Deregulation of the Telecom Sector and its Impact

Deregulation of the Telecom Sector
and its Impact on the Overall Economy
November, 2005
www.adlittle.com
Executive Summary
0
Deregulation stimulates infrastructure investment and has a positive impact
on the overall economic growth and consumer welfare
Executive Summary
In many countries deregulation of the telecoms sector is being discussed as a means
to stimulate investment into new infrastructure
The continuation of a regulatory policy that was designed to support the liberalization
of telecoms markets favors competition on existing technology platforms and makes
investment into new infrastructure less attractive
By analyzing regulatory policy changes in the US over the last years it becomes
evident that deregulation has led to significant investment announcements of the
leading fixed operators in the country
Several studies suggest a positive impact of deregulation on the amount of investments in the telecoms sector and on the overall economy; a positive relationship
between investments into the ICT sector and economic growth is common sense
To realize welfare gains, regulatory policy must pay attention to market and
technology changes and consider deregulation to stimulate investments into new
infrastructure platforms
1
Agenda
1
Introduction
2
(De-)Regulation Perspectives
3
Market Perspectives
4
Conclusions
A
Annex
2
Introduction – Key Questions
1
In many telecom markets, deregulation is currently discussed; this discussion paper examines the impact of deregulation on the overall economy
Having achieved significant welfare gains after liberalization of the
telecom industry, many markets are considering deregulation
Key Questions
In which countries is deregulation currently disscussed and what are the most
relevant issues?
What would be the impact of deregulation on investment, innovation and overall
welfare?
Is there evidence of successful deregulation and what are the lessons learned?
In this paper we will:
Explain the life cycle from liberalization and regulation towards deregulation and give an overview of countries
where deregulation is currently discussed
Describe the relationship between (de-)regulation, market dynamics and telecom operator's investment decisions
Provide evidence of the positive relationship between deregulation and investment decisions based on a country
case study
Draw conclusions on how deregulation can create incentives for more innovation and investment
3
Introduction – Definitions
1
Regulation supports the liberalization process from a monopoly to a
competitive market
Liberalization
Regulation
Deregulation
Market liberalization encourages the entry of new players
Liberalized markets are often regulated to prevent abuses by de facto or
legal monopolies and to protect consumers' and new entrants' rights
Liberalized telecom markets have been regulated to achieve publicinterest objectives (such as widespread service availability) and to avoid
abuse of market power by incumbents through price discrimination, cross
subsidization and remonopolization
Network owners viewed as having considerable market power are obliged
to provide access to other market players (non-discriminating and based
on regulated prices)
While achieving a lasting competitive market environment, deregulation is
a logical step to sustain the further development of the industry
The rationale for deregulation is that less regulation will lead to higher
competitive intensity, an increase in related investments, more innovation
and higher customer benefits
4
Introduction – Milestones
1
Deregulation is the process of lowering the level of imposed regulation and
should be introduced as competition develops
Regulatory Milestones in Establishing Efficient Markets
Liberalization
Main targets
Preconditions
Consequences
of failure
Regulation
not exhaustive
Deregulation
Encourage competition to
increase efficiency and
lower prices
Achieve public interest
objectives
Avoid sub-optimal market
structures
Stimulate investment in new
infrastructure
Establish technology
competition
Established basic
infrastructure
Additional players that are
interested in entering the
market
Existing public interests
- information society
- broadband diffusion
- avoidance of digital divide
Efficient market and
competing technologies
Players that are willing to
invest in (additional) networks
Technology alternatives
available
No sustainable competition
will develop
High prices due to
inefficiencies
Lack of innovation due to
low level of competition
Public interests not achieved
Discrimination
(service & price)
Low investment level
Lack of innovation
Limited investments and
therefore limited technological innovation
Stagnating price / performance levels due to limited
technology competition
5
Agenda
1
Introduction
2
(De-)Regulation Perspectives
3
Market Perspectives
4
Conclusions
A
Annex
6
(De-)Regulation Perspectives – Regulatory policy crossroad
2
Policy makers face a choice between protecting competition in static
markets by regulation or accelerating dynamic market effects by
deregulation
Regulatory Policy
Crossroad
Ongoing Regulation
Deregulation
Regulatory
Policy
Provide equal terms of access
Universal service obligation
Price regulation
Local Loop Unbundling (LLU)
Wholesale obligation
Regulatory certainty constricted in favor of
consumer interests
Prioritization of regulatory certainty
Regulation limited to bottlenecks
Focus on provisioning of high investment
incentives (i.e. regulatory holidays)
No regulation of new infrastructure and markets
(regulatory forbearance)
Regulatory
Impact
Competition is mainly based on existing
technology platforms (infrastructure)
Limited possibilities to differentiate due to
enforced infrastructure sharing obligations at
regulated prices
Limited investment incentives for incumbents
due to expected low / negative ROI
Market is driven by technology innovation
Investment into new infrastructure could be used
