1 Access regulation and incentives for investment in alternative broadband infrastructure* Harald Gruber Presentation for REGULATION AND COMPETITION SEMINAR SERIES 07 UPF, the Comisión del Mercado de las Telecomunicaciones (CMT) and the Barcelona Graduate School of Economics Barcelona, 17 December 2007 *The opinions expressed are of the author and need not necessarily reflect those of the EIB.

2 Outline Sector overview Fixed line access regulation Investment incentives Alternative regulatory scenarios Conclusion

3 Past drivers for investment and growth Technology –Cost reduction –Performance increase Regulatory change –Liberalisation –Changes in market structure

4 EU Commission, 2007

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8 Fixed line market Slow revenue growth: –Pressure on tariffs –Switch to flat fees –Fixed-mobile substitution Pressures on profit margins Increasing role of data/broadband revenues Customer access as key revenue source Persistence of ex ante regulation

9 Fixed line broadband regulation Bottleneck in local loop access Regulatory remedy: open access at cost based prices: –Service based competition: bitstream, resale –Facility based competition: Full LLU, shared access Asymmetric access regulation of DSL (unbundling) vs. cable modem

10 EU Commission, 2007

11 Ladder of investment theory Short term goal of service based competition –Resale –Bitstream Long term goal of facility based competition –Shared access –Full local loop unbundling

12 EU wholesale access line availability European Commission, 2007

13 EU DSL wholesale access types European Commission, 2007

14 Investment incentives Increasing investment profile for new entrants. Investment effect on incumbent uncertain

15 Source: EU Commission, LE Investment ladder without investment?

16 Issues for future investment incentives Does next generation access (NGA) require less investment or are investment incentives diminished? Is unbundling complement or substitute for new entrants’/incumbents’ investment? Incentives for alternative platforms seem reduced (see Waverman et. al, 2007)

17 Role of facility based competition in driving NGA investment There is empirical evidence (for US) that inter-platform competition has significant positive effects on diffusion of broadband Change in regulatory approach in the US Evidence for positive relationship between investment and platform competition

18 Source: European Commission EU is moving away from platform competition

19 European Commission, 2007

20 Vertical separation as remedy for SMP Additional tool proposed: functional separation: separate business units within company Analogy with UK, but BT created Openreach on voluntary basis Ofcom: no relevance for investment incentives Is it creating investment incentives?

21 Source : ARCEP, OTA

22 Reservations about functional separation Risk of monopoly & persistence of ex ante regulation Risk of irreversibility Investment incentives: –does not internalise market interdependencies –hold up problem –lack of incentives for quality What is the prospect for infrastructure competition

23 Further issues Functional separation may not be enough Structural separation: creation of distinct legal entitity with different ownership structure Case of eircom: voluntary structural separation driven by financial rating considerations Unclear whether solves lack of investment issue

24 Alternative scenarios: Duct sharing model –Ducts represent more than half of cost for new network (no need for duplication) –Network (active and passive) represent about one sixth (could be duplicated) –Scope for platform competition Source: France Telecom

25 Alternative scenarios: Unregulated platform competition –Possible where at least two platforms (DSL+cable) exist already –Example of the Netherlands

26 Share of broadband platforms Source: OECD

27 Alternative scenarios: Regional regulation –Regional regulation: regulate only areas with single platform

28 Platform competition May not be feasible to the same degree for all EU countries because of absence of cable networks Look for alternatives, e.g. radio based technologies –Wimax –HSDPA Scope for issuing spectrum licenses (digital dividend)

29 A counterexample Source: OECD

30 Cost comparisons FTTx investment/subs. in the order of € DSL investment/subs. for triple play € So investment for NGA are potentially very large

31 Regulatory challenges Encourage more investment What to do with countries with single platform ? Consider non-uniform regulation across EU? –Mandatory unbundling (possibly limited time horizon) for countries without alternatives to DSL –Deregulation in countries with platform competition

32 Investment patterns Invest Not Invest Incumbent New entrant

33 Conclusion Regulation has strong effects on investment behaviour –Incumbents –New entrants Regulation should not represent a permanent claim on incumbents assets Stimulation of facility based competition