Presentation

1. Trends in Electronic Communications:
Economic and Regulatory Problems
Carlo Cambini
Politecnico diTorino & Florence School of Regulation – EUI
Steffen Hoernig
Nova School of Business and Economics, Lisbon, Portugal
Brussels, 20 January 2017

2. Plan of the talk
 Main themes:
◦ Convergence and value chains
◦ Platforms as intermediaries
◦ Rethinking notions of market structure and market failure
 Regulatory issues:
◦ Market power and market definition
◦ Bundling
◦ Network capacity: the ultra-fast broadband market
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3. What is Convergence?
 Many different forms of electronic communications made possible
through the use of information technology
 ICT: what once were separate industries (telecoms, computing,
broadcasting) are now providing similar services
 Pushed by supply side:
◦ Technology
◦ Internet (IP-based communications)
◦ Digitalization implies that seemingly different services (voice, data and
broadcasting) become simply a stream of data packages
 Pulled by demand side:
◦ “Any device, any service, anywhere, anytime”
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4. Value Chain in Broadcasting
 Digitisation disrupts this model in two ways:
◦ Switch to digital distribution cuts the need for physical logistics:
direct sales from producer/creator/developer
◦ Each segment can push its own model, centred on
 device (Apple)
 distributor – based on infrastructure (cable and telcos)
 aggregation – based on marketing valuable content (Sky)
 search (Google)
 community & user generated content
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5. Implications for Market Structure (1)
 Upstream market (production)
◦ Dominance of high-quality products
◦ Technology favours talent (“superstars”)
 Implications for broadcasters/platforms
◦ Competition among platforms passes these rents upstream ->
commoditization of infrastructure
◦ High fixed costs -> concentrated market structure
◦ Consequence: oligopolies (not new), even more so in large markets
(retail and wholesale; new)
◦ Reinforced where network effects are strong
E.g. Google: the more we search, the better Google becomes
◦ Winner-takes-all markets: one large player
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6. Implications for Market Structure (2)
 Merger wave in EU mobile telephony:
◦ Telefonica/E-Plus (Germany; mobile)
◦ Vodafone/Ono (Spain; CATV) and Kabel Deutschland
(Germany; CATV)
◦ Hutchison Whampoa – 3/O2 (Ireland; mobile)
◦ BSkyB and Sky Germany and Italy
◦ Vivendi/Telecom Italia
◦ Wind/3 Mobile (Italy; mobile)
 Pressure points:
◦ From value creators to providers of tubes
◦ Investment needs
◦ Intense competition in some national markets
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7. Value Stream: Broadcasting
Content providers
Users
Advertisers
Platform
content
content price
subscription fees
ad price
eyeballs
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8. Value Stream: Internet/Broadband
Content providers
(incl. OTT)
Users
Advertisers
Platform
content
subscription fees
ad price
eyeballs
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The platform can be cut out from the monetization of content
Net neutrality makes this effect stronger
service payment

9. PlatformTypes
(Evans & Schmalensee, 2006)
Exchanges
Platforms provide participants with the
ability to search over participants on
the other side and the opportunity to
create matches
Large groups of participants
- Ex: Auction houses, internet sites for
B2B and B2C, real estate etc.
Advertising-Supported
Media
Platforms create content or buy it from
others. Content attracts viewers who in
turn attract advertisers
- Advertisers are the money side.
Ex: Print media, yellow pages.
- Ex: Magazines, free television,
newspapers
Transaction Systems
This kind refers to any recognized
method for payment
Management schemes: proprietary
(American Express) or associative
(VISA).
- Ex: Payment cards, bank checks
Software Platforms
Platforms offer services to developers to
create specific applications. Users run
applications.
Ex: Video games, PC operating
systems, smartphones
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10. More Platforms
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11. Example: Mobile Platforms and App Stores
Platforms that combine state-of-the-art mobile phones (smartphones)
with innovative operating systems and so-called app stores.
