Access regulation and incentives for investment in alternative broadband infrastructure *

1. Access regulation and incentives for investment in alternative broadband infrastructure* Harald Gruber Presentation 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.

2. Outline • Sector overview • Fixed line access regulation • Investment incentives • Alternative regulatory scenarios • Conclusion

3. Past drivers for investment and growth • Technology • Cost reduction • Performance increase • Regulatory change • Liberalisation • Changes in market structure

4. EU Commission, 2007

5. EU Commission, 2007

6. EU Commission, 2007

7. EU Commission, 2007

8. 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

9. 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

10. EU Commission, 2007

11. 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

12. EU wholesale access line availability European Commission, 2007

13. EU DSL wholesale access types European Commission, 2007

14. Investment incentives • Increasing investment profile for new entrants. • Investment effect on incumbent uncertain

15. Investment ladder without investment? Source: EU Commission, LE

16. 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)

17. 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

18. EU is moving away from platform competition Source: European Commission

19. European Commission, 2007

20. 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?

21. Source : ARCEP, OTA

22. 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

23. 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

24. 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 Source: France Telecom

25. Alternative scenarios: Unregulated platform competition • Possible where at least two platforms (DSL+cable) exist already • Example of the Netherlands

26. Share of broadband platforms Source: OECD

27. Alternative scenarios: Regional regulation • Regional regulation: regulate only areas with single platform

28. 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)

29. A counterexample Source: OECD

30. 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

31. 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

32. Investment patterns Incumbent New entrant Incumbent New entrant Incumbent New entrant Invest Not Invest

33. 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