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
Apr 13, 2017
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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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 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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