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Challenges: The Emergence of Next Generation Networks ITU, Geneva, 23 March 2006. Ruling the New and Emerging Markets in the Telecommunications Sector. Christian Wey (DIW Berlin & Technische Universität Berlin). Outline of my Presentation 1. On the Road to the Information Society

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challenges the emergence of next generation networks itu geneva 23 march 2006
Challenges: The Emergence of Next Generation Networks

ITU, Geneva, 23 March 2006

Ruling the New and Emerging Markets in the Telecommunications Sector

Christian Wey(DIW Berlin & Technische Universität Berlin)

Outline of my Presentation

1. On the Road to the Information Society

1.1 New Services and Products

1.2 Next Generation Networks (NGN)

1.3 New Infrastructures & Investments

2. Challenges for ex ante Regulation

3. Lessons from Dynamic Competition Theory

4. Regulatory Options for New & Emerging Markets

5. Summary

1 On the Road to the Information Society

1.1 New Services and New Products

Many new products, services and applications

i) Communication

- individual communication (e.g., voice over IP)

- mass communication (e.g., triple play)

ii) Information services, information goods & e-business

…with effects on business models, international trade, and with that, on overall social welfare

…but also „other“ positive effects for the society, e.g.:education, transparency, democracy, participation etc.


Applications and Content

  • Advertising- Music- Education- Triple Play- eFinance- Multimedia Services- Movies & TV- VoIP- eCommerce- Games
  • Terminals
  • PC- Mobile- Digital TV- Music Players- Videoconsoles- Emerging Platforms
  • Networks
  • DSL- 3G/UMTS- Cable- PLC- Satellite- Wireless- Fibre

1.2 Next Generation Networks

ITU: „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.“


Multimedia Services







Control layer

IP-based network

1.2 Next Generation Networks: Convergence

Evolution from multiple separate networks (each optimized for one service) to a unified IP-based multi-service network


1.2 Next Generation Networks: Potentials for Market Development

Convergence 1:

Different access technologies provide similar


 Potential for strong access competition

 Services remain dependent on access operator

Convergence 2:

Services are provided over different infrastructures

  • Potential for platform (NGN) competition
    • Platforms offer access to all kinds of services
    • Potential for more independence of service providers and users from particular access infrastructure
1.3 New Infrastructures

Realization of the Information Society depends on

a) investments into new infrastructures, b) diffusion of accesses to new infrastructures, c) convergence and inter-operabiliy („everything over IP“)

New infrastructures:

- upgrading of „old“ telephone networks (from copper to fiber, DSL, CableTV) - IP infrastructures - wireless local loops - UMTS in wireless telephony

1 3 new infrastructures access technologies and ngn
1.3 New Infrastructures: Access Technologiesand NGN
  • DSL / advanced DSL, e.g., vDSL
  • Hybrid Fiber Coax, e.g. Cable
  • Ethernet in the first mile (EFM)
  • Passive Optical (FTTx)
  • Powerline Communications
  • Fixed Wireless, e.g. WiMax
  • Mobile Wireless, e.g. UMTS, HSDPA
  • Investments into NGNs
    • Transmission networks, e.g. passing fibre
    • Network equipment, e.g. softswitches
    • Migration of legacy Operating Support Systems
    • Premises, e.g. BT geographically restructuring the network nodes
2 Challenges for ex ante Regulation

A pro-active regulatory approach since liberalization to foster competition:

a) asymmetric regulation of the former monopolist, b) access regulation, c) termination and interconnection, d) more recently, unbundling and resale regulation, e) prices and tariffs typically cost-based (or, price caps).

Underlying philosophy : „investment ladder“, which presumes

a) ex monopolist will preempt entry, b) to make competition work, force service competition, c) by asymmetric regulations imposed on ex monopolist, d) then, backward integration will occur, which results in e) infrastructure based – i.e., effective –competition.

