Competition and regulation in a converged broadband world

Transcription

1 Session 3 Regional Seminar on Costs and Tariffs for Asia and Pacific and meeting of the SG3RG-AO Competition and regulation in a converged broadband world Mr. David Bernal Tokyo, Japan, 8-9 April

2 Contents 1. Introduction 2. Broadband Market Trends 3. Economics of Digital Convergence 4. Relevant Market Definition 5. Wholesale and Retail Markets. 6. SMP Designation 7. Case: OpenNet 8. Conclusions 2

3 Introduction. A new challenging scenario Telecom network operators are facing several financial problems with regards to its traditional business. They need to provide new broadband services in order to increase theirs revenues. Convergence due to different technologies (Fixed and mobile networks) and new price strategies (bundling services, terminal subsidization,.) has provoke not only a more complex scenario to analyze the competition among different operators, but also a more difficult entrance of new players. 3

4 Introduction. Main guidelines regarding market evolution Building broadband networks especiallyp y wireline requires large fixed and sunk investments. The industry will probably always have a relatively small number of facilities-based competitors, and is unlikely to create several new facilities-based entrants competing across broad geographic areas. Bringing down the costs of entry and expansion in wireless broadband by facilitating access to spectrum, sites and high-capacity backhaul may spur additional facilities-based competition. In many developed markets, operators now feel the inevitable squeeze of market saturation as household penetration rates for broadband exceed more than 70%. In these markets, operators focus on retention strategies (bundling, etc ) that incorporate benefits beyond mere price reductions. Competition is crucial for promoting consumer welfare and spurring innovation and investment in broadband access networks. It provides consumers the benefits of choice, better service and lower prices. 4

5 Introduction. Convergent Model Different types of networks being able to provide the same range of services: convergence 5

6 Introduction. Penetration of fixed broadband services (2010) Source: ITU World Telecommunications 6

7 Introduction. Competition and broadband market Robust broadband competition reduces excessive profits and forces companies to cut marginal and fixed costs through innovation and the drive to gain greater efficiencies. Excessive competition can also reduce profits to a level that makes it difficult for firms in an industry to make adequate investments in efficiency and new products or services. Regular market helps to determine where regulation is required and to ensure that it is focused on the competition issues that raise concerns. Barriers to entry are often high (large investments over a long time) because of existing legislative and other regulatory requirements which may limit the number of available licenses or the provision of certain services. The excessive regulation of broadband markets could be a risky proposition and potentially damaging to the long-term development of those markets: In most countries broadband services/networks generally are not yet mature and demand for some applications remains uncertain and fragile legacy regulatory can distort price signals and investment incentives 7

8 Contents 1. Introduction 2. Broadband Market Trends 3. Economics of Digital Convergence 4. Relevant Market Definition 5. Wholesale and Retail Markets. 6. SMP Designation 7. Case: OpenNet 8. Conclusions 8

9 Broadband Market Trends. Traffic from mobile connections, worldwide, COMMENTS Traffic is expected to grow at a 48% CAGR from 2010 to 2015 from 225PB to 1603PB per month In developed markets, traffic (voice +data) is expected to be seven times higher by Data-only traffic is predicted to be 11 times higher. In emerging markets, traffic is expected to be seven times higher in The volume of data traffic alone is forecasted to be 17 times higher. Average wireless network traffic per connection, worldwide, COMMENTS Traffic growth in developed markets is due to the rising average wireless traffic per connection In developed markets traffic growth is driven by the proliferation of smart devices Traffic per connection is expected to increase from 81MB to 523MB per month in developed countries and from 31MB per month ton124mb per month in emerging markets Source: analysis mason 9

10 Broadband Market Trends. Revenue per gigabyte of mobile broadband traffic, worldwide, COMMENTS The competition and market forces has provoked to decline strongly revenue per megabyte. Assuming operators continue using the flat-rate pricing model, we predict revenue of less than USD5 per GB by 2015 in both developed and emerging markets To generate sustainable cash-flows, operators will have to reduce network costs by using several techniques and technology choice optimization and convergence will significantly reduce capex. Different strategies followed by the operators to face this : build new networks, Upgrade existing networks, buy more spectrum (expensive and scarce), stop competitors buying more spectrum, invest in indoor solutions (femtocells, etc.), introduced tiered pricing to stop network congestion. Source: analysis mason 10

