International Regulatory Comparisons: The Evolution to IP-Based Fibre

Transcription

1 WIK-Consult Paper to be presented at the ITS Conference, Montreal International Regulatory Comparisons: The Evolution to IP-Based Fibre Authors: Dieter Elixmann J. Scott Marcus WIK-Consult GmbH Rhöndorfer Str Bad Honnef Germany Bad Honnef, 23 May 2008

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3 Title I Contents Abstract II 1 Introduction 1 2 Regulatory challenges FTTC/VDSL Key themes Crucial factors affecting the business case for FTTC/VDSL FTTB/FTTH Key themes Crucial factors affecting the business case for FTTB/H Common problems to both Market definition Change of network topology Changes in regulated costs 10 3 Regulatory responses FTTC/VDSL Netherlands Germany FTTB/FTTH France Japan Common to both USA 17 4 Comparative Assessment A trade-off between investment and competition? How effective have current approaches been in promoting investment and competition? 19 5 Concluding remarks 22 Bibliography 24

4 II Title Abstract Throughout the developed world, access to the fixed network has been evolving to an Internet Protocol (IP) basis, initially using copper-based DSL and cable television, more recently using fibre optics either to the street cabinet, to the building, or to the home (FTTC, FTTB, and FTTH, respectively). This migration has important regulatory implications. To date, regulators have approached these new challenges in different ways, and early indications are that they are achieving notably different results in consequence. At the upper layers of the network, the evolution to IP enables new forms of competition, possibly alleviating certain competitive bottlenecks. At the access level, however, concerns over last mile access remain. In fact, the migration to VDSL/FTTC or to FTTB/FTTH greatly complicates regulatory strategies based on loop unbundling, thereby putting at risk the wholesale service-based competition that has been crucial to competition in most countries. Regulators in the Netherlands, Germany, and the UK have been forced to deal with these issues due to relatively rapid migration to IP-based Next Generation Networks (NGNs) proposed by their respective incumbent telecoms operators. The European Regulators Group (ERG/IRG) has also published a position paper, as has the Japanese regulatory authority. Most of these proceedings have sought to maintain a ladder of investment, where competitors would have a range of options (suited for different levels of customer density and ability to invest) to acquire cost-based wholesale access to incumbent networks in order to achieve and maintain market entry. The United States has dealt with many of the same issues in a strikingly different way the U.S. has reversed its earlier policies of supporting service-based competition, especially in regard to fibre but also in regard to copper, and has intentionally allowed the electronic communications market to collapse to a series of geographically specific telecommunications/cable duopolies. Germany has taken an intermediate position between that of the U.S. and that of most European Union Member States. In this paper, we compare and contrast the many regulatory proceedings that have been produced by these regulatory authorities, and we attempt to derive lessons from the limited experience to date. What are the likely implications for competition, for deployment and adoption of fibre-based access, and for consumer welfare? To what extent is market power an issue, and how can it best be addressed?

5 Title 1 1 Introduction Technological and market forces are driving network operators and electronic communication service providers throughout the world to migrate their networks to Next Generation Networks (NGNs) based on the Internet Protocol (IP) 1. NGN access in the fixed network (henceforth also called NGAN) is in the process of being enhanced over time in many countries to provide higher speed using fibre-based technology. At an abstract level, one might imagine that a change in underlying technology would have little impact on regulation 2 ; however, the evolution to of the access network to IP-based fibre implies substantial challenges for regulators. Different regulators in different countries are finding somewhat different solutions to these challenges. Two broad families of technical approaches exist. One approach is known as Fibre-tothe-Home [FTTH] or Fibre-to-the-Building (FTTB). The other is Very High Speed DSL [DSL]), which is associated with Fiber to the Curb/Cabinet (FTTC) (because fibre is built out to the street cabinet but not all the way to the individual home or building). Whether the migration is to FTTC/VDSL or to FTTB/FTTH, traditional remedies to incumbent market power typically become difficult to apply. For FTTC/VDSL, the natural point of interconnection (PoI) for purposes of network access moves from the Main Distribution Frame (MDF) to the far more numerous street cabinets; however, access to street cabinets is potentially difficult and costly, calling into question the practicality of Local Loop Unbundling (LLU) as a competitive remedy. For FTTB/FTTH deployments to multiple dwelling units, many challenges exist regarding building wiring. As an additional problem for point-to-multipoint FTTB/FTTH, there are uncertainties as to the practicality of unbundling Passive Optical Network (PON) solutions. All of these challenges call into question the practicality of LLU as a procompetitive regulatory remedy. 3 Different countries have considered these issues, but the pace of regulatory proceedings has been conditioned in each case by developments and market evolution in that country. In both the Netherlands and in Germany, the incumbents (KPN and DTAG) are seeking to move rapidly to replace the traditional fixed access network with a VDSL-capable network. In France, the incumbent as well as its competitors are moving quickly to deploy FTTx in a number of major metropolitan areas. In Japan, fibre deployment has been very successful, with many of the deployments undertaken by third parties other than the incumbents (NTT East and NTT West). In the U.S., 1 IETF, Internet Protocol: Darpa Internet Program Protocol Specification, RFC 791, September Indeed, technological neutrality is ostensibly a core tenet of European regulation. 3 Bitstream access seems to be much less problematic in connection with VDSL and FTTx solutions.: also point-to-point fibre introduces fewer problems with unbundling than PON.

