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SHAPING A REGULATORY AGENCY IN A PERIOD OF CONVERGENCE OR EUROPEAN TELECOM SYSTEM FROM A COUNTRY PERSPECTIVE. Dániel Pataki 2006 Annenberg-Oxford Summer Institute 24 th Ju ly 2006. - PowerPoint PPT Presentation
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SHAPING A REGULATORY AGENCY IN A PERIOD OF CONVERGENCE
OR EUROPEAN TELECOM SYSTEM FROM A COUNTRY PERSPECTIVE
Dániel Pataki
2006 Annenberg-Oxford Summer Institute
24th July 2006.
2„EUROPE WANTS TO BECOME THE MOST DYNAMIC AND MOST COMPETITIVE KNOWLEDGE-BASED ECONOMY BY 2010”.ICT IS ONE OF THE KEY FACTORS REGARDING THE COMPETITIVENESS
The positive growth and productivity effects of ICT infrastructure emerge through broadband access. Within this the widespread adaptation of ICT tools and services has a highlighted role: how is it built in the traditional industries, how does it alter their operation (transmission mechanism).
• Lisbon strategy (2000) • i2010 (2005)• Bridging the Broadband Gap (2006)
IKT eszközöktermelése
IKT eszközökalkalmazása
termelékenység – növekedés – versenyképességtermelékenység – növekedés – versenyképesség
SZÉLESSÁVICT
production
ICT
adaptation
termelékenység – növekedés – versenyképességproductivity – growth – competitiveness
BROADBAND
3
THE STATE SHOULD IDENTIFY AND DO AWAY ANY BOTTLENECKS THROUGH REGULATORY, PUBLIC POLICY AND FISCAL MEANS IN A HARMOISED WAY.
Public policy meansRegulationMarket machanisms
SecuritySecurityContentContent MotivationMotivation EducationEducationAccessAccess
Public policy meansRegulationMarket machanisms
SecuritySecurityContentContent MotivationMotivation EducationEducationAccessAccess
4
TWO BASIC PARADIGMS WITH SAME TARGET: WELL-PERFORMING TELECOM INFRASTRUCTURE
Only end result relevant:Regulated monopoly
Monopolistic marketstructure
Define andenforce desirableoutcomes
Well-performingtelecom environment
Competition with intrinsic value
Monopolistic marketstructure
Create and protect
competition
Competition
Competitionby naturedelivers desirableoutcomes
Well-performingtelecom environment
Only end result relevant:Regulated monopoly
Monopolistic marketstructure
Define andenforce desirableoutcomes
Well-performingtelecom environment
Competition with intrinsic value
Monopolistic marketstructure
Create and protect
competition
Competition
Competitionby naturedelivers desirableoutcomes
Well-performingtelecom environment
5
TELECOM PRIVATIZATION DRIVEN BY LIBERALIZATION TREND, FINANCIAL NEEDS, AND INCREASING INDUSTRY COMPLEXITY
Growing complexity of existing network and competitive pressure from alternative networks
• Mobile services• Parallel fixed networks• Data
3Financial shortage of governments combined with increased need for telecom investments
• Worldwide trend of expansion and upgrade of networks
• Caused by development of international trade and growing customer needs
2
Increased evidence that liberalized markets better serve customer needs
• Greater efficiency• Stronger growth• More innovation
1
Liberalization of telecom
industry
Growing complexity of existing network and competitive pressure from alternative networks
• Mobile services• Parallel fixed networks• Data
3Financial shortage of governments combined with increased need for telecom investments
• Worldwide trend of expansion and upgrade of networks
• Caused by development of international trade and growing customer needs
2
Increased evidence that liberalized markets better serve customer needs
• Greater efficiency• Stronger growth• More innovation
1
Liberalization of telecom
industry
6
AN ULTIMATE OBJECTIVE OF REGULATION IS TO RENDER ITSELF UNNECESSARY. TEMPORARY STEPPING-UP OF REGULATION TO BREAK MONOPOLISTIC DOMINANCE
Time
Incumbentmonopoly
Incumbent monopoly Competition
Competition
Le
ve
l, fo
rm a
nd
sc
op
e o
f re
gu
lati
on
More reliance on general competition law
More reliance on sector-specific regulation
The state of the market and the role of sector-specific regulation and general competition law
?
