1. New Regulatory Approaches Fostering Innovation Dynamics in the Telecommunication Sector How to deal with “emerging markets” and investment incentives? Drs. Robert Stil (r.stil@opta.nl)r.stil@opta.nl Economic Analysis Team, OPTA The Netherlands

2. 2 Disclaimer This presentation is given by the Economic Analysis Team (EAT) of OPTA. EAT is responsible for developing economic reasoning and stimulating discussion on key issues within the telecoms and postal markets. The analyses and conclusions expressed by EAT do not necessarily reflect the opinions of the Commission of OPTA. As such, the opinions of EAT, in whatever shape or form, do not have legal status.

3. 3 Contents The meaning of the emerging market-concept; Can the NRF handle emerging markets? An alternative approach; Possible synthesis.

4. 4 New Regulatory Framework (NRF) The NRF: Recommends assessment of 18 service markets; preaches technological neutrality; has approx. 3 year horizon; poses strict requirements for adding to or subtracting from list of 18 markets.

5. 5 Emerging markets in the NRF The Framework recognises emerging markets as a special case: in which first mover will probably have substantial market share (Recommendation Para 15) should not in principle be regulated ex ante (Recommendation Para 15) since this could distort market development but......allows ex ante regulation if necessary (Market analysis guidance Para 32)

6. 6 Emerging markets in practice Next generation All-IP networks lead to: new service markets; convergence between services; bundling (e.g. triple play); inter-bundle (inter- or intra-infrastructure) competition.

7. 7 Pitfalls when applying NRF Applying NRF to service markets on NGN creates a dilemma: Technologically neutral approach follows NRF but service-based approach may lead to overregulation and hamper investment incentive; Asymmetric regulation, with light-touch or forbearance for the NGN-based service markets goes against NRF Be careful not to allow leveraging of market power and re-monopolisation.

8. 8 Interim conclusions NRF focuses on services, no focus on underlying technology; service-based approach does not suit All-IP NGN’s; No regulation of All-IP NGN’s is best for investment incentive but risk of re-monopolisation and leveraging; Too much regulation leads to under investment.

9. 9 Categories of regulatory attention Established Emergingservices Legacy infrastructure New infrastructure ( Cell 1 ) Established services on legacy infrastructure: use standard market analysis process to decide on when/how to impose ex ante remedies ( Cell 2 ) Emerging services on legacy infrastructure: subject to competition law constraints but no ex ante regulation. Note: prevent leverage of market power from services  regulate established services (Cell 3) Emerging services on new infrastructure: no ex ante regulation in principle Cell 1 Use NRF Cell 2 No ex ante regulation Cell 4 Current debate Cell 3 No ex ante regulation

10. 10 Cell 4: Regulatory options for existing services on new infrastructure 1.Use NRF because of technology-neutrality concept 2.Forbear from regulation because of preserving investment incentives in infrastructure 3.Focus on bottlenecks: regulate non-replicable assets only

11. 11 Pros and cons regulatory options 1 and 2 Using the NRF: + technologically neutral - high risk of regulatory error because of uncertainties - investment incentives negatively affected Forbearance: + investment incentives not affected - not technologically neutral - risk of re-monopolisation not dealt with Conclusion: Both options only deal with the disadvantage of the other

12. 12 Option 3: A non replicable assets approach Identify assets used by new technology platforms which are non replicable. i.e. it does not make commercial sense for an entrant to replicate these assets; Focus all ex ante regulation on these assets and use competition law to constrain behaviour in the provision of services over these assets. This approach deals with both preserving investment incentives and re-monopolisation problem.

13. 13 Questions to be dealt with How to determine replicability; Replicable within what time horizon? Often much longer than 2-3 years due to large infrastructure investments; technical vs functional replicability.

14. 14 How does this approach fit with current NRF? (1) Some thoughts: Replicability of infrastructure is already used to choose between infra based and service based competition (see ERG common position) in determining proportionality; Direct assessment of replicability of infrastructure vs. analysis of market power on wholesale services markets.

15. 15 How does this approach fit with current NRF? (2) Non-replicable assets approach is possible within NRF but the NRF time horizon of 2-3 years often leads to a too short term perspective. With the review of the regulatory framework the European Commission could: encourage a longer-term view of regulation; focus on bottleneck (non-replicable) infrastructures.

16. 16 Conclusion The clear long term signal should be: ex ante regulation limited to non-replicable assets in combination with general competition law the is the best method to ensure that investment incentives are not hampered by the regulatory environment.

17. Questions? Drs. Robert Stil (r.stil@opta.nl) Economic Analysis Team, OPTA The Netherlandsr.stil@opta.nl