6 2 Titel incumbent operators AT&T and Verizon have made substantial investments in fibre to their respective customers. Chapter 2 discusses the regulatory challenges relevant to FTTC/VDSL and FTTB/FTTH solutions. Chapter 3 discusses regulatory solutions that have been attempted in various countries. Chapter 4 provides a comparative assessment, in terms of the degree to which competition has been preserved, and the extent of fibre-based deployment and adoption. Chapter 5 provides concluding remarks and a few recommendations. 2 Regulatory challenges This Chapter explores the various regulatory challenges associated with migration to IPfibre-based Next Generation Access. Section 2.1 explores challenges in an FTTC/VDSL context. Section 2.2 discusses problems that are unique to an FTTB/FTTH environment. Finally, Section 2.3 reviews problems that are common to both. Our focus in this paper is on challenges at the access level of the network; consequently, we disregard a broad array of other regulatory concerns raised by the migration to NGN access from copper to fibre, notably including possible interactions with the interconnection regime (which has more to do with the NGN core than with the access network). 2.1 FTTC/VDSL Key themes In a FTTC/VDSL world the first mover usually is the incumbent. Such an approach is e.g. pursued in Belgium (Belgacom) 4, Germany (Deutsche Telekom), Italy (Telecom Italia) 5 and the Netherlands (KPN). 6 An (All-IP) FTTC/VDSL strategy is characterized by deploying fibre throughout the access network up to the street cabinet. Where this fibre infrastructure is deployed there is no parallel operation of copper and fibre network. A fibre based access infrastructure does not require anymore Main Distribution Frames (MDFs) as network nodes. Rather, the Metro Core Locations, characterising the new 4 See e.g. van Heesvelde (2007). 5 See e.g. Amendola and Pupillo (2008) or Pileri (2008). 6 See Marcus and Elixmann (2008) for the deployment plans of Deutsche Telekom and KPN, respectively.

7 Title 3 network nodes of an NGN, are located on a substantially higher concentration layer of the network. As Marcus and Elixmann (2008) have pointed out KPN plans to phase out about six out of seven MDFs in the Netherlands. An inherent feature of an FTTC/VDSL infrastructure is that the POI moves from the MDF to the street cabinet. This implies multiple challenges for would-be competitors of the incumbent, in particular for those who want to replicate a FTTC/VDSL infrastructure: As there are far more street cabinets than MDFs there are far more nodes to connect to; There are far fewer end-users per street-cabinet; Physical access to the street cabinet is likely to be problematic e.g. due to (alleged) lack of space, heat dissipation etc.; Little realistic possibility to provide separate street cabinets for competitors due to resistance of city governments and home owners (the premises of which are potential locations for a separate street cabinet); Deploying a FTTC/VDSL infrastructure the incumbent usually uses his own duct infrastructure (inherited from monopoly times) to the street cabinets; competitors will not have cost-effective communications access or ducts unless new regulation makes it possible. Thus, it is fair to state that a FTTC/VDSL deployment of the incumbent is likely to bring about several far reaching changes for existing wholesale services. The FTTC/VDSL deployment endangers the existing LLU: after MDFs are phased out by the incumbent this regime virtually makes only limited sense. In particular, the current LLU does not provide access to VDSL loops. As we will show in the next section, there are good reasons to believe that Sub-local Loop Unbundling (SLU) is only be viable under very crucial conditions. Thus, bitstream access comes into play as the alternative. In this context, bitstream access at the MDF might be viewed as a transitory solution, to protect the LLU investments of the alternative competitors at least for a limited time. It is, however, foreseeable that in the long run the bitstream access nodes will migrate (next) to the Broadband Remote Access Server (BRAS). Of course it could very well be that at least in some parts of the network there are also bitstream access nodes on lower aggregation levels of the network. From the perspective of competitors it is plausible to assume that a very important requirement for a new bitstream access regime is that bitstream access is enriched by QoS features and by giving competitors (active) choice to select a specific quality level. There will also be a need to adapt bitstream access because there will be a reduced number of aggregation points in an NGN compared to the case of the PSTN.

8 4 Titel Crucial factors affecting the business case for FTTC/VDSL In this section we argue that business cases for competitors in an FTTC/VDSL environment are likely to be problematic. To this end, we highlight the results of three studies focusing on the issue if and under which conditions there is a viable business case regarding VDSL/FTTC. 7 Analysys (2007a) Analysys has provided a study for the Dutch regulator OPTA focusing on the business case for sub-loop unbundling in the Netherlands. Key results of the Analysis study for OPTA are Based on the current interconnect and wholesale offers from KPN the use of SLU by an alternative provider is not economically viable as an alternative to continuing to use LLU, except under certain conditions A business case for SLU with similar economic viability to that of continuing use of LLU for 60% of the population would require both a market share greater than 55% of all broadband lines (including cable) in areas served the highest estimate for incremental revenue (increase in ARPU across all broadband users of EUR 10 per month by 2016) For an alternative provider with a 10% market share of all broadband lines in areas served, it may be economically viable to deploy SLU to around 1000 of the largest Street Cabinets in dense urban areas, provided that: the interconnect and wholesale tariffs from KPN for SLU line rental, colocation and links to the Street Cabinets are reduced significantly (tested 50%) an increase in ARPU of around EUR 9 per user per month can be achieved for the entire period (which is considered reasonable if business customers are targeted). 7 The issue of crucial factors for the viability of a FTTx business case is also addressed e.g. in Avisem (2007a, b), ERG (2007) and OECD (2008a,b).

