Transcript Regulation of new and emerging services?

Regulatory Challenges of Next
Generation Networks
Regulatory Policy Institute
Annual Competition and Regulation Conference 2008
Oxford, 15th& 16th September 2008
Marcus Weinkopf, Deutsche Telekom
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Cost-Based Price Regulation: Basics
Regulator fixes
Rate of Return
Nutrition:
500 € p.a.
Invest: 2000 €,
Depreciated
over 5 years
Calculates
efficient
Investment
Depreciation
Variable Costs
Common Costs
divides
by output
Price per Liter
Output:
3000 Liter p.a.
Marcus Weinkopf – Deutsche Telekom
April 24, 2008
2
The Next Generation: New Colors for the Market
Invest: 2000 €,
Depreciated
over 5 years
Next Generation Access

Same starting position for all
network operators

Substantial investments needed

High risk of investments
Marcus Weinkopf – Deutsche Telekom
April 24, 2008
3
Cost-Based Regulation with Multiple Business Models ?
“Committed Investor”
Invest: 2000 €,
Depreciated
over 5 years
Reseller / “Bitstream Access”
Despite strongly differing
risks, traditional „cost-based“
regulation would lead to
equal prices for both
business models!
Marcus Weinkopf – Deutsche Telekom
April 24, 2008
!
4
When Regulation Makes No Difference:
Why Should One Take Risks?
Marcus Weinkopf – Deutsche Telekom
April 24, 2008
5
Cost-Based Regulation for New Infrastructures:
A Perfectly Regulated Access to Nowhere?
Marcus Weinkopf – Deutsche Telekom
April 24, 2008
6
FTTH/B: Europe Lags Behind Asia and the U.S.
Number
fiber-based
subscribers
in Mio.
Anzahlofder
Glasfaser-Nutzer
in Mio.
2007(E) 2
18
Subscribers in Mio.
12
8
6
0
2
20041
4
2
1
20061
10
2007(E) 2
20041
20061
Europe
20061
2007(E) 2
20041
USA
Asia
 Recent trends show: Fiber-based
infrastructure grows in all regions, but
at significantly different rates.
 Only slow increase of fiber access
users in Europe. Significantly faster
growth in the U.S. and in Asia.
 In 2004, European fiber network rollout was still ahead of the U.S.
Since 2006, the picture changed
dramatically and with massive fiber
investments, the U.S. left Europe far
behind.
 While Europe passed the 1 million
barrier of fiber-connected homes
thanks to a 30% increase in 2007, the
dynamic is still much faster in the
U.S. and in Asia.
Source: IDATE (2007). Europe: EU-5 +NL+SW; Asia: Korea, Japan
Source: Estimates of the FTTH Council for 2007
Marcus Weinkopf – Deutsche Telekom
April 24, 2008
7
Demand for Bandwidth Will Increase Significantly
Development of network performance
Growth of data traffic in fixed networks
(GPON)
VDSL
ADSL2+
Factor
Factor
10-25
IMT
Advanced
10-25
ADSL
Factor
10-25
Tera Byte/Month
Development
fixed networks FTTH
FTTH
(NG-GPON)
80.000
60.000
40.000
0
LTE
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Growth of data traffic in mobile
networks
HSxPA
UMTS
100.000
20.000
Development
mobile networks
EDGE
Time
Source: Alcatel Lucent 2006-2007; Cisco, Global IP Traffic
Forecast and Methodology, 2006-2011
18.000
Tera Byte/Month
Ø Bandwidth per user
120.000
15.000
12.000
9.000
6.000
3.000
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Marcus Weinkopf – Deutsche Telekom
April 24, 2008
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Next Generation Networks need Next Generation Regulation


1998
PSTN / DSL
2008
NGN & NGA (FTTX)
Market
Deutsche Telekom starts with
close to 100% fixed network
market share
Existing State-of-the-art Network
Market
Regulation
Redistribution of market shares
 Decreasing retail prices
 Regulation of existing networks:
 Access
 Wholesale Prices



Strong broadband competition
Substantial investments in NGA &
NGN needed
Same starting position for all
network operators
Regulation
?
Marcus Weinkopf – Deutsche Telekom
April 24, 2008
9
Deutsche Telekom’s Move towards NGA: T-Entertain / VDSL

TV for the mass market launched in 2007

Eoy 2007: IP TV via VDSL in 27 cities,
ADSL2+ in 750 cities;
Plan 2008: IP TV via VDSL in 40 cities,
ADSL2+ in 1000 cities;
Mid term: VDSL in up to 50 cities

