1

Regulatory Challenges of Next Generation Networks

Regulatory Policy Institute Annual Competition and Regulation Conference 2008Oxford, 15th& 16th September 2008

Marcus Weinkopf, Deutsche Telekom

April 24, 2008Marcus Weinkopf – Deutsche Telekom 2

Invest: 2000 €,Depreciated over 5 yearsNutrition:

500 € p.a.

Output:3000 Liter p.a.

Regulator fixesRate of Return

CalculatesefficientInvestmentDepreciationVariable CostsCommon Costs

divides by output

Price per Liter

Cost-Based Price Regulation: Basics

April 24, 2008Marcus Weinkopf – Deutsche Telekom 3

Next Generation Milk1€

The Next Generation: New Colors for the Market

Next Generation Access

Same starting position for all network operators

Substantial investments needed High risk of investments

Invest: 2000 €,Depreciated over 5 years

April 24, 2008Marcus Weinkopf – Deutsche Telekom 4

Next Generation Milk1€

Cost-Based Regulation with Multiple Business Models ?

Reseller / “Bitstream Access”

Next Generation Milk1€

“Committed Investor”

Invest: 2000 €,Depreciated over 5 years

Despite strongly differing risks, traditional „cost-based“

regulation would lead to equal prices for both

business models!

!

April 24, 2008Marcus Weinkopf – Deutsche Telekom 5

Next Generation Milk1€

Next Generation Milk1€

When Regulation Makes No Difference: Why Should One Take Risks?

April 24, 2008Marcus Weinkopf – Deutsche Telekom 6

Cost-Based Regulation for New Infrastructures: A Perfectly Regulated Access to Nowhere?

April 24, 2008Marcus Weinkopf – Deutsche Telekom 7

FTTH/B: Europe Lags Behind Asia and the U.S.

Anzahl der Glasfaser-Nutzer in Mio.

0

2

4

6

8

10

12

Europe USA Asia

20041 20061

20041

20061

20041

20061

2007(E) 2

2007(E) 2

2007(E) 2

18

Number of fiber-based subscribers in Mio.

Sub

scrib

ers

in M

io.

Recent trends show: Fiber-based infrastructure grows in all regions, but at significantly different rates.

Only slow increase of fiber access users in Europe. Significantly faster growth in the U.S. and in Asia.

In 2004, European fiber network roll-out was still ahead of the U.S. Since 2006, the picture changed dramatically and with massive fiber investments, the U.S. left Europe far behind.

While Europe passed the 1 million barrier of fiber-connected homes thanks to a 30% increase in 2007, the dynamic is still much faster in the U.S. and in Asia.

1 Source: IDATE (2007). Europe: EU-5 +NL+SW; Asia: Korea, Japan2 Source: Estimates of the FTTH Council for 2007

April 24, 2008Marcus Weinkopf – Deutsche Telekom 8

Demand for Bandwidth Will Increase Significantly

Growth of data traffic in fixed networksDevelopment of network performance

Source: Alcatel Lucent 2006-2007; Cisco, Global IP Traffic Forecast and Methodology, 2006-2011

Ø B

andw

idth

per

use

r

Developmentfixed networks

Factor10-25

Factor10-25

Factor10-25

Developmentmobile networks

Time

0

20.000

40.000

60.000

80.000

100.000

120.000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0

3.000

6.000

9.000

12.000

15.000

18.000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Tera

Byt

e/M

onth

Tera

Byt

e/M

onth

Growth of data traffic in mobile networksUMTS

HSxPA

LTE

EDGE

IMT AdvancedADSL

ADSL2+VDSL

FTTH(NG-GPON)

FTTH(GPON)

April 24, 2008Marcus Weinkopf – Deutsche Telekom 9

Next Generation Networks need Next Generation Regulation

Deutsche Telekom starts with close to 100% fixed network market share

Existing State-of-the-art Network

Redistribution of market shares Decreasing retail prices Regulation of existing networks:

Access Wholesale Prices

Regulation

Market Strong broadband competition Substantial investments in NGA &

NGN needed Same starting position for all

network operators

?

1998PSTN / DSL

2008 NGN & NGA (FTTX)

Regulation

Market

April 24, 2008Marcus Weinkopf – Deutsche Telekom 10

Deutsche Telekom’s Move towards NGA: T-Entertain / VDSL

TV for the mass market launched in 2007

Eoy 2007: IP TV via VDSL in 27 cities, ADSL2+ in 750 cities; Plan 2008: IP TV via VDSL in 40 cities, ADSL2+ in 1000 cities; Mid term: VDSL in up to 50 cities

IP TV “Entertain”: 150 TV channels, 2600 VoD titles

T-Home “Entertain” coverage: 44 % / 17 Mio. Homes. Target for 2008: 20 Mio. Homes

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German Market: The Fiber Race to the Home has Started

Have you found the bottleneck?