11 Broadband Market Trends. Mobile connections and traffic per connection, Developed Asia Pacific Comments ) Connections (million Traffic (MB per month h) The number of GSM, UMTS and LTE connections will increase from 224 million to almost 276 million between 2012 and Mobile penetration rate about 4% growth per year Connections Traffic per connection Cumulative base station deployments by technology, Developed Asia Pacific Number of base st tations deployed (tho ousand) GSM UMTS LTE Source: Analysys Mason Comments Growth in data traffic will be a driver demand for UMTS capacity. Traffic growth will exhaust UMTS capacity by 2015, and operators will be forced to deploy new base stations (about UMTS base stations between 2012 and 2017). Operators in the region will deploy about LTE base stations between 2012 and 2017

12 Contents 1. Introduction 2. Broadband Market trends 3. Economics of Digital Convergence 4. Relevant Market Definition 5. Wholesale and retail markets. 6. SMP Designation 7. Case: OpenNet 8. Conclusions 1 2

13 Economics of Digital convergence. Some market issues about convergence The path towards convergence was driven mainly by the digitalisation of content, the movement towards IP network and, the diffusion of high-speed broadband access: Network convergence driven by the shift towards IP-based broadband networks. It includes fixed-mobile convergence and three-screen convergence (mobile, TV and computer). Service convergence stemming from network convergence and innovative handsets, which allows the access to web-based applications, and the provision of traditional and new value-added services from a multiplicity of devices. Industry/market convergence brings together in the same field industries such as information technology, telecommunication, and media, formerly operating in separate markets. Legislative, institutional and regulatory convergence or at least co-operation taking place between broadcasting and telecommunication regulation. Policy makers are considering converged regulation to address content or services independently from the networks over which they are provided (technology neutral regulation). Device convergence most devices include today a microprocessor, a screen, storage, input device and some kind of network connection increasingly they provide multiple communication functions and applications. Convergence has driven by: - Entry of new players into the market. - Increasing competition among players operating in different markets. - The necessity for traditional operators to co-operate with companies previously in other fields. 13

14 Economics of Digital convergence. Sunk costs: Markets Characteristics In telecom networks, CapEx have traditionally been associated with large sunk costs, due to the tremendous initial investment necessary to deploy sufficient infrastructure. These investments are typically sunk because they cannot be recovered should the firm leave the market and are dedicated to the particular use. It can be meant as a natural monopoly. Ex: spectrum auctions Fixed Costs and Economies of Scale and Scope: The OpEx of network operators are mainly constituted t by fixed costs: (Maintenance,Costs, Continuous Infrastructure Costs, Marketing Costs, Billing and Accounting Costs,..) The existence of high fixed costs (while low variable costs) implies strong economies of scale.a larger network is likelyl to have lower unit costs thanasmaller one, which h makes more difficult the entrance of new competitors Barriers to entry: The presence of large scale and scope economies along with significant sunk costs of market entry promotes the existence of high entry barriers to (facilities-based) competition. Some assets constitute essential facilities. Ex: ducts,. 14

15 Economics of Digital convergence. Flat-rate pricing: Markets Characteristics Non-linear pricing refers to those pricing schemes where the unit price depends on the total quantity demanded (fixed and variable). Ongoing broadband services and resulting cost efficiencies have lead to another form of non-linear pricing, flat-rate pricing (variable is equal to zero). Switching costs: Consumer switching costs arise because consumers make investments specific to the service or product they have bought. Moreover, switching costs can also be created by firms, especially by means of contracts. Ex: terminals subsidization Product differentiation: Communications services are not an homogeneous good and may be either horizontally or vertically differentiated, or both. Time until first provision of network access Failures per customer access line per year Failure repair response time Frequency of failed connections Time for connection Switched services response time Information services response time and share of functioning public phones 15

