Posted by: Costas Troulos | July 10, 2008

Facilities-based Competition vs. Open Access Networks

Facilities based competition versus open access public networks is a debate that seems to always surface in almost every fiber agenda. I will try to put in order some thoughts in a personal attempt to clear up things a bit. The choice of one option over the other is not an easy call and it has to be coordinated very carefully. None of them is the panacea to the investment debate and most likely the best solution can be found somewhere in the middle.

Facilities-based Competition

Those who favor facilities-based competition prefer to let market dynamics to shape sustainable business models and market structure. By many economists, primarily US influenced, letting the market forces decide on the competition and market structure for NGANs is considered the most appropriate approach.

Also, it must not be neglected that NRAs welcome facilities based competition since it generally makes their job a lot easier. When physical monopolies become thinner and more and more players have access to rare goods (e.g. land, soil, street subsoil, building basements, collocation facilities) there is evidently less need for regulation.

However, the economics of NGANs (based on international practice, construction costs and services pricing) suggest that business sustainability requires a substantial subscriber base, and (closely depended on the size of the market) significant market share. Facilities-based competition offers very limited options for clear product differentiation to the competing firms. Thus price competition is left probably the only form of differentiation that can have an immediate impact on consumer preferences. However, it also has an immediate (negative) impact to margins and profitability.

Open Access Networks

On the other hand, those who favor open access public networks propose the establishment of one physical infrastructure operator (or equivalent schemes such as one infrastructure owner and one communications operator) that will provide physical access services to all competing providers of the upper market layers.

They argue that a public network’s equal and open access offerings not only lowers the financial barriers to entry for operators, but also increases the profitability in the upper layers of the market and can also serve more efficiently the local communities.

Some even propose that no operator should have the right to dig to places where municipal networks are already present and provide network elements unbundling services. Others further extend these measures to the entire jurisdictional area of the municipal network arguing that if digging is required to serve a certain area of the city, municipal authorities/public operator must take care of it.

On the downside, permitting a single operator to manage the physical infrastructure without direct competition may bring significant social risks. The monopoly power given to the physical infrastructure operator (even if regulated) may have serious negative results as in the case of numerous physical monopolies in the past. For example, it can lead to increased services prices or to overspending of public money to support ineffective operations. If the physical provider is privately operated inefficient management can simply result to service termination and severely hurt public welfare with no short-time immediate alternatives. The presence of competition provides 1) the necessary efficiency incentives to the firms and 2) a sustainable market structure in case of malpractice or management inefficiencies.

Last, far more complex evaluation models are required to assess fiber investments of a publicly owned entity in terms of profitability, paybacks and returns. If we suppose that the principal strategic objective of a public physical infrastructure operator is the increase of local communities’ social welfare then advanced models will have to be designed, which will factor in social and municipal benefits, local economy indicators, public services efficiency, citizens satisfaction, life conditions etc.



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