2 Challenges for ex ante Regulation

First, new realities in telecommunications markets impact on all sorts regulations:

i) Economic regulation

  • Network access(->Focus of this talk)
  • Interconnection
  • Service access

ii) General interest regulation

  • Protection of critical infrastructure
  • Legal requirements
  • Emergency calls
  • Consumer protection
  • Universal Services

iii) Standards and technical regulation

2 Challenges for ex ante Regulation

Challenge is to achieve many goals with a limited set of instruments:

1) Assure efficient use of existing networks by access, interconnection etc. regulations

2) Provide an investment friendly environment

3) Counter new monopolization of markets

2 Challenges for ex ante Regulation

Tradition approach builds on

- natural monopoly picture

- takes infrastructure mainly as given

- assumes persistent monopoly position of incumbent,

- biased towards competition in complementary markets

What are the effects of this approach for firms’ investment incentives?

 Depends on which infrastructures we consider:

i) “essential” parts of the network

ii) infrastructures which is complementary to essential parts of the network

2 Challenges for ex ante Regulation

Cost-based access regulation applied to new infrastructures has direct effects on investment decisions (timing and type):

  • reduces the expected profits of the investing firm and
  • It also reduces the incentives of competitors to undertake investments

(this holds even when access regulation comes not immediately: i.e. regulation creates an option value of waiting for competitors)

=> Access regulation is likely to reduce incentives to invest into infrastructures

3 lessons from the dynamic competition theories
3 Lessons from the Dynamic Competition Theories
  • Innovations and dynamic efficiency
    • Temporary monopolies are part of dynamic competition in a world

with substantial risks and uncertainties

    • Catch-up competition is necessary to ensure dynamic efficiency
  • Vertical relations between telecom markets
    • Consumers derive utility from telecom services – not from inputs
    • Demand for access depends on services/applications
    • High uncertainties and high stakes
    • Coordination problems reduce the incentives to innovate and to invest in new markets / networks (coordination implies delay)
    • Even in the absence of regulation, underinvestment is likely:
      • Complementarities between investments
      • Not internalized user surplus
    • Ex ante access regulation further reduces expected payoffs and hence is aggravates the problem
4 Regulatory Options for New & Emerging Markets

Option vary from commitment to ex post regulation to a direct transfer

of existing ex ante regulations new networks

But #1: Experience with light hand (purely ex post) approach is not encouraging and also theoretically problematic:

- e.g. NZ or experiences in other network sectors

- with strong network effects incumbent‘s have strong incentives to deter entry (interconnection problem)

But #2: No experience with complete transfer of ex ante regulations to new networks

  • Intermediate solutions are being discussed
4 Regulatory Options for New & Emerging Markets

Regulatory options are inspired by the non-discriminatory nature of the Internet

i) Openess

ii) Net Neutrality

4 regulatory options for new emerging markets openess
4 Regulatory Options for New & Emerging Markets: Openess
  • Access network open for information providers
  • Non-discrimination as to transmission of content and applications
    • Technical standards
    • Access (physical layer)
    • Protocols (transport and control layer)
    • Pricing („a bit is a bit“)
  • Right to attach any non-harmful appliance to the network
open access obligations for ngns

Service providers

Incumbents NGN

Competing NGN

Competing physical network infrastructure

Incumbents physical network infrastructure

Open Access obligations for NGNs

Source: Cf. Ofcom (2005)

4 regulatory options for new emerging markets strict net neutrality
4. Regulatory Options for New & Emerging Markets: Strict Net Neutrality

Government should prescribe that now and forever the owner of the access network must not restrict the ability of its end user customers to access specific content or to running specific applications.

