Convergence and Public Policy A Regulatory Perspective

Transcription

1 Convergence and Public Policy A Regulatory Perspective Asia- Pacific Economic Cooperation Telecommunication Working Group Regulators Roundtable Canberra, Australia, March 13, 2001 Presentation Sponsored by the Law Firm of Gilbert and Tobin but Not Necessarily Articulating the Views of Anyone Other Than The Presenter and Perhaps Not Even Him. Presentation of Ashley C. Brown Executive Director, Harvard Electricity Policy Group, John F. Kennedy School of Government, Harvard University Of Counsel, LeBoeuf, Lamb, Greene and MacRae 1

2 Convergence Good News = Convergence Bad News = Convergence Old News = Convergence New News = Convergence 2

3 Background/Context for Approaching Convergence Issues 3

4 Criteria for Regulating an Industry 1. Monopoly Characteristics 2. Imbued with a Public Interest/ Constitutes and Essential Activity 4

5 Role of Regulation 1. Control of Monopoly Power 1. Regulatory Oversight and Supervision 2. Anti-Trust Activity 3. Replicate Results in a Competitive Market (e.g. pricing, efficiency) 2. Protect Public Interest 3. Assure Compliance with Social Obligations 4. Promote and Sustain Competition Where Viable 5

6 Criteria for Withdrawal/ Relaxation of Regulation 1. Existence of Viable Competition 1. Subject to Residual Regulatory Oversight on Anti-Trust Related Matters 2. Achievement of Social Obligations Assured 3. Business Activity No Longer Imbued with Public Interest 6

7 Note on What Economic Theologians Often Forget Competition and Regulation are Means Not Ends Desired Ends are: 1. Efficiency 2. Innovation 3. Social Obligations Fulfilled 4. Public Interest Maintained 7

8 Convergence Old News Bundled Products and Services New News Bundled Products and Services 8

9 Convergence continued The Good News 1. Promotes and Fosters Viable Competition 1. Viable New Players 2. Hastens New Entries 2. Eases Barriers to Entry 1. Potential for Reducing Costs for Niche and Other Players 2. Greater Opportunity for Forging Alliances 3. Incentive for Carriers to Offer New Products Etc. 9

10 Convergence continued The Good News 3. Facilitates and Encourages Innovation in Technology, Products and Services Eases Barriers to Bringing New Products, etc. to Market Allows for Greater Focus on Innovation 4. Captures Economies of Scope and Scale 1. Allows for Cross Industry/Cross Activity Cost Sharing. 2. Reduces Duplication of Facilities and Services 10

11 Convergence continued 5. Enhances Efficiency The Good News Reduces Costs for Players. 6. Enriches Content 1. Reduces Costs of Bringing New Material to Market. 2. Provides Incentives to Facility Owners to Increase Use By Introduction of New Programs and Services. 11

12 Convergence Continued The Bad News 1. Impedes Competition 1. Small Players Must Rely on Large Players for Entry/Participation 2. Many New Entrants Conflicted by their Control of Bottleneck/Critical Facilities 3. Creates False Comfort on Market Power Concerns 4. Blurs Meaningful Market Definition 2. Constitutes a Barrier to Entry 1. Market Participants Can Impede Access of Competitors to Market 12

13 Convergence Continued 3. Impedes Innovation The Bad News 1. Can Lead to Rigidity in Formats and Platforms 2. May Reduce Number of Players Who are In Position to Innovate 4. Preclude Capturing of Scale/Scope Economies 1. Potentially Arbitrary or Biased Distribution of Economic Benefits of Scale/Scope 13

14 Convergence Continued The Bad News 5. Discriminates in Distribution of Efficiency Gains 1. Potential for Ramsey Pricing 2. Incentive to Overlook Interests of Basic Services (POTS) 3. Business Driven, Not Cost Driven Allocation of Costs and Benefits 4. Enormous Potential for Cross Subsidization 14

15 Convergence Continued The Bad News 6. Impoverishes Content 1. Potential for Corporate Censorship 2. Potential for Rigidity in Programming 15

16 Dilemma: Can the Benefits Be Captured Without the Downside Risks? Short Answer: Perhaps, But Only With Great Care 16

17 Poles of Opinion on Convergence 1. Full Benefits Can Only Be Captured Through Deregulation 1. Risks are Slight Because Convergence is So Inherently Competitive 2. Risks of Regulatory Oversight Outweigh the Risks of Deregulation OR 17

