Technological Evolution: Regulatory and Policy Implications for the Region

1. Technological Evolution:Regulatory and Policy Implications for the Region J. Scott Marcus Caribbean Internet Forum V: St. Lucia 6 November 2007

2. Technological Evolution:Regulatory and Policy Implications for the Region • Networks are evolving in complex ways that have profound implications for policymakers. • Developed countries will confront many of these issues somewhat earlier than the Caribbean. • Nonetheless, the transformation is global, and will be strongly felt in the region. • Caribbean policymakers can benefit from studying the effects of policy responses – both what succeeds and what fails – in developed countries (notably in the European Union and the United States).

3. Technological Evolution:Regulatory and Policy Implications for the Region • What’s happening? Disruptive technological evolution. • Rationale for public policy intervention • The move to IP-based NGNs • NGN policy challenges • NGN deployments around the world • Regulatory responses to NGN in various countries • … and now, the good news • Conclusions

4. Disruptive Technological Evolution • Internet technology is no longer “just” about the Internet; the same technologies are becoming central to all networks. • Broadband access is increasingly central to the fixed network. • Increasingly high speeds (copper to fiber). • Increasingly, network access is IP access. • Services (voice, video, data) can be delivered by; • Any network operator (telco, cable, wireless(?)). • Service providers who do not have a network.

5. Disruptive Technological Evolution • Price/performance continues to improve. • Moore’s Law improvements in processing speed and memory. • Increased data transmission speed and capacity (e.g. DWDM). • Voice service will remain very important, but the traditional voice network is of diminishing importance. • Voice traffic is a diminishing fraction of total network traffic. • All voice migrates to VoIP.

6. Disruptive Technological Evolution • Traffic continues to grow rapidly, but the rate of growth is declining year over year. • Voice traffic will continue to migrate from fixed to mobile. • High mobile penetration has been a boon to developing countries. • More mobile subscribers than fixed.

7. Disruptive Technological Evolution • Mobile is certainly being used for IP-based data services, but it may have limited ability to substitute for the fixed network for data. • Inefficient wholesale and retail pricing arrangements that (1) lead to high prices and (2) discourage use. • Limitations in overall capacity and scalability. • Fixed wireless broadband is likely to be a good solution in areas of low teledensity. Where teledensity is higher, capacity and scalability will probably not be adequate.

8. Disruptive Technological Evolution • In comparison to the fixed network, the mobile network is likely to have: • Similar technical evolution (NGN / IMS). • Significantly different commercial evolution.

9. Rationale for Policy Intervention • Three primary reasons for regulation of electronic communications, all related to market failure: • Addressing distortions of competition, especially those caused by some form of market power. • Addressing social needs that the free market might not, typically because the social value exceeds the private value to parties that might otherwise invest. • Allocating scarce resources that are unique to each country. • Network evolution raises issues in all three areas.

10. Rationale for Policy Intervention • Market power • NGN might introduce new forms of competition, thereby mitigating market power. • Other forms of market power (last mile, termination monopoly) are likely to persist. • NGN might introduce new bottlenecks in upper layers of the networks.

11. Rationale for Policy Intervention • Public needs / public goods • Access to emergency services • Lawful intercept • … and more • These are largely the same issues raised by the migration to converged IP-based networks. • Numbering • Geographic or non-geographic numbers? • Far greater salience in Europe than in the US, due to differences in charging arrangements.

12. Rationale for Policy Intervention • Encourage investment? Be careful! • Policy intervention can make sense where: • There is a “public goods” problem – the value to society as a whole is greater than the private value to the firms or to their customers. • There is some other market failure, such as a lack of economies of scale due to fragmentation of regional markets. • Otherwise, the policymaker should let the market choose the winners.

13. Rationale for Policy Intervention • Substantial risk of distorting the market. • Risk that the policymaker “bets on the wrong horse”. • There have been brilliant successes, such as the European choice of GSM. • There have also been many failures – they are not much talked about. “Success has many fathers, but failure is an orphan.” • Otherwise, policymakers should act with restraint, seeking to avoid distortions to market evolution.

14. Disruptive Technological Evolution: IP-based NGNs • Many operators, especially incumbents, look to migrate to IP-based NGNs. • Enhance economies of scope and scale. • Accelerate time-to-market for new IP-based services. • The ITU provides a widely cited Definition of NGN: • “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.” See http://www.itu.int/ITU-T/studygroups/com13/ngn2004/working_definition.html.

