OVUM Workshop presentation

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EXPERTADVICE
EXPERTADVICE
TELECOMS SOFTWARE IT SERVICES
Barriers to competition in the ECNS markets of
the EU
Public workshop on the study findings by David
Lewin of Ovum and Miranda Cole of Gibson, Dunn
Crutcher LLP
16 December 2003 www.ovum.com
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Agenda for the afternoon

• Study objectives and scope
• Barriers to competition in mobile markets DML
• Barriers to competition in fixed network markets
• QA
• Barriers to competition in broadcast markets MC
• Barriers to competition in e-services markets
• QA
• Dealing with the power of the incumbent DML
• Infrastructure v service based competition
• QA

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Study objectives and scope

• Objectives
• examine current state of competition
• identify barriers to competition over the next
  three years
• where appropriate propose regulatory measures to
  remove these barriers
• Independent from current market reviews by NRAs
• Based on extensive consultation with NRAs,
  operators and service providers

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Software supply to 3G

• Operating systems for mobile terminals
• Palm v Microsoft v Symbian v others
• Wireless middleware
• terminal suppliers v MNOs for control of VAS
• Browsers for mobile terminals
• can Microsoft dominate again?
• Web Services
• a universal glue for legacy software?

• Potential competition problems for the future
  but
• Nothing to warrant intervention now

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Telecommunications markets
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Telecoms competition - high level overview

• The main problem lies in the supply of fixed
  access to the mass market

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Barriers to competition in mobile markets
8
Mobile services market - situation

• Reasonable infrastructure competition cf with
  fixed narrowband access
• 25 to 56 market share for leading mobile
  operator
• gt90 market share for leading fixed operator in
  all member states except UK
• Service based competition through negotiation
  functions effectively in many member states but
  
• Leading mobile operator is subsidiary of fixed
  incumbent in 13 of 15 member states
• Economies of scale will probably mean
  consolidation over next few years

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Mobile services market - conclusions - 1

• Current infrastructure based competition
  functions reasonably well
• There are few grounds for regulatory intervention
• There are two main markets where competition
  appears not to function
• mobile call termination
• IOTs as wholesale input to international roaming
  service
• Cost orientation of MTRs and regulation of IOTs
  sub judice - so no recommendations

• European Commission should consider
• guidance so that MNOs charge others and their own
  retail business the same MTR
• how far the bottleneck arguments on MTRs apply eg
  to 3G voice and SMS
• whether to allow (or require) economy of scale
  effects where cost oriented MTRs are used

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Mobile services market - conclusions - 2

• Level of retail competition varies by member
  state
• Market review mechanism to decide if access and
  call origination market is competitive
• In general
• incentives for operators to negotiate deals with
  service providers
• these should increase as 3G roll out produces
  spare capacity
• unlikely to need to regulate access unless high
  levels of concentration and history of denied
  access

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Barriers to competition in fixed markets
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Competition in fixed narrowband mass markets

• Satisfactory service based competition in long
  distance calls market but
• Major barriers to infrastructure competition
• economies of scale, scope and density
• requirements for sunk investments raises entry
  risks
• market is starting to shrink
• Some NRAs have introduced wholesale line rental
  obligations to increase retail competition

• Does WLR deliver public welfare benefits?
• How can we increase cross platform competition
  between fixed and mobile operators?

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Infrastructure based competition in supply of
mass market fixed broadband -1

• EU lags behind its major trading rivals in
  infrastructure based broadband competition
• Very variable level of infrastructure competition
  between member states
• CATV networks offer strong competition to fixed
  incumbent in some countries (A, B, Nl, P,UK)
• But major CATV networks in 5 member states still
  owned by incumbent

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Infrastructure based competition in supply of
mass market fixed broadband -2

