Bundesamt für Kommunikation

Competitive effects of NGA co-investments

Roberto BalmerBAKOM

Disclaimer: The views presented here are those of the author and do not necessarily reflect those of ComCom / BAKOM, BEREC, IRG.

IRG CB Workshop on NGAFrauenfeld, 16 April 2014

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Agenda

BEREC report (12) 41

1. Project overview

2. Who can roll-out?

3. Main forms of NGA co-investments

4. Effects on infrastructure competition / coverage

5. Effects on M4 competition

Introduction Who can roll out?Forms of NGA co-investment

Effect on infra-structure competition

Effect on M4 competition

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Project overviewNGA co-investments (2008): - Today copper LLU is price regulated in all of Europe.- Opportunity to avoid the recreation of a monopolistic bottleneck in the access network.- But: competitive effect depends on many factors and may be insufficient.

Step 1 NRA questionnaire: 5/30 countries with NGA co-investment activities.

Step 2 Definition of different co-investment schemes and determination of elements to be examined for possible national guidelines on SMP in market analyses of markets 4/5.

Step 3 Examination of specific sets of conditions and criteria which NRAs might consider as suitable indicators of effective competition.

Focus: SMP Analysis, FTTH/B, agreements including the incumbent, market 4

According to the NGA recommendation it is now the task of the NRAs to

- provide regulatory certainty and predictability to their national markets, consistently to the general objective of encouraging efficient investment.

Introduction Who can roll out?Forms of NGA co-investment

Effect on infra-structure competition

Effect on M4 competition

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On your marks… Who can roll-out FTTH infrastructure?

- Ducts in the access network required

Incumbent- Excellent network; but opportunity cost of losing copper revenues

Utilities- Economies of scope from operating electricity & telecoms! Deployment can be made during

maintenance of other network!- Space? Depends on utility.

Alternative operators? - Ducts in the access network of the incumbent often regulated (CH about 0.17€/meter)- But price structure may make it difficult (in CH price is independent of number of cables, making

deployment close to the house more costly). - Willingness of incumbent to extend ducts where necessary?

Note: Some Swiss cablecos have also rolled out FTTH (exception)

Incumbent and utilities are in pole positio

n

Introduction Who can roll out?Forms of NGA co-investment

Effect on infra-structure competition

Effect on M4 competition

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Main forms of NGA co-investments 1/3Joint venture (JV) • Common, legally independent firm formed to manage & finance joint NGA roll-out• Partner companies (e.g. Reggefiber/KPN) take JV equity stakes and bring in

assets (e.g. ducts, cash), carrying jointly the financial risk of the investment. • Access products (e.g. fibre LLU) are then sold to shareholders and third

parties (at non-discriminatory prices?).

Long-term cooperation agreements (IRUs)• No common company is founded• With the roll-out of multifibre more than 1 access fibre (e.g. 4) per household are

available. Single fibres can be “sold” to other operators. • Indefeasible rights of use (IRUs) come close to property rights on a (dark)

fibre applying to the potential lifetime of the asset (in France 3x30=90 years) and including access to all strategic inputs such as manholes and cabinets, collocation, splice nodes in and outside of the building.

• The grantor of an IRU continues to hold the property and maintain it (SLA). It undertakes the investment in the dark fiber segment in question alone (rights of way, ducts, poles, installation of cables, testing, etc.).

Monopoly!

Two firms?

Introduction Who can roll out?Forms of NGA co-investment

Effect on infra-structure competition

Effect on M4 competition

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Main forms of NGA co-investments 2/3Long-term cooperation agreements (IRUs) scenarios

Financial contribution

Only one operator constructs and the other contributes to financing to obtain the IRU.

Construction contribution

Both operators construct. Possibilities to divide the work?

1) Hierarchical split: E.g. utility builds the terminating FTTH segment to the house/ apartment and the incumbent the feeder from the concentration point to the ODF/local exchange.

2) Regional split: E.g. utility builds the access network in the more rural areas and the incumbent in the inner city.

3) Both

Operators have to agree on the segments (may be based on a cost criterion, i.e. always the more efficient operator rolls out).

The final “price” for the IRUs (e.g. 40/60 capex shares) may reflect also other factors such as expected future market shares.

