Platform-based vs. Service-based competition: How should Latin America Regulate?

1. Platform-based vs. Service-based competition: How should Latin America Regulate? D. Mark Kennet, Ph.D. www.MarkKennet.com

2. Introduction • As an economist, my position always depends on how we are defining objectives • For that reason, we economists have the bad reputation among the legal community for not having fixed positions. • As the old joke goes, if you ask a mathematician how much is 2+2, he will tell you “4, as long as we are doing integer math.” If you ask a statistician the same question, he will respond “On average, 4.” But the economist answers, “What would you like it to be?” • The case of ICT regulation is the same.

3. PossibleObjectives in an ICT RegulatoryPolicy • Legitimateobjectivesmightbe • Keepingpriceslowenough so thatallusers can afford at leastsomeservices • Stimulateinvestment in infrastructure so thatcoverageincreases, technologyadvances are incorporated, and more services are madeavailable • Maximizeoperatorearnings • Obviously, in some ideal worlditwouldbepossibletoachieveall of these, but in realitywe are forcedtochoosewhichobjectiveismostimportant • Each of theseobjectivesimplies a differentstyle of regulation, and eachonecarriescosts and benefits in terms of theotherobjectives

4. OBJECTIVE: Keeppriceslow • Behind this idea is a notion of an anticompetitive market • Because there are few service providers, it is necessary to stimulate an artificial competition through the use of resale and free access to infrastructure • According to this largely European notion, “Intra-modal competition” as it is being proposed in many countries leads to the “Investment Ladder” that eventually results in more infrastructure and less need to regulate

5. Intra-Modal CompetitionPolicy (I) • Promotes competition within infrastructures • Impose obligations for resale and unbundled access (ULL) on dominant operators independent of technology (copper, cable, etc.) • Uses the investment ladder • Offers of resale and wholesale access are phased in, gradually requiring a greater investment on the part of a new entrant • Typically, in broadband: Shared unbundled access Completely unbundled access Resale Bitstream

6. Intra-Modal CompetitionPolicy(II) • Establishment of transition mechanisms between the investment ladder steps; and • Elimination of resale or unbundling obligations when competition exists • Objective: Increase competition and stimulate gradual investment in network infrastructure so that penetration increases Regulation Competition Investment Penetration

7. IssueswiththeEuropeanapproach • In theory, itsounds fine; and in theapplication in Europe, itseemstofunctionwell. But: • In everyone of the western Europeancountries, theystartedoutwith a nationalfixednetworkalreadydispersedthroughoutthe country • Even in the case of mobilenetworks, therealreadyexistedinfrastructuretocarrysignalstoswitches and controllers • Forthatreason, theregulatoryvisionwasto figure outhowto share theinfrastructure so thatservicecompetitionwouldbefostered • Thecost of investing in a largepart of theinfrastructure and technologywasalreadypaid • In somesense, itwasn’tnecessarytothink of improving forward-lookinginfrastructure

8. Objective: StimulateInvestment • In thisnotion, thereis a vision of a marketsuffering a lack of accessto capital forvariouspossiblereasons: • The country islessdevelopedeconomically • The country wantstomodernizerapidly, including in theless-favoredeconomicsectors • As there are relativelyfewproviders, itisnecessarytostimulatetheentry of investors • Accordingtothis idea, an “Inter-modal Competition” willattractinvestorstoinstallthenetworkcurrentlylacking • Mostregulationisdirectedtowardinterconnection rules in ordertopermit a free and sustainablecompetition

9. Inter-Modal CompetitionPolicy • Promotes competition between infrastructures • There is a clear preference for operators that own their own network facilities • The existence of parallel networks minimizes the possibility of entry barriers in the market • The policy incentivizes the creation of new networks • It is thought that this policy creates sufficient incentives for investment and innovation, permitting facilities owners to be compensated for assuming risks • The envisioned transition is Ex ante (access) Network rollout Ex post (competition) Penetration

10. Posible issueswiththe Pro-investmentnotion • Price reductions may not occur immediately • There may exist a tendency toward higher market concentration

11. Objective: Maximizeoperatorprofits • In this notion, there is a vision of “laissez-faire” – the free market can solve all problems • The theory is that without government intervention, potential operators will be more likely to enter, provide services, and earn money • Supporters of this approach insist that a totally free market can stimulate even more investment than the inter-modal competition model

12. Issueswith laissez-faire • Without government intervention, it is likely that private networks will not interconnect • There will likely be price gouging and other sorts of consumer abuses

13. So, whatisthepoliticalobjective in regulatingthe sector? • Theanswerdependsonhowthesituation in each country isviewed • Ifyouthinkthatthenationalnetworksystemismature and adequate, and thattherereallyisn’troomfor more expansion and coverage, and thatthetechnologybeingusedisthebest, thenit’snotreallynecessarytoworryaboutfutureinvestment • In this case, Euro-styleregulationmightbethebestoption • Regulatingservicesisnecessary so thatconsumerspaythelowestfeasibleprice • Ifyouthinkthatthereis a needfor more investment in ordertoexpandcoverage and topermittheintroduction of new technologies and innovation, thestimulatinginvestmentmaybedesirable • In this case, Euro-styleregulationmaynotwork so well • Itmightbeworthwhileto look at nearbyexampleslike Chile and Peruwhereincentivizinginvestment has takenpriority

14. A fewobservationsregarding Euro-styleregulation • Emphasis on opening existing networks • Insufficient emphasis on stimulating investment • Does not take into account the reality of convergence and 3G and 4G networks • For example, an implication of adopting the Euro-style regulation is having a tight regulation of triple-play services • If there were more emphasis on stimulating investment in infrastructure, triple-play might arise freely as a product differentiation that is beneficial to consumers

15. A few observations on Investment-oriented regulation • In some cases, application of this idea lacks something • For example, in the case of the USA, even with this type of regulatory vision, the problem of federalism and states’ rights leads to the situation in which there are two levels of regulation, one at the national and the other at the state level • We can see another example in Peru, where the creators of the privatization permitted that there be both a vertical and horizontal monopoly in the sense that there was only one company operating the fixed, cable, and mobile networks.

16. Messages • In designing policy, it is necessary to decide on and take into account the objectives • It is not necessary to adopt the policies of other countries; policies should be designed with national priorities in mind • For that reason, I don’t recommend adopting either the North American style policy or the Euro-style approach in their respective totalities • A well-thought-out policy minimizes unanticipated consequences