16 Economics of Digital convergence. Bundling and tying: Markets Characteristics After services and infrastructure have been liberalized, there has been a general tendency to package services into a bundle, like Triple Play (Voice, data and video) Bundling might serve as a price discrimination or product differentiation device, mitigate competition, deter entry or even leverage market power from one market to another Pure Bundling: refers to a pricing strategy where two services, A and B, are only sold together (at some fixed proportion). Neither A nor B is available for individual purchase. Mixed Bundling denotes a pricing strategy where A and B are sold individually andinabundle. The A-B package is generally offered at a discount over the sum of the individual prices of A and B. Of course, mixed bundling is a generalized form of pure bundling, because firms can always choose to set the individual prices arbitrarily high and thereby establish a de-facto pure bundle pricing regime. Tying refers to a firm s practice of making the purchase of good X conditional upon the purchase of good Y. In a static tie, or unilateral mixed bundle a consumer may buy Y alone, or the combination of Y and X, but not X alone. In a dynamic tie, consumers must buy one unit of X together with at least one unit of Y. Thus, consumers may purchase bundles of Y -X, 2Y-X 3Y-X,... and so on. Integrated network operators frequently employ unilateral mixed bundling. Consumers have the choice of a basic subscription to the firms home service, or a Multiple Play package,, including the home service and additional services. 16

17 Economics of Digital convergence. UK Take-up of bundled communications services over time Homes with bundles (%) and increase year-on-year (percentage points) Source: OFCOM (2012) 17

18 Economics of Digital convergence. Take-up of multi-service bundles among fixed broadband customers Source: OFCOM (2012) 18

19 Contents 1. Introduction 2. Broadband Market trends 3. Economics of Digital Convergence 4. Relevant Market Definition 5. Wholesale and retail markets. 6. SMP Designation 7. Case: OpenNet 8. Conclusions 1 9

20 Relevant Market Definition. Market definition Market definition is an instrument used in establishing the limits of competition between undertakings. In Europe, the Commission has recognized sometimes the difficulties in defining the relevant market in an area of rapid technological change and new services provision. Following a market analysis by the NRA, an operator can be designated as having SMP in a specified electronic communications market. Subsequently, it may be subject to specific ex ante regulatory obligations (remedies) The concept of significant market power (SMP) is one of the central elements of the EU regulatory framework for electronic communications. Guidelines followed by NRAs Market definition; Assessment of SMP SMP designation; 4 Procedural issues related to all of these subjects. 20

21 Relevant Market Definition. EU Recommendations: Three criteria test Relevant markets should be defined in accordance with the principles of competition law. The EU Recommendation uses three cumulative criteria relevant markets identification. ("the three criteria test") for The three criteria test has been the basis for the identification of relevant markets for the present (2007) and previous (2003) Recommendation on relevant markets and has continuously been applied by NRAs for the identification of those markets susceptible to ex ante regulation. Three criteria test 1. The presence of high and non-transitory barriers to entry; 2. A market structure which does not tend towards effective competition within the relevant time horizon; and 3. The insufficiency of competition law alone to adequately address the market failure(s) concerned. 21

22 Relevant Market Definition. Main criteria for defining the relevant market In defining Relevant Market, we refer to geographic area in which the businesses compete and the scope of the products, or the group of products, in which the businesses compete. Product Market Category of products that, in practice, consumers believe can easily be substituted for one another, based on product characteristics, price and use. Area in which consumers or businesses acquire certain products, so that if products are not available in one place they can readily be replaced with products elsewhere. Two main criteria: (a) the area covered by a network; and (b) the existence of legal and other regulatory instruments (areas where they have been authorized) Geographical Market Networks that cover different geographic areas may beinthesamemarketif their overlap to a sufficient extent and they employ geographically uniform pricing strategies. In that respect, markets for broadband services can be defined at a national or local level. Geographical market definition are becoming increasingly important during the transition to new ultra-fast networks due to the fact that networks are focusing on most profitable areas such as densely populated areas. 22