as a means to differentiate
Increase of infrastructure based competition
Acceptance of short term market inefficiencies
Continued regulation supports
development of static markets
Deregulation supports
development of dynamic markets
Deregulate if the expected overall welfare gains outweigh short term market inefficiencies
7
(De-)Regulation Perspectives – Deregulation Discussions
2
To stimulate additional investments in the telecom sector, deregulation is
being discussed in many countries
Current Deregulation Discussions
Intention of Deregulation
Country
not exhaustive
Background / Reasoning
Status
US
Fade out of unbundling, line sharing and
collocation obligations for broadband
connections
No unbundling obligations for future
FTTx infrastructure
Decline in investment
Imparity between cable and telco
regulation
Implemented
Hong Kong
Fade out of unbundling obligations for
FTTx
Ending of compulsory provision of LLU
Enable investments in network infrastructure to earn returns adequate to the
associated risk
Implemented;
LLU phase-out 2008
Australia
Enable potential investors to set out
access terms and conditions before
investment
Investment certainty for additional
networks
Subject to approval
Canada
Framework for forbearance of high
speed intra-exchange digital services
Partial deregulation of local telecom
market
Bell Canada's application to react on
pricing and fierce competition
Germany
"Regulatory holiday" i.e. forbearance of
unbundling obligation for FTTx/VDSL
infrastructure investment
Deregulation of international calls
Investment incentives
Regulatory certainty
Incumbent lost significant market power
in the international voice business
Ongoing hearing,
decision Jan. 2006
Need for EU approval;
Affiliation in German
telecom act
Source: Country regulators 2005
8
Agenda
1
Introduction
2
(De-)Regulation Perspectives
3
Market Perspectives
4
Conclusions
A
Annex
9
Market Perspectives - Chapter Summary
3
Deregulation encourages operators to innovate by investing in new access
technologies
Summary
Increased infrastructure competition raises consumer welfare and operators would be
willing to invest in case of an adequate ROI
– Market convergence may result in the entrance of neighbouring players in each
others core business, increasing the pressure for innovation and related investment
– Market convergence and related infrastructure competition is more likely to take
place in dynamic markets
– Deregulation is expected to positively influence the infrastructure investment
decisions of incumbents and to unlock dynamic market effects
Based on market studies in the US, we expect deregulation of the telecom sector to
stimulate investment in new infrastructure
– There is a common understanding in the US that regulation resulted in a decline of
infrastructure investment
– Recent studies suggest that deregulation of the telecom sector has a considerable
positive impact on employment, tax receipts, consumption and GDP
10
Agenda
1
Introduction
2
(De-)Regulation Perspectives
3
Market Perspectives
3.1
Market Drivers
3.2
Case Study
4
Conclusions
A
Annex
11
Market Perspectives – Market convergence
3.1
Market convergence may result in the entrance of neighboring players in
each others core business, increasing the pressure for innovation and
related investment
observed convergence trends
Fixed Operators
Mobile Operators
Mobile enters
fixed voice &
broadband
market
Fixed enters
TV market
(TVoDSL)
Fixed enters
mobile voice
market
Cable enters
fixed voice &
broadband
market
Cable / TV
Mobile
enters TV
market
(DVB-H)
Platforms
enter fixed &
mobile voice
market (VoIP)
DVB-T and
satellite attack
cable TV
Comments
Convergence increases the
choice for consumers
Players are increasingly under
pressure to differentiate through
investments into new
infrastructure and technology
Incumbents find it hard to
defend themselves because
they are the only market
participants restrained by
regulation policy. Differentiation
through capital expenditure is
not possible if regulatory policy
will grant access to new
infrastructure to competitors
Other Platforms & Players
12
Market Perspectives – Market dynamics
3.1
Market convergence and related infrastructure competition is more likely to
take place in dynamic markets
Dynamic Market
Static Market
Generation of
new revenue
sources
Long term
welfare gains
Lower
consumer
prices
Regulation
6 Competition
between multiple
technologies
1
Service
5 innovation based
on new
infrastructure
4
Investment to
innovate
2
3 Differentiation
(service,
brand, etc)
Capital
expenditure
Investment
multiplier
effects
Revenue
decline
Competition
on existing
infrastructure
Deregulation
Service
commoditisation
Investment to
stabilize returns
only
Short term
welfare gains
Company related results
Market development & company (re-)actions
Welfare related results
13
Market Perspectives – Operator’s Options
3.1
Deregulation is expected to positively influence the infrastructure investment
decisions of incumbents and to unlock dynamic market effects
Incumbents’ Investment Options
illustrative
Options
1
2a
"Business as usual"
Description
Implications
2b
Invest
(based on current regulation)
Invest
(after deregulation)
No investment in new infrastructure
Differentiation is focused on
marketing, brand, service application
and packaging issues
Investment in new infrastructure but
regulation behaviour potentially
destroys business case, creating
financial uncertainty
Investment in new infrastructure
Market development and competitors’
behaviour during investment phase
still unclear
Competition is carried out on
existing technology platforms
which leads to commoditisation
and limited differentiation potential
High risk results in lower expected
ROI
No competitive edge and limited
differentiation possibilities due to
access and wholesale
requirements
Possible first mover advantages
Investment payoff is unproven
Risk of aging infrastructure
Innovation might be limited to