9 Title 5 The strong local economies of scale effects that are evident in deployment at the Street Cabinet level mean that even if such significant cuts of 50% in KPN s interconnect and wholesale tariffs were to be realised, the use of SLU would still not be economically viable as an alternative to LLU to reach the mass market, unless we assume for example: a market share of 25%, together with our medium estimate for ARPU increase a market share of 16%, together with our highest estimate for ARPU increase. The current offer from KPN for WBA is also unlikely to be economically viable as an alternative to continuing to use LLU to reach the mass market regardless of the market share, even with the highest estimate for ARPU increase Should OPTA wish to influence the prices offered by KPN to make the SLU option more viable, the prices which affect the viability of an alternative operator s business plan the most are those for the line rental, SDF co-location and SDF MDF link. Furthermore, the assessment of the cost of building a competitive network to provide backhaul to Street Cabinets indicates that unless very substantial revenue streams can be generated from services other than SLU backhaul, then it will not be possible for a third party to provide such backhaul at prices at the same level as, or below, the current offer from KPN. Analysys (2007b) Analysys was commissioned by ComReg, the Irish regulatory authority, to investigate the business case for sub-loop unbundling in Dublin. The study was published on December 20 th, Some key findings are: SLU (Sub-Loop Unbundling) is not as commercially attractive as LLU, even when the competitor concentrates on large Street Cabinets (more than 300 lines). SLU is subject to very strong economies of scale (compared with LLU). The largest costs are the line rental charge, cost for the Street Cabinet and the backhaul link to the MDF. These are the points to be addressed first by regulatory means. Because one can estimate the other areas of the country to be even of poorer performance there is a large relevance for IP-Bitstream.

10 6 Titel JP Morgan (2006) The generic business case analysed by JP Morgan for FTTC/VDSL deployment is based on a comparative static approach. The analysis focuses on the incremental investments and costs, respectively, which are generated by FTTC/VDSL in comparison to ADSL. For both scenarios JP Morgan assumes a greenfield approach, i.e. no sunk costs for ADSL are taken account of. Compared to an MDF based unbundling approach an alternative operator incurs the following additional costs due to VDSL: Additional costs for unbundling at the street cabinet; Additional costs of the local loop between end user and MDF if investments are made to deploy fibre between MDF and street cabinet; Additional costs of the backhaul network due to the bigger capacity requirements by VDSL access lines. Depending on the assumed network topology, the (average) (sub-)loop length (which in practice depends on the decision whether street cabinets are accessed in a star or ring topology), the availability of acces to existing fibre capacity and the actual regulatory conditions there are additional costs of VDSL compared to ADSL. In the worst case an alternative operator with a market share of 25% incurs additional costs of 11 per access line per month. Otherwise stated, this operator had to increase his revenue per acces line by 11 per month to reach break-even. Overall, the JP Morgan study shows that for an alternative operator a FTTC/VDSL deployment is economically feasible only under very strong conditions. If one accepts the assumptions on the network structure and the respective prices for network components, the JP Morgan study shows that even with a 40% market share the profit per subscriber decreases by 2 per month in a VDSL world. To put it another way, even in the case of high market shares the VDSL investments are only reasonable if simultaneously the revenue per access line can be increased. And the JP Morgan study shows that even this result is only reached under optimistic assumptions. 2.2 FTTB/FTTH Key themes There are many approaches in the world where fibre is deployed to the building or even to the apartment in multi-dwelling units (MDUs). Prominent examples are

11 Title 7 in Asia Hongkong, Japan, and Korea, in North America the USA, in Europe France, Sweden, and Italy. FTTB/H players are both incumbents and competitors (even in the same country). Usually, two architectural options are applied: Ethernet/Gigabit-Passive Optical Network (virtually a point-to-multipoint infrastructure where a single fibre strand is spliced perhaps several times; however, there is no active electronic equipment in such a network ); Point-2-Point (i.e. dedicated fibre strands between the Optical Line Terminal and the Optical Network Unit). Key challenges, with severe implications for the costs of a FTTB/H deployment, are: the civil works (digging up the streets, getting the permissions and rights of way), the fact if aerial deployment is possible or if the infrastructure has to be buried, access to the building (getting the relevant permissions and rights of way). in-house wiring: For MDUs, running fibre to individual apartments implies rewiring the building. Few buildings would accept more than one set of fibre. This implies a new dimension to the last mile problem. access to the fibre infrastructure: For point-to-multipoint PON systems, it is unclear how to provide an LLU equivalent to competitors; once such an infrastructure is deployed it would presumably be expensive if not impossible. Thus, in an FTTB/H world it is not necessarily the incumbent that needs to provide access, rather, it is the first mover. Thus, regulation might become more symmetric and regionalized, i.e. sub-national markets might arise Crucial factors affecting the business case for FTTB/H JP Morgan (2006) Overall, the JP Morgan study substantiates that NGAN business models differ in particular with respect to the investment requirements. Indeed, the study shows that the investment outlays of a FTTB strategy can be up to 12 times higher than those required following the traditional strategy based on access at the MDF. Compared to a VDSL strategy the investments can be up to 2.5 times higher than in the case of a FTTB strategy. If, however, existing ducts can be used for the deployment of fibre the Formatted: Bullets and Numbering