Source: Center for Economic Policy Research; BCG analysis
7
NRAs ARE PROMPTED TO COORDINATE WITH OTHER INSTITUTIONS
Government/ministries
• Definition of high-level policy objectives for thetelco industry (industry agenda)
• Use of non-regulatory levers (fiscal incentives, etc.)
NRA
Other NRAs
• European Regulators Group (ERG): Official advisor to Commission
• Harmonization of regulatory measures
• Cooperation in case of transnational markets
EU Commission
• Definition of high-level policy objectives for the EU
• Set up a framework and supervise application in order to ensure single market
Competition council
• Safeguarding competitive level of market - Punishment of improper behavior (ex-post)
• Identification and correction of anti-competitive market changes -Same basic approach to all sectors
Government/ministries
• Definition of high-level policy objectives for thetelco industry (industry agenda)
• Use of non-regulatory levers (fiscal incentives, etc.)
Government/ministries
• Definition of high-level policy objectives for thetelco industry (industry agenda)
• Use of non-regulatory levers (fiscal incentives, etc.)
NRA
Other NRAs
• European Regulators Group (ERG): Official advisor to Commission
• Harmonization of regulatory measures
• Cooperation in case of transnational markets
Other NRAs
• European Regulators Group (ERG): Official advisor to Commission
• Harmonization of regulatory measures
• Cooperation in case of transnational markets
EU Commission
• Definition of high-level policy objectives for the EU
• Set up a framework and supervise application in order to ensure single market
EU Commission
• Definition of high-level policy objectives for the EU
• Set up a framework and supervise application in order to ensure single market
Competition council
• Safeguarding competitive level of market - Punishment of improper behavior (ex-post)
• Identification and correction of anti-competitive market changes -Same basic approach to all sectors
Competition council
• Safeguarding competitive level of market - Punishment of improper behavior (ex-post)
• Identification and correction of anti-competitive market changes -Same basic approach to all sectors
8
„NEW” REGULATORY FRAMEWORK: COMPETITION POLICY (APPLIED EX-ANTE) WITH DECENTRALISED IMPLEMENTATION
"Old" regulatory framework
Objective :
Breaking up former monopolies
• In various communications markets
Foster market access of new entrants
• By regulating specific markets
Means:
Numerous directives
• Focusing on different areas of the market for electronic communications(1)
Due dates for transposition into national law:
Various (in the past), transposition largely completed
"New" regulatory framework
Objective:
One harmonized framework
• For all electronic communications services and networks markets
Minimum degree of regulation: bottom-up
• Relying on anti-trust rules and only regulating markets where competition cannot work
Means:
Set of five directives,
• complemented by one directive on competition and radio-spectrum decision(2)
Due date for transposition into national law:
24 July 2003
"Old" regulatory framework
Objective :
Breaking up former monopolies
• In various communications markets
Foster market access of new entrants
• By regulating specific markets
Means:
Numerous directives
• Focusing on different areas of the market for electronic communications(1)
Due dates for transposition into national law:
Various (in the past), transposition largely completed
"New" regulatory framework
Objective:
One harmonized framework
• For all electronic communications services and networks markets
Minimum degree of regulation: bottom-up
• Relying on anti-trust rules and only regulating markets where competition cannot work
Means:
Set of five directives,
• complemented by one directive on competition and radio-spectrum decision(2)
Due date for transposition into national law:
24 July 2003
9
„NEW” REGULATORY FRAMEWORK: A HARMONIZED MARKET BASED APPROACH TO EX-ANTE REGULATION AND TECHNOLOGICAL NEUTRALITY(TO BE IMPLEMENTED BY JULY 2003)
Imposition of obligationsMarket definition SMP designation
Initial definition by Commission
Selection of markets by
NRA
Identification of
operators with
Significant Market Power
Imposition of appropriate
