technological evolution: regulatory and policy implications for the region

1

Technological Evolution:

Regulatory and Policy Implications for the

Region

J. Scott Marcus

Caribbean Internet Forum V: St. Lucia

6 November 2007

2 TPRC: Washington, DC, 30 Sep 2007

Technological Evolution:Regulatory and Policy Implications for the Region

• Networks are evolving in complex ways that have profound implications for policymakers.

• Developed countries will confront many of these issues somewhat earlier than the Caribbean.

• Nonetheless, the transformation is global, and will be strongly felt in the region.

• Caribbean policymakers can benefit from studying the effects of policy responses – both what succeeds and what fails – in developed countries (notably in the European Union and the United States).


Technological Evolution:Regulatory and Policy Implications for the Region

• What’s happening? Disruptive technological evolution.

• Rationale for public policy intervention

• The move to IP-based NGNs- NGN policy challenges- NGN deployments around the world- Regulatory responses to NGN in various countries

• … and now, the good news

• Conclusions


Disruptive Technological Evolution

• Internet technology is no longer “just” about the Internet; the same technologies are becoming central to all networks.

• Broadband access is increasingly central to the fixed network.

- Increasingly high speeds (copper to fiber).- Increasingly, network access is IP access.

• Services (voice, video, data) can be delivered by;- Any network operator (telco, cable, wireless(?)).- Service providers who do not have a network.



• Price/performance continues to improve.- Moore’s Law improvements in processing

speed and memory.- Increased data transmission speed and

capacity (e.g. DWDM).

• Voice service will remain very important, but the traditional voice network is of diminishing importance.

- Voice traffic is a diminishing fraction of total network traffic.

- All voice migrates to VoIP.



• Traffic continues to grow rapidly, but the rate of growth is declining year over year.

• Voice traffic will continue to migrate from fixed to mobile.

- High mobile penetration has been a boon to developing countries.

- More mobile subscribers than fixed.



• Mobile is certainly being used for IP-based data services, but it may have limited ability to substitute for the fixed network for data.

- Inefficient wholesale and retail pricing arrangements that (1) lead to high prices and (2) discourage use.

- Limitations in overall capacity and scalability.

• Fixed wireless broadband is likely to be a good solution in areas of low teledensity. Where teledensity is higher, capacity and scalability will probably not be adequate.



• In comparison to the fixed network, the mobile network is likely to have:

- Similar technical evolution (NGN / IMS).- Significantly different commercial evolution.


Rationale for Policy Intervention

• Three primary reasons for regulation of electronic communications, all related to market failure:

- Addressing distortions of competition, especially those caused by some form of market power.

- Addressing social needs that the free market might not, typically because the social value exceeds the private value to parties that might otherwise invest.

- Allocating scarce resources that are unique to each country.

• Network evolution raises issues in all three areas.



• Market power- NGN might introduce new forms of

competition, thereby mitigating market power.- Other forms of market power (last mile,

termination monopoly) are likely to persist.- NGN might introduce new bottlenecks in upper

layers of the networks.



• Public needs / public goods- Access to emergency services- Lawful intercept- … and more- These are largely the same issues raised by

the migration to converged IP-based networks.

• Numbering- Geographic or non-geographic numbers?- Far greater salience in Europe than in the US,

due to differences in charging arrangements.



• Encourage investment? Be careful!

• Policy intervention can make sense where:- There is a “public goods” problem – the value to

society as a whole is greater than the private value to the firms or to their customers.

- There is some other market failure, such as a lack of economies of scale due to fragmentation of regional markets.

• Otherwise, the policymaker should let the market choose the winners.



• Substantial risk of distorting the market.

• Risk that the policymaker “bets on the wrong horse”.- There have been brilliant successes, such as the

European choice of GSM.- There have also been many failures – they are

not much talked about. “Success has many fathers, but failure is an orphan.”