12 8 Titel investment outlays are drastically reduced. In this case the investments for FTTB are only slightly higher than in the VDSL case. It seems worth to highlight these findings a bit further. The generic greenfield business case calculated by JP Morgan is based on the following baseline model assumptions, which from our perspective seem to be plausible: The model is calibrated on a 25% market share. The operator has no access to duct infrastructure. There is no ARPU or market share gain due to FTTB/H. For each FTTH customer acquired the operator saves 13 per month regarding ULL and interconnection. There are no changes regarding other OPEX components due to the FTTH roll-out. The weighted average cost of capital (WACC) is equal to 8%, the tax rate is equal to 35 % and the depreciation period is equal to 20 years. Under these baseline model assumptions the payback period for the investments is 16 years. The Net Present Value (NPV) of the investments is, however, still negative and equals -500 per subscriber. In this reference case only a market share of 40% generates a positive NPV. The investments can, however, be economically feasible with a market share of 25 % if the investments can be reduced to a level of 2,000 per subscriber, if additional ARPUs are possible, or if additional savings are possible. Regarding the latter, very important profitability effects arise with savings due to the deployment of fibre. Provided that 50% of the deployment costs to and within the building can be saved (by utilising existing ducts and in-house sharing) the investment costs can be reduced to a level of 1,500 per subscriber. In this case the payback period decreases from 16 to 10 years and the investments become profitable with a NPV of more than 200 per subscriber. A similar result is obtained if it is possible to increase the ARPU by 6 per customer per month. 2.3 Common problems to both This section reviews a range of issues common both to FTTC/VDSL deployments and to FTTB/FTTH deployments.

13 Title Market definition The identification of markets is fundamental to the European regulatory framework. Consistent with numerous communications from the European Commission, we have treated the various forms of fibre-based IP access as being part of a continuous market that also includes conventional broadband (such as ADSL and cable). It is possible over time that applications that are heavily dependent on the bandwidth that only fibre can offer will become more prevalent. At that point, it might be appropriate to treat fibre-based access as a distinct market segment from conventional broadband, inasmuch as conventional broadband will no longer be an adequate substitute for fibre-based access Change of network topology This section focuses on the changes brought about by NGANs regarding the number and location of points where competitors can get access to the network of the incumbent (henceforth also called Points of Interconnection, PoIs). The most important issue in this context is the phasing out of MDFs. 9 The changes in network architectures due to NGAN lead to stranded investments both with the incumbent and the alternative operator. Migrating to FTTC/VDSL or to FTTB/H the incumbent closes down the functionalities of the MDF. In the FTTC/VDSL case they actually are migrating to the street cabinet. In the case of the all-optical FTTH infrastructure no copper is involved anymore, and therefore no MDF functionality (multiplexing) is required at all. Likewise the existing copper cables between MDF and street cabinet, and MDF and building become superfluous while the ducts, manholes etc. can be used for fibre deployment. If an incumbent migrates its network to FTTC/VDSL, the alternative operators experience a potential devaluation with respect to their investments in collocation, in the equipment installed in the MDF as well as in parts of the backhaul infrastructure. The extent to which the latter becomes important hinges upon the degree to which competitors are successful to provide VDSL or DSL access or bitstream access from the current MDF locations. In any case, even though the incumbent might face stranded investments he also might be successful to exploit the new service potentials of VDSL. This is usually not 8 Kirsch and von Hirschhausen (2008) consider this case. They also find that NGN access is unlikely to be replicated, i.e. infrastructure competition is unlikely. 9 The issue of a potential dismantling of MDFs has been addressed in Reichl and Ruhle (2008).

14 10 Titel the case for competitors Moreover, as the KPN approach in the Netherlands shows the incumbent s business case is to a substantial degree improved by the fact that the incumbent can dispose of the MDF locations having been phase out (e.g. by selling them). Stranded investments are most likely to be important in the migration period from PSTN to NGAN, and they need to be reflected in the regulatory shaping of this period. A crucial point is transparency regarding the network deployment plans of the incumbent. The less transparent the information on this is the higher the risk of stranded investments with the competitors Changes in regulated costs Numerous regulatory decisions rest on assumptions about the cost of the network. The migration to fibre-based NGN access will, at a minimum, require regulators to upgrade their cost models. This migration potentially raises more complex issues than the implementation of ADSL, because the investments in fibre are so much larger, and also because they are often associated with fundamental changes in the core network as well. 10 The overall migration to fibre-based IP requires massive investment at the outset, but presumably results in lower ongoing operating costs when the transition is complete. At the same time, the network as a whole may incur higher operating costs during a period where the circuit-switched PSTN and the packet-switched NGN must operate in parallel. Ongoing operating costs should eventually decline, but initially they are likely to increase. What is an appropriate regulated rate of return under those circumstances? Ofcom explained analogous issues in developing a Weighted Average Cost of Capital (WACC) for British Telecom. 11 The WACC provides a measure of what might constitute a reasonable return on BT s investment of capital. Ofcom found it advantageous to disaggregate the WACC, computing different WACCs for different parts of the business in order to accommodate different levels of risk (beta). In the end, they did not specifically address the risk associated with the migration to NGN access, but they left open the door to possible future use of more innovative approaches, including the application of Real Options. 10 A number of papers and reports have evaluated these costs. See Amendola and Pupillo (2008) and J.P.Morgan (2006). 11 Ofcom s approach to risk in the assessment of the cost of capital: Final statement, August 18, 2005