remedy
Veto right of Commission
Assessment of SMP by wide choice of criteria leaves substantial
freedom(SMP: enables performance of its
activities to a large extent independently of its competitors,
the customers and finally the consumers)
Imposition of least severe from a list of potential obligations by local
NRA
3 conjunctive condition:- high and non-transitory entry barriers- the market does not tend towards effective competition- insufficiency of competition law to handle the identified market failures
Imposition of obligationsMarket definition SMP designation
Initial definition by Commission
Selection of markets by
NRA
Identification of
operators with
Significant Market Power
Imposition of appropriate
remedy
Veto right of Commission
Assessment of SMP by wide choice of criteria leaves substantial
freedom(SMP: enables performance of its
activities to a large extent independently of its competitors,
the customers and finally the consumers)
Imposition of least severe from a list of potential obligations by local
NRA
3 conjunctive condition:- high and non-transitory entry barriers- the market does not tend towards effective competition- insufficiency of competition law to handle the identified market failures
10
REGULATION OF WHOLESALE LEVEL IS CRUCIAL FOR DEVELOPMENT OF COMPETITION: POSSIBLE MEANS OF WHOLESALE REGULATION
Customer Customer relationships Access, backbone
Incumbentretailer
Alternativeretailer
Incumbentwholesale operator
1
2
3
5
1 Non discrimination + Transparency
2 Accounting separation
3 Access obligation
5 Price squeeze exemption
4 Cost accounting
4
CustomerCustomer Customer relationshipsCustomer relationships Access, backboneAccess, backbone
Incumbentretailer
Alternativeretailer
Incumbentwholesale operator
1
2
3
5
1 Non discrimination + Transparency
2 Accounting separation
3 Access obligation
5 Price squeeze exemption
4 Cost accounting
4
11
NCAH PREPARES A STRATEGIC CONCEPT ON THE FUTURE REGULATION OF ELECTRONIC COMMUNICATIONS MARKETS IN HUNGARY
Goals
Guideline for the strategy development of market players, providing the general framework and direction of regulation, thus enabling the increase of transparency and communication between the regulator and the industry and also limiting regulatory uncertainty
Internal guideline for NCAH assisting in its (daily) decision making process
Ensuring alignment between the strategic programs and actions of NCAH and other governmental institutions directed at overlapping segments/markets
Process
Phase I
Phase II
Phase III
Strategic discussion paper and consultation (Aug – Sep 2005)
• goal to facilitate the structuring of common strategic thinking, and does not follow the strict format of a strategy
Strategic concept (Oct – Dec 2005)
• Vision (based on market scenarios) and vision-based regulatory strategy
Final statement (Sept 2006)
• Finalized strategy
12
SCENARIO-BASED APPROACH APPLIED, NCAH IS PREPARED FOR DIFFERENT MARKET EVOLUTION PATHS
Market scenariosRegulatory objectives Regulatory challenges
Regulatory principles Regulatory interventions
Generally applicable Market evolution dependent
1 2
4 5
3
Market scenariosRegulatory objectives Regulatory challenges
Regulatory principles Regulatory interventions
Generally applicable Market evolution dependent
1 2
4 5
3
13
NRA’S OBJECTIVES FROM NCAH POINT OF VIEW:EFFECTIVE COMPETITION BASED ON A DEVELOPING SECTOR FULFILLS MAJOR CONSUMER INTERESTS
Consumers’ interests:price, value(1), choice
Penetration/usage
Se
cto
r in
tere
sts
:
Innovation InvestmentFinancial stability
Effective competition(2)
Competition is sustainable and effective with a developing and stable sector
Enabling viable competition is the only possible approach to fulfill consumers’ interest
Note: For some other information society objectives (e.g. universal services) competition is not the primary fulfilment tool(1) Quality, security, content etc. Utility given by the service (2) Effective competition means high intensity of competition among market players at the retail and access infrastructure level. In case of effective competition there is no operator who could significantly influence the dynamics of the competition by itself, and the level of market concentration is low.
