Competition Issues Arising From Communication Over the Internet - - PowerPoint PPT Presentation

Competition Issues Arising From Communication Over the Internet

Henry ERGAS

Key points

• A fundamental transition is underway towards ubiquitous

Internet access and to high levels of broadband connectivity. These changes will reshape the network from its present

• verlay structure, with multiple technology and service

specific access and core components, towards a more uniform access platform and core

• Although this process will bring great economic benefits,

regulatory interventions have substantial potential to distort it and undermine its outcomes

• Far-reaching changes are needed to our regulatory

arrangements to avoid this happening

1 9 7 6 2 1 9 8 4 1 9 9 2 2 8 Billion Million Thousand WIRELINE WIRELESS

First alphanumeric pager 9600> b/s modem GSM 28.8 Kb/s modem 56 Kb/s modem Ricochet radio modem UMTS MIMO 802.11g 1 Gb/s Ethernet 802.11g 100 Mb/s Ethernet Wide-area paging 2.94 Mb/s Ethernet 110-b/s Hayes modem 10 Mb/s Ethernet

Bits per second NOMADIC

Future networks -- Major changes

• Integration of overlays into single core network

– Currently overlay involving multiple networks and transport and control technologies – Digital and packet-switched end-to-end – Common underlying transport service and form of the information transported – Move to commonality of equipment, processing and protocols at network layer

Simplifying the access and core networks with a multi-service approach

Each service has its own Network

• Service deployment requires high upfront investment
• No service interaction
• Multiple customer profiles
• Multiplied operation costs

Unified Optical infrastructure

• Multi-service access
• Virtual Service Networking
• Open Applications and services environment
• Seamless Service Linkage
• Single customer profile
• Operational cost rationalisation

Service Management Service & Application Management PSTN LL/Data Data Mobile net

VSN VSN

Open Apps & Services Broadband

Future networks -- Major changes

• Greater separation between the network and the services and

applications it supports

– Intelligence in customer-end devices – Allows far greater service flexibility

• Opens opportunities for greater contestability and service

flexibility, with increased competition

– To be the network of choice, and – In terms of providing services over that network

2000 2020

Start of mass roll out of fibre to green field estates Start to refurbish copper network Start to refurbish copper within 2km Brown field fibre deployment Green field fibre deployment

Copper Copper

Homes connected to Telstra's network

The gradual replacement of twisted pair access with fibre, first in green fields and then in brown

Fibre Fibre

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 2003 2004 2005 2006 2007 2008 Subscribers (M) 10 20 30 40 50 60 70 80 90 100 Share (%) Broadband subscribers Dial-up subscribers Dial- up share Broadband share

How well has the regulatory regime coped?

• Inappropriate use of competition notices

– Internet interconnection (peering) – ADSL pricing

• Myriad of declared services
• VoIP and LSS

Internet peering

• Refers to interconnection arrangements between ISP’s –

centres on financing of connectivity

• Peering is a situation where two ISP’s each provide similar

levels of network reach, so that payments would net out

• In contrast, where one network provides another with greater

reach, a transit arrangement would be entered into

Peering Arrangements

Customer A Customer B ISP A ISP B

Backbone A Backbone B

Traffic Flow Payment Flow Peering Traffic

Customer X Customer Y ISP A ISP B Internet Traffic Flow Payment Flow Customer Z ISP C Transit Arrangement Peering Arrangement Net Payment Flow

Internet peering outcomes

• Provided selected ISPs with an access price of zero
• Distorted their investment incentives
• Conferred an advantage to these players relative to ISPs not

party to the arrangement

• ACCC not specified principles to alter the arrangement with a

change in circumstances, so that current arrangements are effectively locked in

ADSL competition notice

• Aimed at forcing down Telstra’s wholesale ADSL prices to

the benefit of competitors

• No compelling evidence of a vertical price squeeze
• Telstra retail competitors had led prices down that Telstra had

not previously matched

ADSL competition notice - economics

• ISPs have an incentive to subsidise initial take up through

future sales of higher margin services

• Behavior is grounded in economics of ‘experience goods’ and

in competition to acquire customer base, generally at introductory prices that are very low relative to costs

• In early stages of market growth, this implies margins that

may be negative for five years or more

• Reducing wholesale prices merely serves to reduce the price

point at which this negative retail spread accrues

• So does not solve alleged problem while harming ADSL

infrastructure investment by Telstra and competitors

Normalised average monthly access fees (combined 256/512/1500 kbps plans)

$0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 Capped Plans Throttled & Unlimited Total $/ 1000Mb 13-Feb-04 09-Mar-04 19-Jul-04 $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 Capped Plans Throttled & Unlimited Total $/ 1000Mb 13-Feb-04 09-Mar-04 19-Jul-04

Existing Offers - 512/ 128 kbps plans

2,000 400 12,00012,000 1,000 12,000 500 12,000 2,000 10,000 20,000

$0.00 $20.00 $40.00 $60.00 $80.00 $100.00 $120.00

Ip rim u s O p tu s IiN e t Fro g g y O p tu s Ip rim u s B ig P o n d A A P T U N L IM ITE D IiN e t U N L IM ITE D Fro g g y U N L IM ITE D O p tu s B ig P o n d B ig P o n d O p tu s

ISPs P rice ($/m o n th ) 5,000 10,000 15,000 20,000 25,000 D o w n lo ad L im it (M b )

Price ($/month) Dow nload Limit (MB)