existing technology platforms
Ongoing arbitrage business
models
Positive impact on welfare
due to additional investments
and service innovation
Attractiveness
Impact on Economy
14
Agenda
1
Introduction
2
(De-)Regulation Perspectives
3
Market Perspectives
3.1
Market Drivers
3.2
Case Study
4
Conclusions
A
Annex
15
Market Perspectives – Case Study
3.2
There is a common understanding in the US that regulation resulted in a
decline of infrastructure investment
Overview of US Regulation Approach
Federal Communications
Commission (FCC)
Principles & Policy Goals:
Encourage the ubiquitous
availability of broadband
access to the Internet for
all Americans
Telecom Act of 1996
Mandatory items:
– Interconnection
– Resale
– Unbundled access to
network elements
– Number Portability
– Universal service contributions
– 911 rules
Definition of details in the following years
Extensive unbundling and resale
obligations on RBOCs to encourage
competitive entry of competitors into
local markets
Ensure that broadband
services exist in a minimal
regulatory environment that
promotes investment and
innovation
Annual ILEC & CLEC Capital
Expenditures (bn USD)
Market development
No significant development of
infrastructure based competition
for local telecom services
Market exit of numerous resellers
Asymmetric regulation between
cable and telecom operators
Significant decline in long distance
market revenues
Significant decline of investment in
the public telecom market since
Y2000
Develop an analytical
framework that is as
consistent as possible,
across multiple platforms
50
40
30
20
10
0
1996 1997 1998 1999 2000 2001 2002 2003
Sources: FCC and court documents, T. Rowe Price, Arthur D. Little analysis
16
Market Perspectives – Case Study
3.2
In the US unbundling obligations for new infrastructure investments by
RBOCs have been abolished
Obligations to Regional Bell Operating Companies in US
Explanation
Telecom
Act 1996
UNE-P
Unbundled network
elements-platform. Allows
end to end service without
owning infrastructure
In force, "costbased" pricing
Eliminated
UNE-L
Unbundled network
elements-loop. Local
copper loop (does not
include switching)
In force, "costbased" pricing
Remains
CLECs will not be able to service customers unless
they combine UNE-L and installation of their own
infrastructure
Line Sharing
Access to the higher
frequency portions of the
local copper loop to provide
DSL services
In force, "costbased" pricing
Eliminated
Line sharing is no longer available as an unbundled
element. A 3 year transition period is established, with
new orders only being accepted during the first year
Wholesale
DSL Services
Allowed ISPs to buy DSL
services at wholesale prices
and resell them to end
customers
In force, "costbased" pricing
Eliminated
No future obligation to provide access to wholesale
wireline broadband Internet services. One year
transition period. ISPs may still negotiate commercial
wholesale agreements with an RBOC
Fibre and
Hybrid Loop
Unbundling
Refers to both FTTH and
FTTC with a final copper
connection
Not required
No unbundling requirement in greenfield situations.
Where fibre replaces copper or is installed alongside,
limited unbundling requirements (either provide
access to narrowband fibre or to a spare copper loop)
Obligation
Note: Please refer to glossary in appendix
No rule
New Rule
Comments
Effective dates of UNE-P elimination are not uniformly
defined
Sources: FCC and court documents, Arthur D. Little analysis
17
Market Perspectives – Case Study
3.2
FCC deregulation decisions have been directly followed by investment
announcements of telco operators
FCC Decisions
Timeline of Deregulation and Market Reactions
March: Cable modem
declared as
"information service"
by FCC*
Investment
Reactions
2002
February: FCC
deregulates new FTTx
connections, line
sharing and collocation
obligations
August: FCC
deregulates fiber
to apartment
buidings
2003
October: FCC
confirms the
deregulation of
FTTC
connections
December: FCC
introduces
amended regulation
concerning
unbundling
obligations
2004
1
August:
Verizon
Statement
2
5
2005
October:
SBC
Statement
October: SBC
Investment
Announcement
August: FCC
deregulates wireline
broadband Internet
access services
(copperline DSL)
3
4
June:
BellSouth
Statement
October: Verizon
Investment
Announcement
6
June: BellSouth
Investment
Announcement
*In June 2005 the Supreme Court asserted the FCC's cable ruling (Brand X Case)
Source: FCC – Policy highlights of Michael K. Powell's FCC Tenure (2005); FCC Press Releases and Web Site; Arthur D. Little analysis
18
Market Perspectives – Case Study
3.2
The FCC's deregulation decisions have been highly welcomed by the largest
local incumbents
Statements to Deregulation by RBOCs
1
“This is an important step … This decision will help accelerate deployment of broadband
networks, enabling greater choice and increased access for consumers.”
Susanne A. Guyer, Verizon senior vice president for federal regulatory affairs, August 5,
2004
2
"…with this positive policy movement…The path forward is much clearer. This is the
latest in a series of broadband rulings that demonstrate this Administration and the FCC
understand that keeping outdated regulation off of tomorrow's technology will boost jobs,
investment and innovation.."
SBC Chairman and CEO Edward E. Whitacre Jr., 14 October 2004
3
"By rejecting the CLEC petitions and moving quickly to bring regulatory parity for highspeed broadband providers, the FCC can spark even more investment and faster
delivery of innovative services to customers..."
Herschel Abbott, BellSouth vice president governmental affairs, June 30, 2005
Source: Press clippings, Arthur D. Little analysis
19
Market Perspectives – Case Study
3.2
The deregulation decision was followed by large scale investment announcements by the RBOCs
Investment Announcements by RBOCs*
Company
Announcement
4
Fast as light, Verizon is moving to roll out advanced
fiber-based broadband technology to customers in six
more states.
