Liberalisation and regulation in the electronic communications sector: Theory and empirical evidence Week 2 zThe International and European framework of telecom reform zTechnical aspects of Electronic Communications Networks zBusiness models in network provision zCase studies

19 April Setting the Stage: The International and European framework of telecom reform zThe historical approach to telecommunication service provision zMain pressures for change (technological and socio- economic) zMajor steps of reform: Strategies for the restructuring of markets from the 1980s till now zReform experiences in the US, the UK, and Europe zMain features of the telecommunications industry that are important in the process of regulatory reform

19 April The historical approach to telecommunication service provision zThe PTT (Post, Telephone and Telegraph Administration) was granted a monopoly on the provision of telecommunication infrastructure and services since late 19th century. zBasic model world-wide = monopoly on equipment and on basic network and service provision (public monopoly in Europe vs. private monopoly in the US) zThe natural monopoly doctrine: the industry enjoys large fixed costs whose duplication was neither profitable for private investors nor socially desirable. Telecommunications was one of the societal benefits that economic development allowed. zEuropean PTTs became large and powerful employers, often capable to subsidise other social programmes.

19 April (…cont’d) zPTTs had multiple roles as policy-maker, regulators, and operators. zDuring this time, experiences in telecommunication performance & liberalisation varied among countries (e.g. UK, France, Greece) zCurrent Liberalization Phase : Competitive service provisioning by alternate PNOs (Public Network Operators) protected against incumbent PNO (former state monopoly) by State Regulations; fair competition monitored / enforced by independent National Regulatory Authorities (NRAs) after the US FCC paradigm (UK OFTEL, now OFCOM, Greek EETT etc.)

19 April Main pressures for change (since late 1970s) zRadical developments in the electronics/computer industry and digital technology lowered the costs for certain types of infrastructure, exposed the inefficiencies of PTT monopolies, and offered opportunities for market entry. zIncreasing technological convergence between previously separated industries (consumer electronics industry, telecommunications, and media publishing) created new types of value-added services. zInternationalisation of business urged national carriers to compete in attracting customers wishing to establish multinational private networks. zIn Europe, concerns were raised over creating a single European market for equipment and services able to compete against the US and Japanese rivals.

19 April Major steps of reform: Strategies for the restructuring of markets in the 1980s zMarket structure Strategies yLiberalisation yDeregulation yDivestiture (e.g. AT&T) yConsolidation (for capturing economies of scale and scope, e.g. through mergers and acquisitions) zOwnership strategies ySemi-Public Corporation (loosens direct government control on the PTT) yFull Privatisation – Competition

19 April … (cont’d) zInternational Strategies yExpansion into new international markets yAlliances zCompetitiveness Strategies yIndustrial policy considerations yVertical integration (often with equipment manufacturers)

19 April Reform experiences in the US zUntil the 1960s US telecom industry was dominated by a single private monopoly, AT&T. z1963: Competition in the long distance market following a request filed by MCI. This generated policy debates on interconnection arrangements with the local operating facilities of the Bell System. z1968: Carterphone decision (FCC approves third party CPEs to the AT&T network) z1974: the Department of Justice filed an antitrust complaint against AT&T monopoly position asking for its divestiture. z1984: break up of AT&T. AT&T kept its long-distance operations, its manufacturing subsidiary, and its R&D facilities (Bells Labs). It was also allowed to enter other markets. The seven Bell Operating Companies (BOCs) were restricted to local telephone service. Also known as LECs (Local Exchange Companies) or ILECs (Incumbent LECs). Each LEC was serving one of the 192 Local Access and Transport Areas (LATAs). Inter- LATA services were provided by long-distance carriers such as AT&T and MCI.

19 April … (cont’d) z1993: Restrictions in RBOCs’ line-of-business started to be gradually abandoned and were allowed to offer information services z1994: RBOCs filed a request to enter into long-distance service provision and equipment manufacturing z1995: Restrictions in RBOCs’ long-distance service provision and equipment manufacturing were abandoned z1996: Release of the US Telecommunications Act of 1996 yThe Act aims to foster local market competition and will enable RBOCs to enter the long distance market once there is ‘sufficient competition’ in the local market yEntry into local markets can be done through own facilities, resale, or unbundling yPlayers need to enter into symmetrical and non-discriminant interconnection agreements

19 April US Recent Developments z1995: WorldCom formed after LDDS acquired Williams Telecommunications Group (WilTel) for $2.5 billion. z1996: WorldCom merges with MFS Communications Company (MFS) and UUNet Technologies, an Internet access provider for businesses. SBC Communications  1997: SBC Communications, Inc. acquired Pacific Telesis Group ( $ 16.5 billion). z1997: Bell Atlantic Corporation acquired NYNEX Corporation - New York Telephone Company and New England Telephone and Telegraph Company ($25 billion). z1998: BT fails to acquire MCI z1998: WorldCom completes three mergers: with MCI Communications ($40 billion), Brooks Fiber Properties ($1.2 billion) and CompuServe ($1.3 billion). z1998: SBC Communications, Inc. acquired Ameritech ($62 billion). z1998: SBC Communications, Inc. acquired Southern New England Telecommunications Corporation ($4.4 billion). z2000: 5 January AT&T and BT announce the $10 billion joint venture, Concert (October Final death of Concert). Verizon z2000:Bell Atlantic Corporation and GTE Corporation merged into Verizon Communications ($53 billion – 250,000 employees).