• FWA is not (yet) a commercially viable technology
  but.
• Powerline Communications (PLC) might be
• failed repeatedly over last 10 years and
• backhaul problems like ULLs but
• 3rd generation technology
• privatised electricity companies keen to deploy
• Many operators complain
• state funding rules ignored for regional
  broadband roll out
• serious distortion to market investment and
  competition

• Require incumbents to divest themselves of their
  CATV network businesses
• Give PLC another chance
• Investigate complaints about breach of state aid
  funding rules

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Service based competition in supply of mass fixed
broadband -1

• Retail SBC very variable across EU
• main source of competition in some (F,D,I)
• minor source of competition in others (A,B,Nl,P)
• Overall take up of ULLs disappointing so far
• good in some member states (Dk, SF,Nl)
• some evidence of delay by incumbents
• main barrier is fixed cost of backhaul and
  collocation
• But demand for LLU now growing fast
• 2.5 of broadband in 9/02
• 4.7 by 6/03
• substantial demand as input to 2Mbit/s leased
  line substitute

• SMP operators in Market 11 might be required to
  offer
• co-mingling of equipment
• cost oriented backhaul at appropriate level of
  disaggregation

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Service based competition in supply of mass fixed
broadband - 2

• First two are uncontroversial but why mandate
  bitstream DSL?
• incumbent enjoys big economies of scale
• reduces upfront investment (cf ULL)
• allows differentiation (cf IP level wholesale)
• economic case for bitstream increase as
  incumbents move to VDSL
• potentially provides a bridge from service to
  infrastructure based competition

• What should an operator with SMP in wholesale
  broadband be required to offer?
• IP level wholesale DSL?
• Unbundled local loops (ULLs)?
• Bitstream DSL?
• We believe it should offer all three

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How to price bitstream service?

• Do you price on a cost plus or retail minus
  basis?

Constraint
Move to
Preserve investment incentives for broadband
Retail minus (Cost
roll out. So if cost plus
plus too hard)
- premium on simple LRIC at WACC
- take account of failed projects
- take account of options value to SP
Maintain pricing relativity to other wholesale
Neutral
products
- ULLs prices cost oriented
- IP level wholesale available at retail minus
Give all service providers maximum pricing
Cost plus
freedom to encourage pricing innovation
Prevent excessive end user prices long term
Cost plus in countries
without intrusive retail price controls
where IBC weak
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Barriers to competition in broadcast services
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Broadcasting service markets Scope of study

• Four key issues in Study
• Exclusive rights to content
• Potential for existing regulation to skew basis
  on which services compete
• Appropriate and proportionate CAS regulation
• Ensuring regulation facilitates development of,
  and access to, iTV and other e-Europe services

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Broadcasting service markets Rights
acquisitions and exercise

• Libraries of rights to films concerns over
  breadth, term, windows, timing of expiration
• Sports rights concerns over ensuring all rights
  (all media) are offerred to market, timing
  windows, relationship between individual clubs
  and broader bodies, term
• Interactive content (embedded in enhanced TV
  services) concerns over failure to provide the
  linked iTV services/provide clean feed

• Focus review on exclusive rights of broad scope
  (media, range of rights, windows) and long term
• Competition law provides appropriate means of
  scrutiny
• European Commission should consider developing
  guidelines
• Consider treating enhanced TV as broadcasting
  services rather than iTV services

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Broadcasting service markets Content supply and
Access to platforms
Complex relationship, at least two perspectives
on the appropriate approach and the implications

• Provision of broadcasting transmission services
  to channel suppliers
• Are means of transmission substitutable for
  channel suppliers
• ECNS regime picks up approach
• Impact in ECNS context, given range of potential
  obligations, including access ?