Target is for about half of the homes
in the covered areas to have FTTH or
FTTN by end-2008, i.e. 15 million
Total investment of $15-20 billion
Intention to hire between 3,000 and
5,000 new employees by the end of
2005
SBC Communications Will Deploy Advanced Broadband
Services To Reach 18 Million Homes In 2-3 Years
Project Lightspeed: Target is to reach
18 million homes by 2007 / 2008 (17
mio FTTN + 1 mio FTTH)
Cumulative capex over 3 years is
expected to be about $4 billion + $1
billion for investment in customer
activations
BellSouth Boosts Fiber Deployment Following FCC
Order
Capex in new infrastructure is about 1
bn$ in 2004 and 1.3 bn$ in 2005
Installations of fiber-to-the-curb in 2004
were 126,000 and 200,000 are
estimated in 2005
At a news conference here today, the company announced new
fiber-to-the-premises (FTTP) deployment to homes and
businesses… News Release, Oct. 25, 2004
5
SBC Communications Inc. said today it will dramatically accelerate
its plan to build a new fiber-optics network into neighborhoods…in
two to three years — rather than five years as previously
announced… Press Release, Oct. 14, 2004
6
Details
BellSouth told the FCC today that it plans to deploy fiber to almost
60 percent more locations in 2005 than it did in 2004…Although
BellSouth had installed fiber in many branches of its network, the
rate of deployment rapidly increased once the commission's action
removed the disincentive… Press, June 30, 2005
Source: Press clippings, Arthur D. Little analysis
*) Qwest has not made an investment announcement related to the FCC rulings
20
Market Perspectives – Case Study
3.2
There will be significant increase of new infrastructure investment and
additional FTTx homes passed until 2007
RBOCs Communicated FTTx Investment
Company
Annual Capex in New Infrastructure ($ bn)
RBOC Coverage
4
3
2
1
n.a.
0,9
2003
2004
0
2,0
2005e
2,9
2006e
3,8
2007e
4
3
2
1
0
3,4
n.a.
n.a.
n.a.
2003
2004
2005e
1,6
2006e
Verizon
SBC
Bellsouth
Qwest
Verizon Verizon
+SBC + Qwest
Verizon
+ BS
Annual add. FTTx homes passed (m)
2007e
15
4
10
3
2
1
5
n.a.
1,0
1,3
n.a.
2003
2004
2005e
2006e
0
n.a.
2007e
0
2003
2004
2005e
2006e
2007e
Source: Press clippings, Arthur D. Little analysis
21
Market Perspectives – Case Study
3.2
In addition to RBOCs, cable operators and competitors have announced to
invest into broadband technology
Investment Announcments by Other Market Players
Company
OEN
Announcement
examples
Details
• OEN plans to offer integrated IPTV
OEN Plans Large-Scale FTTH Deployment in Houston
… announced plans to deploy FTTH to 1,600,000 households in service, 10 to 100 Mbps Internet, Voice,
Video-on-Demand (VOD) and other
Houston, the 10th largest television market in the U.S. The
broadband
applications
company … plans to launch its United States service offering in
• OEN said it has acquired programming
December 2005
agreements for IPTV distribution of over
Press release, October 2005
400 television channels
• Agreement with Level 3
Comcast Extends National Fiber Infrastructure
Communications to expand fiber
…to provide inter-city and metro dark fiber as part of Comcast's
footprint
extension of its fiber footprint. This backbone ensures that
• Network expansion including fiber
Comcast has a technically advanced and fully upgradeable
capacity, routing and optical
nationwide broadband network…
equipment
Company press release, December 7, 2004
Covad Announces 2004 Network Expansion Initiative
Covad … today announced plans to expand its nationwide
coverage area and customer reach for digital subscriber line
(DSL), frame access, and T1 broadband services.
Company press release, January 7, 2004
• Installation of additional broadband
equipment in approximately 200 central
offices across the nation, increasing
Covad's nationwide broadband network
to more than 2,000 central offices
• broadening the access network enables
Covad to more efficiently utilize its core
ATM network
Source: Press clipings, Arthur D. Little analysis
22
Market Perspectives – Case Study
3.2
Deregulation is expected to trigger substantial growth of consumer surplus
due to increased broadband penetration
Expected Broadband Penetration & Consumer Surplus
Consumer surplus
($ bn)
Household broadband
penetration (%)
57%
45
52%
40
47%
35
30
12,9
10,6
25
15
5
0
6,6
4,5
12,1
17,7
22
26,4
20%
10%
5,9
2005
40%
30%
8,1
20
10
50%
41%
34%
60%
0%
2006
Baseline growth
in surplus
2007
Incremental surplus
due to deregulation
2008
2009
Broadband penetration
Comment
Consumer surplus is
defined as the value
consumers place on a
good or service above
what they actually pay
A report to the US
chamber of commerce
predicts that consumer
surplus from broadband
alone will increase
between 46% and 76%
per year due to
deregulation compared to
the baseline case
Cumulative additional
consumer surplus in the
years from 2005 to 2009
could be up to 42.7 billion
US Dollars
Source: Hazlett et al.: Sending the right signals (2004)
23
Market Perspectives – Case Study
3.2
Recent studies suggest that deregulation of the telecom sector has a considerable positive impact on employment, tax receipts, consumption and GDP
Expected Economic Impact of Deregulation in the US
Difference in Level
($ bn)
Additional jobs per annum
('000)
130
30
140
114
110
20
16,4
69
20,3 19,7
18,3
120
100
18,8
16,6
12,9
10
1,1
2
60
8,6
30 6,6
2,3
80
40
3,9
3,4
3,7
0
20
0
2004
Federal Tax
Receipts
2005
2006
Personal
Consumption
Expenditures
2007
GDP
2008
Comment
A study prepared by Allen Sinai
et al. for the ACCF (American
Council for Capital Formation)
expects that deregulation will
contribute up to 0.2% of
additional GDP growth over the
next years
On average, 91,000 new jobs
will be generated annually
through 2008
Cumulative additional federal tax
receipts will be up to $14.4
billion
Personal consumption
expenditure will increase from
an additional $8.6 billion in 2005
to an additional $20.3 billion in
2007
Employment
Source: Sinai et al.: Macroeconomic Effects of Telecommunication Deregulation (2004)
24
Market Perspectives – Case Study
3.2
There are several studies supporting the conclusions that deregulation of
the telecom sector triggers investments and overall growth of the economy
Extracts from Studies about Deregulation
1
An accurate scorecard of the
Telecommunications Act 1996:
Rejoinder to the Phoenix Centre
Study No.7 (Crandall et al. 2003):
…Unbundling decreases ILEC’s cash
flows…cash flows are used to finance
ILEC investments …unbundling
generally lowers ILEC investment in a
proportionate manner…
"Capex increase resulting from the
elimination of UNE-P regulations
would have had a multiplicative effect
on the economy"
Regulation caused decrease of
Capex leads to lower ROI and in
consequence to the elimination of
jobs "to address the profit squeeze"
2
How telecom regulations
harm California consumers
(Pociask 2003):
