1. Liberalisation and regulation in the electronic communications sector: Theory and empirical evidence Week 1 zIntroduction to the course zThe International and European framework of telecom reform

2. 12 April 20051 Introduction to the course zObjective: To provide an in-depth understanding of the main issues and options of telecommunication regulations and reform at the EU level. zMain Tools: Economic & Legal principles of Competition Law, Technological Advances in Electronic Communications (e.g. Broadband & Wireless Access to the Internet), Empirical Evidence of Regulation in European countries (e.g. Interconnection & Unbundling of Services) zTopics addressed: yThe international framework of telecom reform yCost modelling and price regulation yInterconnection: Economic and policy aspects yUniversal Service, Universal Access and the digital divide yThe European experience in telecommunications regulation yThe new EU Regulatory Framework (July 2003) yLocal Loop Unbundling: Economic & technical aspects

3. 12 April 20052 Logistics zInformation resources for the course ySee the course site zStudents’ evaluation ySee the course site yGroup assignments yPossible topics for study yMethods of communication

4. 12 April 20053 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

5. 12 April 20054 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.

6. 12 April 20055 (…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 1990-2004: 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.)

7. 12 April 20056 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.

8. 12 April 20057 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

9. 12 April 20058 … (cont’d) zInternational Strategies yExpansion into new international markets yAlliances zCompetitiveness Strategies yIndustrial policy considerations yVertical integration (often with equipment manufacturers)

10. 12 April 20059 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.

11. 12 April 200510 … (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

12. 12 April 200511 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 2000 - AT&T and BT announce the $10 billion joint venture, Concert (October 2001 - Final death of Concert). Verizon z2000:Bell Atlantic Corporation and GTE Corporation merged into Verizon Communications ($53 billion – 250,000 employees).

13. 12 April 200512 … (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

14. 12 April 200513 Reform experiences in the UK z1982: Licensing of Mercury for long-distance and international service provision. Operations began in 1986 and duopoly maintained until 1991. 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

15. 12 April 200514 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).

16. 12 April 200515 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

17. 12 April 200516 … (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.