15 Title 11 3 Regulatory responses Different regulatory approaches are visible in different countries. 3.1 FTTC/VDSL Netherlands Details about KPN s future All-IP strategy can be found in Marcus and Elixmann (2008) as well as in Kirsch and von Hirschhausen (2008). In a nutshell, KPN is about to deploy a nationwide FTTB/VDSL infrastructure. 12 Marcus and Elixmann (2008) also provide an overview of the development of the position of the regulator in the Netherlands vis-à-vis KPN s deployment plan. In brief: OPTA, the regulator for the Netherlands, initially was open to KPN s ALL-IP deployment plan and they planned to find pertinent regulatory rules to shape the migration period. However, the Analysys study (see section 2.1.2) called into question the economic viability of sub-loop unbundling from the street cabinet. OPTA then called on KPN to produce a solution that would be acceptable to all of the parties concerned. KPN and competitors have negotiated Memoranda of Understanding in particular focusing on principles and conditions for phasing out MDF locations in 2007 and early KPN has presented on February 6, 2008 a (revised) MDF migration agreement. After a roundtable discussion on February 7, 2008 with OPTA and all market participants involved it has been concluded that the current MDF related services will be maintained until mid of 2010, that there will be an improved offering regarding large quality wholesale broadband access, and that a substantial share of MDF locations will be usable for unbundled access. Moreover, OPTA has asked market participants to also discuss alternatives like Ethernet access on fibre and interconnecting leased lines (interconnecterende huurlijnen). 12 Moreover, KPN is also involved in FTTH activities: Indeed, it has formed a joint venture with rival telco Reggefiber under which the pair will amalgamate their FTTH activities in a new partnership named Reggefiber FttH. The two companies had earlier agreed to cooperate on a FTTH project in Almere, designed to roll out fibre-optic links to 70,000 households. The Almere project will be rolled up into the new partnership. See TeleGeography May 23, 2008.

16 12 Titel Germany Background information on Deutsche Telekom s (DTAG) network plans and the regulatory positions vis-à-vis NGAN deployment are presented in Marcus and Elixmann (2008). The Commission has launched an infringement procedure against Germany in view of a specific clause in the new telecommunications law opening up possibilities for regulatory holidays for DTAG s FTTC/VDSL deployment. The outcome of this infringement procedure is still pending. As a result of the ongoing market definition and market analysis process BNetzA, the German regulator, in June 2007 has imposed an obligation on DTAG to open up the ducts between MDF and street cabinets for competitors. In case access to ducts is not possible (e.g. due to technical reasons or limited capacity), DTAG has to offer competitors access to dark fiber. Competitors in Germany view this as a step in the right direction, however, they claim that access to ducts (dark fiber) is only part of the elements that make up a viable business case. Equally important, so they argue, is unbundled access to fibre and copper within the street cabinet. Moreover they are demanding the (bundled) access to the hybrid local loop, consisting of copper and fiber, at the MDF. Moreover, it is fair to state that there are still far reaching information asymmetries in the market regarding duct availability and space between DTAG and the competitors. Just recently (May 13, 2008), BNetzA has made a decision regarding the prices of IPbit stream access DTAG is obliged to offer to its competitors. IP bit stream access in Gremany means that DTAG leaves a DSL access line to a competitor and transports the data stream originated by/terminated to this access line via its concentrator network to the respective broadband point of presence where the traffic stream is exchanged. By virtue of this price decision IP-bit stream access is available for the first time in Germany. In principle, IP-bit stream access is giving competitors that have not deployed own infrastructure up to the MDF a maximum of flexibility for providing services with own features. 3.2 FTTB/FTTH France ARCEP has finalized two consultations in September 2007 focusing on Access to ducts and