• Rights to content as asset platform providers
  seek to be licensed to exploit or otherwise
  benefit from
• Possible to compel licensing?
• Essential facilities case hard to make
• Dominance finding would hinge on market defined

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Broadcasting service markets Impact of
regulation

• Must carry
• Reflect reality regarding development of  must
  have  content?
• Jurisdictional issue re same technologies
• Basis for imposing obligation
• Impact on commercial negotiations
• Potential for inconsistent implementation

• Differing services and regimes
• ECSs, information society services, television
  broadcasting
• Status of retail broadcasting
• Tension between broadcasting approach and ECNS
  access and services approach
• Differential treatment of platforms
• modularisation of content

Commission investigate to ensure must carry
obligations remain appropriate and proportionate
Commission review scope of regulatory
distinctions to ensure application does not
defeat digital economy aims
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Broadcasting services Access to CAS

• Two issues raised by Article 6 (of Access
  Directive)
• What does fair, reasonable and
  non-discriminatory obligation entail?
• Should an Article 16 (of Framework Directive)
  review lead to imposition of another
  obligation(s)?

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Interoperable iTV services (and APIs)

• ECNS framework contemplates mandating middleware
  standards to ensure iTV interoperability
• Interoperability concept used in 4 ways,
  reflecting 2 approaches
• A range of factors impact on, and creating
  barriers to, cross-platform iTV
• Estimates that authoring using platform-
  independent languages provides portability
  solution for 80 of current iTV applications

Commission review market failures and links
between interoperability, authoring tools, access
and mandated standards, to determine whether
mandation is necessary
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Barriers to competition in e-services markets
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e-services markets barriers to competition

• Industry structure
• Consumer oriented ISPs
• Web hosting SPs
• Managed application SPs
• Backbone ISPs
• E-payments SPs
• Managed technology SPs
• Competitive supply in most segments of the
  industry
• Policy decisions to be made re consumer oriented
  ISPs
• E-payment implementation issues

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Consumer oriented ISPs barriers to competition

• Business models
• Advertising not materialise, dial-up revenues
  shrinking (with xDSL migration)
• Not clear consumers will pay for content, xDSL
  margin crucial (depends on wholesale products
  available and pricing)
• Policy decision for xDSL weigh benefits of
  inter-ISP competition against reduction in
  infrastructure investment
• Other barriers
• Concern over action by IP rights holders
• Discrimination by incumbents

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E-payments regulation - micropayments

• Value stored on electronic device (e.g., prepaid
  mobile cards) and accepted by undertakings other
  than the issuer of the value is e-money
• Need to ensure consistency concerning
• What constitutes acceptance by undertakings
  other than the issuer
• Mobile prepaid value being classified
  inconsistently across jurisdictions
• Credit transfers-vs.-bearer instruments
• Practical implications
• Separation of e-money and EMI activities (bearing
  in mind how prepaid mobile credit can be used)
• Redeemability proportionate?
• Money laundering customer identification

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Dealing with the power of the incumbent
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Structural options for reduced market power - 1
Access business
Rest
Loopcoseparation
Incumbent operator
Core and access network business
Rest
Netco separation
Rest
CATV business
CATV separation
Rest
Mobile business
Mobile separation

• Legal separation - separate businesses with
  separate accounts but common ownership
• Divestiture - separate businesses with separate
  ownership

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Structural options for reduced market power - 2
Separation
Cost of
Legal
Divestiture
Reasons
option
separation
separation?
Loopco
High
No
No
High costs of contracting and
separation
difficulties in co-ordinating
investment between
separated entities
Netco
Medium
No
No
Difficulties in co-ordinating
separation
investment between
separated entities
CATV
Low
No
Yes
Major source of competition to
Separation
incumbents core business
Mobile
Low
Not yet
Not yet
See over
separation
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Structural options for reduced market power - 3

• Fixed incumbent owns leading MNO in 13 of 15
  member states
• Major concentration of market power. So why not
  require separation?