"Regulations that impede telecommunications
investment harm the economy“
ICT investments fuel growth of productivity and
are worth approximately $56bn in output for
GDP (CA)
Intense regulations harm investments and
reduce the economic output – meaning fewer
jobs and lower wages
Mandatory unbundling and irreversible
investment in telecom networks
4
(Pindyck 2004):
"[The Telecom Act of 1996] leads to an
asymmetric allocation of risk and return… which
creates a significant investment
disincentive…[and] reduce incentives to build
new networks or upgrade existing ones"
3
Telecom deregulation and the
economy – The impact of UNE-P
on jobs, investment and growth
(Eisenach et al. 2003):
Deregulation significantly fuels
further Capex – "Cascading effect
on overall economic growth" might
lead to $13bn additional Capex in
3 years
Major impact on GDP: Reform of
UNE rules (-> deregulation) could
increase GDP up to $102bn in 3
years
Reform of UNE rules
(deregulation) and resulting
investments in the ICT market
could create up to 669k jobs in 3
years
All studies came to the conclusion that deregulation would trigger
additional investments and boost the overall welfare of the economy
25
Agenda
1
Introduction
2
(De-)Regulation perspectives
3
Market Perspectives
4
Conclusions
A
Annex
26
Conclusions – Economic Impact of Deregulation
4
Deregulation stimulates additional investments in new infrastructure
enabling overall welfare gains
Conclusions: Effects of Deregulation
Status Quo
Deregulation
Infrastructure
Investments
Investments primarily in existing infrastructure
(stable to decreasing)
Limited incentive to invest into new
infrastructure
Additional potential investments by incumbents
due to positive business cases
Potential competitor related bandwagon
investment effect
Competition
Competition is carried out on existing platform
(static market view)
Focus on arbitrage business models
Competition is carried out between platforms
(dynamic market view)
Business model focus on innovation
Price Decline
Competition ensures decreasing prices
due to commoditization
More competition on access networks and
services leads to decreasing prices
Service
Innovation
Service innovation limited to existing
technologies and hence focused on e.g.
service applications, product bundles
and pricing only
Service innovation based on new infrastructure
and technology competition
Additional service innovation
Broadband
Penetration
Stable growth until maturity stage
Increased infrastructure competition accelerates
broadband penetration
GDP
Contribution to GDP by fixed telecom
sector will slowly decline
Positive impact through additional investments
and multiplier effects
Overall
Employment
Level
Declining due to high cost pressure
The employment level in the telco industry will be
stabilized due to the roll out of new infrastructure
and services
Potential positive impact on employment in other
industries due to spillover effects
Expected
Effect
27
Conclusions – Economic Impact of Deregulation
4
Studies point out the positive relationship of ICT investments and GDP
growth
Extracts from Studies on ICT Investment and GDP Growth
The economic impact of ICT – Measurement,
Evidence and Implications
(OECD 2004):
ICT investments contribute to an overall increase in
capital and an increase in labor productivity
ICT capital investment contributed on average 0.5%
to GDP growth in OECD countries from 1995 to 2001
The contribution of ICT capital to GDP growth has
strongly increased since the first half of the 1990s
The effects of ubiquitous broadband adoption on
investment, jobs and the US economy
(Criterion Economics 2003):
Effects of increased investment in current generation
broadband technologies
- 61,000 new jobs could be created on average per year
until 2021
- Wide adoption of broadband (DSL, cable) could lead to
an increase in GDP of $179.9bn until 2021
Investments into more advanced technologies (FTTH)
could be up to $82.8bn until 2021
The combined investments into existing and advanced
broadband technologies
- will be up to $146.4bn until 2021
- will lead to a cumulative additional GDP of $414bn until
2021
- Generate on average 140,000 new jobs per year
Studies suggest that there is a considerable relation between ICT investments and
GDP growth
28
Conclusions – Key Success Factors of Regulators
4
To realize welfare gains, regulators must pay attention to possible pitfalls
and behave accordingly
No Regulation of
New
Infrastructure
Timing of Regulatory
Easing
Avoid Uncertainty
If regulation of new infrastructure investments reduces the expected ROI far
below market returns of the same investment in an unregulated environment,
potential investors are likely to refrain from taking the risk associated with
investments
To overcome this problem, regulatory policy must provide investment
incentives, i.e. allow investors to benefit from first mover advantages by not
regulating (or deregulating) new investments or granting regulatory holidays
If the regulatory approach does not match current market conditions, regulation
leads to market distortions, i.e. the risk of absent or delayed investments
The regulatory approach must be reviewed on a regular basis to identify
deregulation possibilities in order to keep up with market and technological
developments; subsequently remaining regulation has to transfer to general
competition law
If market participants believe that the regulator “changes the rules during the
game”, investments and innovation may be held back due to the uncertain
regulatory environment
Once the regulator has committed to a certain regulatory approach, it must also
define a planning horizon during which regulation conditions are not changed
29
4
Conclusions – Summary
Deregulation clearly stimulates investments and recent studies in the US
suggest a significant positive impact on the overall economy resulting in
higher welfare gains
Putting it All Together
(De-)Regulation
Perspectives:
Challenge between
Operators’ and Customers’
Interests
Policy makers face a choice
between protecting competition
in static markets by regulation or
accelerating dynamic market
effects by deregulation
Deregulation is a logical step on
the way from a monopoly to an
efficient market
Key Questions
about Deregulation
While establishing sustainable
competition in the telecom industry,
many markets are considering a
reduction in regulation
The debate is whether and to what
degree deregulation will stimulate
investment and growth
Market Perspectives:
Market Demand and
Operators’
Willingness to Invest
Increased infrastructure
competition raises consumer
welfare and operators would be
willing to invest if ROI is
adequate
Deregulation is expected to
positively influence the
infrastructure investment
decisions of incumbents and to
unlock dynamic market effects
Conclusion: Deregulation Results in Higher Welfare Gains!