• Otherwise, policymakers should act with restraint, seeking to avoid distortions to market evolution.


Disruptive Technological Evolution: IP-based NGNs

• Many operators, especially incumbents, look to migrate to IP-based NGNs.

- Enhance economies of scope and scale.- Accelerate time-to-market for new IP-based services.

• The ITU provides a widely cited Definition of NGN:- “A Next Generation Network (NGN) is a packet-based network able to

provide services including Telecommunication Services and able to make use of multiple broadband, QoS-enabled transport technologies and in which service-related functions are independent from underlying transport-related technologies. It offers unrestricted access by users to different service providers. It supports generalized mobility which will allow consistent and ubiquitous provision of services to users.”

See http://www.itu.int/ITU-T/studygroups/com13/ngn2004/working_definition.html.

http://www.itu.int/ITU-T/studygroups/com13/ngn2004/working_definition.html


Disruptive Technological Evolution: IP-based NGNs

Policy issues are different in the NGN core, concentration, and access networks

NGN Access NetworkNGN Concentration NetworkNGN Core Network


NGN in the UK

Comparison of existing BT voice and broadband networks with 21CN

Source: Ofcom (2005), Next Generation NetworksFuture arrangements for access and interconnection; Figure 1, page 11


NGN in the Netherlands

dsl access

Metro Ethernet

Metro Ethernet

Fiber M etro Network Fiber M etro Network Fiber Core Network

Local Loop Metro Access Metro Core Backbone IP Edge Dienste

Custom erLocations

M ALocations

(28k)

M etroLocations

BB Locations(2x14)

AURALocations

(2x2)

Metro Ethernet

Metrompls

Metro m pls BB MPLS

In ternet

VoDdsl access

dsl access

Fiber Access

PtP/R ing ~ 1000 m

PtP/R ing ~ 70 km

PtP/R ing ~ 70 km Ring ~ 70 km Ring ~ 80-120 km Ring ~ 80-120 km

TV

IMS

dsl access

dsl access

dsl access

Metro Ethernet

Metro Ethernet

Fiber M etro Network Fiber M etro Network Fiber Core Network

Local Loop Metro Access Metro Core Backbone IP Edge Dienste

Custom erLocations

M ALocations

(28k)

M etroLocations

BB Locations(2x14)

AURALocations

(2x2)

Metro Ethernet

Metrompls

Metro m pls BB MPLS

In ternet

VoDdsl access

dsl access

Fiber Access

PtP/R ing ~ 1000 m

PtP/R ing ~ 70 km

PtP/R ing ~ 70 km Ring ~ 70 km Ring ~ 80-120 km Ring ~ 80-120 km

TV

IMS

dsl access

dsl access


Policy Challenges: IP-based NGNs

• The NGN core- The migration to IP potentially enables new

forms of service competition.- NGN/IMS could in principle either enable or

inhibit competition.- Service providers with market power may be

motivated to inhibit competition.- Smaller, competitive maverick operators may

have different motivations.- How will this play out in the marketplace? It is

too soon to say.



• The broadband/fiber NGN access network- If all voice migrates to IP, and the high speed

broadband access becomes the means to reach those services, then the character of the last mile bottleneck changes.

- Absent other changes, the last mile bottleneck does not go away.

- Procompetitive regulations – notably loop unbundling and line sharing – experience significant challenge in a VDSL of FTTB/FTTH environment (bitstream less so).



• Voice services in an IP-based NGN network- The call termination monopoly results because

only a single service provider can, in general, terminate calls to a single telephone number.

- Contrary to what some have claimed, the migration to IP-based NGNs does not significantly change the termination monopoly.



• Regulators might like to lay down their picks and shovels, declare victory and retire. They cannot.

- Likely market power in the last mile.- Likely market power for call termination.- Possible new forms of market power at the

application services layer.


NGN in the UK: Functional Separation

• Vertical separation of British Telecom- Access services division: OpenReach- Provides wholesale products to BT and to

competitors on a nondiscriminatory basis (Equivalence of Input).

