Trends in Electronic Communications:

Economic and Regulatory Problems

Carlo Cambini

Politecnico di Torino & Florence School of Regulation – EUI

Steffen Hoernig

Nova School of Business and Economics, Lisbon, Portugal

Brussels, 20 January 2017

Plan of the talk

Main themes:

◦ Convergence and value chains

◦ Platforms as intermediaries

◦ Rethinking notions of market structure and market failure

Regulatory issues:

◦ Market power and market definition

◦ Bundling

◦ Network capacity: the ultra-fast broadband market

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What is Convergence?

Many different forms of electronic communications made possible through the use of information technology

ICT: what once were separate industries (telecoms, computing, broadcasting) are now providing similar services

Pushed by supply side:

◦ Technology

◦ Internet (IP-based communications)

◦ Digitalization implies that seemingly different services (voice, data and broadcasting) become simply a stream of data packages

Pulled by demand side:

◦ “Any device, any service, anywhere, anytime”

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Value Chain in Broadcasting

Digitisation disrupts this model in two ways:

◦ Switch to digital distribution cuts the need for physical logistics: direct sales from producer/creator/developer

◦ Each segment can push its own model, centred on

device (Apple)

distributor – based on infrastructure (cable and telcos)

aggregation – based on marketing valuable content (Sky)

search (Google)

community & user generated content

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Implications for Market Structure (1)

Upstream market (production)

◦ Dominance of high-quality products

◦ Technology favours talent (“superstars”)

Implications for broadcasters/platforms

◦ Competition among platforms passes these rents upstream ->

commoditization of infrastructure

◦ High fixed costs -> concentrated market structure

◦ Consequence: oligopolies (not new), even more so in large markets

(retail and wholesale; new)

◦ Reinforced where network effects are strong

E.g. Google: the more we search, the better Google becomes

◦ Winner-takes-all markets: one large player

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Implications for Market Structure (2)

Merger wave in EU mobile telephony: ◦ Telefonica/E-Plus (Germany; mobile)

◦ Vodafone/Ono (Spain; CATV) and Kabel Deutschland (Germany; CATV)

◦ Hutchison Whampoa – 3/O2 (Ireland; mobile)

◦ BSkyB and Sky Germany and Italy

◦ Vivendi/Telecom Italia

◦ Wind/3 Mobile (Italy; mobile)

Pressure points:

◦ From value creators to providers of tubes

◦ Investment needs

◦ Intense competition in some national markets

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Value Stream: Broadcasting

Content providers

Users Advertisers

Platform

content content price

subscription fees

ad price

eyeballs

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Value Stream: Internet/Broadband

Content providers

(incl. OTT)

Users Advertisers

Platform

content

subscription fees

ad price

eyeballs

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The platform can be cut out from the monetization of content

Net neutrality makes this effect stronger

service payment

Platform Types (Evans & Schmalensee, 2006)

Exchanges Platforms provide participants with the ability to search over participants on the other side and the opportunity to

create matches

Large groups of participants

- Ex: Auction houses, internet sites for B2B and B2C, real estate etc.

Advertising-Supported Media

Platforms create content or buy it from others. Content attracts viewers who in

turn attract advertisers

- Advertisers are the money side. Ex: Print media, yellow pages.

- Ex: Magazines, free television, newspapers

Transaction Systems This kind refers to any recognized

method for payment

Management schemes: proprietary (American Express) or associative

(VISA).

- Ex: Payment cards, bank checks

Software Platforms Platforms offer services to developers to create specific applications. Users run

applications.

Ex: Video games, PC operating systems, smartphones

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More Platforms

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Example: Mobile Platforms and App Stores

Platforms that combine state-of-the-art mobile phones (smartphones)

with innovative operating systems and so-called app stores.

Most important players & app stores:

Apple Apple app store for iPhone

Google Google Play

Nokia Nokia Store (discontinued in 2015)

Amazon Amazon Appstore

Windows Windows Phone Store

BlackBerry BlackBerry World

App Store

-Features

-Characteristic

-Policies

Mobile Platform

Apps

Developers Users

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Google Play and Apple are by far the largest

Windows Phone Store

2011: - Fifth largest app store

- but 39 times smaller than Apple app store

Amazon Appstore

2011: number of apps added was 22 times smaller than Google

2013, US: Google is 10x larger for free apps, 2x for paid apps

BlackBerry World

2014: the smallest for available apps

Nokia

From dominant mobile incumbent to isolated operating system

Mobile Platforms and App Stores (2)

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Platforms: Pricing Structures

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Platforms are not “One-Sided”

Different legacies result in very different business models

◦ TV from free-to-air

◦ “Open” Internet, over regulated platforms (often formerly state-owned incumbents)

Yet, common elements

◦ Different users interacting, platform as intermediary

◦ Externalities between groups

◦ Structure of prices as important as their levels

◦ Typical to have skewed prices

Huge implications for market definition

◦ How to apply a SSNIP test?

◦ How to define market power?

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Platforms: Implications

Asymmetric treatment of delivery platforms not justified simply on

the grounds of different size

Multi-sided platforms

◦ Note (1): one-sided logic wrong in two-sided markets

(e.g., mark-ups of individual services, margin test, ...)

