Technological Evolution: Regulatory and Policy Implications for the Region

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Technological EvolutionRegulatory and Policy
Implications for the Region

• J. Scott Marcus
• Caribbean Internet Forum V St. Lucia
• 6 November 2007

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Technological EvolutionRegulatory 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 EvolutionRegulatory and Policy
Implications for the Region

• Whats 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

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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.

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Disruptive Technological Evolution

• Price/performance continues to improve.
• Moores 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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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/ng
  n2004/working_definition.html.

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Disruptive Technological Evolution IP-based NGNs

• Policy issues are different in the NGN core,
  concentration, and access networks

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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
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NGN in the Netherlands
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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.

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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).

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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.

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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.

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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.

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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

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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.

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The Netherlands Broadband Market
Source European Commission 12th Implementation
Report (10/2006)
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The French Broadband Market
Source European Commission 12th Implementation
Report (10/2006)
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The duopolistic U.S. broadband market
Derived from data from FCC reports based on Form
477 carrier data
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U.S. EU Comparison DSL Lines
European Average
Source European Commission 12th Implementation
Report
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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.

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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.

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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.

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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

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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.

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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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