dániel pataki 2006 annenberg-oxford summer institute 24 th ju ly 2006

SHAPING A REGULATORY AGENCY IN A PERIOD OF CONVERGENCE

OR EUROPEAN TELECOM SYSTEM FROM A COUNTRY PERSPECTIVE

Dániel Pataki

2006 Annenberg-Oxford Summer Institute

24th July 2006.

2„EUROPE WANTS TO BECOME THE MOST DYNAMIC AND MOST COMPETITIVE KNOWLEDGE-BASED ECONOMY BY 2010”.ICT IS ONE OF THE KEY FACTORS REGARDING THE COMPETITIVENESS

The positive growth and productivity effects of ICT infrastructure emerge through broadband access. Within this the widespread adaptation of ICT tools and services has a highlighted role: how is it built in the traditional industries, how does it alter their operation (transmission mechanism).

• Lisbon strategy (2000) • i2010 (2005)• Bridging the Broadband Gap (2006)

IKT eszközöktermelése

IKT eszközökalkalmazása

termelékenység – növekedés – versenyképességtermelékenység – növekedés – versenyképesség

SZÉLESSÁVICT

production

ICT

adaptation

termelékenység – növekedés – versenyképességproductivity – growth – competitiveness

BROADBAND

3

THE STATE SHOULD IDENTIFY AND DO AWAY ANY BOTTLENECKS THROUGH REGULATORY, PUBLIC POLICY AND FISCAL MEANS IN A HARMOISED WAY.

Public policy meansRegulationMarket machanisms

SecuritySecurityContentContent MotivationMotivation EducationEducationAccessAccess

Public policy meansRegulationMarket machanisms

SecuritySecurityContentContent MotivationMotivation EducationEducationAccessAccess

4

TWO BASIC PARADIGMS WITH SAME TARGET: WELL-PERFORMING TELECOM INFRASTRUCTURE

Only end result relevant:Regulated monopoly

Monopolistic marketstructure

Define andenforce desirableoutcomes

Well-performingtelecom environment

Competition with intrinsic value


Create and protect

competition

Competition

Competitionby naturedelivers desirableoutcomes


Only end result relevant:Regulated monopoly


Define andenforce desirableoutcomes


Competition with intrinsic value


Create and protect

competition

Competition

Competitionby naturedelivers desirableoutcomes


5

TELECOM PRIVATIZATION DRIVEN BY LIBERALIZATION TREND, FINANCIAL NEEDS, AND INCREASING INDUSTRY COMPLEXITY

Growing complexity of existing network and competitive pressure from alternative networks

• Mobile services• Parallel fixed networks• Data

3Financial shortage of governments combined with increased need for telecom investments

• Worldwide trend of expansion and upgrade of networks

• Caused by development of international trade and growing customer needs

2

Increased evidence that liberalized markets better serve customer needs

• Greater efficiency• Stronger growth• More innovation

1

Liberalization of telecom

industry

Growing complexity of existing network and competitive pressure from alternative networks

• Mobile services• Parallel fixed networks• Data

3Financial shortage of governments combined with increased need for telecom investments

• Worldwide trend of expansion and upgrade of networks

• Caused by development of international trade and growing customer needs

2

Increased evidence that liberalized markets better serve customer needs

• Greater efficiency• Stronger growth• More innovation

1

Liberalization of telecom

industry

6

AN ULTIMATE OBJECTIVE OF REGULATION IS TO RENDER ITSELF UNNECESSARY. TEMPORARY STEPPING-UP OF REGULATION TO BREAK MONOPOLISTIC DOMINANCE

Time

Incumbentmonopoly

Incumbent monopoly Competition

Competition

Le

ve

l, fo

rm a

nd

sc

op

e o

f re

gu

lati

on

More reliance on general competition law

More reliance on sector-specific regulation

The state of the market and the role of sector-specific regulation and general competition law

?

Source: Center for Economic Policy Research; BCG analysis

7

NRAs ARE PROMPTED TO COORDINATE WITH OTHER INSTITUTIONS

Government/ministries

• Definition of high-level policy objectives for thetelco industry (industry agenda)

• Use of non-regulatory levers (fiscal incentives, etc.)

