INTERMODAL TELECOMMUNICATIONS COMPETITION: IMPLICATIONS FOR ...

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INTERMODAL TELECOMMUNICATIONS COMPETITION: IMPLICATIONS FOR ...

  1. 1. INTERMODAL TELECOMMUNICATIONS COMPETITION: IMPLICATIONS FOR REGULATION T William E. Taylor NATIONAL ECONOMIC RESEARCH ASSOCIATES, INC. 200 CLARENDON STREET, 35TH FLOOR BOSTON, MASSACHUSETTS 02116 International Telecommunications Society 17th Biennial Conference June 24th - 27th 2008
  2. 2. Intermodal Competition and Telecommunications Deregulation Overview § Universal expectation of “dependent” competition in retail telecom markets. – Last-mile monopoly – Consequent regulation of wholesale services: — Mandatory unbundling — Price regulation § Surprising relative growth of intermodal competition – Cable telephony – Wireless – Broadband - VoIP § Effects on regulation: – Reconsider regulation of wholesale services – Reconsider analysis of competition in wholesale markets – Problems with ex ante wholesale regulation and the need for parity across platforms 1
  3. 3. Regulation in a World of Dependent Competitors
  4. 4. Regulation with Dependent Competitors § Long experience in regulating and deregulating retail telecom markets. – Cost-of-service replaced by price regulation replaced by pricing flexibility or deregulation where warranted. – General agreement on market power as trigger. General disagreement on everything else. § Less experience, but long-time economic regulation of wholesale services in the U.S. Assumption of a single vertically-integrated ILEC network with dependent competitors drove regulatory structure: – Carrier access services since 1984 – Wholesale local exchange services (UNEs / resale) since 1996. – Little thought regarding regulation or deregulation of wholesale services. – Understanding the relationship between retail and wholesale services and regulation is now necessary, due in part to intermodal competition. 3
  5. 5. Regulation with Dependent Competitors § Regulatory parity particularly critical here: – where markets are characterized by rapid technological change and competing platforms or technologies are subject to lock-in or path dependence. § Such regulation is not a simple squabble over rents -- does not merely transfer welfare among carriers -- but inevitably affects consumers’ technology choices, – which can have large and irreversible welfare effects on consumers, reducing economic efficiency and productivity by distorting the competitive market outcome and driving the market to an inefficient platform or technology. § How can parity be achieved when regulatory jurisdiction differs across wireline, cable, wireless and broadband? – Removal of ex ante regulation of prices, wholesale unbundling, terms and conditions, quality of service, reporting requirements – Substitution of ex post reliance on antitrust, competition law, consumer protection law, possibly adjudicated by the regulatory commission. 4
  6. 6. Regulation with Dependent Competitors § In economics, benefits from wholesale regulation are different: – welfare effects are measured in the market for final goods. – If wholesale regulation has no effect downstream, it has no benefits for consumers. § Costs of wholesale regulation are more complex: – Induces distortions in retail markets because some platforms are regulated and others are not. – Incentive effects are important because network investment is sunk and irreversible. 5
  7. 7. Intermodal Competition: Cable Wireless Broadband / VoIP
  8. 8. Wireline Subscription Florida § Year-end 2000: about 3.4 million more 20,000,000 CLECs mass market (residence and small 18,000,000 16,000,000 ILECs Wireless Subscribers Wireless plus Residential (Small Business) Broadband business) wireline access lines than total Number of Lines or Subscribers 14,000,000 wireless subscribers and mass market 12,000,000 10,000,000 high-speed broadband lines. 8,000,000 6,000,000 § Year-end 2002: about 1.3 million fewer 4,000,000 2,000,000 mass market wireline lines than total 0 wireless subscribers and mass market 12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 broadband lines. Note: Due to differences in reporting, 2005-2006 data are not comparable to previous. Source: FCC December 2000-December 2006 Local Competition and High-Speed Internet Reports. § Year-end 2006: about 12 million fewer ILEC and CLEC mass market lines 12,000,000 Actual Lines combined than total wireless and mass Residential Switched Access Lines 10,000,000 Predicted Lines market broadband lines. 8,000,000 3.3 million lines 6,000,000 § Trending residential access lines using 4,000,000 the historical relationship with population 2,000,000 suggests a more rapid reduction in - wirelines. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 7