19 April … (cont’d) Qwest Corporation z2000: U S WEST Communications Group merged with Qwest Communications International, forming Qwest Corporation. ($45 billion) Verizon Wireless z2000: Verizon Wireless, a joint project of Verizon Communications and Vodafone (55% - 45%). Largest wireless US service provider (51,000 employees – 43.8 Million customers - $24.4 Billion annual revenues 2004) z2002: July 21 — WorldCom CEO Sidgmore says the company will file for Chapter 11, with the company listing assets of over $100 billion, and having more than 1,000 creditors, debt estimated at $32.8 billion, serving around 20 million consumers and running the world's biggest Internet network z2004: Cingular Wireless acquired AT&T Wireless Services Inc. 2nd largest wireless US service provider($41 billion) z2004: Sprint Corp. acquired Nextel Communications Inc. forming the 3 nd largest wireless US service provider. ($35 billion) z2005: SBC Communications (a Baby Bell) acquiring the No. 1 long- distance carrier, AT&T, for $16 billion. z2005: Verizon, MCI to link up in $6.7 billion deal

19 April Reform experiences in the UK z1982: Licensing of Mercury for long-distance and international service provision. Operations began in 1986 and duopoly maintained until Discussions over interconnection charges began. z1984: Privatisation of British Telecom (BT) z1991: Licensing of several new long-distance and international operators. Cable TV companies allowed to offer local telephony services and long-distance and international through wholesale agreements with BT’s competitors. BT and Mercury were excluded from offering television services on existing phone lines. z1996: Ionica entered the local market through a fixed wireless service. BT and Mercury were excluded from offering fixed wireless service. zCurrently BT is loosing significant market share out of new competitors

19 April Reform experiences in Europe (up to 2001) z1987: Issue of the EC Green Paper on Telecommunications. It proposed the introduction of competition in the equipment and services market. z1988: Commission Directive on competition in the markets for telecommunications equipment. z1990: Commission Directive on competition in the markets for telecommunications services. Its scope was gradually extended until 1998 when voice telephony and networks were completely liberalised. z1996: Commission Directive with regard to the implementation of full competition in telecommunication markets (96/19/EC).

19 April The New European Regulatory Regime (2003) From Telecommunications to Electronic Communications Electronic Communications Networks (ECN) Electronic Communications Services (ECS) zFramework Directive (2002/21/EC)2002/21/EC zAuthorization Directive (2002/20/EC)2002/20/EC zAccess & Interconnection Directive (2002/19/EC)2002/19/EC zUniversal Service and Users' rights Directive (2002/22/EC)2002/22/EC zData Protection Directive (2002/58/EC)2002/58/EC zUnbundled Local Loop Regulation (2000/2887)2000/2887

19 April … (cont’d) zMajor principles underlying EC liberalisation measures: yremoval of special or exclusive rights yobjective, non-discriminatory and transparent conditions for granting of licences and access to networks ybreaking of “monopoly bottlenecks” e.g. local loops, obligation for fairness in wholesale services market. yuniversal service provisioning The old Regulatory Framework: ex-post regulation of incumbent operators The old Regulatory Framework: The ONP Principle (OPEN NETWORK PROVISION), access and interconnection rights for licenced operators at wholesale, cost-based tariffs imposed by NRAs to ex-post regulation of incumbent operators. The new Regulatory Regime: ex-ante regulation of SMP (Significant Market Power) holders. The new Regulatory Regime: Competition Law. Definition, Analysis and Remedies of Markets by NRAs, ex-ante regulation of SMP (Significant Market Power) holders.

19 April Technical aspects of Electronic Communications Networks z Core – Backbone Network y Fixed (Fiber, PDH/SDH, PoS, GigaBit Ethernet, WDM, DWDM) y Wireless z Access Network y Fixed wired (Fiber to the Curb/Home, Cable, Coax, Copper - xDSL) y Wireless (802.11, , LMDS) y Mobile (GSM, UMTS, ) y Satellite communications (DVB/RCS, VSAT) z Interconnection y Interconnection y Unbundling

19 April Backbone - Core Networks

19 April Backbone - Core Networks (cont'd)

19 April Access Networks

19 April Access Networks (cont'd)

19 April Electronic Communications Networks Single Operator

19 April Electronic Communications Networks Competition

19 April Interconnection zPhysical and logical connection of telecommunications networks. zUsers connected to different telecommunications networks communicate directly or indirectly.

