1. mec1224 EETT: From Telecommunications to Electronic Communications Athens, 28 March 2005 “Investment and competition in electronic communications services markets: lessons from Europe and elsewhere” Martin Cave Warwick Business School, UK Martin.Cave@wbs.ac.uk

2. 2 mec1224 2 The significance of current generation broadband Broadband can transform not only EU economies, but also the structure of the telecommunications industry. There are two paths: -Narrowband operators extend their dominance into broadband, or -Growing effective competition in broadband which then, via VoIP, eliminates current voice dominance and creates a competitive platform for next generation networks (both core and access)

3. 3 mec1224 3 Where will the competition come from? -Cable TV (not available in most member states) -Wireless (Wi-Max and other technologies untried; spectrum not always available; more expensive than fixed in many geographies) Apparent best strategy is to promote competitive infrastructure investment in DSL technolgies. But this cannot happen instantaneously.

4. 4 mec1224 4 The path to infrastructure Competition If the aim is to embed infrastructure competition in the network as deeply as possible, a step by step approach is necessary: ‘Competition would never be able to to develop, in the short term, if entrants were not able to gain access to the incumbent operator’s network to start offering services’ ‘In order to reconcile access-based and facilities-based competition it is necessary to take account of the time dimension. NRAs should provide incentives for competitors to seek access from the incumbent in the shorter term and to rely increasingly on building their own infrastructure in the longer term.’ Commissioner Monti, December 2003.

5. 5 mec1224 5 Similarly the ERG ‘…new entrants can decide on their investment in a step- by-step way and can establish a customer base (critical mass) before they go to the next step of deploying their own infrastructure. In those areas where infrastructure- based competition is feasible, such interventions have as their long-term objective the emergence of self- sustaining effective competition and the ultimate withdrawal of regulatory obligations.’ Regulators need to encourage firms to ‘climb the ladder’ of investment

6. 6 mec1224 6 Where should investment be encouraged? Competitors have to be encouraged progressively to install assets which are replicable, where replicability is governed by the interaction of cost and demand conditions -costs: economies of scale and scope, degree to which costs are sunk -demand: growth projections of the final services and availability of competing infrastructures. Assets involved in telecommunications value chains are likely to exhibit different degree of replicability - e.g. core network, backhaul, access network, etc. This implies use of regulation which creates incentives to build up competition via intermediate products such as bitstream.

7. 7 mec1224 7 What not to do: local competition in the USA -The 1996 Communications Act allowed competitors access to the Bell Companies’ local networks -Initially, competitors installed their own switches (replicable) and leased unbundled loops (non-replicable) at low rates -The FCC then allowed large operators such as AT&T and MCI to lease all assets at discounted prices, enabling them to undercut local competitors -Eventually the court over-turned the FCC’s decisions. The result- -no significant replication of local assets -9 years of effort wasted.

8. 8 mec1224 8 An example : ladder of investment in broadband services Local loop DSLAMs Backhaul IP Network Retailing Later, use pricing to encourage competitors to climb the ladder to here Initially mandate access here Most replicable Bitstream Wholesale broadband product Least replicable

9. 9 mec1224 9 Conclusions The ‘ladder of investment’ is designed to maximise sustainable infrastructure competition through: -identifying feasible investment opportunities, based on empirical evidence. -ensuring timely and equivalent access at the appropriate points to the incumbent’s infrastructure, where it benefits consumers. -withdrawing or worsening the terms of such access as replication becomes practicable. -approximating regulation increasingly to competition law.