Transcript Glenn Woroch (UC Berkeley) "Open Access, Structural Remedies

Economic characteristics and
policy challenges of NGANs
Glenn A Woroch
C.R.T.P. / UC Berkeley
Policy for Next Generation Networks:
European and US Perspectives
MIT Communications Futures Program
27 March 2009
Overview
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Engineering & economic properties of NGANs
Competition & regulatory concerns
Policy options & economic criteria
Vertical separation as a remedy
Different approaches in the U.S. and E.U.
Open questions & policy challenges
1. What is the NGAN?
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Consensus so far …
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Converged: IP transport of all kinds of content to
all kinds of devices
Layered: OSI and other layered architectures
Modular and Open: interoperability among layers,
components
Backward compatible: interoperate with legacy
PSTN and data networks
What is the NGAN?
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Not your father’s Internet
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Consolidation of ATM, SONET, Ethernet, MPLS
More than best effort: carrier class, security
But still a work in progress
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Competing technologies: FTTx’s, xDSL’s, etc.
Competing architectures: star, PON, etc.
Open and proprietary technologies
Distinct economic features of NGAN
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Natural monopoly at the core
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Open entry at the edges
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High fiber results in high fixed costs, low
marginal costs
Impediments to facility sharing
Open interfaces, standard protocols
Limited capacity of critical facilities
Converged devices at the ends
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Need to manage connections & traffic
2. Competitive & regulatory concerns
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How to respond to a fortified access
monopoly?
How to maintain progress toward competition
in retail services?
How to preserve incentives to invest in
facilities and to rollout innovative services?
How to transition from current institutions?
Competitive concerns
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Disadvantage downstream rivals
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Margin squeeze
Quality sabotage
Refusals to supply
Tying and bundling
Technical incompatibilities
Vertically integrated bottleneck monopoly
V.I.M.
Retail
rival
Consumers
Regulatory concerns
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What parts of NGAN are natural monopolies?
 Distinguishing new from legacy bottleneck
facilities
How carve out potentially-competitive portions
of the NGAN?
 Engineering: layers
 Economics: markets
Regulatory concerns (cont’d)
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What policy to impose on the boundaries of the
NGAN?
 Nondiscriminatory access
 Full interoperability
How to transition from legacy network and
ownership structure to NGAN?
 Maintain regulation on legacy network?
 “Regulatory holiday” for NGAN?
3. Policy options & economic criteria
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Objectives of policy intervention
Economic criteria for evaluating policies
Structural and behavioral strategies
What are the objectives of intervention?
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Curb monopoly excesses
Prevent exclusionary behavior
Promote efficient entry and competition
Facilitate investment in infrastructure
Preserve incentives to innovate
Economic guidelines for policy analysis
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Overarching criterion should be efficiency
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Time is of the essence
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Consumer welfare is paramount
But measured by social welfare
Not just short term or just long term
Dynamic progress critical to network evolution
Policies need to be “incentive compatible”
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All agents will pursue their private interests
Policy options
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Forbearance
Promotion of platform competition
Opening access network and unbundling
Facility sharing
Vertical separation
Ex ante regulation
Ex post competition policy
4. Vertical separation as remedy
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Kinds of vertical separation
Vertical separations experiments in U.S., E.U.,
and elsewhere
Economic benefits and costs of separation
Obstacles to separation
Why the interest in separation now?
