Investment, Competition and Regulation in the Recession


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Martin Cave of the Warwick Business School discusses how policymakers in communications should react in the credit crunch as broadband infrastructure projects require investment

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Investment, Competition and Regulation in the Recession

  1. 1. International Institute of Communications Telecoms and Media Forum Brussels, March 25 2009 ‘ Investment, Competition and Regulation in the Recession ’ Martin Cave Warwick Business School, UK [email_address] mec1730 mec1730
  2. 2. IMF Output Growth Forecasts (%) 2009 2010 World US Euro Zone Japan UK -1.0 to -0.5 -2.6 -3.2 -5.8 -3.8 1.5to 2.5 +0.2 +0.1 -0.2 -0.2
  3. 3. Long-term Effects for UK GNP 2000 2008 2016 Long term loss of productive potential accompanied by a permanent increase in the cost of capital
  4. 4. The key development: investment in NGAs? <ul><li>They are high speed broadband networks </li></ul><ul><li>Including, </li></ul><ul><li>replacement for copper network </li></ul><ul><ul><li>fibre to the node/cabinet </li></ul></ul><ul><ul><li>fibre to the home/premises </li></ul></ul><ul><li>upgraded cable networks, eg. DOCSIS 3.0 </li></ul><ul><li>neighbourhood networks </li></ul><ul><li>high speed fixed wireless (Wi-Max) </li></ul><ul><li>high speed mobile networks? </li></ul>
  5. 5. Who wants NGAs? Past trends show demand for speed increasing 10-fold every 5 years- ie to 50 Mbps in 2013 Applications include: Web 2.0 in-home wireless distribution systems streaming applications with low error rate and symmetry HD content, including internet TV How urgent are these needs?
  6. 6. What regulators should do depends on the competitive environment: three variants <ul><li>2F + W: Upgraded cable system, ubiquitous DSL, 3G networks </li></ul><ul><li>F + W: (Near) ubiquitous DSL, 3G networks </li></ul><ul><li>W: Wireless only- 2G/3G; prospectively Wi-Max </li></ul>
  7. 7. What Triggers NGA Investment in Different Competitive Environments? <ul><li>Competitive rivalry </li></ul><ul><li>Certain regulatory deal offering adequate (non truncated) return. </li></ul><ul><li>Under monopoly: </li></ul><ul><li>extra revenue (less cost of sales) + operational cost savings – annualised capital costs + scrap value of copper </li></ul><ul><li>Under competition: </li></ul><ul><li>As above: </li></ul><ul><li>+ revenue captured from competitors </li></ul><ul><li>+ revenue defended from competitors </li></ul><ul><li>How does recession change these individual elements? </li></ul>
  8. 8. Flexing regulation in competitive areas <ul><li>How many competitors are enough to justify forbearance? </li></ul><ul><li>Precedents include </li></ul><ul><li>2F + wireless (US) </li></ul><ul><li>≥ 4F (UK wholesale broadband access notification) </li></ul><ul><li>Depends on market stage: fierce competition may erupt for new customers, but risk of long term collusion is high. </li></ul>
  9. 9. Areas without effective competition: regulatory options <ul><li>What should be regulated at LRIC price? </li></ul><ul><li>Access </li></ul><ul><li>after a regulatory holiday </li></ul><ul><li>only on passive assets </li></ul><ul><li>with pricing flexibility </li></ul><ul><li>to provide basic service only </li></ul><ul><li>at a higher cost of capital to reflect risk? </li></ul><ul><li>+ additional risk-sharing options </li></ul><ul><li>Does/should a recession encourage the less rigorous options? </li></ul>
  10. 10. Why pricing flexibility may be needed Price discrimination increases revenue
  11. 11. Plan B: Government Money <ul><li>Several governments (Australia, Singapore, soon NZ) are conducting tenders for ptivate partners in the construction of NGAs </li></ul><ul><li>In Europe, public money is provided by municipalities City of Amsterdam), public firms (Swedish municipal electricity companies), etc. </li></ul><ul><li>ARCEP has concluded that in France this has a positive ‘gearing’ effect on private investment. </li></ul>
  12. 12. Encouraging Mobile Investment <ul><li>Mobile competition is generally very promising: </li></ul><ul><li>the sector’s structure is opening up; </li></ul><ul><li>vertically integrated firms are subject to more competition; </li></ul><ul><li>‘ open internet’ has replaced ‘walled garden’; </li></ul><ul><li>multi-modal devices permit network by-pass; </li></ul><ul><li>promising prospects for mobile broadband; </li></ul><ul><li>spectrum release is lowering barriers. </li></ul>
  13. 13. Should the recession encourage network sharing? <ul><li>Disadvantages are: </li></ul><ul><li>fails to take competition as far as is practicable; </li></ul><ul><li>softens competition in coverage; </li></ul><ul><li>disadvantages entrants, which have to seek to join a coalition or go it alone; </li></ul><ul><li>may lead to suppression of later innovations; </li></ul><ul><li>may spread collusion to service markets. </li></ul><ul><li>Be cautious! </li></ul>