14
THE REGULATOR’S ‘MAP OF COMPETITON’ SHOWS THE LEVEL OF EFFECTIVE COMPETITION
The market competition
from the consumers’
point of view
Relevant field of competition
Preference of the regulator
HHI(1) of the access infra structure competition
HH
I(1)o
f th
e r
eta
il m
ark
et
com
pe
titi
on
0
0
1
Servicecompetition
Monopolymarket
Effectivecompetition
Infrastructurecompetition
Infrastructure competition in
terms of acce ss
Unnecessary, not desired level of infrastructure competition (due to economies of scale, investments in access infrastructure will not be effective any more )
Structural limit to effective retail market competition in electronic communications
Unlikely and undesirable situation where operators increase the concentration by using infrastructure owned by other players
The market competition
from the consumers’
point of view
Relevant field of competition
Preference of the regulatorPreference of the regulator
HHI(1) of the access infra structure competitionHHI(1) of the access infra structure competition
HH
I(1)o
f th
e r
eta
il m
ark
et
com
pe
titi
on
HH
I(1)o
f th
e r
eta
il m
ark
et
com
pe
titi
on
0
0
1
Servicecompetition
Monopolymarket
Effectivecompetition
Infrastructurecompetition
Infrastructure competition in
terms of acce ss
Unnecessary, not desired level of infrastructure competition (due to economies of scale, investments in access infrastructure will not be effective any more )
Structural limit to effective retail market competition in electronic communications
Unlikely and undesirable situation where operators increase the concentration by using infrastructure owned by other players
(1) All the coordinates are scaled by the values of Herfindahl-Hirschman index used to measure market concentrationNote: The ‘theoretical maximum’ level of retail market and access infrastructure competition may differ in each of the markets
15
NCAH IS CAPABLE OF INCREASING THE CONSUMER SATISFACTION ALONG THE REGULATION IMPACT CURVE
Low High
Low
High
Ratio of the switches
Price/Value sense= Satisfaction
Very strong competition and
growing satisfaction
Efficient service
providers and satisfaction
The competition starts: extending service provider switches
Dissatisfaction and little possibility to
choicePrice Value
%%
Price Value
%
%
1 The regulator can affect this in the short term
Imp
ac
t o
f m
ark
et\
co
mp
eti
tio
n i
n
the
lon
g t
erm
2
Re
gu
lati
on
Imp
ac
tC
urv
e
Relevant measurable choice-indicator from the consumer point of view
Market A
Market C
Market B
Low High
Low
High
Ratio of the switches
Price/Value sense= Satisfaction
Very strong competition and
growing satisfaction
Efficient service
providers and satisfaction
The competition starts: extending service provider switches
Dissatisfaction and little possibility to
choicePrice Value
%%
Price Value
%
%
1 The regulator can affect this in the short term
Imp
ac
t o
f m
ark
et\
co
mp
eti
tio
n i
n
the
lon
g t
erm
2
Re
gu
lati
on
Imp
ac
tC
urv
e
Relevant measurable choice-indicator from the consumer point of view
Market A
Market C
Market B
16SIX TRENDS SEEM TO BE CRITICAL ON THE HUNGARIAN MARKET THERE ARE STRONG INTERDEPENDENCIES BETWEEN THE TRENDS (E.G. CONVERGENCE AS AN OVERARCHING MEGA-TREND)
1
2
3
4
10
11
12
5
6
7
8
9
x Most important trends
Technological trends Service trends Value chain trends
Voice traffic grows only with price decrease
Data usage shows strong growth
The difference between services diminishes – all become IP-based data service
Services will be offered in bundles
Interactive, on-demand services become more widespread
Voice and data services are increasingly distributed on more technological platforms
Audiovisual services are available on new platforms
Technological convergence on several elements of the value chain
New, upcoming technology (e.g, WiMax) becomes a relevant factor on the market
The role and importance of content provisioning is growing
Stronger division between network operation, service provision and customer relationship functions
Fight between device producers and service companies for service intelligence
17
MOST IMPORTANT BOTTLENECKS IN THE MEDIUM TERM: ACCESS AND CUSTOMER REALITONSHIP. BOTTLENECKS CAN ALSO EMERGE IN THE AREA OF CONTENT
Content creating
Content aggregation
ApplicationTransmissionAccessEnd-user
deviceCustomer
relationship
(1) Present mobile networks
• Huge benefits on economies of scale and network effect
• Strong brands as entry barrier
• Extended distribution
• Critical size turnover/customer base
• Limiting switching intention and ability
• Strong competition among vendors
• International supply
• Wirelinenetworks:natural monopoly
• Wireless networks: limitedlicence(1)
• Limited economies of scale benefit
• Working competition
• Strong competition among vendors
• International supply
• Easier switch
• Basically competition, but: at certain infrastructures (mobile, cable)the provider, who is dominanton the area of access and customer relationship, prevails the competition as well
• Considerable competition,international supply
• „Killer content”and certain premium contents denote market power
!