IP TV “Entertain”: 150 TV channels, 2600 VoD titles

T-Home “Entertain” coverage: 44 % / 17 Mio. Homes.
Target for 2008: 20 Mio. Homes
Marcus Weinkopf – Deutsche Telekom
April 24, 2008
10
German Market: The Fiber Race to the Home has Started
 Roll out Start: October 2007
 Current Coverage : 600 HH in Munic und
Augsburg; in 2008: 110,000 HH
 Plan: up to 400,000 HH in 2011
 Roll out Start: August 2006
 Current Coverage : 90,000 HH in
Norderstedt and Hamburg
 Further roll out planned
 Roll out Start: 2005
 Current Coverage : 2000 HH in
Westerstede; Lohne under construction
 Plan: Roll-out in Oldenburg beginning in
2008
Other announcements by
Have you found
the bottleneck?
Not yet..
Source: Wilhelm.tel presentation, November 2006 , bubbles by DT
 Roll out Start: July 2006
 Current Coverage: 10 – 20,000 HH in
Cologne
 Plan: up to 800,000 HH in 2011
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Required Investment per HH
FttH: Strong Economics of Density,
Nation-wide Roll-out requires Enormous Investments
No economically
viable roll-out
Region 3
One FTTH
Network + Cable
Region 2
Infrastructure
Competition
FTTH/Cable
0
20
40
60
80
Region 1
100
FTTH Coverage (in %)
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Next Generation Regulation: Regionalization Appropriate
Region 1
Region 2
Region 3
Infrastructure competition
FTTH/cable
Service-based competition
through access to NGAnetwork
No economically viable
network roll-out possible
Priority for commercial
solutions
Subsidiary price- and
access regulation with risksharing possible
Structural funds
PPP/tenders
Non-discriminatory access
Symmetric opening of ducts as
enabler
No regulation
Increasing costs per access line

Regulatory decisions must reflect regional/local conditions of competition

Decisions on access and prices for NGAs must be long-term – no regular short term review of
conditions every 2 years

Access conditions must allow for flexible pricing by the regulated operator and fair risk sharing
between investor and access seeker
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Next Generation Regulation: Network Access
Today: Regulated Access to each Element of the value chain
InHo
us
e
Col
loc
atio
n
SubLoop
ULL
Unbu
ndling
Lea
sed
Lin
es
Access Network Operators
ZIS
P&
Gat
e
&
OC
Res
ale
&
BS
A
ISP
IC
&
Car
rier
Sel
ecti
on
Telephone SP
Tomorrow: Regulators should focus on only one Type of Access, …
InHo
us
e
Duct
s
or
BS
A
( … and leave room for alternative commercial arrangements.)
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Wholesale Prices: Investment Risk Must be Taken into Account
Regulation of NGA under
current regulatory regime
average
costs
Price according to
supposed network
capacity utilization
Wholesale price
Amount of risk to be
shared
between access
seekers and investor
Price depending on duration
and quantity of contract
Retail price
Retail price
x x*
x**
Output/
Time
No risk sharing
 No mechanism to adequately reflect
the investment risk
 Investor fully bears the risk of
sufficient network utilization
 Investment is not profitable in early
market phase whereas access
seeker can make a profit right from
the beginning
 Market entry possible anytime (free
“option value“)
x2
Committed
Output/
Time
x1
Risk sharing through:
Long-term contracts with
committed duration and
quantities per time period or
 Up-front payments
 Access seeker partly takes over
the investment risk

average
costs
Retail price
Risk
P2
P1
regulate
d price
Price incl. risk premium
premium
Wholesale price
Wholesale price
average
costs
Proposal for the Review
price
basis
Output/
Time
Risk sharing through risk premium
 Access seeker pays price basis
plus risk premium for “option value“
 Risk premium decreases with
growing market penetration
 Price squeeze test must reflect the
Risk Sharing Mechanism:
Wholesale Price > Retail Price
Priority of commercial solutions!
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Conclusion: NGAs call for fundamental changes of the
regulatory framework
Current Framework

Network
Access


Retail





Maximum validity period of
regulated prices: 2 years.
No mechanism for risk sharing
through wholesale pricing
Constant pricing pressure

Regulation


Wholesale
Price
Regulation
Asymmetric obligations for access
to ducts to DTAG only
Regulation also in regions with
infrastructure based competition
Parallel network access on
several steps within the value
chain
Required changes for NGA



Symmetric: Opening all ducts
No regulation in case of existing or
potential infrastructure based
competition
Access obligations only for one step
of the value chain (ducts or BSA)
Longer approval periods (up to 10
years)
Appropriate risk sharing mechanisms
Stable wholesale pricing also for the
remaining life of the copper network
No regulation
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Thank you for your attention.
Marcus Weinkopf
Vice President Regulation Wholesale and Networks
Head Office T-Home, Deutsche Telekom AG, D-53105 Bonn
[email protected]
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