- exclusive focus on service level (where innovation is indeed impressive)


- neglects synergies from integration

- neglects the infrastructure investment problem


4 regulatory options for new emerging markets new separation options
4. Regulatory Options for New & Emerging Markets: New Separation Options

Restrictions on vertical integration

  • Separation of access and backhaul/backbone networks
    • Not feasible for all networks, e.g. cellular networks, therefore possibility of competition bias
    • Termination market power problem persist, therefore separation may not yield the results envisaged
    • Restricted integrated service provision
  • Separation of physical, communications protocol and service/application layer
    • Physical layer needs similar regulation as integrated networks
    • May be counterproductive to the extent that profits at the different levels are necessary for the returns needed
    • May make product development more difficult through coordination requirements across different layers
4 regulatory options for new emerging markets non replicable assets approach
4. Regulatory Options for New & Emerging Markets: Non-replicable assets approach

Identify new bottlenecks

  • If there are non-replicable assets, then regulate access
  • Time?
  • How do we know the non-replicable network parts?
  • Even after having identified non-replicable assets, there may be no monopoly power problem from the consumers perspective
  • Incentives of competitors are not taken into account
4 regulatory options for new emerging markets regulatory holidays
4. Regulatory Options for New & Emerging Markets: Regulatory Holidays

Self-commitment of regulatory authority not to intervene in order to provide investment incentives a for monopolist

  • Taking account of uncertainties and incumbents investment incentives
  • Specifying the appropriate time period is difficult
  • Commitment problems: how to deal with openly anticompetitive practices
  • Does not explicitly take into account dynamic competition: the fact that after some time ex ante access regulation steps in creates an option value for competitors which delays dynamic investment competition
4. Regulatory Options for New & Emerging Markets: Market based and contingent regulation

Elements of such a procedure

i) Is there a new market created by network investments?

- if no, then regulation

- note: it takes some time after this can be decided

ii) If there is a new market, then a regulatory holiday should come

- to reward investments

iii) Then it has to be evaluated whether effective competition comes

- if competition is increasingly emerging, then no access

regulation (this entails longer run tendency tests)

- the perspective of no regulation and the longer run perspective give incentives to invest also for competitors


Conditional Regulation of New Markets

„New market“?

Allocate to existing market



After b years:



After a years:




After c years:

Growing market shares




After d years:

Forecast significant

Market power?




After e years:

significante market





No regulation


„Intensity“ of Regulation

4. Summary

The Liberalization Process in Perspective

Monopoly and ex ante Regulation

Danger of over-regulation

No effective competition

State-owned monopoly

Effective Competition and competition policy






Dynamically efficient regulation of “new markets” must consider the incentives to innovate and to invest:

    • on the incumbent’s side and
    • on the competitors’ side
  • Vertical structures involve coordination problems and imply that “new markets” need time to develop
  • A short run market power test (as SMP) is not appropriate in the early stages
  • Regulation should depend on the longer-run tendency towards competitive structures
  • Vertical integration may help to ease coordination
  • A fully liberalized approach may fail because the threat of regulation deters the incumbent from using re-monopolization strategies

4. Summary

4. Summary

Challenges for regulation in the near future

  • Facilitate the creation of important alternative access networks
      • E.g.: Spectrum Policy (for radio broadcast and wireless access): make large amount available; encourage efficient use (abstain from imposing artificial restrictions on licensees, build out requirements etc)
  • Keeping the threat of regulation while abstaining from premature intervention
      • Be aware of creation of option value for competitors
      • Open access is advisable if a single provider of broadband access will have a monopoly…
      • Openness in the form of non-discrimination as to content may become a problem
  • Market definition and concentration based on market power tests
      • How to separate new markets from (regulated) old markets?
      • Complementary products (pricing is very different to standard markets)
      • Bundling of services
4. Summary

Challenges for regulation in the near future

4) How to implement structural openness through separation?

      • Access – switch – switch-to-switch connection
      • Physical layer – communication protocols – service layer – application layer
      • Is such a separation meaningful / possible?
      • Should be studied seriously – but technical progress / investments …
  • How to deal with (social) service regulations?
      • VoIP (emergency calls…
      • Universal services…(how pays how?)

6) Role of the state in promoting investments/diffusion

      • What lessons can be learned form subsidy programs?
  • Promotion of an open layered structure to retain option for effective ex post regulation?

- but there are already strong incentives for standardized network equipment and operating support systems…