Presentation delivered at Florence School of Regulation - Annual Policy Conference 2016

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Access Regulation:
Challenges and Solutions
Marc Lebourges
Personal views
Florence School of Regulation – Annual Policy Conference
27th May 2016

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Agenda
. Challenges of standard access regulation
conflicts with investment political objective
supports inefficient market structures
does not address duopolies issue
. New access regulation
Fit for data dynamics (different economic features between data and voice)
Secures 3 competitors + no barrier neither support for further entry
Through proportionate risk sharing symmetric access obligation supporting investment, in practice
Only variable part of access price should be subject to Economic Replicability Test
Fixed price negotiated under authorities supervision to balance bargaining power and
prevent foreclosure, in monopoly and duopoly areas
. Covering Non Profitable areas

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Standard access regulation conflicts with investment political objective
. Access supports competition on existing infrastructure but deter investment
replacing infrastructure
Private investment motivated by competitive edge
Under access regulation, investment benefit shared with competitors
No point in investing absent expectations of competitive gains
Even less if investor supports all financial and policy risks, competitors none
. Analysis supported by empirical evidence
Bacache 2013
Briglauer 2013
Crandall 2013
Grajek 2012
Nardotto 2013
Jeanjean 2013

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Standard access regulation supports inefficient market structures
. FW designed to unconditionally support entry
Historic FW mission: transform monopolistic markets into competitive markets
FW objectives and structure designed to support entry, always presumed to improve outcome
Reinforced by ECJ Margin Squeeze case law
But if 3 vs. 4 is controversial, no one seriously supports 5, 6, 7, 8 ….as efficient telecom market
structures
. FW could result in duopolies with FM convergence
Where 2 fixed infrastructure owners are also mobile and compete on FM convergent offers
Current framework does not secure fixed access for pure MNOs
Pure MNOs driven out of the market
Not competitive to serve customers using fixed and mobile service
Cannot survive just serving mobile only customers

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Standard access regulation fails to address duopoly issue
. Duopoly in fixed infrastructures in a significant proportion of Europe market
Telco + cablo areas
. Duopoly lead to suboptimal market outcomes (Horstmann 2016)
Prone to tacit collusion
High static inefficiencies
. No improvement through standard regulatory instruments
Inefficient price equilibrium under linear access price (Höffler 2008, Bourreau 2011)
. Inefficiency of asymmetric regulation of symmetric duopoly
Regulation reduces investment incentives of regulated operator (Kocsis-2014)
Lower investment of regulated operator imply lower investment of unregulated operator

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New access regulation fit for data markets dynamics
. Higher dynamics in data than in voice
From 30-40% (fixed) to 80% (mobile) volume growth per year
Technology trend: Capacity cost reduction  -50% per year for mobile data
Matching demand growth highly dependant on investment
Optimal static – dynamic efficiency balance different between voice and data
. Fixed - Mobile: substitutes for voice, complement for data
Usage continuity through smartphones and tablets
Econometric evidence (Grybowski 2015)
Data Mobile only customers due to affordability of fixed access (Liang 2016)
FM Convergence implies even more investment to match demand

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New access regulation should secure markets with 3+ players
. Two not enough: systematic risk of tacit collusion, high static inefficiencies
. Optimal mobile market structure:
3, 4, 5, … equivalent vs. tacit collusion risk: (Horstmann 2016)
Unilateral effects: static vs. dynamic balance different between voice and data
4 optimum for voice, 3 optimum for data (Houngbonon 2015)
Most studies voice centric concerning prices
Published papers focussed on data:
Investment drive Mobile data price down (Jeanjean 2015)
Max invest/customer for 37% Ebitda margin + Long Term effects (Houngbonon 2016 1)
Invest/customer decreases in long run with number MNOs (Houngbonon 2016 2)
. Regulation secure 3 competitors + no barrier neither support for more entry
. Market of 3+ on 1/2 fixed infrastructures implies some form of access

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Risk sharing symmetric access regulation to support investment
 When and where  3 fixed infrastructure based operators effectively compete, all
fixed infrastructures should be subject to sharing obligation
Geographically imposed local area per local area
One single access level per infrastructure and per area
Symmetric to secure fair competition and investment incentives
 Right to share infrastructure subject to obligation to share investment risk
Safeguard incentive to invest in fibre infrastructure
Lower variable wholesale prices, fostering competition and segmentation in the retail
market
Consistent with an efficient concentrated retail market structure
Risk sharing access should be exclusive of standard access
 Supported by 2009 FW and 2013 ND Costing Recommendation
 Supported by economic analysis
Nitsche 2011, Cambini 2013, Kramer 2014 …