◦ Note (2): because of externalities, outcomes in two-sided

markets, even if competitive, are often not efficient

Almost inevitably, wider relevant markets

Will be more difficult to intervene ex post

Higher-level question: competition policy vs regulation

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Convergence: Implications

Convergence has been progressive, not disruptive

Lots of inertia on the demand side

Switching costs? Equipment, retention… de facto little

switching i.e. apps portability in mobile segments: More serious than number

portability; probably the most relevant competitive problem in future

Major work still to be done by economists

Economics, user preferences, and regulation likely

to be more important than technology

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Convergence: Fixed-Mobile Termination

US experience – a simplified approach to FTM termination: ◦ Fixed incumbents (ILEC)-Local Competitors (CLEC) and ILEC-mobile

reciprocal compensation rates are generally symmetric, and set at a rate that reflects the marginal cost of the ILEC;

◦ ILEC-ILEC, CLEC-CLEC, CLEC-mobile, and mobile-mobile reciprocal compensation rates are determined through voluntary negotiations, and in many cases are set to zero (“bill-and-keep”), in particular for ILEC-ILEC and mobile-mobile interconnection.

◦ Mobile operators formally also charge their customers for receiving calls (RPP), but contracts with “buckets of minutes” mitigate this effect.

Similar convergence of wholesale prices also in the EU

Digital convergence (IP telephony with IP interconnection, over-the-top content, VoIP) and multi-homing will likely make the termination issue go away

Potential effects: ◦ a) deregulation of termination (with a cap)

◦ b) capacity-based termination charges

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Convergence and Bundles

Rising importance (EU, 2015):

◦ 80% of broadband products bought in bundles

◦ 60% of TV subscriptions bought in bundles

◦ 63% of voice services bought in bundles

Bundling has good and bad aspects

◦ Cost reduction

◦ Single billing

◦ Price discrimination device

◦ Creates strategic entry barriers

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Convergence and Bundles: UK

March 2013: BSkyB acquired broadband users from O2, and BT became the second broadband provider in UK … and still is!

August 2013: BT reacted => acquired TV sports content (from ESPN; 1bn £), offered free to its fibre broadband subscribers

UK broadband market share

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Bundles: Market Definition

The bundle as a new product: should it be analysed in the context of already defined markets, or as a new market?

◦ Empirical question. Answer may change over time

◦ Development: just introduced, most likely analysed within already defined markets

◦ Transition: gaining importance, may constitute a new market alongside existing ones

Note: Dominance in traditional markets for single products does not imply dominance in the new market for bundles, and vice-versa!

◦ Maturity: most buy bundles, traditional markets vanish

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Bundles: New Regulation?

Without intervention: increased vertical or cross-market mergers, and decrease in the number of firms

Regulation typically to guarantee access

◦ Network (telecoms) and premium content (TV)

Not new in telecoms or TV

◦ EU: access to telcos, difficult to touch TV content

◦ US: no access obligations

Change of emphasis?

◦ Hard to justify different treatment of telcos and cable

◦ Shift to ensuring access to premium content? – Ex ante regulation or ex post check for abuse?

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Convergence and Fast Broadband (1)

Networks need more capacity but investments are

extremely costly

Regulatory framework:

◦ Increase regulatory certainty and consistency

◦ Provide sufficient spectrum

◦ Facilitate financing

◦ Lower deployment costs

◦ Stimulate demand for high bandwidth

Country-specific characteristics influence regulatory

intervention (difficult to have a «one-size-fits-all»

approach)

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Convergence and Fast Broadband (2)

Differences in terms of infrastructure competition: in countries

where alternative fast broadband networks are present (i.e.

cable) both deployment and penetration of ultra-fast broadband

are larger

Differences at geographical level: different degrees of

competition at local level (“black” and “grey” areas) … might

this imply geographical regulation?

Cable operators lead fast broadband investment in 68% of the

EU27 countries; for the rest, telecom incumbents do.

Symmetric or asymmetric regulation?

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What is Symmetric Regulation?

The standard approach in which SMP is a prerequisite for regulation

embodies the “asymmetric” approach: regulate only the SMP operator

However, Article 5 of the framework Directive and Article 12 of the

Access Directive envisage the imposition of access or interconnection

obligations on all operators

Moreover, the 2012 NGA recommendation stipulates that “where it is

justified on the grounds that duplication of infrastructure is economically

inefficient or physically impracticable, Member States may also impose

obligations of reciprocal sharing of facilities on undertakings operating an

electronic communications network….”

A good example is the regime operating in France of symmetrical

regulation of a fibre network’s terminating segment in certain localities

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Can the roll-out of fibre generate less

asymmetric market outcomes?

The above example shows how an extension of

regulation can be pro-competitive

But the diverse experiences of fibre roll-out in Europe

show that the impact of incumbency can be diminished

or even removed: perhaps symmetric regulation can

mean deregulation

Indeed, cable providers have largely escaped access

regulation in Europe – a process assisted by the

Commission’s policy of excluding cable products from

wholesale access markets

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The New EU Regulatory Package

Focus on high-speed connectivity and investment,

delivered through different levels of infrastructure

competition (FTTCab/FTTH)

Preference for passive over active remedies (and fewer

remedies), even though active remedies are in place in

many countries

Encouragement of commercial agreements

Wider scope of access to include wholesale-only

operators and co-investment

Largely preserves, rather than tightens, the existing SMP

framework

Possibly extends symmetric regulation

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Some Conclusions

What’s next?

◦ Market consolidation? (=> the Single Market in the EU)

◦ Competition over bundles will get stronger

◦ Infrastructure competition - but competition may not always work at wholesale level

◦ Need of new infrastructure investment (NGN and LTE)

◦ Net or service (i.e. Google for search? WhatsApp/Skype?) - device (i.e. Apple with iPhone/iPad?) neutrality? New gatekeepers emerge?

◦ This calls for new and innovative regulatory rules

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