19 April Interconnection - PSTN Operator A Operator B A Subscriber B Subscriber Switch Trunk Group Point of Interconnect (POI)

19 April Interconnection - NGN Originating Carrier ISP B Users Point of Presence (POP) Users Terminating Carrier ISP B Web Sites

19 April Interconnection - NGN Originating Carrier ISP B Users Terminating Carrier ISP B Web Sites Backbone Carrier

19 April Business models in network provision zTraditional TELCO offerings (ATM – PDH/SDH) zNew TELCO Broadband offerings (Gigabit Ethernet/Packet over SDH, λ-DWDM) zalternate models (dark fiber, condominium arrangements)

19 April Customer Empowered Networks z School boards and municipalities are building condominium dark fiber networks in partnership with next generation carrier z Individual institutions – the customers – own and control their own strands of fiber y Fiber are configured in point to point private networks; or y Connect to local ISP or carrier hotel y Private sector maintains the fiber z Low cost LAN architectures and optics are used to light the fiber z These new concepts in customer empowered networking are starting in the same place as the Internet started – the university and research community. z Customers will start with dark fiber but will eventually extend further outwards with customer control and ownership of wavelengths y Extending the Internet model of autonomous peering networks to the telecom world

19 April Market Drivers  First - low cost  Up to 1000% reduction over current telecom prices month payback  Second - LAN invades the WAN – no complex SDH/SONET or ATM in network  Network Restoral & Protection can be done by customer using a variety of techniques such as wireless backup, or relocating servers to a multi-homed site, etc  Third - Enables new applications and services not possible with traditional telecom service providers  Relocation of servers and extending LAN to central site  Outsourcing LAN and web servers to a 3 rd party with no performance impact  IP telephony in the wide area (skype)  HDTV video  Fourth – Allows access to new competitive low cost telecom and IT companies at carrier neutral “meet me” points  Much easier to outsource servers, e-commerce etc to a 3 rd party at a carrier neutral collocation facility

19 April What is condominium fiber? z A number of organizations (schools, hospitals, businesses and universities) get together to fund and build a fiber network z Carrier partners are also invited to be part of condominium project z Fiber is installed, owned and maintained by 3 rd party professional fiber contractors – usually the same contractors used by the carriers for their fiber builds z Each institution gets its own set of fibers, at cost, on a 20 year IRU (Indefeasible Right of Use). z One time up front cost, plus annual maintenance and right of way cost approx 5% of the capital cost z Institution lights up their own strands with whatever technology they want – Gigabit Ethernet, ATM, PBX, etc z Ideal solution for point to point links for large fixed institutions z Payback, with the current level of prices, is usually less than 18 months!!!

19 April Municipal Condo Architecture School School board or City Hall School Telco Central Office Central Office For Wireless Company Condominium Fiber with separate strands owned by school and by service providers Carrier Owned Fiber Cable head end Average Fiber Penetration to homes Colo Facility / Fiber Splice Box

19 April Benefits to Carriers z Cablecos and telcos: helps them accelerate the deployment of high speed internet services into the community z Small Innovative Service Providers: provides opportunities to offer service to public institutions as well as homes z e-Commerce & Web Hosting Companies: generates new business in outsourcing, web hosting, Hosting etc.

19 April Montreal, Quebec (consortium) z Municipal authorities, school boards, RISQ (Réseau d’informations scientifiques du Québec – Quebec scientific information network) and IMS (IMS Health Canada) have joined in a consortium to build a municipal owned dark fibre network. y Schools can be connected for an average of $80 per month, per school based on a 20 year amortization of the fibre & eliminate the network servers at each individual school y Each school has essentially unlimited bandwidth (100 Mbps) y Schools LAN can be extended back to the central administrative site. Maintenance, Backups and Software Updates can all be done much more cost effectively from the central administrative building. y Schools are able to explore new high-end applications such as video conference & Voice over IP. z In Montreal, the estimated payback for dark fibre is between 6 months and 2 years.

19 April The case of FTTH (Fiber to the Home) z Problem: How to provide facilities based competition with FTTH? z The incumbent avoids heavy regulation z First generation FTTH models assume the old telco model where competitors can only get open access e.g. PON (Passive Optical Networks) z Second generation FTTH models assume structural separation between service providers and an “aggregator” using Gigabit Ethernet or ATM z CANARIE (the Canadian Research & Education Network) proposes a third generation FTTH model with structural separation using condominium fiber and choice of aggregators or service providers through point to point fiber and RPON (reverse PON)….

19 April Gigabit Internet to the Home z With municipal condominium fiber builds multiple carriers share in the cost of fiber build out to neighbourhood nodes serving approximately homes z It is impractical to have multiple carriers own individual strands from the neighbourhood node to each and every home: y Therefore let the customer have title to individual fiber from the residence to the neighborhood node y The customer connects to the service provider of their choice at the neighborhood node y Customer decides if they wish to connect to an aggregator, convergence provider, or single service Internet provider z Two approaches: y RPON which allows easy moves, adds and changes y Micro conduit, fiber is blown in upon customer request from designated service provider

19 April Gigabit to the Home ISP B ISP C Splice Box Up to 15 km Customer owns fiber strand all the way to Neighborhood Node X X 864 strands ISP D ISP E Colo Facility with RPON Colo Facility Business with dual connections Municipal Condominium Fiber Trunk

19 April RPON Passive Optical Splitter TDM return Aggregator ISP Neighborhood Node Switch Customer Controlled or Owned Fiber Active laser at customer premises

19 April Regional Networks in EU zSweden zUK zIreland zGreece