NRA

Other NRAs

• European Regulators Group (ERG): Official advisor to Commission

• Harmonization of regulatory measures

• Cooperation in case of transnational markets

EU Commission

• Definition of high-level policy objectives for the EU

• Set up a framework and supervise application in order to ensure single market

Competition council

• Safeguarding competitive level of market - Punishment of improper behavior (ex-post)

• Identification and correction of anti-competitive market changes -Same basic approach to all sectors







NRA

Other NRAs




Other NRAs




EU Commission



EU Commission



Competition council



Competition council



8

„NEW” REGULATORY FRAMEWORK: COMPETITION POLICY (APPLIED EX-ANTE) WITH DECENTRALISED IMPLEMENTATION

"Old" regulatory framework

Objective :

Breaking up former monopolies

• In various communications markets

Foster market access of new entrants

• By regulating specific markets

Means:

Numerous directives

• Focusing on different areas of the market for electronic communications(1)

Due dates for transposition into national law:

Various (in the past), transposition largely completed

"New" regulatory framework

Objective:

One harmonized framework

• For all electronic communications services and networks markets

Minimum degree of regulation: bottom-up

• Relying on anti-trust rules and only regulating markets where competition cannot work

Means:

Set of five directives,

• complemented by one directive on competition and radio-spectrum decision(2)

Due date for transposition into national law:

24 July 2003

"Old" regulatory framework

Objective :

Breaking up former monopolies

• In various communications markets

Foster market access of new entrants

• By regulating specific markets

Means:

Numerous directives

• Focusing on different areas of the market for electronic communications(1)

Due dates for transposition into national law:

Various (in the past), transposition largely completed

"New" regulatory framework

Objective:

One harmonized framework

• For all electronic communications services and networks markets

Minimum degree of regulation: bottom-up

• Relying on anti-trust rules and only regulating markets where competition cannot work

Means:

Set of five directives,

• complemented by one directive on competition and radio-spectrum decision(2)

Due date for transposition into national law:

24 July 2003

9

„NEW” REGULATORY FRAMEWORK: A HARMONIZED MARKET BASED APPROACH TO EX-ANTE REGULATION AND TECHNOLOGICAL NEUTRALITY(TO BE IMPLEMENTED BY JULY 2003)

Imposition of obligationsMarket definition SMP designation

Initial definition by Commission

Selection of markets by

NRA

Identification of

operators with

Significant Market Power

Imposition of appropriate

remedy

Veto right of Commission

Assessment of SMP by wide choice of criteria leaves substantial

freedom(SMP: enables performance of its

activities to a large extent independently of its competitors,

the customers and finally the consumers)

Imposition of least severe from a list of potential obligations by local

NRA

3 conjunctive condition:- high and non-transitory entry barriers- the market does not tend towards effective competition- insufficiency of competition law to handle the identified market failures

Imposition of obligationsMarket definition SMP designation

Initial definition by Commission

Selection of markets by

NRA

Identification of

operators with

Significant Market Power

Imposition of appropriate

remedy

Veto right of Commission

Assessment of SMP by wide choice of criteria leaves substantial

freedom(SMP: enables performance of its

activities to a large extent independently of its competitors,

the customers and finally the consumers)

Imposition of least severe from a list of potential obligations by local

NRA

3 conjunctive condition:- high and non-transitory entry barriers- the market does not tend towards effective competition- insufficiency of competition law to handle the identified market failures

10

REGULATION OF WHOLESALE LEVEL IS CRUCIAL FOR DEVELOPMENT OF COMPETITION: POSSIBLE MEANS OF WHOLESALE REGULATION

Customer Customer relationships Access, backbone

Incumbentretailer

Alternativeretailer

Incumbentwholesale operator

1

2

3

5

1 Non discrimination + Transparency

2 Accounting separation

3 Access obligation

5 Price squeeze exemption

4 Cost accounting

4

CustomerCustomer Customer relationshipsCustomer relationships Access, backboneAccess, backbone

Incumbentretailer

Alternativeretailer

Incumbentwholesale operator

1

2

3

5

1 Non discrimination + Transparency

2 Accounting separation

3 Access obligation

5 Price squeeze exemption

4 Cost accounting

4

11

NCAH PREPARES A STRATEGIC CONCEPT ON THE FUTURE REGULATION OF ELECTRONIC COMMUNICATIONS MARKETS IN HUNGARY

Goals

Guideline for the strategy development of market players, providing the general framework and direction of regulation, thus enabling the increase of transparency and communication between the regulator and the industry and also limiting regulatory uncertainty

Internal guideline for NCAH assisting in its (daily) decision making process

Ensuring alignment between the strategic programs and actions of NCAH and other governmental institutions directed at overlapping segments/markets