Introduction Who can roll out?Forms of NGA co-investment

Effect on infra-structure competition

Effect on M4 competition

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Main forms of NGA co-investments 3/3

Other forms of risk sharing also allow to distribute “risk” (i.e. of low future demand) to non-investing firms. - E.g. unconditional “upfront” ex-ante payments (in

exchange for favourable ex-post access)- Volume commitments

Not focus of the report.

Overview of options in Inderst & Peitz (2012, 2013).

Introduction Who can roll out?Forms of NGA co-investment

Effect on infra-structure competition

Effect on M4 competition

Actors Public, Private,Incumbent

Public,Incumbent

Public,Incumbent (Public)

Network de-ployment type

FTTH GPON and FTTH P2P - multifibre

FTTH P2P - single fibre

Mostly FTTH P2P - multifibre

Co-investment mechanism

Co-investments based i.a. on symmetric regulation - multifibre terminating segment IRU access

Joint-Venture with regulated access

Similar to France with IRU multifibre access. But no symmetric regulation in terminating segment. Also -Regional/hierarchical Co-construction-Purely financial Co-Investments

* Co-investment projects have been reported also in Italy and Portugal.

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Country cases (2012)*

Introduction Who can roll out?Forms of NGA co-investment

Effect on infra-structure competition

Effect on M4 competition

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- Extending the potential coverage for two FTTH networks; «infrastructure competition»- With co-investment red coverage approaches yellow coverage

Use of Multifibre co-investments?

Introduction Who can roll out?Forms of NGA co-investment

Effect on infra-structure competition

Effect on M4 competition

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Caveat: Two «independent» firms?

• JV=M4 Monopoly as before the incumbent• IRU cooperation? Depends on clauses. Examples:

- Layer 1 exclusivity: One partner is not allowed to sell layer 1 products

Monopolizes the market

Introduction Who can roll out?Forms of NGA co-investment

Effect on infra-structure competition

Effect on M4 competition

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Compensation mechanism

Depends. Can monopolize market

Introduction Who can roll out?Forms of NGA co-investment

Effect on infra-structure competition

Effect on M4 competition

40%

40%

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What is needed for M4 competition and deregulation 1/2 • Report finds that the following co-investment clauses may have

a high impact on competition:• Joint-ventures• Number of FTTH operators in the market. At least 3

independent operators needed for competition («two is not enough»), unless indirect effects from cable are strong (unlikely)(see also BEREC report on self-supply).

• IRU agreements which can strongly limit competition:- Layer 1 exclusivity- Strong compensation mechanisms- Short term contract instead of long term (IRU)- Discrimination in operational access - Monofibre (medium): switching procedure and churn create

issues and needs increased cooperation between partners and lowers flexibility.

Introduction Who can roll out?Forms of NGA co-investment

Effect on infra-structure competition

Effect on M4 competition

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What is needed for M4 competition and deregulation 2/2 • Competition authorities (NCAs) responsible to sanction

horizontal agreements • Likely that a series of such clauses are illegal (e.g.

Switzerland)• Unclear whether this is positive. • For example compensation mechanisms can lead to a

predetermined market outcome limiting competition but they can also limit substantially the investment risk for the partners.

• There could therefore be a trade-off investment-competition which an NCA non necessarily takes into account.

• NRAs objective is competition and investment• Future: NRAs need also to understand investment effects of

regulation and of such agreements to design future regulation with NCAs

Introduction Who can roll out?Forms of NGA co-investment

Effect on infra-structure competition

Effect on M4 competition

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Questions?

Roberto BalmerBundesamt für Kommunikation Zukunftstr. 442501 Biel Tel. +41 32 327 56 43 roberto.balmer@bakom.admin.ch

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References

- BEREC report on Co-investment and SMP in NGA networks (12) 41- Inderst, R., & Peitz, M. (2012a). Network investment, access and competition. Telecommunications Policy, 36(5) - Inderst, R., & Peitz, M. (2012b). Market asymmetries and investments in

next generation access networks. Review of Network Economics, 11(1). - Inderst, R., & Peitz, M.(2013). Investment Under Uncertainty and

Regulation of New Access Networks. ZEW-Centre for European Economic Research Discussion Paper, (13-020).