David Flacher¹ & Hugues Jennequin¹, ² ¹ : Paris XIII University CEPN – CNRS UMR 7115 ² : Rouen University, CARE Liberalization of the telecommunications sector: Stakes and limits Symposium EAEPE and PRESOM

Contents Introduction The liberalization in Europe Investment, innovation and regulation Foreign experiences: USA and Korea Conclusion

Introduction Introducing competition in the European telecommunications sector (around the 90’s) Aims at increasing consumer and global welfare Ex ante regulation is needed to introduce effective competition Is this policy efficient? Which kind of policies apply in the future framework of telecommunications regulation in 2010? Crucial question since telecom is a crucial sector for the whole economy

Liberalization (in Europe): Why? Why did EU open the telecom sector to competition? Perfect competition model theoretically considered as the optimal one (global welfare)  allocative efficiency The X-inefficiency theory defended by Leibenstein (1966) Dynamic efficiency: innovation  efficiency gains and cost reductions

Liberalization: How? Distinction between ex ante (introducing effective competition through asymmetrical regulation) and ex post (concerning abuses of dominant position) Two layers The lower one: infrastructures With strong economies of scale (essential facility: problem for facility-based competition) Accessing this layer is needed to remove entry barriers The upper one: the services offered to consumers Weaker economies of scale but network externalities

Liberalization in Europe, How? Ex ante regulation Ex ante regulation consists in Market structure regulation (licensing) or price regulation of wholesale and retail markets This “stepping stone” regulation is supposed to be only transitory before competition law (ex post) applies: First step: low enough wholesale prices for resale (controlling anti- competitive practices and attracting new competitors) Second step: low enough prices for the access to the essential facilities infrastructures (unbundling, for instance) Third step: Higher prices for the access to the infrastructure in order to incite competitors to invest in their own infrastructure  To a service-based competition to a facility-based competition  ladder of investment

Liberalization in Europe: a brief history 1987 Green book to protect the monopoly for basic services (fixed telephony…) but to liberalize the others, to organize competition with fair access to incumbents networks 1993 Complete liberalization (including basic services and infrastructures) since 1998 and process of liberalization 2002: new telecom framework (being changes currently) Independence of the NRA Principle of technological neutrality Establishing a list of 18 relevant markets with and the powers of NRA 2008 (?): application of a new framework…

Limits of the liberalization process: Econometrical studies Ambiguous effect of the liberalization process on the performances of the sector (productivity, prices, employment, quality of services…) Boylaud & Nicoletti, 2001; Wallsten, 2001; Bortolotti & al., 2002; Li & Xu, 2002; Uri, 2003 The facts: Global decrease in investment and employment since 2001 R&D which favours the short term programs

Investment and innovation problem Some theoretical approaches explain under- investment when price regulation applies Jorde, Sidak & Teece (2000) Ex ante regulation of network elements (through mandatory unbundling on a cost-oriented and non discriminatory basis) reduces incumbents’ investment both in maintaining and improving the networks but also in adopting new techniques because regulation reduces the option value of investing (real option theory). Regulation delays competitor’s investment since they are able to take advantage of incumbents’ investment without taking risks.

Investment and innovation problem Foros (2004) and Kotakorpi (2006) show that investment into services improvement usually decreases when access rate is regulated. Bourreau & Dogan (2005) show that low unbundling rates can lead to under- investment in new infrastructures since competitors prefer to rent it rather than building a new and innovating one.

A current evolution enhancing this investment problem Convergence of techniques leads to convergence of the usages (telecommunications, hardware, software, contents…). Sector specific development will come from high broadband networks (FTTH)  how to build it? Risks and uncertainties appear: the demand side Will consumers use very high broadband? the regulatory one Will the investors be obliged to unbundle their infrastructure on a cost oriented basis? the supply (technological) side Will new techniques, especially wireless ones, make FTTH non profitable enough in a near future? What about the free rider behavior (Skype; Google): a Schumpeterian view more destructive than creative? The question of Universal Service : What happens for new services?

Foreign experiences: The USA case Four differences: An earlier regulation A dismantlement of the private monopoly (AT&T) in 1984 Differences in the market structure (cable, low regulated) Legal proceedings with, recently (2005): a final decision against FTTH unbundling (at least for many years) The main argument of RBOC was that they would not have incentives to develop new infrastructures (such as optical fiber local loop) if they would be obliged, once the infrastructure built, to offer a cost oriented and non discriminatory access to their competitor.

Foreign experiences: The Korean case Institutional transformation in the 80’s and mainly in the 90’s, with the aim of introducing competition in the telecommunications sector. Two major differences can be noted with the European model: Absence of an independent NRA Existence of an industrial polic Public policy aiming at promoting the specific development of a sector, in particular with incentives and grants mechanisms Korea decided not to require the FTTH unbundling State’s direct and indirect help for infrastructure deployment but also for developing new services and applications (IT839…) The sector appears to be one of the most efficient in the world.

Conclusion Three options: Maintain the current regulation with ex ante asymmetric price regulation and intervention if operators appear dominant on a market Replace ex ante by ex post regulation Take into account the macro-strategic dimensions of developing the telecommunications sector at the national and international level and the importance of institutions in the country’s technological path following a vertical industrial policy  An intermediate option between ex ante and ex post regulation seems to emerge in Europe