Date post: | 24-Jan-2015 |
Category: |
Documents |
Upload: | catharine24 |
View: | 505 times |
Download: | 1 times |
William E. TaylorNATIONAL ECONOMIC RESEARCH ASSOCIATES, INC.
200 CLARENDON STREET, 35TH FLOOR
BOSTON, MASSACHUSETTS 02116
International Telecommunications Society17th Biennial Conference June 24th - 27th 2008
INTERMODAL TELECOMMUNICATIONS COMPETITION:IMPLICATIONS FOR REGULATION
T
1
Intermodal Competition and Telecommunications Deregulation
Overview
§ Universal expectation of “dependent” competition in retail telecom markets.– Last-mile monopoly– Consequent regulation of wholesale services:
ó Mandatory unbundlingó 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
Regulation in a World of Dependent Competitors
3
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.
4
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.
5
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.
Intermodal Competition:CableWirelessBroadband / VoIP
7
Wireline SubscriptionFlorida
§ Year-end 2000: about 3.4 million more mass market (residence and small business) wireline access lines than total wireless subscribers and mass market high-speed broadband lines.
§ Year-end 2002: about 1.3 million fewer mass market wireline lines than total wireless subscribers and mass market broadband lines.
§ Year-end 2006: about 12 million fewer ILEC and CLEC mass market lines combined than total wireless and mass market broadband lines.
§ Trending residential access lines using the historical relationship with population suggests a more rapid reduction in wirelines.
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
20,000,000
12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006
Num
ber
of L
ines
or
Subs
crib
ers
CLECsILECsWireless SubscribersWireless plus Residential (Small Business) Broadband
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.
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Res
iden
tial S
witc
hed
Acc
ess
Lin
es
Actual Lines
Predicted Lines
3.3 million lines
8
Wireline UsageFlorida
§ A dramatic decline in expected wireline usage in Florida based on historical relationships with population.
§ A similar dramatic reduction in Florida wireline long distance usage, as measured by the average annual changes in switched access minutes 1995-2000 compared with 2000-2006.
5.9% 6.6%
13.0%
7.8% 7.2%
-4.2% -3.9%
-5.6%-6.8%
2.1%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
BellSouth Verizon Embarq Windstream Total of 4 Carriers
Ann
ual C
hang
e in
Acc
ess M
inut
es
1995-2000 2000-2006
Source: FCC, National Exchange Carrier Association, Network Usage Data.
-
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
50,000,000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Ann
ual L
ocal
Cal
ls (T
hous
ands
)
Actual Local CallsPredicted Local Calls
27 billion calls
9
Cable TelephonyU.S.
§ National penetration rates for cable telephony.
– Data presented in chronological order of deployment (from top to bottom)
– Penetration increases significantly with time.
§ Cable telephony availability is forecasted to increase dramatically.
9.1%
11.6%
4.9%
5.0%
8.0%
11.1%
19.4%
20.8%
21.6%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
Mediacom
Insight
Charter
Comcast
Time Warner
Bright House
Cablevision
Knology
Cox
Source: VoIP Deployment & Strategies Update: Cable Operators , Broadband Advisory Services, Pike & 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.
-
20
40
60
80
100
120
140
2002A 2003A 2004A 2005A 2006E 2007E 2008E 2009E 2010E
Cab
le T
eleph
ony
Hom
es P
asse
d (M
illio
ns)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100% Cable T
elephony Hom
es Passed as % of A
ll U.S. H
omes
Circuit Switched Homes Passed
VoIP Homes Passed
Cable Telephony Homes Passedas % of All U.S. Homes
Source: J. Halpern, et al., Bernstein Research, Quarterly VoIP Monitor: VoIP Growth Still Accelerating , April 18, 2006, Exhibit 12.
10
Cable TelephonyU.S.
§ Cable broadband growing rapidly
§ Cable telephone growing rapidly.
§ Cable telephony penetration is forecast to grow rapidly
§ But from a small base as a proportion of addressable households. Room for expansion.
-
5
10
15
20
25
2002A 2003A 2004A 2005A 2006E 2007E 2008E 2009E 2010E
Subs
crib
ers
(Mill
ions
)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Share of U.S. H
ouseholds
Cable Telephony SubscribersShare of U.S. Households
Source: J. Halpern, et al. ,Bernstein Research, Quarterly VoIP Monitor: VoIP Growth Still Accelerating , April 18, 2006, Exhibit 13.
Cable Broadband and Telephony Subscribers
0
5
10
15
20
25
30
35
40
2001Q2
2001Q4
2002Q2
2002Q4
2003Q2
2003Q4
2004Q2
2004Q4
2005Q2
2005Q4
2006Q2
2006Q4
2007Q2
2007Q4
Digital Cable High Speed Cable Cable Telephony
millions
Source: NCTA Surveyhttp://www.ncta.com/Statistic/Statistic/CableBroadbandAvailability.aspx
11
Mobile WirelessU.S.