  9. 9. Wireline Usage Florida 50,000,000 § A dramatic decline in expected wireline 45,000,000 Actual Local Calls 40,000,000 Predicted Local Calls Annual Local Calls (Thousands) usage in Florida based on historical 35,000,000 27 billion calls 30,000,000 relationships with population. 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 - 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 § A similar dramatic reduction in Florida 15.0% 13.0% wireline long distance usage, as 10.0% Annual Change in Access Minutes measured by the average annual 5.9% 6.6% 7.8% 7.2% changes in switched access minutes 5.0% 2.1% 1995-2000 compared with 2000-2006. 0.0% -5.0% -4.2% -3.9% -5.6% -6.8% -10.0% BellSouth Verizon Embarq Winds tream Total of 4 Carriers 1995-2000 2000-2006 Source: FCC, National Exchange Carrier Ass ociation, Network Usage Data. 8
  10. 10. Cable Telephony U.S. § National penetration rates for Cox 21.6% Knology 20.8% cable telephony. Cablevision 19.4% Bright House 11.1% – Data presented in chronological Time Warner 8.0% Comcast 5.0% order of deployment (from top Charter 4.9% to bottom) Insight 11.6% Mediacom 9.1% – Penetration increases 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Source: VoIP Deployment & Strategies Update: Cable Operators , Broadband Advisory Services, Pike & significantly with time. Fischer, July 2006, p. 3; Bright House Networks Press Release, More than 225,000 Florida Families Switch to Bright House Networks Digital Phone: Now Announcing a Florida Unlimited Calling Plan , May 2, 2006 and Table 1; Knology Inc, SEC, Form 10-Q, March 31, 2006, p. 12. 140 100% Circuit Switched Homes Passed Cable Telephony Homes Passed as % of All U.S. Homes § Cable telephony availability is 120 VoIP Homes Passed 90% Cable Telephony Homes Passed (Millions) Cable Telephony Homes Passed 80% forecasted to increase 100 as % of All U.S. Homes 70% 60% 80 dramatically. 60 50% 40% 40 30% 20% 20 10% - 0% 2002A 2003A 2004A 2005A 2006E 2007E 2008E 2009E 2010E Source: J. Halpern, et al., Bernstein Research, Quarterly VoIP Monitor: VoIP Growth Still Accelerating , April 18, 2006, Exhibit 12. 9
  11. 11. Cable Telephony U.S. Cable B roadband and Telephony Subscribers § Cable broadband growing millions 40 35 rapidly 30 25 § Cable telephone growing 20 15 rapidly. 10 5 0 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 § Cable telephony penetration is Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Digital Cable High Speed Cable Cable Telephony Source: NCTA Survey forecast to grow rapidly http://www.ncta.com/Statis tic/Statistic/CableBroadbandAvailability.aspx 25 20.0% § But from a small base as a Cable Telephony Subscribers 18.0% 20 16.0% proportion of addressable Share of U.S. Households Share of U.S. Households Subscribers (Millions) 14.0% households. Room for 15 12.0% 10.0% expansion. 10 8.0% 6.0% 5 4.0% 2.0% - 0.0% 2002A 2003A 2004A 2005A 2006E 2007E 2008E 2009E 2010E Source: J. Halpern, et al. ,Bernstein Research, Quarterly VoIP Monitor: VoIP Growth Still Accelerating , April 18, 2006, Exhibit 13. 10
  12. 12. Mobile Wireless U.S. 100% 90% 80% 70% § Wireless-only households are 60% 50% growing while wireline-only 40% 30% households are shrinking. 20% 10% 0% 03 03 04 04 05 05 06 06 07 st . Es t Es t Es t ne ec. ne ec. ne ec. ne De c. ne 7E 08 08 09 Ju D Ju D Ju D Ju Ju c0 ne ec ne 3t o to 4t o to 5t o to 6t o to 7t o De Ju -D u 0 03 04 y0 5 06 to -J n. ly n .0 ly n. 0 l n. 0 ly n. 0 07 8t o 08 9 Ja Ju Ja Ju Ja Ju Ja Ju Ja ly n0 Ju ly n0 Ju Ja Ja S ou rce : NIH S u rve y – Tardi ff-W are , C oun te rstate m e nt, Iowa Dock e t No. Wireless Only Landline Only § National penetration grown to 71% of the population and 800 $0.50 $0.45 essentially 100% of the aged 20- 700 $0.40 600 49 population. 500 $0.35 $0.30 M nh M U o t ly O RM AP § Dramatically lower prices and 400 $0.25 $0.20 300 higher usage volumes. 200 $0.15 $0.10 100 $0.05 0 $0.00 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 MO U A RP M 11
  13. 13. Mobile Wireless Florida 45,000 16 40,000 Wireline Minutes of Use (Millions) 14 Wireless Subscribers (Millions) 35,000 12 30,000 10 25,000 8 20,000 6 15,000 4 10,000 5,000 2 0 - § Wireless calls have displaced 2000 2001 2002 2003 2004 2005 2006 Wireline Minutes Wireless Subscribers Note: Minutes of use are interstate switched access minutes for Florida ILECs . wireline local and toll minutes of Source: FCC, National Exchange Carrier As sociation, Quarterly Minutes of Us e Data; FCC December 2006 Local Competition Report, Table 13. use in Florida. 3800 540 3600 530 3400 520 Local Calls per Line 3200 510 Toll Calls per Line 3000 500 2800 490 2600 480 2400 470 2200 460 2000 450 1999 2000 2001 2002 2003 2004 2005 2006 Local Calls/ Line (Left Y-Axis) Toll Calls/ Line (Right Y-Axis) Source: ARMIS 43-08. 12
  14. 14. Broadband and VoIP Florida Florida Broadband Penetration § Internet penetration stable (71-73%) but 60% dramatic shift from dial- 50% up to broadband 40% § Broadband penetration exceeds 50% of Florida 30% households in 2Q2006 20% § Florida broadband 10% availability, December 2006: 0% – 89% DSL availability 03 03 04 04 04 05 06 06 03 03 04 05 05 05 20 20 20 20 20 20 20 20 20 20 20 20 20 20 3Q 2Q 2Q 1Q 2Q 4Q 1Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q (79% national) Source: Florida PSC 2006 Competition Report, Figures 25-26 – 97% cable modem availability (96% national) 13
  15. 15. Broadband and VoIP U.S. § Rapid national growth in independent VoIP subscribers. § Package prices competitive with wireline / wireless packages. 14
  16. 16. Consequences for Regulation
