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Marcus Weinkopf, Deutsche Telekom

Marcus Weinkopf, Deutsche Telekom. Regulatory Challenges of Next Generation Networks Regulatory Policy Institute Annual Competition and Regulation Conference 2008 Oxford, 15 th & 16 th September 2008. Output: 3000 Liter p.a. Cost-Based Price Regulation: Basics. Regulator fixes

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Marcus Weinkopf, Deutsche Telekom

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  1. Marcus Weinkopf, Deutsche Telekom Regulatory Challenges of Next Generation NetworksRegulatory Policy Institute Annual Competition and Regulation Conference 2008Oxford, 15th& 16th September 2008

  2. Marcus Weinkopf – Deutsche Telekom Output: 3000 Liter p.a. Cost-Based Price Regulation: Basics Regulator fixes • Rate of Return Calculatesefficient • Investment • Depreciation • Variable Costs • Common Costs divides by output Price per Liter Invest: 2000 €, Depreciated over 5 years Nutrition: 500 € p.a.

  3. Marcus Weinkopf – Deutsche Telekom Invest: 2000 €, Depreciated over 5 years Next Generation Milk 1€ 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

  4. Marcus Weinkopf – Deutsche Telekom Reseller / “Bitstream Access” Despite strongly differing risks, traditional „cost-based“ regulation would lead to equal prices for both business models! ! Invest: 2000 €, Depreciated over 5 years Next Generation Milk 1€ Next Generation Milk 1€ Cost-Based Regulation with Multiple Business Models ? “Committed Investor”

  5. Marcus Weinkopf – Deutsche Telekom Next Generation Milk 1€ Next Generation Milk 1€ When Regulation Makes No Difference: Why Should One Take Risks?

  6. Marcus Weinkopf – Deutsche Telekom Cost-Based Regulation for New Infrastructures: A Perfectly Regulated Access to Nowhere?

  7. Marcus Weinkopf – Deutsche Telekom 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. Anzahl der Glasfaser-Nutzer in Mio. FTTH/B: Europe Lags Behind Asia and the U.S. Number of fiber-based subscribers in Mio. 2007(E) 2 18 12 20061 10 8 Subscribers in Mio. 6 20041 4 2007(E) 2 20061 2 2007(E) 2 20061 20041 20041 0 USA Europe Asia 1 Source: IDATE (2007). Europe: EU-5 +NL+SW; Asia: Korea, Japan 2 Source: Estimates of the FTTH Council for 2007

  8. Marcus Weinkopf – Deutsche Telekom Demand for Bandwidth Will Increase Significantly Development of network performance Growth of data traffic in fixed networks FTTH (NG-GPON) Developmentfixed networks FTTH(GPON) Tera Byte/Month Factor 10-25 VDSL ADSL2+ Factor 10-25 Ø Bandwidth per user IMT Advanced ADSL Factor 10-25 LTE Growth of data traffic in mobile networks HSxPA Developmentmobile networks UMTS EDGE Time Tera Byte/Month Source: Alcatel Lucent 2006-2007; Cisco, Global IP Traffic Forecast and Methodology, 2006-2011 8

  9. Marcus Weinkopf – Deutsche Telekom Next Generation Networks need Next Generation Regulation 2008 NGN & NGA (FTTX)‏ 1998PSTN / DSL Market Market • 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 • Strong broadband competition • Substantial investments in NGA & NGN needed • Same starting position for all network operators ? Regulation Regulation

  10. Marcus Weinkopf – Deutsche Telekom 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

  11. Not yet.. Have you found the bottleneck? German Market: The Fiber Race to the Home has Started • 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 Source: Wilhelm.tel presentation, November 2006 , bubbles by DT • 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

  12. FttH: Strong Economics of Density, Nation-wide Roll-out requires Enormous Investments No economically viable roll-out Region 3 Required Investment per HH One FTTH Network + Cable Region 2 Infrastructure Competition FTTH/Cable Region 1 100 0 20 40 60 80 FTTH Coverage (in %)‏

  13. Region 1 Region 2 Region 3 Next Generation Regulation: Regionalization Appropriate Infrastructure competition FTTH/cable Service-based competition through access to NGA-network No economically viable network roll-out possible Priority for commercial solutions Subsidiary price- and access regulation with risk-sharing possible Structural funds PPP/tenders Non-discriminatory access Symmetric opening of ducts as enabler No regulation 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 13

  14. 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 Tomorrow: Regulators should focus on only one Type of Access, … BSA In-House Ducts or ( … and leave room for alternative commercial arrangements.) 14

  15. Priority of commercial solutions! Wholesale Prices: Investment Risk Must be Taken into Account Regulation of NGA under current regulatory regime Proposal for the Review Wholesale price Wholesale price Wholesale price Amount of risk to be shared between access seekers and investor Price incl. risk premium Price according to supposed network capacity utilization average costs average costs average costs Price depending on duration and quantity of contract Retail price Retail price Retail price Risk premium P2 regulated price P1 price basis Committed Output/ Time Output/ Time Output/ Time x1 x x2 x* x** No risk sharing • No 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 risk premium • Access 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 Risk sharingthrough: • Long-term contracts with committed duration and quantities per time period or • Up-front payments • Access seeker partly takes over the investment risk 15

  16. Conclusion: NGAs call for fundamental changes of the regulatory framework Current Framework Required changes for NGA • 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) Network Access • 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 • Longer approval periods (up to 10 years) • Appropriate risk sharing mechanisms • Stable wholesale pricing also for the remaining life of the copper network • Maximum validity period of regulated prices: 2 years. • No mechanism for risk sharing through wholesale pricing • Constant pricing pressure Wholesale Price Regulation • No regulation Retail • Regulation 16

  17. Marcus Weinkopf Vice President Regulation Wholesale and Networks Head Office T-Home, Deutsche Telekom AG, D-53105 Bonn marcus.weinkopf@telekom.de Thank you for your attention.

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