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Risk sharing regulation in practice
 Risk sharing wholesale price:
Variable price (number of access)
Other price elements: « Fixed price » conveys how investment risk is shared
 Only variable price should be subject to Economic Replicability Test (ERT)
Otherwise ERT conflicts with risk sharing principle (Jaunaux 2015)
 “Fixed price” defined by commercial negotiations
Concerns how shareholders’ money is invested: market rather than regulatory decision
Regulatory conditions to balance bargaining power and prevent foreclosure strategy:
In monopoly telco areas: transitory « competition migration test », prevents incumbent
to attract altnets copper customer base on incumbent fibre offers (Jaunaux 2015)
In duopoly areas (telco + cablo): NRA + NCA warn that foreclosure equilibrium
considered as infringement of sector specific or competition law

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Covering non profitable areas
. Non profitable areas: investment non profitable, not operations
Need for public intervention to support investment
No need for public intervention concerning operations
. Two types of non profitability, two types of public support for investment
(Jeanjean 2012)
Potentially profitable areas depending of adoption: demand side subsidies
Vouchers, tax benefit, public procurement
Non profitable areas whatever adoption
Public financing of the white area specific investment costs (e.g. infrastructure to serve a remote
area)
Restore economic conditions of competitive areas

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References-1
M. Bacache, M. Bourreau, G. Gaudin Dynamic Entry and Investment in New Infrastructures: Empirical Evidence from the Fixed
Broadband Industry 2014 Review of Industrial Organization, 44(2), 179–209.
Briglauer, W., Ecker, G. and Gugler K. (2013). The impact of infrastructure and service-based competition on the deployment of
next generation access networks: Recent evidence from the European member states. Information Economics and Policy,
25(2013): 142-153.
Crandall, R., J. Eisenach, and A. Ingraham (2013). “The long-run effects of copper-loop unbundling and the implications for
fiber”, Telecommunications Policy 37, pp 262-281
Grajek, M. and Roller, L.-H. (2012). Regulation and investment in networks industries: Evidence from european telecoms.
Journal of Law and Economics, 55(1):189–216.
Nardotto, M, T. Valetti, and F. Verboven (2013). “Unbundling the incumbent: Evidence from UK broadband”, Journal of the
European Economic Association Volume 13, Issue 2, pages 330–362, April 2015
Jeanjean F. Forecasting fibre penetration based on Copper Access Regulation (2013) In F. Jeanjean PhD Thesis 2015 LAMETA
Horstmann, N., Kraemer, J . and Schnurr D. (2016). Number effects in oligopolies: How many competitors are enough to ensure
competition? Working Paper. SSRN 2016
F.Höffler, K.M. Schmidt Two tales on resale International Journal of Industrial Organization 26 (2008) 1448–1460
Bourreau, M., Hombert J., Pouyet, J. and Schutz N. (2011). Upstream competition between vertically integrated firms. The
Journal of Industrial Economics. Vol LIX (4): 677-713.
Grzybowski L. and Liang J. (2015). Estimating demand for fixed-mobile bundles and switching costs between tariffs. Information
Economics and Policy, 33(2015): 1-10.

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References – 2
M. Petulowa, J. Liang Mobile-only consumers arise from heterogeneous valuation of fi…xed services November 2015, Working
Paper
Houngbonon,G.V The Impact of Competition on the Price of Wireless Communications Services, in PhD Thesis, Paris School of
Economics, December 2015
Jeanjean, F. (2015). What causes the megabyte price drop in the mobile industry?. Economia e politica Industriale, 42(3): 277-
296.
Houngbonon,G.V., & Jeanjean,F. What level of competition intensity maximises investmentin the wireless industry?
Telecommunications Policy (2016),
Houngbonon,G.V., & Jeanjean,F. Optimal Market Structure in the Wireless Industry (2016) Under revision for Information
Economics and Policy
Nitsche, R. and Wiethaus L. (2011), Access Regulation and Investment in Next Generation Networks – A Ranking of Regulatory
Regimes. International Journal of Industrial Organization, 29: 263-272.
Koczis, The effects of asymmetric regulation on the quality of broadband networks. Working Paper, ITS Conference Florence
2013
Cambini, C. & V. Silvestri (2013), Investment sharing in broadband networks. Telecommunications Policy, 37: 861-878.
Kramer, J and Schnurr D. (2014). A unified framework for open access regulation of telecommunications infrastructure: Review
of the economic literature and policy guidelines. Telecommunications Policy, 38(2014): 1160-1179.
Jaunaux L. and Lebourges M. (2015). Economic replicability tests in Next Generation Access Networks. Telecommunications
Policy, 39(6): 486-501
Jeanjean F. Subsidising the next generation infrastructures. Consumer‐side or supply‐side? Working paper 2010

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Thank you