Economic characteristics and policy challenges of NGANsGlenn A Woroch
C.R.T.P. / UC Berkeley
Policy for Next Generation Networks: European and US Perspectives
MIT Communications Futures Program27 March 2009
Overview
1. Engineering & economic properties of NGANs
2. Competition & regulatory concerns
3. Policy options & economic criteria
4. Vertical separation as a remedy
5. Different approaches in the U.S. and E.U.
6. Open questions & policy challenges
1. What is the NGAN?
Consensus so far … Converged: IP transport of all kinds of content to
all kinds of devices Layered: OSI and other layered architectures Modular and Open: interoperability among layers,
components Backward compatible: interoperate with legacy
PSTN and data networks
What is the NGAN?
Not your father’s Internet Consolidation of ATM, SONET, Ethernet, MPLS More than best effort: carrier class, security
But still a work in progress Competing technologies: FTTx’s, xDSL’s, etc. Competing architectures: star, PON, etc. Open and proprietary technologies
Distinct economic features of NGAN Natural monopoly at the core
High fiber results in high fixed costs, low marginal costs
Impediments to facility sharing Open entry at the edges
Open interfaces, standard protocols Limited capacity of critical facilities
Converged devices at the ends Need to manage connections & traffic
2. Competitive & regulatory concerns How to respond to a fortified access
monopoly? How to maintain progress toward competition
in retail services? How to preserve incentives to invest in
facilities and to rollout innovative services? How to transition from current institutions?
Competitive concerns
Disadvantage downstream rivals Margin squeeze Quality sabotage Refusals to supply Tying and bundling Technical incompatibilities
Regulatory concerns
What parts of NGAN are natural monopolies? Distinguishing new from legacy bottleneck
facilities How carve out potentially-competitive portions
of the NGAN? Engineering: layers Economics: markets
Regulatory concerns (cont’d)
What policy to impose on the boundaries of the NGAN? Nondiscriminatory access Full interoperability
How to transition from legacy network and ownership structure to NGAN? Maintain regulation on legacy network? “Regulatory holiday” for NGAN?
3. Policy options & economic criteria Objectives of policy intervention Economic criteria for evaluating policies Structural and behavioral strategies
What are the objectives of intervention? Curb monopoly excesses Prevent exclusionary behavior Promote efficient entry and competition Facilitate investment in infrastructure Preserve incentives to innovate
Economic guidelines for policy analysis Overarching criterion should be efficiency
Consumer welfare is paramount But measured by social welfare
Time is of the essence Not just short term or just long term Dynamic progress critical to network evolution
Policies need to be “incentive compatible” All agents will pursue their private interests
Policy options
Forbearance Promotion of platform competition Opening access network and unbundling Facility sharing Vertical separation Ex ante regulation Ex post competition policy
4. Vertical separation as remedy Kinds of vertical separation Vertical separations experiments in U.S., E.U.,
and elsewhere Economic benefits and costs of separation Obstacles to separation
Why the interest in separation now? Dissatisfaction with progress toward
competition Lack of entry under unbundling policies Slow development of platform competition
Fear that NGAN could reverse progress Opportunity to establish dominance in new
infrastructure market Such dominance could be extended to retail
Degrees of vertical separation/integration
Full integration Forward and backward integration
Quasi-integration Long term contracting
Nonstructural separation Accounting separation Functional separation Operational separation
Structural (ownership) separation Reciprocal partitioning Club ownership No vertical integration
Efficiencies of vertical separation
Benefits Eliminates of cross
subsidies Eliminates conflict of
interest Counteracts
discriminatory treatment of retail rivals
Costs Forgoes vertical scope
economies Causes double
marginalization Lowers reliability due to
quality externality Raises transaction costs Blunts incentive for
access investment
Obstacles to vertical separation Divorced facilities may not be sharable
Certain portions of a non-IP video market Separation may preclude certain bundled
services Access + retail services, especially for businesses Arms’ length contracting alternative can be costly
5. Divergence in U.S. and E.U. approaches Origins of institutions and property rights of
the two telecoms sector were vastly different Current network infrastructure and industry
structure varies considerably in EU, but not in the US
Subtle but fundamental differences in competition policy
Example of competition policy differences
U.S. E.U.
Quality degradation
Trinko (2005) IMS Health (2004) Microsoft (2004)
Price/margin squeeze
LinkLine (2008) Deutsche Telekom (2003) Telefonica (2007)
Separation policy in the U.S.
Anti-trust separations LOB restrictions on AT&T in 1956 Divestiture of AT&T in 1984
Regulatory separations FCC’s Computer I, II, III LOB restrictions on
RBOCs PSCNY’s Rochester Tel experiment in 1995 SBC’s separation of DSL service in 2001 Failure of state nonstructural separations (e.g.,
Pennsylvania)
Separation policy in Europe
Regulatory stance on separation in the EC OECD separation recommendation (2001) EC recommendations on accounting separation
(1998, 2004) Reding speech (2006)
OFCOM-BT’s undertakings in 2005 Separation of OpenReach and BT Retail Applies to 21CN products
6. Open questions & policy challenges Implementing vertical separations Enforcing non-discrimination Measuring success
Implementing vertical separation Pre-conditions for separation policy
Activity prone to “enduring bottleneck” Complements are potentially competitive Bottleneck monopolist integrated into the complementary
markets Essential elements of vertical separation
Quarantine of bottleneck Isolate of essential facilities Impose line-of-business restrictions
Regulate the bottleneck Dictate range of wholesale access services Enforce price and quality nondiscrimination
Measuring success
Direct measures of success Entry of new firms upstream and downstream
Facilities based or service based Development of infrastructure/platform
competitors (e.g., wireless) Indirect measures of success
Lower retail prices, higher service quality Expanded retail service offerings
Measuring success (cont’d)
All impacts need to be evaluated incremental to the status quo Any unbundling regime Any access/interconnection pricing regulation Any form of vertical separation
Case of Italy Unbundling Interconnection pricing Operational separation of network services
Various non-discrimination principles OFCOM’s “equivalence of inputs”
Same products, sold at same prices, using same order processes as BT’s retail division
Applied to certain existing and future products FCC’s “parity principle” TCNZ’s “fair and equivalent” AGCOM’s “parity of internal-external
treatment” (152/02/CONS) Competitors can replicate TI’s retail services
Why non-discrimination may not be good Retailers value input quality differently
Some retailers prefer lower quality input if they receive a sufficient price break
Sabotage may impose cost on access supplier Greater costs to creating multiple qualities of an
input Greater sales to the advantaged affiliate retailer
offset by reduced sales to rival retailer
Performance measurement: the plan Map indicators of wholesale service into
monetary penalties Benchmark is service received by bottleneck’s
retail division Induce bottleneck monopoly to provide
equivalent service to retail rivals Discriminatory treatment becomes sufficiently
costly
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