Existing offers- 1500/ 264 kbps plans

1,000 400 500 1,000 12,00012,000 48,000 12,000 2,000 10,000 20,000 72,000 20,000

$0.00 $20.00 $40.00 $60.00 $80.00 $100.00 $120.00 $140.00 $160.00 Iprimus Optus BigPond Optus IiNet Optus AAPT UNLIMITED IiNet Iprimus BigPond BigPond Optus iiNet BigPond

ISPs Price ($/month)

10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000

Download Limit (Mb)

Price ($/month Dow nload Limit (Mb)

Declared voice band services

TSLRIC (plus contribution to unrecovered CAN costs) Voice band carriage Circuit switched Domestic PSTN OTA Voice band carriage Circuit switched Local PSTN OTA Voice band transmission capacity Copper wire Conditioned local loop service Retail minus Voice band carriage Circuit switched Local carriage service ACCC pricing approach Service description Network/medium Declared service

Declared higher capacity services

TSLRIC flagged as a possibility Carriage service >2Mb/s Not medium specific Transmission Carriage service supporting 64 kilobits per second unrestricted and no.

• f other services

ISDN ISDN PSTN OTA TSLRIC (no CAN costs) Non-voiceband frequency spectrum Copper or aluminium wire Line sharing service TSLRIC Infrastructure service Copper wire Unconditioned local loop service ACCC pricing approach Service description Network/medium Declared service

Declared higher capacity services (cont’d)

Data carriage in digital form, capable of

• ccurring at a X.50

rate using X.50 interfaces; or a n x 64 rate using n x 64 interfaces Not medium specific Digital data access service Historic costs Analogue pay TV carriage ‘Lines’ (excludes wireless/satellite) Analogue Pay TV ACCC pricing approach Service description Network/medium Declared service

Distortions from ACCC LSS pricing

• Zero allocation of joint costs
• Geographic averaged pricing
• Biased demand estimation
• Signals to infrastructure investors

Zero Allocation of Line Costs

• The ACCC’s pricing principles do not allocate CAN costs to

LSS prices.

• Substitute services bear an allocation of CAN costs while

having to compete against LSS.

• The results of this distortion are:

– Inefficient substitution away from competing services (ULL, wholesale ADSL, DAR) to LSS – Pressure on Telstra to cut wholesale prices on the competing services – In both cases, preventing Telstra from recovering its CAN costs

Biased Demand Estimation

• The ACCC adopted an ‘aspirational’ demand approach tied to a ‘reasonably
• ptimistic’ view of likely demand for broadband services.
• ACCC calculated the average ratio of LSS demand to ADSL demand in

European Union countries (3.1%) and applied the ratios of 4% and 5% as low and high demand scenario’s.

• Difficulties with ACCC approach:

– No regard for the demand for substitute services (ULL and Bitstream) which were included in the same dataset used by the Commission. – The results are dependent on potential outliers:

• If the highest and lowest values are removed from the sample the ratio is 1.8%
• If the two highest and lowest values are removed the ratio is 0.7%

– The ACCC provides no reason for marking up the ratio from 3% to 4% and 5%.

Biased Demand Estimation

• Seemingly upward bias of demand estimation will result in:

– Prices that are inefficiently low, since price is set to average cost, leading to inefficient signals for consumers; – Distortions to investment incentives for Telstra and other suppliers planning to wholesale voice/data services (e.g. Personal Broadband using iBurst, XYZed using ULL etc); – Without an adjustment mechanism that compensates for the difference between forecast and actual demand, a continuation of these distortions.

Geographic Averaged Pricing

• ACCC’s pricing principles dictate geographically averaged LSS prices

While requiring ULL prices to be geographically deaveraged.

• The undertaking prices for LSS and ULLS are:
• ULL and LSS are similar wholesale inputs for data services supply, then

price difference inefficiently distorts choice between these services.

• Inability to recover costs accentuated by geographic arbitrage.

$15 $15 $15 $15 LSS $100 $40 $22 $13 ULLS Rural Regional Built-Up CBD

Signals to Infrastructure Investors

• These distortions will affect investment signals for potential infrastructure-

based competitors

• The ACCC has clearly signalled that LSS prices (and by retail

competition, ADSL prices) will not contribute to the infrastructure over which they are provided – the customer access network.

• Investors, whether contemplating investing in wireless (Unwired, Personal

Broadband, WiFi) or wireline customer access networks (XYZed/Optus, TransACT), will be aware their investments compete against access seekers that do not incur any CAN costs.

• Thus, the ACCC’s LSS pricing principles are likely to foreclose new

investment and long term facilities-based competition.

The way ahead: declared services

• Currently inconsistent treatment of technologies and pricing
• Leads to distortions
• Need to be reviewed to deal with a converged environment
• Scope to replace with a digital access service

– Technologically neutral – Service independent

• Investment friendly terms and conditions

2000 2020

Start of mass roll out of fibre to green field estates Start to refurbish copper network Start to refurbish copper within 2km Brown field fibre deployment Green field fibre deployment

Copper Copper

Homes connected to Telstra's network

The gradual replacement of twisted pair access with fibre, first in green fields and then in brown

Fibre Fibre

Estimated National Basic Access SIO by % - Indicative of CAN Network Size / Age Profile

0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00% 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

50% of Existing Network Growth Point 100% of Existing Network Growth Point 28 Years 19 Years

Conclusions

• Transition to broadband, IP based networks offers substantial

potential gains

• Inappropriate regulation can seriously erode those gains or

prevent them from being realised

• Substantial change is therefore needed to the regulatory

framework

• The aging of our existing infrastructure and the prospect of

real benefits from deployment of new infrastructure makes it all the more urgent that this change occur