§ Wireless-only households are growing while wireline-only households are shrinking.
§ National penetration grown to 71% of the population and essentially 100% of the aged 20-49 population.
§ Dramatically lower prices and higher usage volumes.
0
100
200
300
400
500
600
700
800
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Mon
thly M
OU
$0.00
$0.05
$0.10
$0.15
$0.20
$0.25
$0.30
$0.35
$0.40
$0.45
$0.50
ARP
M
MOU ARPM
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan. 03 to June 03
July 03 to Dec. 03
Jan. 04 to
June 04
July 04 to Dec. 04
Jan. 05 to June 0
5
July 05 to Dec.
05
Jan. 06 to June 0
6
July 06 to Dec.
06
Jan .07 to June 0
7
July 07 to
Dec 07 Est .
Jan 08 to June 08 Est
July 08 - D
ec 08 Est
Jan 09 - June 0
9 Est
Wireless Only Landline OnlySource: NIH Survey – Tardi ff-Ware , C ounterstatement, Iowa Docket No.
12
Mobile WirelessFlorida
§ Wireless calls have displaced wireline local and toll minutes of use in Florida.
2000
2200
2400
2600
2800
3000
3200
3400
3600
3800
1999 2000 2001 2002 2003 2004 2005 2006
Loca
l Cal
ls p
er L
ine
450
460
470
480
490
500
510
520
530
540
Toll
Cal
ls p
er L
ine
Local Calls/ Line (Left Y-Axis) Toll Calls/ Line (Right Y-Axis)
Source: ARMIS 43-08.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2000 2001 2002 2003 2004 2005 2006
Wir
elin
e M
inut
es o
f Use
(Mill
ions
)
-
2
4
6
8
10
12
14
16
Wir
eles
s Sub
scri
bers
(Mill
ions
)
Wireline Minutes Wireless Subscribers
Note: Minutes of use are interstate switched access minutes for Florida ILECs .Source: FCC, National Exchange Carrier Association, Quarterly Minutes of Use Data; FCC December 2006 Local Competition Report, Table 13.
13
Broadband and VoIPFlorida
§ Internet penetration stable (71-73%) but dramatic shift from dial-up to broadband
§ Broadband penetrationexceeds 50% of Florida households in 2Q2006
§ Florida broadband availability, December 2006:
– 89% DSL availability (79% national)
– 97% cable modem availability (96% national)
Florida Broadband Penetration
0%
10%
20%
30%
40%
50%
60%
1Q20032Q2003
3Q20034Q2003
1Q20042Q2004
3Q20044Q2004
1Q20052Q2005
3Q20054Q2005
1Q20062Q2006
Source: Florida PSC 2006 Competition Report, Figures 25-26
14
Broadband and VoIPU.S.
§ Rapid national growth in independent VoIP subscribers.
§ Package prices competitive with wireline / wireless packages.
Consequences for Regulation
16
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.ó Increase in the wholesale price
passed through by all carriersó 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.
17
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).
18
Regulation of Wholesale Services
§ Regulation of Wholesale Price is Unnecessary when Retail Market is Competitive:
– Assume:ó Retail price is set in a competitive
market.ó Wholesale is essential facility.ó ILEC chooses pW to maximize
profits, given pR
– Theorem: pW is a Ramsey mark-up of the ECPR wholesale price.
– As wholesale demand elasticity gets large, profit maximizing wholesale price approaches efficient level.
– Wholesale demand elasticity becomes large as intermodal alternatives become important.
)]([1 RRWW
W
WW
W cpcp −++
=η
η
11
→+ W
W
WW
ηη )( RRWW cpcp −+=
)])(,())(,([max,
WWWRWRRWRRppcpppqcpppq
WR
−+−=π
19
Regulation of Wholesale Services
§ Intermodal Competition Reduces the Profit-Maximizing Wholesale Price:
– Consider an increase in pW.
– When a wholesale customer goes away, only α percent of the demand goes to ILEC retail.
– Effectively, wholesale is no longer an essential facility.
– Resulting profit-maximizing level of pW is smaller.
11
→+ W
W
WW
ηη
W
W
W
R
pq
pq
∂∂
−=∂∂
α 10 <<α
)]([1 RRWW
W
WW
W cpcp −++
= αη
η
)]([ RRWW cpcp −+= α
20
Regulation of Wholesale Services
§ Deregulation is different for wholesale and retail services.
– ILEC with no wholesale competitors may have no wholesale market power.
– Wireline CLECs may have no alternative methods of accessing their customers.
– “Defining the relevant market for a wholesale facility” may not involve any substitute wholesale services.
Telecom Decision CRTC 2008-17
Ottawa, 3 March 2008
§ 37. With regard to future applications to consider the essentiality 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:
§ (i) The facility is required as an input by competitors to provide telecommunications services in a relevant downstream market;
§ (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 the relevant downstream market; and
§ (iii) It is not practical or feasible for competitors to duplicate the functionality of the facility.
§ 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.
21
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…
Conclusions
23
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.