23 Relevant Market Definition. Substitutability Analysis Determining the substitutable products or range of products to which consumers could easily switch in case of a relative price increase. Demand substitutability g g -In a situation where end users face significant switching costs in order to substitute product A for product B, these two products should not be included in the same relevant market Supply subsitutability It analyzes how easy would it be for a new competitor to enter the market, or for an existing company to expand its distribution area or add a new product to its line, in each filling the void and sustaining competition. - Nevertheless, the fact that a rival firm possesses some of the assets required to provide a given service is immaterial if significant additional investment is needed to market and offer profitably the services 23

24 Relevant Market Definition. Analytic analysis The definition of relevant market is complemented with "hypothetical monopolist" test. Monopolist Test (Test SSNIP*) Limitations of monopolist test Likelihood that a hypothetical company could impose a modest but substantial (5 to 10 percent) price increase forasustainedperiodoftime(typicallyone year) and remain profitable even as some consumers stop buying the product. Analysis: Product X in geographic area A controlled by a monopolist that decides to increase prices (5% -10%) and profitability is checked. If price increase is profitable, monopolist has no competition avoiding a price increase. So, product X in area A is a relevant market If price increase is not profitable, there is competition to avoid monopolist to increase the price. But, if consumers had re-orientated its consume towards an alternative product Y, this one would make pressure over X, so X and Y should be included in the same relevant market. The same situation could arise with an alternative geographical area B. In this case, the monopolist test should be applied to the monopolist that controls X and Y ( or/and A and B). The use of right price: competitive price vs observed prices Thearbitrarity of substitutability definition: What does it mean substitute product? Why 5%-10% and not a higher value? (*) Small but Significant Non-Transitory Increase in Price. 24

25 Relevant Market Definition. EU Commission The European Commission (EC) has launched a public consultation, as part of the Digital Agenda with the objective of updating the list of relevant wholesale and retail telecommunications markets covered by the Article 7 procedure set out under Directive 2002/21/EC of the European Parliament and of the Council of 7 March Based on the results of the consultation, the Commission will review the current recommendation on relevant markets, last updated in 2007 (Commission Recommendation 2007/879/EC of 17 December). Background: List of relevant markets in EU Retail level 1. Access to the public telephone network at a fixed location for residential and nonresidential customers Wholesale level 2. Call origination on the public telephone network provided at a fixed location 3. Call termination on individual public telephone networks provided at a fixed location 4. Wholesale (physical) network infrastructure access (including shared or fully unbundled access) at a fixed location 5. Wholesale broadband access 6. Wholesale terminating segments of leased lines 7. Voice call termination on individual mobile networks. Source: European Commission 25

26 Relevant Market Definition. 1. Introduction 2. Broadband Market trends 3. Economics of Digital Convergence 4. Relevant Market Definition 5. Wholesale and retail markets. 6. SMP Designation 7. Case: OpenNet 8. Conclusions 26

27 Wholesale and retail markets Wholesale market If there is no strong network competition, wholesale services will only exist as a result of regulatory intervention: identification of wholesale markets is key. Wholesale access obligations should promote the emergence of competition by limiting the ability of incumbent operators to increase prices over infrastructure that cannot be easily: make or buy by new entrants depending on access obligations. Offeringa variety of wholesale products or services promotes infrastructure investment by enabling third parties to enter the market at the retail level, attract customers, and then invest in infrastructure in order to replace the purchase of access over time. Wholesale demand is derived from retail demand, and therefore, substitutability at the retail level needs to be taken into account when considering wholesale market characteristics. Relevant broadband markets in Europe Market 4: Wholesale (physical) network infrastructure access (including shared or fully unbundled access) at a fixed location, that would allow new entrant to roll-out new services of their own design without the need to install their own physical network Market 5: Wholesale broadband access 27

28 Wholesale and retail markets The use of cost models when establishing regulated charges (2011) Source: ITU 28

29 Wholesale and retail markets Retail market Retail competition can be promoted by offering third parties a wide choice of potential wholesale services. If there is an imposition of retail price regulation then it is unlikely that firms would seek to enter those markets and the potential for competition and overall welfare gain might be lost. In that respect, OFCOM has shown its preference for regulating at wholesale level. Nevertheless, price regulation at the wholesale level may not always completely remove the need for some form of ex ante price regulation at the retail level, (ex: period of transition after market liberalization): The problem of retail market regulation is that can provoke that new competitors be dissuaded from entering the market if they perceive their potential retail profits being diminished by the regulator. Retail price Margin profitable for existing operators and new entrants Wholesale price Different cost methodologies (LRIC, FDC, ). Avoiding price squeeze. 29