Process

Phase I

Phase II

Phase III

Strategic discussion paper and consultation (Aug – Sep 2005)

• goal to facilitate the structuring of common strategic thinking, and does not follow the strict format of a strategy

Strategic concept (Oct – Dec 2005)

• Vision (based on market scenarios) and vision-based regulatory strategy

Final statement (Sept 2006)

• Finalized strategy

12

SCENARIO-BASED APPROACH APPLIED, NCAH IS PREPARED FOR DIFFERENT MARKET EVOLUTION PATHS

Market scenariosRegulatory objectives Regulatory challenges

Regulatory principles Regulatory interventions

Generally applicable Market evolution dependent

1 2

4 5

3

Market scenariosRegulatory objectives Regulatory challenges

Regulatory principles Regulatory interventions

Generally applicable Market evolution dependent

1 2

4 5

3

13

NRA’S OBJECTIVES FROM NCAH POINT OF VIEW:EFFECTIVE COMPETITION BASED ON A DEVELOPING SECTOR FULFILLS MAJOR CONSUMER INTERESTS

Consumers’ interests:price, value(1), choice

Penetration/usage

Se

cto

r in

tere

sts

:

Innovation InvestmentFinancial stability

Effective competition(2)

Competition is sustainable and effective with a developing and stable sector

Enabling viable competition is the only possible approach to fulfill consumers’ interest

Note: For some other information society objectives (e.g. universal services) competition is not the primary fulfilment tool(1) Quality, security, content etc. Utility given by the service (2) Effective competition means high intensity of competition among market players at the retail and access infrastructure level. In case of effective competition there is no operator who could significantly influence the dynamics of the competition by itself, and the level of market concentration is low.

14

THE REGULATOR’S ‘MAP OF COMPETITON’ SHOWS THE LEVEL OF EFFECTIVE COMPETITION

The market competition

from the consumers’

point of view

Relevant field of competition

Preference of the regulator

HHI(1) of the access infra structure competition

HH

I(1)o

f th

e r

eta

il m

ark

et

com

pe

titi

on

0

0

1

Servicecompetition

Monopolymarket

Effectivecompetition

Infrastructurecompetition

Infrastructure competition in

terms of acce ss

Unnecessary, not desired level of infrastructure competition (due to economies of scale, investments in access infrastructure will not be effective any more )

Structural limit to effective retail market competition in electronic communications

Unlikely and undesirable situation where operators increase the concentration by using infrastructure owned by other players

The market competition

from the consumers’

point of view

Relevant field of competition

Preference of the regulatorPreference of the regulator

HHI(1) of the access infra structure competitionHHI(1) of the access infra structure competition

HH

I(1)o

f th

e r

eta

il m

ark

et

com

pe

titi

on

HH

I(1)o

f th

e r

eta

il m

ark

et

com

pe

titi

on

0

0

1

Servicecompetition

Monopolymarket

Effectivecompetition

Infrastructurecompetition

Infrastructure competition in

terms of acce ss

Unnecessary, not desired level of infrastructure competition (due to economies of scale, investments in access infrastructure will not be effective any more )

Structural limit to effective retail market competition in electronic communications

Unlikely and undesirable situation where operators increase the concentration by using infrastructure owned by other players

(1) All the coordinates are scaled by the values of Herfindahl-Hirschman index used to measure market concentrationNote: The ‘theoretical maximum’ level of retail market and access infrastructure competition may differ in each of the markets