- Distinct branding, uniforms.- Employee compensation reflects results of

OpenReach, not the results of BT.- Separate board to monitor effectiveness of

Equivalence of Input.


NGN in the UK: Functional Separation

• Promising approach reflects competition law, not pursuant to the regulatory framework.

- Many claim that the system is working well, including Martin Cave (Six Degrees of Separation)

- In reality, the measure is a bit extreme, and it is a bit early to say whether it is effective.

• Much interest in this approach- European Commission- Italy- Babcock and Brown / eircom- Australia and New Zealand


“NGN” access in the US

• Near-total and irrevocable elimination of regulation of the last mile, ostensibly in order to encourage investment.

• Has led the market to collapse to a series of geographically specific telco-cable duopolies.

• This approach cannot make sense in the absence of substantial modernized cable television plant.


The Netherlands Broadband Market

Source: European Commission 12th Implementation Report (10/2006)

The Netherlands Broadband Marketplace

45%

5%11%

0%

0%

37%

2%

Incumbent

ULL

Shared Access

Bitstream

Resale

Cable

Other


The French Broadband Market

The French Broadband Marketplace

48%

13%

16%

14%

3%6% 0%

Incumbent

ULL

Shared Access

Bitstream

Resale

Cable

Other

Source: European Commission 12th Implementation Report (10/2006)


The duopolistic U.S. broadband market

US Broadband 12/2004

14,134,865 , 37%

1,150,981 , 3%

21,319,224 , 57%

1,163,357 , 3%

ILEC DSL / other telco

CLEC DSL / other telco

Cable modem

Other

Derived from data from FCC reports based on Form 477 carrier data


U.S. – EU Comparison: DSL Lines

Source: European Commission 12th Implementation ReportEuropeanAverage

US 4%


“NGN” access in the US

• The results are still unfolding, but the policy seems to me to be a disaster.

• May have indeed spurred incumbent investment in VDSL and FTTH, but at a cost!

- Slower adoption of broadband than would otherwise be the case.

- No investment by competitors.- High prices for relatively slow broadband.- Less consumer choice.- Threats to Network Neutrality.


NGN access in Germany

• The German government has tried to provide DeutscheTelekom with a “regulatory holiday” in exchange for a commitment to deploy VDSL widely.

• Note that cable television in Germany is crippled by inappropriate competition law remedies.

• The German regulator (BNetzA) seeks to open ducts to competitors, potentially providing cost-effective access to street cabinets.

• The European Commission has launched an infringement proceeding to challenge the regulatory holidays.


NGN access in most of Europe

• Most European countries with NGN deployments – notably including France, the Netherlands, and Italy – are seeking to adjust and refine the European regulatory framework.

- Maintain competition in the last mile.- Avoid remonopolization of their networks.


Other NGN challenges

• Interconnection challenges are emerging everywhere, as the PSTN model collides with Internet arrangements (and also with more efficient arrangements used in the U.S. and Canada).

• The migration of voice to IP implies challenges for:- Access to emergency services- Lawful intercept- Access by those with disabilities- Numbering plans- And more …


And now, the good news…

• Mobile services are already well advanced in bringing voice service and some data service to large numbers of residents of the region.

• Progressive improvements in price/performance will make it easier to provide universal access, and ultimately universal service, to all.

• The emergence of competitive undersea cable to the region is an enormous boon.

• Third party service providers (Skype, Vonage, SIPgate) provide valuable competition.


Conclusions

• The transformation of the network is global, and will ultimately be strongly felt in the region.

• Many aspects benefit residents of the region.

• Others pose new policy and regulatory challenges.

• Caribbean policymakers can benefit from studying the effects of policy responses – both what succeeds and what fails – in developed countries (notably in the European Union and the United States).

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technological evolution: regulatory and policy implications for the region

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