30 Wholesale and retail markets Wholesale and retail markets Regulation in wholesale markets minimizes the need to regulate retail markets: often the result of ineffective competition and market dominance in an upstream wholesale market Retail market Residential customers Business customers Wholesale market Passive infrastructure Active infrastructure 30

31 Wholesale and retail markets Case: Open reach (UK) Openreach model: BT had substantial wholesale market power and was a vertically integrated provider with a presence in the directly related retail markets This combination gave BT the ability and the incentive to discriminate against downstream competitors who were also wholesale customers Key elements of BT s Undertakings: Functional Separation creation of Openreach Equivalence of inputs (EoI) Transparency and separate accounting Independent audit and oversight. Openreach controls and operates the duct, fiber, copper and other non-electronic assets in BT s access and backhaul networks. It provides product management, sales and service management for significant market power (SMP) products delivered over BT s access and/or backhaul networks -bottleneck products 31

32 Wholesale and retail markets Openreach assets.

33 Wholesale and retail markets Openreach- Corporate Governance. 33

34 Relevant Market Definition. 1. Introduction 2. Broadband Market trends 3. Economics of Digital Convergence 4. Relevant Market Definition 5. Wholesale and retail markets. 6. SMP Designation 7. Case: OpenNet 8. Conclusions 34

35 SMP Designation. Assessing SMP The existence of a dominant position cannot be established on the sole basis of large market shares. A dominant position can derive from a combination of: Criteria overall size of the undertaking, control of infrastructure not easily duplicated, technological advantages or superiority, absence of or low countervailing buying power, easy or privileged il access to capital markets/financial i resources, product/services diversification (e.g. bundled products or services), economies of scale, economies of scope, vertical integration, ti a highly developed distribution and sales network, absence of potential competition, barriers to expansion. SMP is strongly linked to market share (MS), but a firm with a small market share may or may not enjoy market power : further analysis must be made Simple concentration ratios or the Hirschman-Herfindahl Index (HHI) continue to be used for analyzing market concentrations, additionally to other ratios. 35

36 SMP Designation. Assessing SMP In general, SMP is closely aligned with the notion of dominance, a position of economic strength th enjoyed by an undertaking which h enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers (ITU 2011). There is a difference between SMP and dominance: SMP needs to be established ex-ante, whereas dominance is normally assessed ex-post (only after a complaint has been made about alleged abusive behaviour of a firm). More every time, network operators try to enter into agreement to consolidate its business and not to enter into an aggressive fight:: dominance in relation to a combination of players in the market. (collective or joint dominance) Wideningi the market, due to the fact thatt different technologies can provide the same services, to include both fixed and mobile broadband services would imply that it is difficult to have market power in the retail market: wholesale market with commercial terms would be enough to create a competing environment. New investment to be made will provide excess capacity discouraging competing infrastructures due to the sunk investments and theirs unrecoverable part. 36

37 SMP Designation. Benchmark: Criteria used in determining SMP EUROPE AMERICA AFRICA ASIA-PACIFIC ARAB-STATES Factors such as barriers to entry, control of an essential facility allow NRAs to identify market power. Reviews typically take place every two to three years Canada considers geography, market share, control of essential facilities, economies of scale and scope, and barriers to entry when assessing market power and dominance In Latam, a lot of countries consider only market share with defined thresholds standing at between 25 and 40%. Reviews typically take place every two years A lot of countries consider market share and the control of essential facilities in determining dominance. The majority of NRAs make a review of dominant status on an annual basis while others make it every two to three years. India, Indonesia, Pakistan and Vietnam acknowledge market shares (25%-30%) only. In addition to market shares, Japan considers only the control of an essential facility whereas other countries include other determinants, Algeria considers only market share (more than 50%), but other countries include, additionally, other criteria such as geography, control of essential facilities, easy access to financial resources, economies of scale and scope, barriers to entry, potential competition, technological advantages or superiority. Source: ITU 37