17 Title 13 Sharing of in-house infrastructure in an FTTB/H environment. Regarding access to ducts ARCEP is arguing that competitors shall have access to FT s infrastructures in order to establish fair competition in the high-speed broadband market. Hence, the objective of regulation should be to set appropriate incentives for investments in local loop infrastructure. A possible implication could be less asymmetric regulation. Moreover, there will be no necessity to think about functional separation. Regarding the sharing of in-house infrastructure ARCEP states that it cannot be efficient that each fibre based operator actually deploys own fibre strands and optical connectors in each building and each apartment, respectively. Thus, the interests of home owners are involved. Moreover, tenants might feel disturbed by (too much) deployment within their building and apartment, respectively. ARCEP favours the principle that end users have the chance to switch their broadband operator without the need to move from one location to another. Thus, they see the need for infrastructure sharing. Recently (June 2007), Free/Iliad had sued FT before the antitrust authority, due to anticompetitive behaviour, i.e. refusing to give its competitors access to its civil engineering infrastructures. In this regard, the Conseil de la Concurrence has come to the following decision on 12 February, 2008 : FT's holding of civil engineering infrastructures is likely to give the company a particular responsibility, notably including not to distort the play of competition on the very high speed budding markets in keeping for itself the use of the infrastructures and refusing its competitors to use them, or giving them a discriminatory access. FT started to deploy optical fibre in its civil-engineering infrastructures with the copper local loop, while postponing its response to competitors' request for having access to the same infrastructures. Conseil decided to carry on with the investigation on the merits of the case. Nevertheless, the Conseil decided not to order interim measures, considering that there was no serious or immediate infringement to the sector. The Conseil noted that since October 2007 France Telecom had committed itself before ARCEP to elaborate an access offer to its wires, which should normally lead to an operational offer in Summer The Conseil notes that the first tests seem to globally satisfy alternative operators.

18 14 Titel Japan Japan is the country with by far the highest FTTB/H penetration in the world; there are more than 11 mill. subscribers at the end of 2007, see next figure. Figure 3-1: Broadband penetration in Japan according to different technologies subscribers (1 million) Number of subscribers FTTH/FTTB DSL CATV Total: M /3 02/3 03/3 04/3 05/3 06/3 07/3 02/03 03/03 04/03 FTTH/ FTTB DSL CATV /12 (millions) 05/03 06/03 07/03 07/ Source: Katagiri (2008) The figure shows on the one hand that the most popular broadband service in Japan still is ADSL. On the other hand there is a remarkable shift to FTTH/FTTB over the past 3 years. 13 The Next Generation Broadband Strategy 2010 formulated in August 2006 by the Japanese Government aims at eliminating the non-broadband-areas 14 : By Fiscal Year 13 The number of NTT customers taking broadband services via its ADSL platform dropped from 5.3 million (as of March 31, 2007) to 4.6 million (as of March 31, 2008). The number of conventional main lines in service fell to 39.2 million from 43.3 million in this period; see TeleGeography NTT fibre users up, ADSL subscriptions down, May 15, See Taniwaki (2008).

19 Title (1) broadband service should be available to 100 % of the population; (2) super high speed broadband (FTTH) should be available to 90 % of the population. In Japan there is infrastructure competition at least in the largest metropolitan areas, i.e. one can observe parallel deployment of fibre strands on the very last mile. Important drivers of this kind of infrastructure competition are the density of the population, the fact that aerial deployment of fibre on the very last mile is permitted in Japan (in contrast to much of Europe), and regulation. Yet, it is also true that NTT s market position with respect to fiber deployment still is very strong: as of end of March 2007, the combined market share of NTT East and West (by number of lines) regarding FTTB/H is 78.9 % (the FTTB/H share by revenue is equal to 69.0 %) according to Taniwaki (2008). 15 For many years, the Japanese broadband market has been built around an open access regime. Indeed, in autumn 2000 collocation and unbundling rules for access networks of NTT East and West have been established. By virtue of this decision, competitive providers were able to use essential elements of NTT's network, particularly they were entitled to get low cost access to copper lines to the home and to metropolitan fibre connections running between NTT exchanges and to other locations. It is fair to state that these elements have been the basic building blocks of competitive ADSL providers' networks in Japan to date, as can be seen from the next figure. 15 NTT reports that the number of people signed up to its FLET'S Hikari fibre-optic service reached 8.78 million as of 31 March 2008, up from 3.2 million a year earlier; see TeleGeography NTT fibre users up, ADSL subscriptions down, May 15, 2008.

20 16 Titel Figure 3-2: Unbundling decision and development of the DSL service market in Japan (March 99 March 07, in million) Autumn 2000 Establishment of collocation and unbundling rules for access networks of NTT E/W DSL Cable Modem 0 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Although unbundled access continues to be an obligation for fibre going forward, these obligations have been less effective than the previous copper-oriented regime; thus, the role of unbundling going forward in Japan is unclear. Japan is on the verge of changing its policy due the anticipated transition to full IPbased networks. In October 2006, the Japanese government launched a New Competition Promotion Programme This programme is related to a review of a framework of competition rules to address the transition to IP-based networks and aims at defining a road map to policy reform to be implemented by the early 2010s. In view of these developments it is fair to state that the Japanese policy is moving from a world of ex-ante regulation to a world of ex-post regulation. This means in particular the abolition of Type I and Type II business categories, a drastic deregulation of price and tariff regulations and the introduction of a competition review mechanism. The New Competition Promotion Program 2010 will be periodically reviewed on an annual basis. In the year 2010, the Japanese government aims at making a comprehensive review regarding the status of NTT as well as passing a comprehensive legal framework including telecommunications and broadcasting. Currently, the fibre access of NTT East and West is unbundled, and its charge is calculated on the basis of the estimated actual cost of fibre deployment from 2001 to