  17. 17. Regulation of Wholesale Services Essential Facilities § Assume the retail market is competitive. – Assume all competitors are dependent on ILEC facilities. – The ILEC has the ability to exercise market power in the wholesale market. — Increase in the wholesale price passed through by all carriers — Hence extraction of additional profit from wholesale monopoly requires effective market power downstream. § Not unreasonable to regulate wholesale services when they meet the conditions for an essential facility. – May be more efficient methods than ex ante regulation. 16
  18. 18. Regulation of Wholesale Services Intermodal Competition § Assume the retail market is competitive and would be absent the dependent CLECs. § Even though the ILEC is (assumed to be) a monopoly supplier of the wholesale service, it would possess no market power. – Would have no ability to extract supracompetitive profits from dependent CLECs – Would have no incentive or ability to price wholesale services at an anticompetitive level (entailing a margin squeeze). 17
  19. 19. Regulation of Wholesale Services § Regulation of Wholesale Price is Unnecessary when Retail Market is Competitive: – Assume: — Retail price is set in a competitive π = max [ q R ( p R , pW )( p R − c R ) + qW ( p R , pW )( pW − cW )] market. p R , pW — Wholesale is essential facility. ηWW — ILEC chooses pW to maximize pW = [ cW + ( p R − c R )] profits, given pR 1 + ηWW – Theorem: pW is a Ramsey mark-up of the ECPR wholesale price. – As wholesale demand elasticity ηWW p W = cW + ( p R − c R ) gets large, profit maximizing → 1 wholesale price approaches 1 + ηWW efficient level. – Wholesale demand elasticity becomes large as intermodal alternatives become important. 18
  20. 20. Regulation of Wholesale Services § Intermodal Competition ∂q R ∂ qW Reduces the Profit-Maximizing = −α 0 <α <1 Wholesale Price: ∂ pW ∂ pW – Consider an increase in pW. – When a wholesale customer ηWW goes away, only α percent of pW = [ c W + α ( p R − c R )] 1 + ηWW the demand goes to ILEC retail. – Effectively, wholesale is no longer an essential facility. ηW pW = [cW + α ( pR − cR )] W → 1 – Resulting profit-maximizing 1+ηWW level of pW is smaller. 19
  21. 21. Regulation of Wholesale Services § Deregulation is different for Telecom Decision CRTC 2008-17 wholesale and retail services. Ottawa, 3 March 2008 – ILEC with no wholesale competitors may have no § 37. With regard to future applications to consider the essentiality wholesale market power. of a non-mandated service, the definition will read as follows: To be essential, a facility, function, or service must satisfy all of the following conditions: – Wireline CLECs may have no § (i) The facility is required as an input by competitors to provide alternative methods of telecommunications services in a relevant downstream market; accessing their customers. § (ii) The facility is controlled by a firm that possesses upstream market power such that denying access to the facility would likely result in a substantial lessening or prevention of competition in – “Defining the relevant market the relevant downstream market; and for a wholesale facility” may not § (iii) It is not practical or feasible for competitors to duplicate the involve any substitute functionality of the facility. wholesale services. § 43. The Commission considers that determining duplicability is comparable to defining the relevant market for a wholesale facility in the sense that both exercises require the identification of potential substitutes, either through existing or potential alternatives. 20
  22. 22. Regulation of Wholesale Services § DOJ Merger Guidelines Market Definition – Take loops. Start with narrow market definition – ILEC wireline loops. – Consider whether cable, broadband or wireless loops are offered for wholesale use. No. – Nonetheless, they compete indirectly with wireline wholesale loops through the retail market. – A five percent increase in the price of ILEC wholesale loops would not induce entry into the supply of wholesale services. – Nonetheless, such a price increase might not be profitable if it rendered CLEC customers non-competitive in the retail market. – Hence the ILEC may be the only supplier in a conventionally-defined wholesale market and yet not have market power, conventionally defined, in that market. – High market price elasticity even though there are no substitutes… 21
  23. 23. Conclusions
  24. 24. Conclusions § Ex ante economic regulation of both wholesale and retail services is generally unwarranted, inconsistent and rife with inefficient, unintended consequences. – Particularly, if retail market is effectively competitive – Platform parity possible using ex post regulation through the legal system. § Ex ante regulation of wholesale services is best confined to essential facilities. BUT: – We frequently don’t know if a facility is essential at competitive market prices. – Facility may not be essential even though there are no substitutes. – Efficiency consequences of regulating some platforms but not others recalls the debacle of surface transport regulation: truck / rail / barge. – Ex post regulation through competition law avoids these costs. 23

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