The Strategic Implications of VOIP for Regulating the...
Transcript of The Strategic Implications of VOIP for Regulating the...
The Strategic Implications of VOIP for Regulating the Electronic Communications Markets
Richard CadmanDirectorStrategy & Policy Consultants Network Ltd
+44 1603 [email protected]
Disruptive Potential of VOIP
Voice over the Internet has the potential to restructureelectronic communications markets making existing regulation redundant, but leaving a new monopoly.
To ensure the survival of the competitive gains enjoyed since 1998, NRAs will need to re-evaluate the remedies
imposed on SMP operators.
Agenda
• Introduction to SPC Network
• VOIP’s Disruptive Potential
• Rate of Substitution
• Implications for Interconnection & Regulation
Introduction to SPC Network
• Specialist policy and strategy consultancy in electronic communications
• Rigorous analysis: exceptional advice
• Built on three key assets:– Services– Experience– People
• Founded in 2003• Have worked for 19 clients
including….
Policy
EconomicsRegulation
Introduction to SPC Network
Introduction to SPC Network
• Presentation paper based on
– Paper prepared for a client on VOIP and the future of regulation
– Report being prepared to be published by Market Cohesion Ltd (www.marketcohesion.com)
The Market Review Process
• 18 markets determined by European Commission
• Implemented slightly differently by NRAs
• Product and geographic markets• Voice access, Origination,
Transit and Termination• Broadband access and
conveyance
Marketdefinition
The Market Review Process
Marketdefinition
Assessmentof market
power
Applicationof remedies
Voice Markets
TransitTransit
AccessOrigination
Termination
Incumbent dominant in Access, Origination and Transit
Own network dominancein termination
Interconnection charges are distance dependent so incentivise Altnets to build out to DLE
Broadband Markets
wwwwww
ConveyanceConveyance
W/sale AccessRetail Access
Incumbent dominant at wholesale level
Bitstream access charges generally capacity based
Convergence
• Current:– Separate voice and broadband supplier – Voice market measured by connections/minutes– Broadband measured by connections
• Future–Integrated supplier of voice and broadband–Market measured by connections
Convergence
All-IP backbone
All-IP backbone
www
PSTN/mobile
PSTN/mobile
Termination
www
Access
Broadband server
Customer premises
ServiceProvider
ServiceProvider
Convergence
“All-IP Architecture”
DWDM (usually)
Fibre
IP
“Traditional Architecture”
IP
ATM
SDH
Fibre
DWDM (sometimes)
Convergence
Voice Video Data StorageThen
Telephone Network
Telephone Network
Broadcast Network
Broadcast Network
IPNetwork
IPNetwork
Storage Area
Network
Storage Area
Network
Telephone Network
Telephone Network
Broadcast Network
Broadcast Network
IPNetwork
IPNetwork
Storage Area
Network
Storage Area
Network
Now
Convergence
“The impact of IP on the traditional telephony world will be to replace voice services with integrated voice and IP-basedapplications. These will extend through messaging and e-commerce,supporting applications with which the traditional telephony networkarchitecture cannot compete technically or economically.”
Trends in IP Technology: Their impact on the the traditional Telephony carrier worldOECD March 2002
Currently separated voice origination/transmissionand broadband access market definitions will no longer be
relevant.
Rate of Substitution
• What will drive consumers to switch from traditional voice services to an integrated Voice and Internet platform? – Price– Convenience– Quality
Price
• Calls to other VoIP phones free
• Substantial savings on international rates
Price (All GB£)
4.0
4.0
4.0
3.08.01.51.1USA
20208.19.6 – 10.5India
3.08.01.51.1Germany
4.08.01.51.1France
One-TelBT
(Option 3)
Gossiptel(World 500)*
Skype
*£9.99 monthly cost Source: company websitesJanuary 2005
Price
• Calls to other VoIP phones free
• Substantial savings on international rates
• But….. Less convincing savings on calls to PSTN/Mobile
Price
Based on calls to Vodafone
5516Weekends
61016Evenings
161516Peak
BT (Option 3)
Gossiptel(World 500)
Skype
Source: company websitesJanuary 2005
Convenience & Quality
• Both rapidly improving• VoIP handsets available – no longer an enthusiasts’
toy• Quality related to price but acceptable even at “best
efforts” level
Rate of Substitution
• How quickly will VOIP be taken up?
– Mercer: 30% of UK homes by 2007– Jupiter Research: 17% of US homes by 2009– Ovum: 197 million users worldwide by end of
2008– Skype: 80,000 downloads per day
Rate of Substitution
“However, Voice over IP-based (VoIP) applications are likely to be best implemented when they are used in opening new sources of revenue for service providers rather than as a means of competing directly against traditional telephony whose vast infrastructure is likely to co-exist and be interconnected to IP-based infrastructure for many years ahead.”
OECD
Implications for Interconnection & Regulation
Economics of Competition: Today
LRACI
LRACE
€
Size of Network
Current voice interconnectregime encourages buildingout to DLEs to allowentrant (E) to realiseeconomies of scale and tobenefit from more efficienttechnology.
Entrant therefore able to beprice competitive.
Economics of Competition: Future
LRACI
€
Size of Network
LRACE
All-IP networks are built on standard protocols/equipment.
Can entrant gain efficiency/scale advantages over incumbent?
Wholesale Interconnection
Entrant (E) has choice of adding increment i of capacity through own build or buying from the incumbent (I).
Assume that I’s price for i is regulated at LRIC+ based on I’s cost model and data.
E’s LRIC is likely to greater than I’s due to smaller discounts and higher cost of capital reflecting greater risk.
E is faced with two prices for increment: I’s or its own Always more rational for E to buy rather than build.Incentive to buy is compounded given that there is no advantage in
building out to the DLE, as there is no distance related charging so no additional benefit to be gained from a larger network.
DANGER DANGER DANGER
MONOPOLY RE-EMERGING
Is IP access and transit a
natural monopoly?
Mandate interconnectdeep enough in the network to allow service providers to control product
differentiation
Yes
Here?
Here?
Here?
“All-IP Architecture”
DWDM (usually)
Fibre
IP
Civil infrastructure
Is IP access and transit a
natural monopoly?
Mandate interconnectdeep enough in the network to allow service providers
to control product quality
Yes
Do not regulate as if it were a monopoly. Do notimpose remedies whichdiscourage competitive
investment
No
The national regulatory authorities shall promote competition in the provision of electronic communications networks, electronic communications services and associated facilities and services
Framework Directive, Article 8, para 2.
But, tools available to NRA, i.e. remedies to apply to SMPoperators, are designed to control monopoly behaviour.Can such tools also promote competition?
Summary
• Significant retail uptake of VoIP is likely to lead to restructuring of electronic communications markets
• Separate voice and broadband markets will converge to form a unitary market
• Will All-IP networks revitalise scale advantages of incumbent operators leading to a renewed “natural monopoly”?
• If yes, regulators must mandate interconnection at a sufficiently low level of the network to encourage differentiated competition
• If no, regulators must use regulation to encourage, not mimic, competition
Rigorous analysis: Exceptional advice
www.spcnetwork.co.uk