21 Title (for seven years). On the basis of an exchange rate of 160 Yen per Euro, Katagiri (2008) reports a current price of 31.7 Euros per fibre. 16 Katagiri points out that this price regime might be unfavourable for competitors. The reason is that FTTB/H is usually provided via a Passive Optical Network architecture and in NTT s network one fibre is splitting to eight users. Given that the NTT s market share is more than 70% (see above), the cost per user would be quite different between NTT and competitors. Regulation or rather deregulation of fibre-based access in the United States is relevant both to VDSL and to FTTB/FTTH deployments. 3.3 Common to both Regulation or rather deregulation of fibre-based access in the United States is relevant both to VDSL and to FTTB/FTTH deployments USA The United States under the George W. Bush administration has been consistently pursuing a policy of deregulation of last mile access in the hopes of stimulating deployment of broadband, and especially of fibre-based solutions. This reflects a dramatic change from prior U.S. communications policy. 17 The most significant change in regard to fibre-based access came in 2003 with the Federal Communication Commission s Triennial Review. 18 This decision exempted fibre from loop unbundling obligations. In a series of related decisions, the FCC abolished nondiscrimination obligations for telephony incumbents in regard to IP-based services; eliminated obligations to implement shared access ( line sharing ); and exempted broadband services delivered over cable television from procompetitive regulatory remedies. It is important to remember that the market in the United States differs from that of most other countries in that cable operators provide a larger fraction of broadband access than do telephone companies. This established a significantly different market dynamic than that of other countries. 16 In October 2007, the Japanese government started to examine the interconnection charge for the fibre access from fiscal year They decided to keep the current method, but to re-calculate the fibre cost based on high-demand estimation. As a result, fibre charges will go down to 28.8 Euros/ fibre (of NTT East). 17 See Marcus (2005). 18 FCC (2003).

22 18 Titel 4 Comparative Assessment 4.1 A trade-off between investment and competition? What are the likely implications of regulation for competition, for deployment and adoption of fibre-based access, and for consumer welfare? How will regulation impact on the incentives and viability of business models in the market? Does regulation negatively impact incentives to invest, for incumbents and for competitors? How will it impact on the intensity of infrastructure based and service based competition? These questions necessarily involve complex trade-offs, the resolution to which are not clear. What is clear is that regulators are interested in both competition and innovation, and that there is sometimes a tension among these objectives. For Europeans, this tension is manifest in Article 8 of the Framework Directive, which simultaneously calls on regulators to ensure that users derive maximum benefit in terms of choice, price, and quality and that there is no distortion or restriction of competition in the electronic communications sector, but at the same time to [encourage] efficient investment in infrastructure, and [promote] innovation What is the poor regulator to do if these goals are somewhat at odds with one another? The arguments in favour of procompetitive regulation are well established in network industries. There are key assets that would not be cost-effective for competitors to replicate. Absent regulatory intervention, the industry would tend toward monopoly, resulting in a loss of consumer choice, in a transfer of surplus from consumers to suppliers, and typically in deadweight social loss inefficiencies. If sufficient infrastructure-based competition were present, it would be appropriate to withdraw regulation and to leave matters to the unregulated market. Today, these conditions do not appear to be satisfied anywhere outside of North America, if there. Thus, our sense is that procompetitive interventions on last mile access will need to be maintained for the foreseeable future, even if that were to imply some cost in the speed of fibre-based deployment. It is by no means certain that maintenance of regulatory remedies on last mile access has a dramatic adverse effect on deployment. In the case of broadband, Europe has achieved near-parity in penetration with the United States, despite intensive regulation, a dearth of cable television infrastructure, and a simply enormous head start for the United States. A number of studies cast doubt on the theory, often put forward by incumbents, that willingness to deploy is primarily conditioned on lack of regulation See Friederiszick et al. (2007) and Wernick (2007).

23 Title 19 Having argued that it is appropriate in all or nearly all cases to maintain regulation on the last mile, we now come to the question of how it should be implemented. The two primary alternatives would appear to be (1) classical separation, as is practiced throughout the European Union, or (2) functional separation, as has been implemented in the UK by Ofcom and British Telecom. The functional separation model is attractive, but it is still a bit soon to assess its true effectiveness. Since BT has not implemented fibre-based solutions yet, there is no working example to point to (and indeed, one must ask whether functional separation has somehow discouraged the deploymemt of fibre in the UK). These question are too large to deal with in this paper, but they will unquestionably occupy the attention of experts in the years to come How effective have current approaches been in promoting investment and competition? This sections aims at illuminating how effective current regulatory approaches have been in promoting investment and competition. To this end, we focus on Germany, France, Japan, Netherlands, and the US. We are both addressing the deployment and adoption of fibre and the competitive structure in these countries. Germany As of May 2008 DTAG has deployed FTTC/VDSL infrastructure in 27 cities, and ADSL 2+ infrastructure in about 750 cities, thus, reaching around 17 mill. households. Until the end of 2008, a further 13 cities will be connected to the VDSL network and ADSL 2+ will be available in about 1,000 cities. Thus, overall 20 mill. households (about half of the overall number of households in Germany) will have broadband DSL access. Up until now there is no public information about phasing out of MDFs. Conventional wisdom tells that FTTC/VDSL is only a step towards FTTB/H to be deployed in the long run. Although its overall market share still is considerable 21 there are at least two main driving forces for DTAG s FTTB/H deployment activities. (1) The speed of market losses regarding telephony access lines is considerable: In the past 2-3 years DTAG has lost about 2 mill. access lines p.a. to competitors. (2) There is fierce price competition in Germany which more and more has changed to an overall flat rate regime for triple play services ((VoIP) telephony, broadband access, Internet access). Thus DTAG has to 20 See also Kirsch and von Hirschhausen (2008). 21 DTAG has a share of 48 % with respect to the overall (nominal) telecommunications service market volume in Germany. With respect to telephony access lines DTAG has a market share of more than 80 % (81.4 %). DTAG has a share of slightly below 50 % (48.6 %) in the overall number of DSL access lines; see BNetzA, Jahresbericht 2007, Bonn..

