Commercial aspects of regulation

1. Commercial aspects of regulation Peter Lundy MSc DIC BSc(Eng) Information and Communications Technology consultant November 2008

2. Agenda • Telecoms technologies • Overview of competitive telecoms markets • The main market players • Customer service and convergence

3. Networks, services and technologies • Telecoms networks have been around since the late 19th century • They have used many methods and different technologies but the basic principles remain the same

4. The main elements The person being called (a friend, a business, a computer, a recorded message, or no answer) Q: How do we know their number? The line (network) (a metallic cable, an optical fibre, a radio signal or a combination of these) Q: Who provides these and isn’t it expensive? The person making the call (from a home, from an office, or a mobile, from a car, a ship, a ‘plane, or on a computer) Q: How do they pay for the calls?

5. Basic features of a successful “public” telecoms service Customer Interfaces Services Networks • It needs customers • It has to be able to carry voice and data • It has to be “economic” • right technologies in the right places • right services in the right places • right tariffs • The operator of the network and its services must be able to calculate bills, send them out and collect the money Q: What is a “Virtual Operator?”

6. The “Fixed Network” Local Exchange 1 Transmission links The Local Loop, (or access network or “last mile”) Local Exchange 2 Tandem Exchange A To Local Exchanges 3,4,5 etc The “Access Network” The “Core Network” To Tandem Exchanges B, C, etc International Gateway Exchange To other countries International links and “world-wide-web”

7. The essentials of switching and transmission • Transission • Local loops between the customer and the local switch • Can now be converted to “broadband” by installing digital boxes at each end (ADSL) • Wireless Local Loop (WLL) becoming more attractive than metallic cables • Local Loop Unbundling gives new operators the chance to compete (this is especially important for the growth of broadband) • Core and international networks use optical fibres for reliability and economy • Satellites now mainly used commercially for TV broadcasting Switching • Local digital switches connected to customers • Route each call to its destination • Record each call’s time, duration and charge • Provides a testing point for maintenance • Main point for competitors to interconnect • Need special power and environment • Tandem and international digital switches ensure economic network design • Conventional switches being replaced by internet “servers” and “routers” technology (“Next Generation Networks” – NGNs)

8. Part of a telecoms switch room

9. Another part of the same switch room

10. Alternative Fixed Network Technologies All the links can be metal, fibre or radio “wireless local loop” Local Exchange 1 “point-to-point” radio relay The Local Loop, (or access network or “last mile”) copper wires Tandem Exchange A fibre To Local Exchanges 3,4,5 etc To other countries To Tandem Exchanges B, C, etc Cable, radio and satellite links, submarine cables International Gateway Exchange All the switches are digital (or becoming digital), now using Internet techniques

11. Cables in ducts Hrvatska agencija za telekomunikacije

12. What happens underground Hrvatska agencija za telekomunikacije

13. Things about telecoms technologies • What you need to know • More economic, reliable and flexible for all networks • Crap, the sooner it goes the better • Higher capacity transmission, better for nearly everything • A way of using your computer to get cheap phone calls • A brilliant way to get all the services you want • Today’s and tomorrow’s mobile phone networks • A way to serve customers without having to lay cables • How to ensure your customers can phone customers on your competitors’ networks • Re-connecting an existing customer’s line to a competitor’s network • A dedicated link paid for and used by a business customer What they say • Digital • Analogue • Optical fibre • Voice over IP • Broadband • GSM and 3G • WiMax • Interconnect (ion) • Local Loop Unbundling • Leased line • Any more?

14. “Base Transmitter Stations” GSM Exchange 2 GSM Exchange 1 Interconnection links Tandem Switch The same core network “Fixed Network” To other countries Local Exchange International links and “world-wide-web” The “Access Network” The “Mobile Network”

15. Some GSM “base transmitter stations”

16. Another type of GSM transmitter

17. Cost of network Low Marginal (or Incremental) Cost High Fixed Cost Size of network (capacity, or demand) Basic telecom network economics

18. Forward-looking incremental costs costs existing network line operator’s variable cost modern network line operator’s incremental cost= CI operator’s fixed cost traffic TO TO+I 18

19. Access to the Internet Internet Services Provider 1 Broadband or “dial-up” S Cable, wireless or 3G mobile network The same core network “Fixed Network” Local Exchange International links to “world-wide-web”

20. Old and new market players • Today’s telecom networks can be provided by anyone • Different operators can (and do) provide local, regional, national and international networks and services • The players can provide all or only part of the networks and services • Interconnection has to be easy and economic, so that we don’t need lots of separate national networks • The ex-monopoly operator – “the incumbent” has; • advantages (size, money, customers, know-how) and • disadvantages (legacy networks and attitudes, inefficiency and often relatively poor quality and customer service)

21. Who are the market players? Virtual Operators (Mobile and Fixed) Mobile Operator or Service Providers C, D, E etc Mobile Operator and Service Provider A Internet Service Providers Operator or “Service Provider” X,Y,Z etc To other countries Fixed Operator or Service Providers A, B, F, G, H etc TV and Radio Channel Providers

