Posted by: Costas Troulos | June 10, 2008

3rd International Conference of EETT “Innovation in Broadband Networks & Services” – Part C

Day 2 – Innovative Applications of Broadband Internet

Session 1: Innovative Regulatory Measures for Competition and Broadband Market

The session discussed Functional & Structural Separation from many perspectives. The speakers common conclusion was that Functional/Structural separation may be attractive but it is not an a-priori straight-forward solution to the problem of NGA investment encouragement and competition promotion.

Martin Cave, Director of Centre for Management under Regulation, University of Warwick approached the matter via the lenses of economic theory. He talked about vertical separation issues such as:

  • Break up the value chain (Provision of core services + access and/or retail services)
  • Separation either voluntarily undertaken (drawn by the fear of something worse) or mandated by government
  • Preemptive separation (firm that fears of being separated, separates itself to avert a worse outcome)
  • Points of Separation (Access networks + rest of the business – to overcome monopoly bottlenecks; which are usually formed in the access network)

He stretched the importance of behavioral measures as opposed to structural measures. It may not be necessary to enforce structural measures if the vertically integrated firm behaves as an efficient vertical entity and does not engage in any discriminating strategies – e.g. price discrimination against competition.

The greatest argument against structural and functional separation is the coordination costs (amongst different parts of the vertical chain) that the integrated firm will suffer (when disintegrated either structurally of functionally). Also, especially in the case of NGAs functional/structural separation will substract from the infrastructure investment decision all the benefits associated with the exploitation of the infrastructure of the rest of the firm’s activities (e.g. retail services, value added services etc.) [Real options theory refers to these benefits as growth options]. This can be overcome via contractual arrangements between stakeholders (wholesalers and retails) but the risks are relatively high and the costs of that type of contracts are high as well – information transfer, risk-taking, SLAs.

Emanuele Vadilonga, Head of Regulatory – Mobility and MED Region, BT Global Services presented results and conclusions from a BT Global Services study undertaken last year. The main results were:

  • Business telecoms markets are different to consumer markets (Business customers require high availability, reliability, security – dedicated private networks (e.g. banks), one-stop-shop (lowers administration costs) and simultaneous connections to scatters cities
  • Policy makers’ lack of attention to needs of business customers has led to unharmonized regulation and poor supply of pan-European communications services (Increased prices of wholesale products, non-availability of some wholesale products to some member states, delivery and repair times offered are much higher than those provided to the incumbent’s retail arms)
  • Poor supply of pan-European communications services is blocking the ability of enterprises to improve productivity and competitiveness (ICT investment productivity impact is much lower in EU than in US, EU enterprises find it more difficult to restructure and re-engineer business processes than competitors in other blocs, Impact is particularly significant for knowledge-intensive services, Single Market benefits are lost – Services account for 70% of EU employments but for only 20% of intra-EU trade

He concluded by confronting argumentation against functional separation. In a nutshell:

  • Functional separation (FS) must not be confused with Structural separation
  • Price discrimination issues arise whether or not FS is implemented
  • FS encourages new entry (thus investments) as it gives greater ability to reach critical mass
  • FS guarantees equal access to enduring bottlenecks
  • BT’s experiences shows that FS does not destroy shareholder’s value nor eliminates jobs

Mark Shurmer, Director of Regulation Affairs, Openreach presented many figures and charts about Openreadh spread, coverage and impact in UK business, broadband coverage and market growth. He also clarified what Equivalence of Inputs is about:

  • Same products & services
  • Same time-scales
  • Same systems & processes
  • Same reliability & performance
  • Same commercial information

According to Mr. Shurmer, with BT’s undertakings clarity is increased, regulation is focused on enduring bottlenecks, foundation is provided to reduced retail regulation, incentives to invest and innovate are created and infrastructure-based competition is enabled

He also indicasted a fiber only all-optical new community that is being planned in Ebbsfleet. There is a similar initiative for a green deployment project in Greece. For more check this ppt presentation or ΔΕΠΕΠΟΚ web site.

Bo Andersson, Chief Economist, Competition Department, Economic Analysis Swedish Post and Telecom Agency (PTS) presented another excellent case of broadband market. This of Sweden: 100% ADSL penetration, 60% of CableTV and 30% of FTTB/H.

Although Sweden is a much more mature broadband market than other European markets, it is challenged by the same competition issues that Greece is faced (just to name a few: different serving levels between competition and retail arm of Telia Sonera, mistrust between Telia Sonera and its competitors, legal disputes etc.).

Today Sweden is working on a proposal by PTS for functional separation of national access network (keeping the access network within the Telia Sonera). Implementation issues include: management independence, bitstream access (it is not included in access network) and Telia Sonera – competition relation improvement.

Sweden also acknowledges the benefits of functional separation and considers implementing it.

Tom Kiedrowski, Principal, International, Ofcom also discussed the UK experience of FS. Ofcom view on broadband competition is that sustainable and effective competition requires infrastructure-based operators with scale. Here’s a couple of remarks on the effects of FS to UK market that stand out:

  • Overall trust in BT is improving
  • Openreach (the wholesale arm of BT) generates reasonable returns
  • BT group has benefited overall
  • LLU competition has significantly increased
  • Openreach efficiency decreased (at the beggining)

He concluded that FS is not necessarily a panacea to all telecom competition problems and should be carefully applied, if conditions permit it. For that reason, he proposed that the EU framework should not refer to FS explicitly, rather indicate FS as an exceptional, complementary, last-resort, regulatory remedy.

p.s. Tom presented himself to the audience in exceptional Greek 😉 Everybody was just about to applaud and cheer but they didn’t. Don’t mind that Tom, it’s only a cultural thing!


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