15. Disruptive Technological Evolution: IP-based NGNs Policy issues are different in the NGN core, concentration, and access networks

16. NGN in the UK Comparison of existing BT voice and broadband networks with 21CN Source: Ofcom (2005), Next Generation NetworksFuture arrangements for access and interconnection; Figure 1, page 11

17. NGN in the Netherlands

18. Policy Challenges: IP-based NGNs • The NGN core • The migration to IP potentially enables new forms of service competition. • NGN/IMS could in principle either enable or inhibit competition. • Service providers with market power may be motivated to inhibit competition. • Smaller, competitive maverick operators may have different motivations. • How will this play out in the marketplace? It is too soon to say.

19. Policy Challenges: IP-based NGNs • The broadband/fiber NGN access network • If all voice migrates to IP, and the high speed broadband access becomes the means to reach those services, then the character of the last mile bottleneck changes. • Absent other changes, the last mile bottleneck does not go away. • Procompetitive regulations – notably loop unbundling and line sharing – experience significant challenge in a VDSL of FTTB/FTTH environment (bitstream less so).

20. Policy Challenges: IP-based NGNs • Voice services in an IP-based NGN network • The call termination monopoly results because only a single service provider can, in general, terminate calls to a single telephone number. • Contrary to what some have claimed, the migration to IP-based NGNs does not significantly change the termination monopoly.

21. Policy Challenges: IP-based NGNs • Regulators might like to lay down their picks and shovels, declare victory and retire. They cannot. • Likely market power in the last mile. • Likely market power for call termination. • Possible new forms of market power at the application services layer.

22. NGN in the UK: Functional Separation • Vertical separation of British Telecom • Access services division: OpenReach • Provides wholesale products to BT and to competitors on a nondiscriminatory basis (Equivalence of Input). • Distinct branding, uniforms. • Employee compensation reflects results of OpenReach, not the results of BT. • Separate board to monitor effectiveness of Equivalence of Input.

23. NGN in the UK: Functional Separation • Promising approach reflects competition law, not pursuant to the regulatory framework. • Many claim that the system is working well, including Martin Cave (Six Degrees of Separation) • In reality, the measure is a bit extreme, and it is a bit early to say whether it is effective. • Much interest in this approach • European Commission • Italy • Babcock and Brown / eircom • Australia and New Zealand

24. “NGN” access in the US • Near-total and irrevocable elimination of regulation of the last mile, ostensibly in order to encourage investment. • Has led the market to collapse to a series of geographically specific telco-cable duopolies. • This approach cannot make sense in the absence of substantial modernized cable television plant.

25. The Netherlands Broadband Market Source: European Commission 12th Implementation Report (10/2006)

26. The French Broadband Market Source: European Commission 12th Implementation Report (10/2006)

27. The duopolistic U.S. broadband market Derived from data from FCC reports based on Form 477 carrier data

28. US 4% U.S. – EU Comparison: DSL Lines European Average Source: European Commission 12th Implementation Report

29. “NGN” access in the US • The results are still unfolding, but the policy seems to me to be a disaster. • May have indeed spurred incumbent investment in VDSL and FTTH, but at a cost! • Slower adoption of broadband than would otherwise be the case. • No investment by competitors. • High prices for relatively slow broadband. • Less consumer choice. • Threats to Network Neutrality.

30. NGN access in Germany • The German government has tried to provide DeutscheTelekom with a “regulatory holiday” in exchange for a commitment to deploy VDSL widely. • Note that cable television in Germany is crippled by inappropriate competition law remedies. • The German regulator (BNetzA) seeks to open ducts to competitors, potentially providing cost-effective access to street cabinets. • The European Commission has launched an infringement proceeding to challenge the regulatory holidays.

31. NGN access in most of Europe • Most European countries with NGN deployments – notably including France, the Netherlands, and Italy – are seeking to adjust and refine the European regulatory framework. • Maintain competition in the last mile. • Avoid remonopolization of their networks.

32. Other NGN challenges • Interconnection challenges are emerging everywhere, as the PSTN model collides with Internet arrangements (and also with more efficient arrangements used in the U.S. and Canada). • The migration of voice to IP implies challenges for: • Access to emergency services • Lawful intercept • Access by those with disabilities • Numbering plans • And more …

33. And now, the good news… • Mobile services are already well advanced in bringing voice service and some data service to large numbers of residents of the region. • Progressive improvements in price/performance will make it easier to provide universal access, and ultimately universal service, to all. • The emergence of competitive undersea cable to the region is an enormous boon. • Third party service providers (Skype, Vonage, SIPgate) provide valuable competition.

34. Conclusions • The transformation of the network is global, and will ultimately be strongly felt in the region. • Many aspects benefit residents of the region. • Others pose new policy and regulatory challenges. • Caribbean policymakers can benefit from studying the effects of policy responses – both what succeeds and what fails – in developed countries (notably in the European Union and the United States).

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