38 SMP Designation. Case: Spain Obligations in market 4 Shares of BB subs. 3Q 2012 In 2009, the CMT reviewed the markets 4 and 5 and the next review will be in the first half of 2013 Operators do not have the obligation to give access to the fibre local loop. Regarding the copper network, the incumbent operator (Telefónica) is obliged to offer access, with cost oriented prices, to: the copper local loop,(oba) passive infrastructure, including ducts and civil infrastructure. (MARCo) Regarding the hybrid network, Telefónica has the obligation to offer access to the sub local loop. The regional cable operators hold together more than 18% share of broadband subscribers Source; Analysis Mason 38

39 Relevant Market Definition. 1. Introduction 2. Broadband Market trends 3. Economics of Digital Convergence 4. Relevant Market Definition 5. Wholesale and retail markets. 6. SMP Designation 7. Case: OpenNet 8. Conclusions 39

40 Case: OpenNet Open Access Broadband Networks in Singapore Singapore Singapore has had good broadband connectivity for many years, with uptake rates close to the OECD average. In 2006, an advisory committee recommended: (1) the deployment of an open access fibre-optical network that would provide gigabit gg speeds to all homes, schools and businesses (FTTP) in the country, replacing the copper/hfc infrastructure already in use (2) the parallel development of a pervasive nationwide wireless broadband network to meet the access needs of individuals everywhere and every time Initial planning for a public-private partnership to build and operate Singapore s next generation national broadband network (NGNBN) began in Southeast Asian island citystate off the southem tip of Malay Peninsula. Area: 710 km 2 Population (2012): 5,312,400 GDP: $ billion. 40

41 Case: OpenNet Open Access Broadband Networks in Singapore In 2007, it was announced that the broadband network would be built with structural separation between the passive and active network infrastructure. (1) In 2008, the NetCo contract t to build the network was awarded to OpenNet, (2)In 2009, Nucleus Connect was awarded the OpCo contract to install the active electronic components The Singaporean government has invested a lot of funds in the project by providing grants to OpenNet and to Nucleus Connect, allowing several retail providers to launch their services Singapore Retail Service Providers: (1) 7 RSPs have announced retail broadband (2) Bandwidth plans range from 25Mbps to 1Gbps, and (3) Prices for 100Mbps plans range from S$39 to S$69 Source: IDA Singapore 41

42 Case: OpenNet Open Access Broadband Networks in Singapore Singapore OpenNet is controlled by the state-controlled incumbent telco, Singtel, and a private company, Axia. Nucleus Connect is controlled by the cable TV incumbent, StarHub. END CUSTOMERS RSP (RETAIL) sell services to residential and business customers. NUCLEUS CONNECT (WHOLESALE) operating company activates it and sells wholesale capacity to the retail service providers OPENNET a network company owns the fibre Source: IDA Singapore 42

43 Relevant Market Definition. 1. Introduction 2. Broadband Market trends 3. Economics of Digital Convergence 4. Relevant Market Definition 5. Wholesale and retail markets. 6. SMP Designation 7. Case: OpenNet 8. Conclusions 43

44 Conclusions. Convergence has a lot of implications for regulatory policy: highly dynamic nature of telecoms, and the growing demand for bandwidth implies that setting the right investment incentives is a key point. Regulatory policy in a converging broadband world is facing a number of challenges: More difficulties to define relevant markets and identify SMP. Broadband networks imply to consider a lot of commercial strategies to be examined. NRAs must analyze if ex-ante regulation is needed and if access bottlenecks could be subject to cost-based regulation: new trends towards more complicated models based on real options in the future. There are several ways by which regulatory policy could impact on investment incentives for deploying broadband networks. If no regulatory measures are applied (i.e. a commitment not to impose access obligations and set regulated charges) for a period of time, it can be seen as a model to reward investors. Including additional risk premiums when setting regulated charges is another possibility (CMT, spanish regulator applies a risk premium to fiber models) The same model doesn t fit all: different methodologies to the different economies due to the different broadband infrastructures. 44