As indicated by several studies, deregulation stimulates additional investments in
network infrastructure and results in a positive economic impact
To stimulate economic growth, regulatory policy must consider market and
technology changes
30
Agenda
1
Introduction
2
(De-)Regulation Perspectives
3
Market Perspectives
4
Conclusions
A
Annex
31
Glossary of Abbreviations
A
Term
Definition
Term
Definition
Capex
Capital Expenditures
IP
Internet Protocol
CLEC
Competitive Local Exchange Carrier
DSL
Digital Subscriber Line
ISP
Internet Service Provider
LLU
Local Loop Unbundling
FCC
Federal Communications Commission. US
national regulation authority for
telecommunications and broadcast
MIMO
Multiple Input Multiple Output
NGN
Next Generation Network
FTTC
Fiber To The Curb
RBOC
Regional Bell Operating Company (US)
FTTH
Fiber To The Home
ROI
Return on Investment
FTTN
Fiber To The Node
FTTP
Fiber To The Premises
Superordinate term for the different levels of
Fiber deployment
UMTS
Universal Mobile Telecommunications System
UNE
Unbundled Network Elements
UNE-L
Unbundled Network Elements-Loop. Refers to
the local copper loop itself, but does not
include switching facilities (US)
UNE-P
Unbundled Network Elements-Platform. Endto-end service on third party infrastructure (US)
VoIP
Voice over Internet Protocol
FTTx
GDP
Gross Domestic Product
GSM
Global System for Mobile Communications
ICT
Informations and Communications Technology
ILEC
Incumbent Local Exchange Carrier
IPTV
IP Television
32
Deregulation Case Study – United States
A
RBOCs attributed the decline in infrastructure investment to the existing
regulation framework not providing investment incentives
Comment on FCC Regulation by Verizon April 25, 2001
Testimony (extracts) of Thomas Tauke, Senior Vice President Public Policy, Verizon before U.S.
House Energy and Commerce Committee
…Existing federal regulations handicap Verizon’s provision of DSL. The FCC has applied the section 251 unbundling
and resale requirements to Verizon and other incumbent local telephone companies. They require Verizon to allow
competitors to put their DSL equipment not only in our central office equipment buildings but also in small "remote
terminal" boxes in local neighborhoods.
They require us to provide not only unbundled lines from our locations to customers, but also "subloop" pieces of those
lines. The FCC first required us to provide DSL-capable loops, then it required "line sharing" -- allowing a competitor to
use only a portion of the capacity of the loop almost for free to provide DSL service while Verizon provided the
underlying basic telephone service. Now we are also required to "line split" -- to arrange for two different competitors to
share our lines, while we provide no service at all to the customer.
The FCC is now considering requests from other carriers that we be required to provide our new DSL services to them
at very low TELRIC prices -- that is prices that are below our costs. If we have to do this, what incentive will we
have to make the investments that make these services possible? And yet that investment is exactly what you
and the public expect from us.
The other characteristic of the regulatory landscape is uncertainty -- participants and investors don’t know for sure what
the rules are. Whether Verizon must provide wholesale DSL services at discounts to their competitors and whether it
must unbundle its retail DSL service are now before the courts. Our investment decisions, and the investment
decisions of our competitors, will be affected by the actions of these courts and by the Commission’s actions
in response to them…
33
Deregulation Case Study – United States
A
Verizon announced a significant increase in infrastructure investment after
the deregulation decision of the FCC
Verizon
Verizon comment to FCC decision regarding the
removal of common carrier obligations and to create
parity in the regulatory treatment between cable and
phone company-provided broadband services.
Susanne A. Guyer, Verizon senior vice president
for federal regulatory affairs, August 5, 2004:
“This is an important step … This decision will help
accelerate deployment of broadband networks,
enabling greater choice and increased access for
consumers… We commend Chairman Martin and the
commission for acting quickly to move us closer to
the president’s goal of broadband deployment to all
Americans by 2007.”
Ivan Seidenberg, CEO Verizon 09/05
"Verizon wants to pass an incremental 50% of homes
in his territory in the next three years"
Annual capex in new
infrastructure ($ bn)
Annual add. FTTx
homes passed (m)
4
15
3
10
2
3,8
2,9
1
2,0
0,9
0
2003
1
2004
2
3
4
5
0
2005e
2006e
2007e
Verizon’s plans are the most ambitious of the RBOCs
Roll out target is for about half of the homes in the areas in which it has
traditional telephone franchises to have FTTH or FTTN by end-2008, i.e.