Bottleneck
Content creating
Content aggregation
ApplicationTransmissionAccessEnd-user
deviceCustomer
relationshipContent creating
Content aggregation
ApplicationTransmissionAccessEnd-user
deviceCustomer
relationship
(1) Present mobile networks
• Huge benefits on economies of scale and network effect
• Strong brands as entry barrier
• Extended distribution
• Critical size turnover/customer base
• Limiting switching intention and ability
• Strong competition among vendors
• International supply
• Wirelinenetworks:natural monopoly
• Wireless networks: limitedlicence(1)
• Limited economies of scale benefit
• Working competition
• Strong competition among vendors
• International supply
• Easier switch
• Basically competition, but: at certain infrastructures (mobile, cable)the provider, who is dominanton the area of access and customer relationship, prevails the competition as well
• Considerable competition,international supply
• „Killer content”and certain premium contents denote market power
!
BottleneckBottleneck
18
SCENARIOS CREATED ALONG DIMENSIONS WITH HIGH IMPACT AND UNCERTAINTY
Mainissues
Extreme situations considered
To what extent will the communications market infrastructure be dominated by a single provider that can offer the majority of the services?
Incumbent transforms its network to NGN and acquires a significant competitive advantage
More than one, by-and-large equal infrastructures and their independent providers compete
To what extent the difference between services will disappear, what will be the market success of bundled services?
Services converge, companies able to offer bundles have competitive advantage
Significant demand remains for separate, non-bundled services
To what extent will the functions and market players diverge or converge along the value chain?
Significant market players appear, which are active in only some elements of the value chain
Vertically integrated companies dominate the market, which are active in all elements of the value chain
Technological trends Service trends Value chain trends
19
FOUR BASIC SCENARIOS IDENTIFIED AS POTENTIAL MARKET EVOLUTION PATHS IN HUNGARY UNTIL 2010
Dominant infrastructure provider
Players in thevalue chain
Exists Does not exist
One/ few
SignificantNotsignificant
Role of bundled services
Many
Service layerseparation
Dominantplayer
Intensifyingcompetition
Battle of platforms
Dominant infrastructure provider
Players in thevalue chain
Exists Does not exist
One/ few
SignificantNotsignificant
Role of bundled services
Many
Service layerseparation
Dominantplayer
Intensifyingcompetition
Battle of platforms
20
EXPECTED OUTCOME OF COMPETITION SHOULD BE TAKEN INTO ACCOUNT WHEN DETERMINING REGULATORY APPROACH
Effective competition
Current / expected level of competition
Competition law
Regulatory approach
1
Functioning infrastructure-based competition
Mainly competition law2
Infrastructure-based competition can evolve by itself
Ensuring effective competition between platforms
3
Infrastructure-based competition can evolvethrough service-based competition
Promoting gradual investments
– investment ladder
4
(Wholesale-based)Service-based competition
Long term wholesale regulation
5
Monopol(istic) market Retail regulation6
HH
Iof
the
re
tail
ma
rke
t co
mp
eti
tio
n
0
1
5
6
1
2
4 3
HHI of the access infrastructure competition
0
Effective competition
Current / expected level of competition
Competition law
Regulatory approach
1
Functioning infrastructure-based competition
Mainly competition law2
Infrastructure-based competition can evolve by itself
Ensuring effective competition between platforms
3
