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Asymmetric regulation in telecommunications

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The market is structurally imbalanced (operators’ situation is asymmetric): high cost difference due to licensing fees along with late entrance (temporal difference in entering) into the market create an important imbalance between first and later entrants. Regulation should not ignore or neglect such asymmetric situation and should correct such imbalanced situation by adopting an asymmetric interconnection (call termination, roaming…) – at least for a transitory period – to compensate the advantages of first movers that are related to temporal difference and – or cost difference of spectrum allocation. Therefore, it will enable all operators to converge towards the efficiency by allowing challengers to lower their retail prices being effectively competitive.
The question is, how easy to apply the asymmetric regulation without bringing too much effort in costing methods calculation, accounting and functional separation…? What is the cost target and which cost reference should be used (actual and current cost, long-run – incremental cost, incumbent or dominant operator cost, most efficient cost, etc.)?

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Asymmetric regulation in telecommunications

  1. 1. Mohamed Bouanane D i r e c t o r – M a n a g e m e n t C o n s u l t i n g J u n e 2 0 1 6 The market is structurally imbalanced (operators’ situation is asymmetric): high cost difference due to licensing fees along with late entrance (temporal difference in entering) into the market create an important imbalance between first and later entrants. Regulation should not ignore or neglect such asymmetric situation and should correct such imbalanced situation by adopting an asymmetric interconnection (call termination, roaming…) – at least for a transitory period – to compensate the advantages of first movers that are related to temporal difference and – or cost difference of spectrum allocation. Therefore, it will enable all operators to converge towards the efficiency by allowing challengers to lower their retail prices being effectively competitive. The question is, how easy to apply the asymmetric regulation without bringing too much effort in costing methods calculation, accounting and functional separation…? What is the cost target and which cost reference should be used (actual and current cost, long-run – incremental cost, incumbent or dominant operator cost, most efficient cost, etc.)? Asymmetric Regulation in Telecoms: Fairness and not equal treatment
  2. 2. Asymmetric Regulation in Telecoms M. Bouanane 2 Imbalanced and highly concentrated market Despite many years of liberalization and regulation of the telecoms market (more than two decades in some cases) in general and termination rating in particular, the mobile market is still imbalanced as shown below through the high concentration in the European countries using symmetrical regulation.
  3. 3. Asymmetric Regulation in Telecoms M. Bouanane 3 *Market share of revenues for Denmark (March 2015) China – February 2014; UK – Q2-2014; Germany – Q4-2014; Spain – Q1-2012; Italy – Q1-2015; France – Q1-2015; Switzerland – Q1-2015; Sweden – Q4-2014; Norway – Q2-2015; Countries of Central and Eastern Europe CEE (in the figure above, excluding China) – Q4-2014; CEE - Average Asymmetry of interconnection charges to correct the asymmetry of positions: Fairness and not equal treatment Indeed, the market is structurally imbalanced (operators’ situation is asymmetric) since the high cost difference due to licensing fees along with late entrance (temporal difference in entering) into the market create an important imbalance between first and later entrants. Regulation should not ignore or neglect such asymmetric situation and should correct such imbalanced situation by adopting an asymmetric interconnection (call termination, roaming…) – at least for a transitory period – to compensate the advantages of first movers that are related to temporal difference and – or cost difference of spectrum allocation. Therefore, it will enable all operators to converge towards the efficiency by allowing challengers to lower their retail prices being effectively competitive. However the asymmetrical model should not treat every operator in an absolute manner but relatively to their current position in the market. The asymmetry should be applied between two operators having different positions expressed e.g. by market shares (number of subscribers) or revenue shares (or gross margin). Such condition that requires the adoption of asymmetrical regulation needs to be determined using the same criterion as per the below formula (a AND b): a. Market concentration (asymmetry) is evaluated using the Herfindahl-Hirschman Index (HHI) as high or moderately high. The HHI1 is calculated by summing the squares of each individual operator’s market share (refer to figures above for mobile market concentration examples). The higher the concentration, compared to the average market share (equal to 1 / Number of operators), the less competition. b. The difference of market shares between two operators is (for example) equal or higher than the standard deviation of all market shares in the country. Dominant operator is each operator having a market share higher than the market share of its competitor by the standard deviation. If conditions a) and b) are verified, it means that the level of competition in the market requires decisions to limit competitive distortions and it can justify incentives to strengthen the position of small operators through the adoption of asymmetric regulation, thus helping the challengers to converge towards higher efficiency and the whole market to become highly competitive while lowering retail prices. 1 For example, a market consisting of four operators with market shares of thirty percent, thirty percent, twenty percent, and twenty percent has an HHI of 0.26 (0.30 2 + 0.30 2 + 0.20 2 + 0.20 2 = 0.26) or 2600 (30 2 + 30 2 + 20 2 + 20 2 = 2600). The HHI ranges from 1 (or 10,000 in case of a pure monopoly) to a number approaching zero (in case of an atomistic market).
  4. 4. Asymmetric Regulation in Telecoms M. Bouanane 4 Many researches have demonstrated a positive effect of asymmetric regulation for the termination rates (access charges) on the growth, the pricing and the demand. The question is, how easy to apply the asymmetric regulation without adding too much effort and complexity in costing methods calculation, accounting and functional separation…? What is the cost target and which cost reference should be used (actual and current cost, long-run – incremental cost, incumbent or dominant operator cost, most efficient cost, etc.)? The algorithm (methodology and cost calculation technique) that we recommend is the most simple – for cost determination and implementation (without any cost control obligation) – and the most successful, bringing fairness and leading to efficiency convergence, while promoting competition and investment in fixed, mobile and roaming segments. For further information and discussion regarding such methodology, please feel free to contact the author. A dedicated professional with over 20 years of consulting experience across Europe and the Middle East. He has high expertise in the field of strategic management consulting with an in-depth experience and a particular focus on TMT, digital and knowledge economy sectors (government and public policy, telecom operator, regulator, corporate strategy). He is a leader in designing unified policies and convergent planning across multi-sectors and involving multiple private and public stakeholders. He brings his strategic thinking and his balanced management approach with the ability to recommend pragmatic and innovative policies, viable business cases and action plans that enable the creation of greater and sustainable value.

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