15

NCAH IS CAPABLE OF INCREASING THE CONSUMER SATISFACTION ALONG THE REGULATION IMPACT CURVE

Low High

Low

High

Ratio of the switches

Price/Value sense= Satisfaction

Very strong competition and

growing satisfaction

Efficient service

providers and satisfaction

The competition starts: extending service provider switches

Dissatisfaction and little possibility to

choicePrice Value

%%

Price Value

%

%

1 The regulator can affect this in the short term

Imp

ac

t o

f m

ark

et\

co

mp

eti

tio

n i

n

the

lon

g t

erm

2

Re

gu

lati

on

Imp

ac

tC

urv

e

Relevant measurable choice-indicator from the consumer point of view

Market A

Market C

Market B

Low High

Low

High

Ratio of the switches

Price/Value sense= Satisfaction

Very strong competition and

growing satisfaction

Efficient service

providers and satisfaction

The competition starts: extending service provider switches

Dissatisfaction and little possibility to

choicePrice Value

%%

Price Value

%

%

1 The regulator can affect this in the short term

Imp

ac

t o

f m

ark

et\

co

mp

eti

tio

n i

n

the

lon

g t

erm

2

Re

gu

lati

on

Imp

ac

tC

urv

e

Relevant measurable choice-indicator from the consumer point of view

Market A

Market C

Market B

16SIX TRENDS SEEM TO BE CRITICAL ON THE HUNGARIAN MARKET THERE ARE STRONG INTERDEPENDENCIES BETWEEN THE TRENDS (E.G. CONVERGENCE AS AN OVERARCHING MEGA-TREND)

1

2

3

4

10

11

12

5

6

7

8

9

x Most important trends

Technological trends Service trends Value chain trends

Voice traffic grows only with price decrease

Data usage shows strong growth

The difference between services diminishes – all become IP-based data service

Services will be offered in bundles

Interactive, on-demand services become more widespread

Voice and data services are increasingly distributed on more technological platforms

Audiovisual services are available on new platforms

Technological convergence on several elements of the value chain

New, upcoming technology (e.g, WiMax) becomes a relevant factor on the market

The role and importance of content provisioning is growing

Stronger division between network operation, service provision and customer relationship functions

Fight between device producers and service companies for service intelligence

17

MOST IMPORTANT BOTTLENECKS IN THE MEDIUM TERM: ACCESS AND CUSTOMER REALITONSHIP. BOTTLENECKS CAN ALSO EMERGE IN THE AREA OF CONTENT

Content creating

Content aggregation

ApplicationTransmissionAccessEnd-user

deviceCustomer

relationship

(1) Present mobile networks

• Huge benefits on economies of scale and network effect

• Strong brands as entry barrier

• Extended distribution

• Critical size turnover/customer base

• Limiting switching intention and ability

• Strong competition among vendors

• International supply

• Wirelinenetworks:natural monopoly

• Wireless networks: limitedlicence(1)

• Limited economies of scale benefit

• Working competition



• Easier switch

• Basically competition, but: at certain infrastructures (mobile, cable)the provider, who is dominanton the area of access and customer relationship, prevails the competition as well

• Considerable competition,international supply

• „Killer content”and certain premium contents denote market power

!

Bottleneck

Content creating

Content aggregation


deviceCustomer

relationshipContent creating

Content aggregation


deviceCustomer

relationship

(1) Present mobile networks

• Huge benefits on economies of scale and network effect

• Strong brands as entry barrier

• Extended distribution

• Critical size turnover/customer base

• Limiting switching intention and ability



• Wirelinenetworks:natural monopoly

• Wireless networks: limitedlicence(1)

• Limited economies of scale benefit

• Working competition



• Easier switch

• Basically competition, but: at certain infrastructures (mobile, cable)the provider, who is dominanton the area of access and customer relationship, prevails the competition as well

• Considerable competition,international supply

• „Killer content”and certain premium contents denote market power

!

BottleneckBottleneck

18

SCENARIOS CREATED ALONG DIMENSIONS WITH HIGH IMPACT AND UNCERTAINTY

Mainissues

Extreme situations considered

To what extent will the communications market infrastructure be dominated by a single provider that can offer the majority of the services?

Incumbent transforms its network to NGN and acquires a significant competitive advantage

More than one, by-and-large equal infrastructures and their independent providers compete

To what extent the difference between services will disappear, what will be the market success of bundled services?

Services converge, companies able to offer bundles have competitive advantage

Significant demand remains for separate, non-bundled services

To what extent will the functions and market players diverge or converge along the value chain?

Significant market players appear, which are active in only some elements of the value chain

Vertically integrated companies dominate the market, which are active in all elements of the value chain

