In the past, telecommunications operators have been viewed as stable, monopolistic utilities. The main challenge for regulators had been to prevent excessively high retail pricing (section 7) by incumbent operators.
With increasing competition from new providers and new services, the telecommunications sector is becoming more volatile. Average revenues per line from traditional services are declining under pressure from competing providers and modes of delivery. In particular, the emerging de-layered structure of the industry means that ‘over-the-top’ applications (like Skype) which have no intermediation by the carriage provider take revenues directly from the end customer. This loss of revenues is happening to both fixed operators and, with smartphones, also mobile network providers.
At the same time, network providers are expected to invest heavily in next generation fixed and wireless broadband networks. This may not happen fast enough to suit policy makers [1] with regulatory implications for open access, competition and price regulation.
A common reason for market invention is market failure due to ‘positive externalities’. That is, investment in broadband is socially beneficial (public and private benefits exceed total costs) but private investment is not profitable (private costs exceed private benefits). This is most likely in rural areas where costs are high and demand is sparse, but may also occur in urban areas.
- The approved remedy for this kind of market failure is to provide a capital grant or subsidy to the private operator to make the investment profitable. This could be done through a public tender process and conditions could be attached to make the operator provide open access.
- Another remedy is to provide a regulatory ‘access holiday’. This is what was done for Verizon and AT&T [2] and sought by Deutsche Telekom [3]
- A third option which has been used is direct public investment. This can range from local municipal networks to national networks like the Australian National Broadband Network [4].
Box 1.5: Public Investment
Public investment is popular with users but disliked by incumbents and regulators who want to prevent ‘unfair’ competition.
To justify a public investment, the European Commission requires detailed local mapping of availability, need, and rollout; an open tender process; acceptance of the most economically advantageous offer (which need not be the lowest bid); that the tenders be technologically neutral; that, where possible, they use existing infrastructure (except where the recalcitrance of the local monopolist is part of the problem); that the successful bidder offer its network for wholesale services to other providers at rates that are benchmarked against wholesale rates in competitive areas, and; that the tenders or laws pursuant to which a tender is made include claw back provisions allowing the state to seek restitution of profits found to have been excessive following such price benchmarking.
Another form of market failure is due to ‘natural monopoly’. That is, duplication of fixed broadband access networks is uneconomic. That is of special concern to countries where investment resources are scarce but could also be of concern to developed countries if it meant that no duplicated network achieves the scale it needs to be viable.
- The approved remedy is open access; which is what the Australia’s national broadband network will provide. It has persuaded incumbents to close their own fixed broadband networks and to move their customers to the new network in what is effectively a switch from infrastructure-based competition to service-based competition.
- A single broadband access network with open access can be seen as just another vital utility network. The days when networks were built around applications (i.e. telephony and television) are over. With technological change, control of the access network does not confer control of the customer or service.
Significant Market Power (SMP) could lead to an operator restricting output to increase profits. Even if there is latent demand for faster broadband, the operator may prefer to sell existing data services rather than provide broadband services where it cannot differentiate so easily between business and residential customers.
- One remedy is to force existing operators to provide open access to their networks (i.e. provide wholesale services).
Uncertainty over demand could lead to an operator not deploying next-generation broadband. This could be a market failure if there was enough underlying demand, but operators were not able to identify it.
- This potential market failure can be overcome by demand-side stimulation interventions.
Regulatory uncertainty could lead to operators not investing in new infrastructure as they are unclear on how regulation may impact their investment in future.
END NOTES
[1] Analysys-Mason report for the UK Broadband Stakeholders Group. The report also discusses social drivers and semi-commercial public sector expansion (often by a utility).
[2] The FCC decided to forbear from unbundling and price regulation of FTTH in August 2003, extended this to FTTN in October 2004 and also DSL in September 2005.
[3] In February 2006, the German Government exempted Deutsche Telekom’s VDSL (FTTN) network from providing access, without reference to either its own regulator (the 'Bundesnetzagentur') or the European Commission. The European Court of Justice confirmed the Commission’s position that national legislation may not exempt next-generation (‘new’) electronic communication markets from regulation or limit the discretionary powers of the national regulator in its exclusive right to assess whether markets should be regulated or not under EU rules.
[4] NBN Co. was was set-up as public company offering only wholesale broadband fibre access (FFTH) services after a tender process for FTTN was aborted. http://www.dbcde.gov.au/broadband/national_broadband_network