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Dissatisfaction with progress toward
competition
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Lack of entry under unbundling policies
Slow development of platform competition
Fear that NGAN could reverse progress
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Opportunity to establish dominance in new
infrastructure market
Such dominance could be extended to retail
Vertical separation
Access
Division
Retail
Division
Retail
rival
Consumers
Degrees of vertical separation/integration
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Full integration
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Quasi-integration
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Long term contracting
Nonstructural separation
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Forward and backward integration
Accounting separation
Functional separation
Operational separation
Structural (ownership) separation
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Reciprocal partitioning
Club ownership
No vertical integration
Four degrees of separation
Accounting
Operational
Functional
Structural
Telecom separation around the world
Efficiencies of vertical separation
Benefits
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Eliminates of cross
subsidies
Eliminates conflict of
interest
Counteracts
discriminatory treatment
of retail rivals
Costs
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Forgoes vertical scope
economies
Causes double
marginalization
Lowers reliability due to
quality externality
Raises transaction costs
Blunts incentive for
access investment
Obstacles to vertical separation
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Divorced facilities may not be sharable
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Certain portions of a non-IP video market
Separation may preclude certain bundled
services
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Access + retail services, especially for businesses
Arms’ length contracting alternative can be costly
5. Divergence in U.S. and E.U. approaches
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Origins of institutions and property rights of
the two telecoms sector were vastly different
Current network infrastructure and industry
structure varies considerably in EU, but not in
the US
Subtle but fundamental differences in
competition policy
Example of competition policy
differences
U.S.
E.U.
Quality
degradation
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Trinko (2005)
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IMS Health (2004)
 Microsoft (2004)
Price/margin
squeeze
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LinkLine (2008)
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Deutsche Telekom (2003)
 Telefonica (2007)
Separation policy in the U.S.
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Anti-trust separations
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LOB restrictions on AT&T in 1956
Divestiture of AT&T in 1984
Regulatory separations
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FCC’s Computer I, II, III LOB restrictions on
RBOCs
PSCNY’s Rochester Tel experiment in 1995
SBC’s separation of DSL service in 2001
Failure of state nonstructural separations (e.g.,
Pennsylvania)
Separation policy in Europe
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Regulatory stance on separation in the EC
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OECD separation recommendation (2001)
EC recommendations on accounting separation
(1998, 2004)
Reding speech (2006)
OFCOM-BT’s undertakings in 2005
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Separation of OpenReach and BT Retail
Applies to 21CN products
But much earlier there was the French
approach to vertical separation …
6. Open questions & policy challenges
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Implementing vertical separations
Enforcing non-discrimination
Measuring success
Implementing vertical separation
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Pre-conditions for separation policy
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Activity prone to “enduring bottleneck”
Complements are potentially competitive
Bottleneck monopolist integrated into the complementary
markets
Essential elements of vertical separation
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Quarantine of bottleneck
 Isolate of essential facilities
 Impose line-of-business restrictions
Regulate the bottleneck
 Dictate range of wholesale access services
 Enforce price and quality nondiscrimination
Measuring success
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Direct measures of success
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Entry of new firms upstream and downstream
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Facilities based or service based
Development of infrastructure/platform
competitors (e.g., wireless)
Indirect measures of success
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Lower retail prices, higher service quality
Expanded retail service offerings
Measuring success (cont’d)
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All impacts need to be evaluated incremental
to the status quo
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Any unbundling regime
Any access/interconnection pricing regulation
Any form of vertical separation
Case of Italy
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Unbundling
Interconnection pricing
Operational separation of network services
Various non-discrimination principles
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OFCOM’s “equivalence of inputs”
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Same products, sold at same prices, using same
order processes as BT’s retail division
Applied to certain existing and future products
FCC’s “parity principle”
TCNZ’s “fair and equivalent”
AGCOM’s “parity of internal-external
treatment” (152/02/CONS)
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Competitors can replicate TI’s retail services
Why non-discrimination may not be good
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Retailers value input quality differently
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Some retailers prefer lower quality input if they
receive a sufficient price break
Sabotage may impose cost on access
supplier
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Greater costs to creating multiple qualities of an
input
Greater sales to the advantaged affiliate retailer
offset by reduced sales to rival retailer
Performance measurement: the plan
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Map indicators of wholesale service into
monetary penalties
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Benchmark is service received by bottleneck’s
retail division
Induce bottleneck monopoly to provide
equivalent service to retail rivals
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Discriminatory treatment becomes sufficiently
costly
Performance measurement: the reality
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Evolution of PMPs
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Measures divide and multiply
Penalties occur for uncontolled events
Competitors learn to “game the system”
Link between effort and penalty becomes weak
 PMP distorts behavior of incumbent and its
competitors