Technological trends Service trends Value chain trends

19

FOUR BASIC SCENARIOS IDENTIFIED AS POTENTIAL MARKET EVOLUTION PATHS IN HUNGARY UNTIL 2010

Dominant infrastructure provider

Players in thevalue chain

Exists Does not exist

One/ few

SignificantNotsignificant

Role of bundled services

Many

Service layerseparation

Dominantplayer

Intensifyingcompetition

Battle of platforms

Dominant infrastructure provider

Players in thevalue chain

Exists Does not exist

One/ few

SignificantNotsignificant

Role of bundled services

Many

Service layerseparation

Dominantplayer

Intensifyingcompetition

Battle of platforms

20

EXPECTED OUTCOME OF COMPETITION SHOULD BE TAKEN INTO ACCOUNT WHEN DETERMINING REGULATORY APPROACH

Effective competition

Current / expected level of competition

Competition law

Regulatory approach

1

Functioning infrastructure-based competition

Mainly competition law2

Infrastructure-based competition can evolve by itself

Ensuring effective competition between platforms

3

Infrastructure-based competition can evolvethrough service-based competition

Promoting gradual investments

– investment ladder

4

(Wholesale-based)Service-based competition

Long term wholesale regulation

5

Monopol(istic) market Retail regulation6

HH

Iof

the

re

tail

ma

rke

t co

mp

eti

tio

n

0

1

5

6

1

2

4 3

HHI of the access infrastructure competition

0

Effective competition

Current / expected level of competition

Competition law

Regulatory approach

1

Functioning infrastructure-based competition

Mainly competition law2

Infrastructure-based competition can evolve by itself

Ensuring effective competition between platforms

3

Infrastructure-based competition can evolvethrough service-based competition

Promoting gradual investments

– investment ladder

4

(Wholesale-based)Service-based competition

Long term wholesale regulation

5

Monopol(istic) market Retail regulation6

HH

Iof

the

re

tail

ma

rke

t co

mp

eti

tio

n

0

1

5

6

1

2

4 3

HHI of the access infrastructure competition

0

21

THE LADDER OF INVESTMENT CONCEPT FUNCTIONS AS A BRIDGE FROM (SHORT TERM) SERVICE TOWARDS (LONG TERM) INFRASTRUCTURE COMPETITION

Example: Ladder of investment possibilities to provide traditional narrowband services (1)Effect of ladder of investment

possibility of deregulation

real possibility to differentiate

real customer relationship

it competes in prices only

it competes in minute fees only

takeover of total business risk

critical density level risk, network effect

the total customer risk at the provider

traffic depending business risk

it ensures return even to a minimal extent

possibility of deregulation

real possibility to differentiate

real customer relationship

it competes in prices only

it competes in minute fees only

takeover of total business risk

critical density level risk, network effect

the total customer risk at the provider

traffic depending business risk

it ensures return even to a minimal extent

CS CPS WLR LLU

alternativeaccess

deploying

Extent of investments

customer relationship

latitude of product design

latitude of pricing

The make-or-buy deliberation changes gradually by

increasing of customer base

It is not ensured

0

1

2005

2010

0

Maximum level of infrastructure based competiton in short term

(1) Voice and dial-up internet. In case of VoIP backbone technology bitstream access ensures relevant alternative even at the voice services.

22

DETERMINATION OF CONCRETE INTERVENTIONS SHOULD BE PRECEDED BY DETAILED MARKET REVIEW AND IMPACT ASSESSMENT. THE FOCUS AND WEIGHT OF SAME INTERVENTION CAN DIFFER ACCORDING TO THE SCENARIOS

‘Intensifyingcompetition’

‘Dominantplayer’

2006- 2007 2008- 2010

• Determining interaction of fixed and mobile markets on regulation means’ level

• Developing wholesale products connected to investment ladder

• Enhancing broadband Internet service competition by further development of DSL wholesale products

• Promoting emerging technologies

• Decreasing cross ownerships of parallel infrastructures

• Further decrease of mobile IC-fees

• Enhancing competition in AV markets

• Increase of consumer transparency




• Liberalised spectrum policy

• NGN regulation

• Issues of content providing

Time horizon of possible regulatory intervention

independent of scenario


• NGN regulation

• Deregulation‘Intensifyingcompetition’

‘Dominantplayer’

2006- 2007 2008- 2010

• Determining interaction of fixed and mobile markets on regulation means’ level

• Developing wholesale products connected to investment ladder

• Enhancing broadband Internet service competition by further development of DSL wholesale products

• Promoting emerging technologies

• Decreasing cross ownerships of parallel infrastructures








• NGN regulation

• Issues of content providing

Time horizon of possible regulatory intervention

independent of scenario independent of scenario


• NGN regulation

• Deregulation

THANK YOU FOR YOUR ATTENTION!

dániel pataki 2006 annenberg-oxford summer institute 24 th ju ly 2006

Documents

competition policy

effective competition

development of competition

direction of regulation

exante regulation

new regulatory framework

regulatory agency

universal services competition