1. Competition Policy for the new U.S. Telecoms Market: Background and Outline Howard A. Shelanski, U.C. Berkeley Nanterre, Paris X November 9, 2006

2. Transformation of the U.S. Market

3. Transformation of the U.S. Telecoms Market, 1996 to 2005 In 1996, the U.S. had 38 million wireless subscribers; in 2005 it had over 185 million. In 1996, incumbent local exchange carriers (ILECs) served over 180 million lines. By 2005 that figure was below 140 million lines. In 1996 only 19% of U.S. households had internet access. By 2005 nearly 75% had access.

4. New versus Old Technologies Wireless and internet-based communications –Complements, and –Substitutes for conventional service

5. New versus Old Technologies Wireless and internet-based communications –Complements and, increasingly, substitutes for conventional service –In 1996, Americans placed 504 billion conventional local telephone calls and made an average of 143 minutes of long-distance calls per month. –In 2003, Americans placed 425 billion conventional local telephone calls and made an average of only 71 minutes per month of long-distance calls.

6. Where did the calls go? In 1996, the 38 million U.S. wireless customers used an average of 125 minutes per month => In 2005, the over 185 million subscribers used an average of 580 minutes per month. In 1996, fewer than than 20 million U.S. households even had internet access => By 2005, the three leading instant messaging services had 100 million distinct monthly users. So, calls went from conventional telephony to wireless and internet-based alternatives.

7. Inter-modal Substitution is Increasing FCC: “Even when not ‘cutting the cord’ completely, consumers appear increasingly to choose wireless over traditional wireline service, particularly for certain uses.” Pew: By 2003, 21% of American wireless subscribers said they would consider canceling conventional home telephone service.

8. Regulatory Implications Monopoly assumptions no longer hold A priori rules no longer applicable

9. Regulatory Implications Monopoly … no longer holds. A priori rules no longer apply So, Need to Reconsider: –Retail price regulation, –Line-of-business limitations, and –Obligations to provide network facilities to competitors

10. Regulatory implications Regulatory benefits decline as competition increases

11. Regulatory implications Regulatory benefits decline Costs of regulation increase with competition –In the presence of competition, regulation may fail to send correct economic signals and –Regulation may “divert scarce resources from carriers that would otherwise use those resources to compete in local markets.” (FCC)

12. Regulatory implications Monopoly gives regulators a margin for error: –regulation can be imprecise and still be beneficial Under competition, –Regulators have no such margin for error

13. The Market Calls For A New Approach The new competition is not perfect, but in network industries with high fixed costs, even partial substitution can provide effective competitive discipline. Revenues fall faster than costs as customers leave, so even small losses in market share hurt. Even in concentrated and imperfectly competitive telecom markets, incumbents can lose market power; this provides good cause to reconsider the conventional, a priori approach to regulation.

14. New approach The new competition does not necessarily imply complete regulatory “laissez-faire.” It does imply that regulation through punishment of anti-competitive behavior ex post, on a case-by-case basis, would be more likely to create benefits and less likely to distort competition than conventional a priori conduct rules.

15. Hard Questions To what extent is antitrust law adequate for such ex post enforcement? –Is the essential facilities doctrine in the EU a strong enough tool for such a shift in Europe? –In the U.S., is sector specific competition policy needed to get around U.S. antitrust law’s right to refuse to deal (see Verizon v. Trinko)?

16. Hard Questions When should basic interconnection among competing networks for the exchange of traffic be mandated and when left to the market? What other anti-discrimination measures might still be warranted as the telecommunications market becomes more competitive?

17. Conclusions The U.S. telecommunications market has become remarkably more competitive since 1996. This transformation undermines the rationale for conventional telecom regulation through a priori rules, and weighs in favor of regulation through ex post competition enforcement. Hard questions remain about the scope of remaining regulation and about the need for sector-specific competition policy to supplement general antitrust law.