22. Regulation • Technical standards are now global, this is the equipment manufacturers’ problem • A regulator has to help all market players to provide good quality networks and services, irrespective of the technologies being used • Fair competition means a fair amount of co-operation too, technically and commercially • The suppliers, the technology, the networks, the services, the operators and the regulators are really only there for one reason - consumers

23. Competitive markets -agenda • How is competition provided? • How the incumbents behave • The role of regulation

24. Incumbent network and service provider Monopoly

25. Cable (or wireless) local loop Interconnection Alternative network and service provider Incumbent network and service provider How competition is provided (1: alternative network) Mobile (GSM)

26. Carrier selection Interconnections Alternative network and service provider Incumbent network and service provider How competition is provided (2: carrier selection)

27. Unbundled Local Loop Interconnections Alternative network and service provider Incumbent network and service provider How competition is provided (3: local loop unbundling)

28. Types of local loop unbundling • Local loop unbundling is where the local line to the customer is disconnected from the incumbent’s network and reconnected to an alternative operator • The technology allows all or part of the capacity of each local loop to remain connected to the incumbent also all or part to the new operator (“partial” and “full” unbundling) • “Partial unbundling” means that part of the service (e.g. voice calls) can remain with the incumbent, while new services (e.g. broadband) can be provided competitively by a new operator • “Full unbundling” means that all the services are now provided by the new operator • The re-connection can take at any place in the local network

29. Customers now have a choice Incumbent Operator Individual local loops 1 3 3 Incumbent’s cable 2 [Note: alternative unbundling point] 1 2 Case 1: “Partial Unbundling” = where customer continues to get voice calls with incumbent but chooses new operator for broadband (also called a “shared access line”) Case 2: “Full Unbundling” = where customer gets all services from new operator Case 3: Customer continues with incumbent operator New operator in town B [Note: The new operator should be allowed to put their interconnection equipment in the incumbent’s exchange = “physical co-location”] Local loop Unbundling

30. Customer relationship, including billing Alternative retail service provider (e.g. Mobile and Fixed Virtual Network Providers) Information flows Incumbent network and service provider Relationships with other providers (e.g. other network operators, content providers) How competition is provided (4: “no network” providers)

31. 1. Traditional monopolist 2. Reluctant competitor 3. Competing enterprise How incumbents behave It is possible to observe 3 stages of transition for an incumbent: The transition is normally accompanied by a dramatic improvement in efficiency and customer service

32. Phase 1: the incumbent as a traditional monopolist • Government-owned, no competition • Tariffs out of balance • Under-investment • Inefficient, unreliable and inconsistent • Poor customer service • Long waiting times for customers (The bad old days)

33. Phase 2: the incumbent as a reluctant competitor • Reorganising • Competing against new entrants • Rebalancing tariffs • Launching new services • Investing in modernisation, training and customer service • “Monopolist tendencies” remain: • barriers to interconnection, both economic and technical • poor service culture • culture of superiority over new entrants and regulators • resentment at regulator’s encouragement of new entrants • defensive about being compared unfavourably to new entrants

34. Phase 3: the incumbent as a true competitor • Running retail and wholesale services as efficient, commercial businesses • Forward-looking investments, innovation • Profitable “carriers’ carrier” • Proper systems and processes for: • products and services management • customer services (e.g. CRM, billing) • managing relationships (media, shareholders, regulator, partners, competitors) • Improving service performance and profitability • Using “universal service” as a brand virtue

35. British Telecommunications was separated from the British Post Office in 1981. It has been competing in telecommunications in the UK since 1983 and by 1993, it became a 100% privatised company. In 2001, its mobile operations (now O2) were de-merged from BT. As BT Group plc, it now serves customers in 170 countries. In the UK it offers voice, broadband, internet, mobile and TV services

36. 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Staff numbers – decline and fall?

37. 1984 1096 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 BT since 1984

38. BT now • Operates in 170 countries • 28 million UK customer lines (40% more than in 1984) • BT Retail “new wave” revenues increased by 20% in 2007, while traditional revenues reduced by 3% • 12.7m broadband lines in the UK, 4.4m connected to BT, the remainder via wholesale “BT is transforming from a traditional telecoms company to a leading provider of converged networked services and its aim is to help customers get the most out of communications technology by providing tailored solutions that are easy to use”

39. BT: successful as a retailer and as a “carriers’ carrier” Source: BT published accounts

40. BT Retailer Retailer BT Retailer Wholesaler Retailer C u s t o m e r s Retailer BT Retailer Wholesaler Wholesaler Retailer Retailer The market is expanding in new ways

41. What does this mean for regulation? • The regulator’s role is to further the interests of consumers in relevant markets, where appropriate by promoting competition • “Light regulatory touch”, for example adopting a forward-looking stance on enabling technologies like convergence and VoIP • Market analysis in separate and “converged” markets • Action to ensure competition in all telecoms markets

42. Overall regulatory environment • Regulator independence • regulators should be able to exercise their powers impartially and transparently • Converged regulators • most Member States have established converged regulators with powers covering the whole e-communications sector • Regulatory focus • local loop unbundling • effective interconnection • Regulatory accounting: separation of costs, cost modelling • Regulator involvement • well-ordered public consultation in relation to regulatory decisions