Infrastructure-based competition can evolvethrough service-based competition
Promoting gradual investments
– investment ladder
4
(Wholesale-based)Service-based competition
Long term wholesale regulation
5
Monopol(istic) market Retail regulation6
HH
Iof
the
re
tail
ma
rke
t co
mp
eti
tio
n
0
1
5
6
1
2
4 3
HHI of the access infrastructure competition
0
21
THE LADDER OF INVESTMENT CONCEPT FUNCTIONS AS A BRIDGE FROM (SHORT TERM) SERVICE TOWARDS (LONG TERM) INFRASTRUCTURE COMPETITION
Example: Ladder of investment possibilities to provide traditional narrowband services (1)Effect of ladder of investment
possibility of deregulation
real possibility to differentiate
real customer relationship
it competes in prices only
it competes in minute fees only
takeover of total business risk
critical density level risk, network effect
the total customer risk at the provider
traffic depending business risk
it ensures return even to a minimal extent
possibility of deregulation
real possibility to differentiate
real customer relationship
it competes in prices only
it competes in minute fees only
takeover of total business risk
critical density level risk, network effect
the total customer risk at the provider
traffic depending business risk
it ensures return even to a minimal extent
CS CPS WLR LLU
alternativeaccess
deploying
Extent of investments
customer relationship
latitude of product design
latitude of pricing
The make-or-buy deliberation changes gradually by
increasing of customer base
It is not ensured
0
1
2005
2010
0
Maximum level of infrastructure based competiton in short term
(1) Voice and dial-up internet. In case of VoIP backbone technology bitstream access ensures relevant alternative even at the voice services.
22
DETERMINATION OF CONCRETE INTERVENTIONS SHOULD BE PRECEDED BY DETAILED MARKET REVIEW AND IMPACT ASSESSMENT. THE FOCUS AND WEIGHT OF SAME INTERVENTION CAN DIFFER ACCORDING TO THE SCENARIOS
‘Intensifyingcompetition’
‘Dominantplayer’
2006- 2007 2008- 2010
• Determining interaction of fixed and mobile markets on regulation means’ level
• Developing wholesale products connected to investment ladder
• Enhancing broadband Internet service competition by further development of DSL wholesale products
• Promoting emerging technologies
• Decreasing cross ownerships of parallel infrastructures
• Further decrease of mobile IC-fees
• Enhancing competition in AV markets
• Increase of consumer transparency
• Further decrease of mobile IC-fees
• Enhancing competition in AV markets
• Increase of consumer transparency
• Liberalised spectrum policy
• NGN regulation
• Issues of content providing
Time horizon of possible regulatory intervention
independent of scenario
• Liberalised spectrum policy
• NGN regulation
• Deregulation‘Intensifyingcompetition’
‘Dominantplayer’
2006- 2007 2008- 2010
• Determining interaction of fixed and mobile markets on regulation means’ level
• Developing wholesale products connected to investment ladder
• Enhancing broadband Internet service competition by further development of DSL wholesale products
• Promoting emerging technologies
• Decreasing cross ownerships of parallel infrastructures
• Further decrease of mobile IC-fees
• Enhancing competition in AV markets
• Increase of consumer transparency
• Further decrease of mobile IC-fees
• Enhancing competition in AV markets
• Increase of consumer transparency
• Liberalised spectrum policy
• NGN regulation
• Issues of content providing
Time horizon of possible regulatory intervention
independent of scenario independent of scenario
• Liberalised spectrum policy
• NGN regulation
• Deregulation
THANK YOU FOR YOUR ATTENTION!