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

P LATFORM - BASED VS . S ERVICE - BASED COMPETITION : H OW SHOULD L ATIN A MERICA R EGULATE ? D. Mark Kennet, Ph.D. www.MarkKennet.com

I NTRODUCTION  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.

P OSSIBLE O BJECTIVES IN AN ICT R EGULATORY P OLICY  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: K EEP 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

I NTRA -M ODAL C OMPETITION P OLICY (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: Shared Completely unbundled unbundled Resale Bitstream access access

I NTRA -M ODAL C OMPETITION P OLICY (II)  Establishment of transition mechanisms between the investment ladder steps; and  Elimination of resale or unbundling obligations when competition exists  Objective: Increase competition and stimulate gradual investment in network infrastructure so that penetration increases Regulation Competition Investment Penetration

I SSUES WITH THE E UROPEAN 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

O BJECTIVE : S TIMULATE I NVESTMENT  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

I NTER -M ODAL C OMPETITION P OLICY  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 Network Ex post Penetration (access) rollout (competition)

P OSIBLE ISSUES WITH THE P RO - INVESTMENT NOTION  Price reductions may not occur immediately  There may exist a tendency toward higher market concentration

O BJECTIVE : M AXIMIZE 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

I SSUES 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

S O , 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 order to expand coverage and to permit the introduction of 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 E URO - 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 I NVESTMENT - ORIENTED REGULATION  In some cases, application of this idea lacks something  For example, in the case of the USA, even with this type of 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 other 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.

M ESSAGES  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