P LATFORM - BASED VS . S ERVICE - BASED COMPETITION : H OW SHOULD L - - PowerPoint PPT Presentation

PLATFORM-BASED VS. SERVICE-

BASED COMPETITION: HOW SHOULD

LATIN AMERICA REGULATE?

• D. Mark Kennet, Ph.D.

www.MarkKennet.com

INTRODUCTION

 As an economist, my position always depends on

how we are defining objectives

 For that reason, we economists have the bad

reputation among the legal community for not having fixed positions.

 As the old joke goes, if you ask a mathematician

how much is 2+2, he will tell you “4, as long as we are doing integer math.” If you ask a statistician the same question, he will respond “On average, 4.” But the economist answers, “What would you like it to be?”

 The case of ICT regulation is the same.

POSSIBLE OBJECTIVES IN AN ICT REGULATORY POLICY

 Legitimate objectives might be  Keeping prices low enough so that all users can afford

at least some services

 Stimulate investment in infrastructure so that coverage

increases, technology advances are incorporated, and more services are made available

 Maximize operator earnings  Obviously, in some ideal world it would be possible

to achieve all of these, but in reality we are forced to choose which objective is most important

 Each of these objectives implies a different style of

regulation, and each one carries costs and benefits in terms of the other objectives

OBJECTIVE: KEEP PRICES LOW

 Behind this idea is a notion of an anticompetitive

market

 Because there are few service providers, it is

necessary to stimulate an artificial competition through the use of resale and free access to infrastructure

 According to this largely European notion, “Intra-

modal competition” as it is being proposed in many countries leads to the “Investment Ladder” that eventually results in more infrastructure and less need to regulate

INTRA-MODAL COMPETITION POLICY (I)

Promotes competition within infrastructures

 Impose obligations for resale and unbundled access (ULL) on

dominant operators independent of technology (copper, cable, etc.)

Uses the investment ladder  Offers of resale and wholesale access are phased in,

gradually requiring a greater investment on the part of a new entrant

 Typically, in broadband:

Resale Bitstream Shared unbundled access Completely unbundled access

INTRA-MODAL COMPETITION POLICY (II)

Establishment of transition mechanisms

between the investment ladder steps; and

Elimination of resale or unbundling

• bligations when competition exists

 Objective: Increase competition and stimulate

gradual investment in network infrastructure so that penetration increases

Regulation Competition Investment Penetration

ISSUES WITH THE EUROPEAN APPROACH

 In theory, it sounds fine; and in the application in

Europe, it seems to function well. But:

 In every one of the western European countries, they

started out with a national fixed network already dispersed throughout the country

 Even in the case of mobile networks, there already

existed infrastructure to carry signals to switches and controllers

 For that reason, the regulatory vision was to figure out

how to share the infrastructure so that service competition would be fostered

 The cost of investing in a large part of the infrastructure

and technology was already paid

 In some sense, it wasn’t necessary to think of improving

forward-looking infrastructure

OBJECTIVE: STIMULATE INVESTMENT

 In this notion, there is a vision of a market suffering a

lack of access to capital for various possible reasons:

 The country is less developed economically  The country wants to modernize rapidly, including in the less-

favored economic sectors

 As there are relatively few providers, it is necessary to

stimulate the entry of investors

 According to this idea, an “Inter-modal Competition” will

attract investors to install the network currently lacking

 Most regulation is directed toward interconnection rules

in order to permit a free and sustainable competition

INTER-MODAL COMPETITION POLICY

 Promotes competition between infrastructures

 There is a clear preference for operators that own their own

network facilities

 The existence of parallel networks minimizes the possibility of entry

barriers in the market

 The policy incentivizes the creation of new networks

 It is thought that this policy creates sufficient incentives for

investment and innovation, permitting facilities owners to be compensated for assuming risks

 The envisioned transition is

Ex ante (access) Network rollout Ex post (competition) Penetration

POSIBLE ISSUES WITH THE PRO-INVESTMENT

NOTION

 Price reductions may not occur immediately  There may exist a tendency toward higher market

concentration

OBJECTIVE: MAXIMIZE OPERATOR PROFITS

 In this notion, there is a vision of “laissez-faire” –

the free market can solve all problems

 The theory is that without government intervention,

potential operators will be more likely to enter, provide services, and earn money

 Supporters of this approach insist that a totally free

market can stimulate even more investment than the inter-modal competition model

ISSUES WITH LAISSEZ-FAIRE

 Without government intervention, it is likely that

private networks will not interconnect

 There will likely be price gouging and other sorts of

consumer abuses

SO, WHAT IS THE POLITICAL OBJECTIVE IN

REGULATING THE SECTOR?

 The answer depends on how the situation in each

country is viewed

 If you think that the national network system is mature

and adequate, and that there really isn’t room for more expansion and coverage, and that the technology being used is the best, then it’s not really necessary to worry about future investment

 In this case, Euro-style regulation might be the best option  Regulating services is necessary so that consumers pay the

lowest feasible price

 If you think that there is a need for more investment in

• rder to expand coverage and to permit the introduction
• f new technologies and innovation, the stimulating

investment may be desirable

 In this case, Euro-style regulation may not work so well  It might be worthwhile to look at nearby examples like Chile

and Peru where incentivizing investment has taken priority

A FEW OBSERVATIONS REGARDING EURO-

STYLE REGULATION

 Emphasis on opening existing networks  Insufficient emphasis on stimulating investment  Does not take into account the reality of

convergence and 3G and 4G networks

 For example, an implication of adopting the Euro-style

regulation is having a tight regulation of triple-play services

 If there were more emphasis on stimulating investment

in infrastructure, triple-play might arise freely as a product differentiation that is beneficial to consumers

A FEW OBSERVATIONS ON INVESTMENT-

ORIENTED REGULATION

 In some cases, application of this idea lacks

something

 For example, in the case of the USA, even with this type

• f regulatory vision, the problem of federalism and

states’ rights leads to the situation in which there are two levels of regulation, one at the national and the

• ther at the state level

 We can see another example in Peru, where the

creators of the privatization permitted that there be both a vertical and horizontal monopoly in the sense that there was only one company operating the fixed, cable, and mobile networks.

MESSAGES

 In designing policy, it is necessary to decide on and

take into account the objectives

 It is not necessary to adopt the policies of other

countries; policies should be designed with national priorities in mind

 For that reason, I don’t recommend adopting either

the North American style policy or the Euro-style approach in their respective totalities

 A well-thought-out policy minimizes unanticipated

consequences