15 million
Total investment of $15-20 billion
Intention to hire between 3,000 and 5,000 new employees by the end of
2005 to help build the network
Video will initially be provided in traditional multichannel cable TV
distribution mode, with IPTV (only requested channels are sent to a
home) later
Source: Company documents, CIBC, Arthur D. Little analysis
34
Deregulation Case Study – United States
A
The FCC deregulation decision paved the way for accelerated SBC
investment and FTTN roll out
SBC (Rebranding to at&t)
SBC comment on the FCC decision to remove
common carrier obligations and to create parity in the
regulatory treatment between cable and phone
company-provided broadband services.
SBC Chairman and CEO Edward E. Whitacre Jr.,
14 October 2004
"…with this positive policy movement, the delivery of
next-generation broadband and video services is no
longer at some distant point in the future. …The path
forward is much clearer. This is the latest in a series
of broadband rulings that demonstrate this
Administration and the FCC understand that keeping
outdated regulation off of tomorrow'
s technology will
boost jobs, investment and innovation. It will be
equally important at the state and local level that the
path remain clear of unnecessary regulatory or
legislative hurdles."
Annual capex in new
infrastructure ($ bn)
Annual add. FTTx
homes passed (m)
4
15
3
10
10
2
6
1
0
3,4
5
1,6
0,0
0,0
0
0,0
2003
2004
2005e
0
2006e
2007e
SBC Communications announced in Oct. 2004 that it will dramatically
accelerate its plan to build a new fiber-optics network into neighborhoods
Project Lightspeed: Roll out target is to reach 18 million homes by 2007 /
2008 (17 mio FTTN + 1 mio FTTH)
Cumulative capital investment over 3 years is expected to be about $4
billion + $1 billion for investment in customer activations
Provisioning of 25Mbps, four streams of HQ video per line, Internet
access and VoIP service (U.S. expectation is to offer 4 different video
channels at any one time to different viewers in a household)
Source: Company documents, Press releases, Arthur D. Little analysis
35
Deregulation Case Study – United States
A
Although BellSouth had installed fiber in many branches of its network, the
rate of deployment rapidly increased once the FCC's ruling removed the
disincentive to invest
BellSouth
Bellsouth comment on the FCC decision to remove
common carrier obligations and to create parity in the
regulatory treatment between cable and phone
company-provided broadband services.
Herschel Abbott, BellSouth vice president
governmental affairs.
"By rejecting the CLEC petitions and moving quickly
to bring regulatory parity for high-speed broadband
providers, the FCC can spark even more investment
and faster delivery of innovative services to
customers… The radical rewriting of the fiber-to-thecurb order proposed by [CLECs] runs the risk of
paralyzing the ability of incumbents to evolve their
networks and implement new, advanced
technologies."
Annual capex in new
infrastructure ($ bn)
Annual add. FTTx
homes passed (m)
4
1,0
3
2
1
0,5
0,10
0,13
2003
2004
1,0
0,20
1,3
0
0,0
2005e
Capex in new infrastructure is about 1 bn$ in 2004 and 1.3 bn$ in
2005
Installations of fiber-to-the-curb were 126,000 in 2004 and
200,000 are estimated for 2005
The increase is being attributed to the decision to have no
unbundling obligations on FTTC installations
Source: Company documents, Wachovia, Arthur D. Little analysis
36
Deregulation Case Study – United States
A
OEN is an example for an alternative operator investing in new infrastructure
Optical Entertainment Network
OEN Plans Large-Scale FTTH Deployment in Houston (Oct. 2005)
Announced Services
Optical Entertainment Network (OEN), a private investor-backed company based in Texas,
announced plans to deploy FTTH to 1,600,000 households in Houston, the 10th largest
television market in the U.S. The company, which has partnered with leading European
and North American vendors plans to launch its United States service offering in December
2005 and begin European operations in Q2 of 2006.
• 10 to 100 Mbps Internet
OEN's FISION will
provide Internet service at
speeds of 10 to 100 Mbps
and each FISION
subscriber will receive a
minimum of 10 Mbps of
symmetrical connectivity.
• Online gaming
• Digital video recorder
with time shifting
capabilities
• Tailored advertising
Imagine seeing
commercials that are
tailored to customer's
lifestyle and interests
• Personalized TV
• Unlimited local, national
and global television
channels
The company plans to offer integrated IPTV service, 10 to 100 Mbps Internet, Voice,
Video-on-Demand (VOD) and other broadband applications such as, Home Security,
videoconferencing and telemedicine. OEN said it has acquired programming agreements
for IPTV distribution from top programming television networks and will deliver over 400
television channels, including 50 plus channels of HDTV.
OEN's first deployment partner is Phonoscope of Houston, Texas, owner of the largest
privately held metro fiber networks. Already the existing network reaches 200,000
household easements and is within 100 to 500 yards of approximately 1.6 million
households in the 6 county areas around Houston.
Source: Company website
37
Deregulation Case Study – United States
A
Infrastructure suppliers endorse the deregulation in the US in order to
sustain the growth of the US broadband market
Alcatel
Example
November 9, 2005
The following statement should be attributed to Tim Krause, Chief Marketing Officer and Senior Vice President for
Government Relations for Alcatel in North America, who testified today before the Telecommunications and Internet
Subcommittee on the forthcoming BITS (Broadband Internet Transmission Services) Act:
"Alcatel endorses the BITS Act, and requests the Committee move it forward in the legislative process without delay.