 Most important players & app stores:
Apple  Apple app store for iPhone
Google  Google Play
Nokia  Nokia Store (discontinued in 2015)
Amazon  Amazon Appstore
Windows  Windows Phone Store
BlackBerry  BlackBerry World
App Store
-Features
-Characteristic
-Policies
Mobile Platform
Apps
Developers
Users
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12.  Google Play and Apple are by far the largest
 Windows Phone Store
2011: - Fifth largest app store
- but 39 times smaller than Apple app store
 Amazon Appstore
2011: number of apps added was 22 times smaller than Google
2013, US: Google is 10x larger for free apps, 2x for paid apps
 BlackBerry World
2014: the smallest for available apps
 Nokia
From dominant mobile incumbent to isolated operating system
Mobile Platforms and App Stores (2)
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13. Platforms: Pricing Structures
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14. Platforms are not “One-Sided”
 Different legacies result in very different business models
◦ TV from free-to-air
◦ “Open” Internet, over regulated platforms
(often formerly state-owned incumbents)
 Yet, common elements
◦ Different users interacting, platform as intermediary
◦ Externalities between groups
◦ Structure of prices as important as their levels
◦ Typical to have skewed prices
 Huge implications for market definition
◦ How to apply a SSNIP test?
◦ How to define market power?
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15. Platforms: Implications
 Asymmetric treatment of delivery platforms not justified simply on
the grounds of different size
 Multi-sided platforms
◦ Note (1): one-sided logic wrong in two-sided markets
(e.g., mark-ups of individual services, margin test, ...)
◦ Note (2): because of externalities, outcomes in two-sided
markets, even if competitive, are often not efficient
 Almost inevitably, wider relevant markets
 Will be more difficult to intervene ex post
 Higher-level question: competition policy vs regulation
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16. Convergence: Implications
 Convergence has been progressive, not disruptive
 Lots of inertia on the demand side
 Switching costs? Equipment, retention… de facto little
switching
 i.e. apps portability in mobile segments: More serious than number
portability; probably the most relevant competitive problem in future
 Major work still to be done by economists
 Economics, user preferences, and regulation likely
to be more important than technology
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17. Convergence: Fixed-MobileTermination
 US experience – a simplified approach to FTM termination:
◦ Fixed incumbents (ILEC)-Local Competitors (CLEC) and ILEC-mobile
reciprocal compensation rates are generally symmetric, and set at a rate that
reflects the marginal cost of the ILEC;
◦ ILEC-ILEC, CLEC-CLEC, CLEC-mobile, and mobile-mobile reciprocal
compensation rates are determined through voluntary negotiations, and in many
cases are set to zero (“bill-and-keep”), in particular for ILEC-ILEC and mobile-
mobile interconnection.
◦ Mobile operators formally also charge their customers for receiving calls (RPP),
but contracts with “buckets of minutes” mitigate this effect.
 Similar convergence of wholesale prices also in the EU
 Digital convergence (IP telephony with IP interconnection,
over-the-top content,VoIP) and multi-homing will likely make
the termination issue go away
 Potential effects:
◦ a) deregulation of termination (with a cap)
◦ b) capacity-based termination charges
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18. Convergence and Bundles
 Rising importance (EU, 2015):
◦ 80% of broadband products bought in bundles
◦ 60% ofTV subscriptions bought in bundles
◦ 63% of voice services bought in bundles
 Bundling has good and bad aspects
◦ Cost reduction
◦ Single billing
◦ Price discrimination device
◦ Creates strategic entry barriers
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19. Convergence and Bundles: UK
 March 2013: BSkyB acquired broadband users from O2, and BT became the second broadband
provider in UK … and still is!
 August 2013: BT reacted => acquiredTV sports content (from ESPN; 1bn £), offered free to its
fibre broadband subscribers
UK broadband market share
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20. Bundles: Market Definition
 The bundle as a new product: should it be analysed in the context
of already defined markets, or as a new market?