Not yet..

Sou

rce:

Wilh

elm

.tel p

rese

ntat

ion,

Nov

embe

r 200

6 , b

ubbl

es b

y D

T

Roll out Start: July 2006 Current Coverage: 10 – 20,000 HH in

Cologne Plan: up to 800,000 HH in 2011

Roll out Start: October 2007 Current Coverage : 600 HH in Munic und

Augsburg; in 2008: 110,000 HH Plan: up to 400,000 HH in 2011 Roll out Start: August 2006 Current Coverage : 90,000 HH in

Norderstedt and Hamburg Further roll out planned

Roll out Start: 2005 Current Coverage : 2000 HH in

Westerstede; Lohne under construction Plan: Roll-out in Oldenburg beginning in

2008

Other announc-ements by

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FttH: Strong Economics of Density,Nation-wide Roll-out requires Enormous Investments

FTTH Coverage (in %)100

No economically viable roll-out

One FTTH Network + Cable

Infrastructure Competition FTTH/Cable

20 40 60 800

Req

uire

d In

vest

men

t per

HH

Region 1

Region 2

Region 3

Next Generation Regulation: Regionalization Appropriate

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Service-based competition through access to NGA-

network

Infrastructure competition FTTH/cable

Symmetric opening of ducts as enabler

No regulation

Priority for commercial solutions

Subsidiary price- and access regulation with risk-

sharing possible

No economically viable network roll-out possible

Structural fundsPPP/tenders

Non-discriminatory access

Region 1 Region 2 Region 3

Increasing costs per access line

Regulatory decisions must reflect regional/local conditions of competition Decisions on access and prices for NGAs must be long-term – no regular short term review of

conditions every 2 years Access conditions must allow for flexible pricing by the regulated operator and fair risk sharing

between investor and access seeker

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Next Generation Regulation: Network Access

Today: Regulated Access to each Element of the value chain

In-House Sub-Loop Unbund-

ling ULL Col-

location Leased

Lines Resale &

BSA

ZISP & Gate & OC

IC & Carrier

Selection

Access Network Operators ISP Telephone SP

In-House Ducts BSAor

Tomorrow: Regulators should focus on only one Type of Access, …

( … and leave room for alternative commercial arrangements.)

Wholesale Prices: Investment Risk Must be Taken into Account

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Proposal for the Review

No risk sharingNo mechanism to adequately reflect

the investment risk Investor fully bears the risk of

sufficient network utilization Investment is not profitable in early

market phase whereas access seeker can make a profit right from the beginning

Market entry possible anytime (free “option value“)

Risk sharing through: Long-term contracts with

committed duration and quantities per time period or

Up-front paymentsAccess seeker partly takes over the investment risk

Risk sharing through risk premiumAccess seeker pays price basis plus risk premium for “option value“

Risk premium decreases with growing market penetration

Price squeeze test must reflect the Risk Sharing Mechanism: Wholesale Price > Retail Price

Priority of commercial solutions!

Regulation of NGA under current regulatory regime

Committed Output/ Time

Retail price

Output/Time

averagecosts

regulated

price

Wholesale price

Output/Time

Price according to supposed network capacity utilization

x**x

Retail priceRetail price

x1

P1

Price depending on duration and quantity of contract

Wholesale price

averagecosts

Risk

prem

ium

price basis

Wholesale price

Price incl. risk premiumaveragecosts

Amount of risk to be shared between access seekers and investor

x*

P2

x2

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Conclusion: NGAs call for fundamental changes of the regulatory framework

Required changes for NGA

Network Access

Symmetric: Opening all ducts No regulation in case of existing or

potential infrastructure based competition

Access obligations only for one step of the value chain (ducts or BSA)

Longer approval periods (up to 10 years)

Appropriate risk sharing mechanisms Stable wholesale pricing also for the

remaining life of the copper network

Wholesale Price

Regulation

Retail No regulation

Current Framework Asymmetric obligations for

access to ducts to DTAG only Regulation also in regions with

infrastructure based competition Parallel network access on

several steps within the value chain

Maximum validity period of regulated prices: 2 years.

No mechanism for risk sharing through wholesale pricing

Constant pricing pressure

Regulation

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Thank you for your attention.

Marcus WeinkopfVice President Regulation Wholesale and NetworksHead Office T-Home, Deutsche Telekom AG, D-53105 Bonnmarcus.weinkopf@telekom.de