The BITS Act will ensure the continued growth of the U.S. broadband market by creating legal and regulatory certainty
for the services that flow over powerful new broadband networks, such as the IPTV networks being built by Alcatel for
U.S. telecommunications carriers, in several ways:
"First, it generally protects nascent broadband services from regulation at the Federal, State, and local level,
and does so in a socially conscious manner by preserving important public policies, such as E911. (emphasis
added)
"The bill creates a streamlined Federal video franchise process for broadband video services that will ensure they can
be a key driver of continued broadband deployment immediately. The BITS Act achieves this goal while protecting the
ability of municipalities to manage their local rights of way, as well as the video franchise fee revenue streams they
have come to rely on.
"Alcatel also supports the inclusion into the BITS Act of Internet Neutrality principles, which promotes consumer
broadband demand, as well as protections for municipal entry into the broadband market when necessary."
Source: Verizon; Alcatel (system integrator for SBC’s Project Lightspeed)
38
Deregulation Case Study – Hong Kong (1/2)
A
The market liberalization has led to substantial competition and the regulator
started to review its policy in 2003
Regulation Background
Type II interconnection policy was introduced in 1995
– Type II interconnection is interconnection to a
fixed carrier's network at the customer access
network level
– The policy made unbundling for the incumbent
(PCCW-HKT Telephone Ltd.) mandatory but
required regulatory intervention only if commercial
negotiations failed
The policy mainly applied to three new entrants:
– Wharf T&T Ltd.
– New World Communications Ltd.
– Hutchison Global Communications Ltd.
New competitors entering the market from 2003 were
not eligible for Type II interconnection as of right (i.e.
Hong Kong Broadband Network)
Results
Since 1995, new entrants followed different
strategies in the Hong Kong market
– Hong Kong Broadband Network had no choice
but to build its own network infrastructure
– Hutchison also started to invest into its own
infrastructure
– New World Communications and Wharf T&T
relied mainly on Type II interconnection
In 2004, about 53% of households were connected
by at least two independent networks, including that
of the incumbent
The broadband market share of new entrants
(including broadband offers from the Hong Kong
cable operator) amounted to 45%
Narrowband market share for new competitors was
about 28% of the total market
The Telecommunication Authority found that the continuation of mandatory access was justified only if
benefits from facilitating competition and consumer choice would outweigh detriments arising from
dampening of incentives for investment in network infrastructure and began to review its policy in 2003
Source: Hong Kong Legislative Council Brief (2004)
39
Deregulation Case Study – Hong Kong (2/2)
A
The outcome of the policy review induced the Telecommunications Authority
to decide in favor of a regulation fade-out
Analysis
Options
Implications
Decision
The interconnection rules were only partially responsible for the development of the market
The infrastructure on which interconnection is based has limitations concerning future services
Additional investments into new infrastructure should be stimulated to keep Hong Kong's leading
edge
Continue regulation
Discourage further
investments into advanced
telecommunications networks
High level of services
competition and enhanced
customer choice
Regulation fade-out
A regulation fade-out would
mean that customers could face
a reduction of choices in the
short to mid-term
In the medium to long term, the
accelerated rollout of networks
should more than compensate
75%-80% of consumers
End regulation immediately
Total withdrawal would mean
that around 400 000 customers
would be forced to switch to
another telecommunications
provider
Competitors relying on
interconnection would be forced
to invest immediately
The Hong Kong Telecommunication Authority has chosen to fade-out interconnection until 2008
This fade out is limited to buildings which are connected by two alternative networks
The Telecommunications Authority hopes that this policy will give both incumbents and competitors
incentives for further investments into advanced networks
Source: Hong Kong Legislative Council Brief (2004)
40
Deregulation Case Study – Canada
A
In Canada deregulation is discussed with respect to local exchange and
digital broadband services
Canada
Intention of
Deregulation
Forbearance of
regulation of local
exchange services
Telecom Public Notice
CRTC 2005-2
Framework for
forbearance of high
speed intra-exchange
digital services
Telecom Public Notice
CRTC 2005-8
Details
The regulatory body CRTC* opened a proceeding in April 2005 to determine the framework and the criteria for a
framework for forbearance from the regulation of residential and business local exchange services.
The proceeding covers the following issues:
1) the local exchange services that should be within the scope
2) the relevant market(s) with respect to services and geographic areas
3) the criteria to be applied to determine whether the relevant market(s) is/are sufficiently competitive for
forbearance
4) the appropriate scope of the Commission's forbearance from its powers and duties
5) post-forbearance criteria and conditions
6) the process for future applications for forbearance from the regulation of local exchange services
In addition the CRTC intends to determine whether there should be a transitional regime that provides ILECs with
more regulatory flexibility prior to forbearance through:
1) lessening or removing competitive safeguards on promotions and the no-contact restriction under the
winback rules
2) permitting the ex parte filing of tariff applications for promotions
3) the waiving of service charges for residential local winbacks
The CRTC opened a proceeding in June 2005 to establish the framework and the criteria for forbearance from
regulation of intra-exchange high-speed digital services (HSDS). The proceeding covers the following issues:
the definition of intra-exchange HSDS;
1. the relevant market(s) with respect to services and geographic areas
2. the qualitative and quantitative criteria for determining market power
3. the scope of the Commission's forbearance from its powers and duties
4. the process to consider future applications for forbearance of intra-exchange HSDS
5. post-forbearance criteria, conditions or safeguards
Source: CRTC, Arthur D. Little analysis
*Canadian Radio-television and Telecommunications Commission
41