18 Poles of Opinion on Convergence 2. Regulation is Only Safeguard Against Downside Risks of Convergence 1. Market Power Still Pervasive 2. Risks Fall Disproportionately on Small Players 3. Social Obligations and Public Interest May Well Go Unfulfilled 18

19 Neither Side is Completely Wrong, So What Do We Do? 19

20 Key Public Policy Questions to Be Addressed Before Deregulating 1. Market Power 2. Content Issues 20

21 Potential Market Power Problems Inherent in Convergence Barriers to Deregulation 1. Identification of When Market Competitive (e.g. viable, sustainable, potential, theoretical, contestability, HHI number 2. Definition/Identification of Market (s) 3. Distinguishing Monopoly (Essential Bottleneck) and Competitive Aspects of Industry 4. Distinguishing Natural Monopolies from Monopolies by Fiat or Behavior 21

22 Potential Market Power Problems Inherent in Convergence Barriers to Deregulation 5. Cross Subsidization/Ramsay Pricing 6. Tying Arrangements 7. Predatory Pricing 8. Discriminatory Use of Bottleneck Facilities 9. Discriminatory Access to Information 10. Control of Customer Interface 11. Daisy Chaining 22

23 Methodological Approaches to Market Power Issues 1. Go For It! (Just Deregulate) 2. Ban It! (Just Regulate) 3. Middle Ground Approaches: Where Ideology Leaves Off and Traditional Wisdom Does Not Apply Where Regulation and Competition May Have to Coexist I. Structural Fixes/ Prophylactics for Real or Potential Abuses 1. Bans on Cross Ownership of/participation in Otherwise Potentially Converged Activities (e.g. Bottleneck and Contestable Market Participation) 23

24 Methodological Approaches to Market Power Issues 3. Middle Ground Approaches: Where Ideology Leaves Off and Traditional Wisdom I. Structural Fixes/ Prophylactics for Real or Potential Abuses 2. Mandating Loss of Market Share By Incumbent 3. Auction off Residual Service Responsibilities 4. Proactive Creation of Competitive Market 5. Regulatory Approval of and Strict Standards Applied to Mergers and Acquisitions 24

25 Methodological Approaches to Market Power Issues Continued 3. Middle Ground Approaches Continued II. Behavioral Fixes/ Prophylactics for Real or Potential Abuses 6. Strict Accounting Separations and Separate Auditing Function 7. Limiting Role of Holding Company 8. Separate Corporate Entities/Profit Centers for Each Business Activity 9. Competitors Get Same Access to Information that Affiliates Receive 25

26 Methodological Approaches to Market Power Issues Continued 3. Middle Ground Approaches Continued II. Behavioral Fixes/ Prophylactics for Real or Potential Abuses 10. Conditioning Rights to Engage in Certain Business Activities (e.g. RBOC s and Long Distance Service) 11. Career Path and Training Expense Issues 12. Relies on Ex Post Anti-Trust Enforcement 26

27 Advantages of Structural Approach 1. Less Regulatory Intrusion 2. More Predictable 3. Ease of Enforcement 4. Markets and Competitiveness Pre-defined 27

28 Advantages of Behavioral 1. More Flexible 2. More Focused Approach 3. Less Theoretical (Often Based on Actual Experience) 28

29 Content Issues Two Traditional Inconsistent Concerns 1. Content Neutrality/Non-Liability of Carriage Provider in Direct Communication (e.g. Telephone, Fax, e- mail) 2. Appropriateness of Content for Mass Audience Consumption (e.g. television or radio) 29

30 Impact of Convergence on Content Issues 1. Potentially Confuses Traditional Concerns (Converged Players May Have to Respond in Contradictory Ways) 2. Common Ownership of Carriage and Content Creates Incentive for Corporate Censorship or Discriminatory Access 3. Confuses Liability Issues 30

31 Conclusions 1. Convergence is a Mixed Blessing 2. Capturing the Benefits While Avoiding the Problems is a Major Challenge 3. Restructuring and Deregulation Are Separate Variables One Does Not Inexorably Lead to the Other Indeed the Converse May Be True 4. Convergence is a Great for Lawyers, Economists and their Pension Plans 31