Network industry. with monopoly infrastructure

Transcription

1 Network industry with monopoly infrastructure Welfare consideration of alternative vertical structure Alain BOURDEAU de FONTENAY Presentation to The Future of Telecommunications Sector Investment, A CITI Conference, Columbia University New York, 4 March, 2002

2 Outline Background Objective Parameters Determinants Closing question I would like to thank Bruno Chaves, Paris I/Sorbonne, who bears no responsibility for any of the errors but who has helped me enormously through his unique insights,... 2

3 Background

4 Lipsky & Sidak s 1999 Essential Facilities Baxter: Settled the AT&T case by splitting up the Bell System. based on Remedies having to be both : Feasible for a court to administer ; and Conducive to enhancing consumer welfare. 4

5 Crandall s 1999 Managed Competition in US Telecommunications One obvious choice for liberalizing a network industry with natural-monopoly infrastructure is simply to separate the infrastructure from the delivery of the service ; The natural monopoly in telecommunications -- if there is one : Is in the local distribution of messages to the subscriber ; and Could be divorced from the... regional distribution function 5

6 Crandall s II/IV The vertical separation of facilities from... services may be a satisfactory second-best solution... in industries... [with] little... technological change, such as railroads or pipelines. ; and In technologically progressive industries, such as telecommunications, such separation creates enormous problems of modifying and expanding the infrastructure... 6

7 Crandall s III/IV Vertical separation : Baxter s solution: Feasible; and To enhance social welfare; Crandall: Effectively a satisfactory second-best solution. 7

8 Crandall s IV/IV In telecommunications In the case of the 1984 AT&T divestiture, despite all of these changes, there have been few problems in accommodating the essential traffic-exchange function that is required for competition in this network industry. At the same time, he argues such separation: Creates... problems; but What are the alternatives? Is it not an implementation problem? 8

9 Is it conducive to enhancing consumer welfare? Is it social welfare-enhancing? Baxter s second requirement. In Pennsylvania: The PUC was informed by Verizon that full structural separation would cost approximately $1 Billion; and No evidence was given for the amount. Crandalls reservation is set aside: Important; but A matter of implementation. 9

10 Objective We agree with Verizon that it is not possible at this stage to know with certainty the full impact of such a corporate reorganization. This does not diminish the value of developing a best guess of its cost and benefit to the stakeholders. 10

11 Conclusions Vertical separation would appear to benefit, a priori (and depending upon how well it is implemented) not only society but probably the ILECs due to factors such as: Improved valuation of the ILEC on the capital market, hence improved access to capital; Economies of scale and, probably, economies of scope; and Probably, transaction and organization costs. 11

12 Parameters

13 What kinds of cost/benefit? What cost/benefit? Transitory: ILEC reorganization; or Net present value: Gains/losses due to the new structure? What benchmark for comparison? Is it the status quo? How is it quantified?... Whose cost/benefit? The ILEC s Network? Its shareholders? Social? 13

14 What kind of model? An ILEC s commercial wholesale unit (e.g., Telstra): Probably short run incremental solution; No problem, mostly: Low costs; and High profits. Vertical separation: The question considered here. 14

15 Determinants

16 What determinants? The ILECs market valuation; Economies of scale and scope; Investment plans and production costs; & Transaction and organization costs. 16

17 Valuing market structures Vertical separation would contribute to a better valuation of the ILEC: Improved: Capital market efficiency; and Strategic planning. In 2001 in the UK, Earthlease and Compere/WestLB express interest in BT s infrastructure assets; Many analysts and some BT shareholders viewed that as win-win; 17

18 Economies of scale and scope Interconnection and unbundling essentially confers on [the ILEC s] competitors whatever economies of scale and scope [it] possesses. (Teece, 1995) The converse is also true and what matters are the economies of scale and scope of the interconnected and unbundled networks. 18

19 Economies of scale Vertical separation and scale: Network benefits: Increased demand; and More stable demand. Question: How is local access wholesale priced? Retail benefits if it is competitive and able to diversify and compete; Shareholders unless the ILECs can extract sufficient rents from information asymmetries (e.g., ASI); Social welfare 19

20 Separability & economies of scope Separability: Evaluated through scope between wholesale and retail products; Vertical separation and scope: Harder to determine ex ante; However, if the boundary is related to organization boundaries, it would not create additional costs; Best guess: unlikely to be a significant factor (barring high external transaction costs). 20

21 Transaction and organization costs I/III Moving from a larger to 2 smaller management structures is typically an unknown: Potentially, more managers; but Potentially, a leaner more flexible and responsive organization. Moving from one to 2 profit centers: Improved resource allocation, strategic planning, and wholesale pricing; and Better market information. 21

22 Transaction and organization costs II/III OSS/BSS Unlikely to be a significant factor: Very large economies of scale; Increasingly modular and scalable; and Relatively short live span. Potentially, a positive factor: Incentive to design OSS/BSS for: Efficiency and QOS rather than Increasing competitors transaction costs. 22

23 Transaction and organization costs III/III Is it introducing a new layer (hence, a new source of costs)? No: look at Telstra s TIC. Organizations need essentially the same information as markets for efficient budget planning: How much to produce? Of what? What will it cost? 23

24 Closing question While the answer to Baxter s question cannot be answered unambiguously without knowing how vertical separation might be implemented,... the best guess principle does suggest that today s vertical integration might not maximize shareholders value. Why then such opposition to it? Crandall suggests: Existing cross subsidies ( Incumbents naturally respond very aggressively to the loss of market share... ); [essential facilities] ( Since these incumbents are typically vertically integrated, providing all telecommunications services, their local network connections are essential for originating and terminating the new rivals' calls. ) 24