• Case for forced separation of fixed incumbents
  mobile subsidiary not yet made
• Case will strengthen if fixed mobile integration
  becomes important

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Infrastructure based competition(IBC) v service
based competition (SBC)
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The different competitive positions in the voice
telephony market
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Where viable, IBC is better than SBC

• IBC requires less regulation - so less scope for
  regulatory error skewing market development
• IBC generates more competitive pressure than IBC
• IBC leads to faster roll out of new services
• NRAs should take account of these dynamic
  benefits when taking regulatory decisions

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Dynamic v static allocative efficiency

• Suppose we set access prices to incumbents costs
• Entrant then buys rather than builds
• minimises total costs of providing services
• eliminates supernormal profit for incumbent BUT
• reduces chances of IBC and dynamic benefits which
  it brings

• If no prospect of infrastructure based entry then
  price based on maximising static allocative
  efficiency
• Otherwise consider dynamic benefits of IBC as well

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But there are limits on the viability of IBC

• Main infrastructure based rivals to fixed
  incumbent
• CATV operators with major economies of scope
  between TV and telecoms services
• operators serving corporate customers with focus
  on high volume users in CBDs
• Prospects for future investment for IBC
  relatively poor
• Chapter 11 for main CATV operators
• poor EBITDAs for COLT, Equant, CW etc
• prospects for Powerline and other new
  technologies uncertain

• Economies of scope and scale in network provision
  - especially fixed access network
• Major sunk costs for infrastructure based rivals
  to fixed incumbent before any revenue generation
  raise investment risks

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The role of SBC

• It makes sense for NRAs to introduce measures to
  promote SBC where IBC is not viable eg CPS, WLR
  and
• Potentially SBC can act as stepping stone to IBC
  but
• SCB measures can undermine IBC and/or
  infrastructure investment eg
• CPS reduces incentives for CATV network
  investment
• LRIC price for bitstream DSL removes incentives
  for fixed incumbent to invest in broadband rollout

• Factors for SBC
• the inherent natural monopoly characteristics of
  fixed access network supply
• the relatively poor prospects for investment in
  IBC for the fixed sector - especially access
• the need to consider that SBC can act as a
  stepping stone to IBC
• Factors against SBC
• the inherent superiority of IBC where viable
• the need to preserve incentives for
  infrastructure investment when setting regulated
  prices for SBC measures
• the need to avoid SBC measures which undermine IBC

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Measures to maximise efficient IBC

• To promote infrastructure investment NRAs should
• take a consistent long term approach to IBC
• provide adequate rewards for new service
  investment

• To promote investment by alternative
  infrastructure operators NRAs should
• allow economy of scale effects in setting cost
  oriented call termination charges
• carry out a (qualitative) cost benefits analysis
  before introducing service based measures
• preserve geographical averaging of the
  incumbents prices
• consider explicit entry assistance
• enforce state aid rules

• To promote cross platform competition NRAs
  should
• require CATV divestiture
• monitor for possible divestiture of incumbents
  mobile subsidiary
• require consistent regulation of call termination
  charges - fixed v mobile
• ensure non discrimination in competition for
  corporate voice traffic - fixed v mobile

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Consistent regulation of call termination charges

• Roll out of 3G services will
• reduce unit costs of voice substantially
• lead to increased cross platform competition
• Fixed call termination charges regulated to cost
• explicitly for incumbent
• through reciprocal charging for others
• Historically call termination charges for mobile
  not regulated
• This asymmetry leads to cross subsidy from fixed
  to mobile operators

• Removing this cross subsidy
• important to eliminate distortion of cross
  platform competition
• most easily done through requirement for cost
  oriented prices for all call termination charges

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Preserving geographical averaging of incumbents
retail prices

• Geographic averaging of incumbent's prices
• common across EU - narrowband and broadband
• economically inefficient from static allocative
  efficiency perspective but...
• ...relied on by infrastructure based rivals for
  their viability
• Future deaveraging of prices could significantly
  reduce
• infrastructure based competition and
• the dynamic benefits which it brings

• NRAs should
• clarify their policy on geographical averaging of
  the incumbents retail prices
• take account of the dynamic benefits which IBC
  generates before allowing more geographical
  deaveraging