by making it easier to verify and enforce compliance with non-discrimination obligations • FS may be justified in exceptional cases (ultima ratio) • where there is no prospect of infrastructure competition • after recourse to one or more remedies • Incentives to invest need to be preserved • NRAs should pay particular attention to products, network roll-out, degree of technological progress, which may affect substitutability of fixed and wireless services • FS should be approved in advance by the Commission Agreement in third reading expected autumn 2009; 18 months timeframe for transposition into national law

  7. How to implement separation? • Responsible for marketing, service provision to end-users and takes care for the customer relationship • Manages the core network, parts of the aggregation network and the traffic types (originating, termination, transit etc.) NetCo • Responsible for wholesale services such as access networks, the terminating segment of leased lines, parts of the aggregation network and the wholesale provision of leased lines LoopCo Structure of a vertical integrated operator and options for separation

  8. Telco‘s face weak investment incentives in NGA Source: New Zealand Institute 2008

  9. Functional separation and investment incentives 1. No operator is going to invest 2. One operator invests in fibre optic access networks 3. Two or more operators invest in high speed access networks 3 scenarios Functional separation does not necessarily resolve the reluctance to invest Functional separation might be appropriate to assure non-discrimination Intervention ex-post in case of market failure Does functional separation help?

  10. Pros and cons for separation Summary Con Pro Separation as a regulatory tool only advisable if access network can be regarded as enduring bottleneck. Separation strengthens monopolistic character of access network Overcome incentive and factual possibility of vertically integrated operators to discriminate Regulation remains a "permanent task" It may distort the rollout of alternative networks Regulate incentives instead of behavior Modularization of telecom industry will happen anyway due to economic reasons

  11. The blueprint for functional separation(?) "We are the proud guardians of the nation's local access network …"

  12. Outline 1 Functional separation Functional separation as a regulatory remedy Functional separation and Investment incentives Pros and cons 2 Open access Open access – what is it? Open access models and policy Pros and cons 3 Comparison of concepts

  13. Open access – what is it? • Allows open, transparent and non-discriminatory access of third parties to high speed telecom infrastructure • http://www.bundesnetzagentur.de/media/archive/16268.pdf • Open access is predominantly about a business model. A key issue is the establishment of a trusted actor, that owns, maintains and supervises a well designed set of access rules to a common shared infrastructure creating a market place for users and a wider spectrum of service providers. • R. Battiti et al: Global growth of open access networks, 2003 Definitions • Any user must be free to select any service provider on the Open Access network (OAN) • Any service provider must be free to deliver services over the OAN • Service providers should be offered transport services at different architectural levels and refinements • All services providers must be offered the same conditions • The owner of the OAN is not allowed to offer services to end users Rules for open access

  14. The mechanics of open access Source: Sebben, P. (2009): "Ausbau und Kooperationsmodelle für Zugangsinfrastruktur"; presentation Vienna, 15. April 2009, see http://www.rtr.at/de/komp/Sebben_openaxs/Sebben.pdf

  15. The reason for open access Passive infrastructure are long lived assets Investment cycle > 20 years 70-80 % of overall cost Services Open access Open access Different layers Different characteristics • Services • Service companies do not need to worry about networks • Investment cycle (<)< 1 Jahr • 10-15 % of overall cost Development of innovative services • Active components (Hard- and Software) • Operations and maintenance • Investment cycle 3-5 years • 10-15 % of overall cost Operations and maintenance of the network Active components Passiveinfrastructure Roll-out of network

  16. Open access as a business model Similarities to service competition • A telecom operator offering wholesale and retail services might never become the trusted actor OANs require Similarities to the Internet • Open access is not restricted to Layer 3, it can also be offered on layer 1 or layer 2 What about infrastructure competition? • Infrastructure competition is clearly preferable, but there will always remain areas where infrastructure competition is not economically feasible. Open access can cover these regions or communities OAN - on which layer? • Open access will be placed on the layer, which represents an infrastructure that is not economically replicable. This could be ducts, cables, bit stream, ethernet in layer 2 or layer3 – IP) The challenge • To determine the • Appropriate region • Appropriate layer • Probability of infrastructure competition

  17. Pros and Cons for open access Con Pro May contain the nucleus to new monopolies due to the fact that competition on infrastructure level is not possible Efficient use of the network and non-discriminatory supply of services Overcomes the problem of historic monopolies and vertical integration The open access provider may not be able to refinance his investment only by offering wholesale services and may want to enter the retail market Efficient investment Open access networks require regulatory rules and intervention in case market power is abused No nation-wide approach needed. Open access networks can be run by communities, developers, utility and telecom companies Open access networks might come under attack by vertically integrated players Cost savings in civil engineering; distribute the costs of digging

  18. Outline 1 Functional Separation Functional Separation as a regulatory remedy Functional Separation and Investment incentives Pros and Cons 2 Open Access Open Access – what is it? Open Access models and policy Pros and Cons 3 Comparison of concepts

  19. Comparison Summary Open access Functional separation • Both instruments are complementary tools in the regulatory toolbox • Both concepts address the same issues (competition and investment) but are applicable in different circumstances • Functional separation and open access are complementary concepts. Both should be considered by policy makers Bottom-up approach to create an environment for sharing of critical resources Aimed at remaining competition problems due to vertically integra-ted players with SMP Involves generally non-telco players Highly intrusive Open access imposes specific business models Contribution to investment questionable Open access is applicable for non-replicable infrastructure

  20. Concluding thoughts (I) Current regulation • Current regulation is mainly aimed at effective competition und regulates main market players Top-down or … • Functional Separation might create that trusted market player required for open access • Investment in next generation access will not only come from telecom companies. Successful examples for bottom-up creation of open-access environments have emerged in Sweden and the Netherlands … bottom-up? Services evolution • “Open Access” to a global IP infrastructure has fostered innovation in Internet applications Infrastructure competition • Will cable and especially wireless technologies serve as alternative infrastructure with full coverage? Will these technologies in the end also rely on the fixed (fibre) network?

  21. Concluding thoughts (II) The shortcomings of vertical integration • It has become clear that the vertically integrated paradigm is not best suited to foster investment and innovation • Open access is a facet in the changing landscape of telecommunications. It is a further way to change business models to a more modular environment Open access (a) Starting point • A staring point for open access networks can be found in initiatives of cities, municipalities or networks of utility (e.g. power, railway) companies (b) Intervention by the government • There are also public initiatives to create these trusted players required for open access. Examples are Singapore and Australia Policy makers • Policy makers need to look carefully at emerging open access models since they could easily be conquered by traditional players

  22. Contact: SBR Juconomy Consulting AG Düsseldorf Nordstraße 116 40477 Düsseldorf Tel.: + 49-211-68 78 88 0 Fax.: + 49-211-68 78 88 33 ruhle@sbr-net.com Vienna Parkring 10/1/10 1010 Vienna Tel.: + 43-1-513 514 0-0 Fax.: + 43-1-513 514 0-95 reichl@sbr-net.com kittl@sbr-net.com

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