◦ Empirical question. Answer may change over time
◦ Development: just introduced, most likely analysed within
already defined markets
◦ Transition: gaining importance, may constitute a new market
alongside existing ones
 Note: Dominance in traditional markets for single products
does not imply dominance in the new market for bundles,
and vice-versa!
◦ Maturity: most buy bundles, traditional markets vanish
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21. Bundles: New Regulation?
 Without intervention: increased vertical or cross-market
mergers, and decrease in the number of firms
 Regulation typically to guarantee access
◦ Network (telecoms) and premium content (TV)
 Not new in telecoms or TV
◦ EU: access to telcos, difficult to touchTV content
◦ US: no access obligations
 Change of emphasis?
◦ Hard to justify different treatment of telcos and cable
◦ Shift to ensuring access to premium content? – Ex ante
regulation or ex post check for abuse?
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22. Convergence and Fast Broadband (1)
 Networks need more capacity but investments are
extremely costly
 Regulatory framework:
◦ Increase regulatory certainty and consistency
◦ Provide sufficient spectrum
◦ Facilitate financing
◦ Lower deployment costs
◦ Stimulate demand for high bandwidth
 Country-specific characteristics influence regulatory
intervention (difficult to have a «one-size-fits-all»
approach)
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23. Convergence and Fast Broadband (2)
 Differences in terms of infrastructure competition: in countries
where alternative fast broadband networks are present (i.e.
cable) both deployment and penetration of ultra-fast broadband
are larger
 Differences at geographical level: different degrees of
competition at local level (“black” and “grey” areas) … might
this imply geographical regulation?
 Cable operators lead fast broadband investment in 68% of the
EU27 countries; for the rest, telecom incumbents do.
 Symmetric or asymmetric regulation?
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24. What is Symmetric Regulation?
 The standard approach in which SMP is a prerequisite for regulation
embodies the “asymmetric” approach: regulate only the SMP operator
 However, Article 5 of the framework Directive and Article 12 of the
Access Directive envisage the imposition of access or interconnection
obligations on all operators
 Moreover, the 2012 NGA recommendation stipulates that “where it is
justified on the grounds that duplication of infrastructure is economically
inefficient or physically impracticable, Member States may also impose
obligations of reciprocal sharing of facilities on undertakings operating an
electronic communications network….”
 A good example is the regime operating in France of symmetrical
regulation of a fibre network’s terminating segment in certain localities
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25. Can the roll-out of fibre generate less
asymmetric market outcomes?
 The above example shows how an extension of
regulation can be pro-competitive
 But the diverse experiences of fibre roll-out in Europe
show that the impact of incumbency can be diminished
or even removed: perhaps symmetric regulation can
mean deregulation
 Indeed, cable providers have largely escaped access
regulation in Europe – a process assisted by the
Commission’s policy of excluding cable products from
wholesale access markets
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26. The New EU Regulatory Package
 Focus on high-speed connectivity and investment,
delivered through different levels of infrastructure
competition (FTTCab/FTTH)
 Preference for passive over active remedies (and fewer
remedies), even though active remedies are in place in
many countries
 Encouragement of commercial agreements
 Wider scope of access to include wholesale-only
operators and co-investment
 Largely preserves, rather than tightens, the existing SMP
framework
 Possibly extends symmetric regulation
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27. Some Conclusions
 What’s next?
◦ Market consolidation? (=> the Single Market in the EU)
◦ Competition over bundles will get stronger
◦ Infrastructure competition - but competition may not
always work at wholesale level
◦ Need of new infrastructure investment (NGN and LTE)
◦ Net or service (i.e. Google for search? WhatsApp/Skype?) -
device (i.e.Apple with iPhone/iPad?) neutrality? New
gatekeepers emerge?
◦ This calls for new and innovative regulatory rules
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