24 20 Titel react in particular due to capital market expectations to sell a convincing new growth story. In this respect, DTAG, however, has not been that successful: its share price has gone down in the past years and today is below the IPO first quotation price in Regional competitors like e.g. in Cologne, Munich, and Hamburg have launched/are planning to launch FTTB/H infrastructure. These ventures, however, are concentrated on densely populated areas. An important factor for their business case are savings from ULL wholesale services currently purchased from DTAG. Thus, a lower ULL price would have made these investments of the competitors more unlikely. Cable modem access still plays a minor role in the German broadband market, i.e. inter-modal competition is still relatively low. However, the cable operators represent a potential threat to the telcos because they are also upgrading their networks in order to offer HFC (hybrid fiber coax based) triple play services. This might entail a speeding up of infrastructure investments by telcos in Germany. As we have mentioned in section the economic conditions for the IP bitstream access service offering of DTAG are now clear. However, it is far too early to assess how this service is going to reshape the German competitive landscape. France In France there are ambitious FTTB/H deployment plans by incumbent and competitors alike (although geographically mainly focusing on big cities with very dense population and a high percentage of MDUs). Part of the drivers for this development are particular conditions in Paris and some other French cities (existence of man-high sewage channels leading even into the buildings) favouring fibre deployment. The regulator in France is very active and successful in convincing city authorities to charge competition friendly prices for providing access to their infrastructure (e.g. sewage channels). The policy in France is also monitoring the discussion process with housing companies in order to establish a win-win situation as regards access to inhouse infrastructure by fibre deployers. Japan A far reaching unbundling policy (copper and later on fibre) has been a decisive factor for the rapid adoption and diffusion of ADSL. ADSL competition was fierce in Japan. This, in turn, has led to fiber based infrastructure competition, although the two incumbent companies (NTT East, West) still account for a FTTB/H market share of more than two thirds. Moreover, aerial deployment on the final part of the loop brings costs down. Netherlands

25 Title 21 Unlike in other European countries, there is a far reaching information regarding the deployment plans of the incumbent in the Netherlands. The regulator is in principle open to the NGAN deployment. The originally very ambitious deployment plan by the incumbent (phasing out of six out of seven MDFs by 2010) is, however, obviously postponed by at least 2-3 years due to regulatory decisions. Thus, there will be no important effects on competitors up until today and for the short and mid-term. US The withdrawal of pro-competitive regulation in the United States has had more or less predictable effects. On the one hand, there is a reasonably good roll-out of fibre-based access to the home, using a mix of VDSL and of FTTH/FTTB technologies. 22 On the other, there has been the predictable negative effect on intra-modal competition (i.e. competition among telephone companies for a given customers). For traditional copper-based broadband, intra-modal competition is negligible, having declined since the Triennial Review to some 3.1% of ADSL lines. Intra-modal competition over cable was never mandated, and is negligible. 23 For fibre deployment, 91% has been undertaken by incumbents large and small, and only 9% by competitors (CLECs). 24 Advocates for the U.S. approach will argue that consumers have many access options. They may, for instance, point to FCC statistics that show robust deployments of wireless broadband. Our sense is that these arguments are not well founded, for a number of reasons. The FCC counts as broadband many services that nobody else would count as broadband, including services that are less than 200 Kbps in the slower direction, and mobile services where it is not clear that the subscriber is using the broadband and possibly does not view it as a substitute for a wired connection. For the great majority of Americans, the realistic choices are broadband from a cable operator or broadband (over copper or fibre) from a telephone company. In assessing the overall effect of the FCC s deregulatory approach, it is difficult to say what the net effects have been. It seems clear that there has been far less broadband deployed and adopted than one might have expected given the long and early lead that the United States enjoyed, and also the widespread availability of cable television. At the same time, the robust roll-out of fibre is clearly a strength. How one assesses the relative balance of the two necessarily reflects complex judgment calls: What is the true value to the consumer of the greater bandwidth available with fibre? What is the impact on the consumer of the lack of intra-modal competition? million lines as of 30 June 2007 according to FCC statistics, and growing rapidly. 23 An obligation was imposed on AOL/Time Warner as a merger condition, but it proved to be ineffective and the FCC declined to take steps to enforce it. 24 The latest FCC data are as of 30 June This time lag (nearly a year) is normal for FCC data.