Transcript CEO Council Meeting

CEPS workshop:
Promoting investment through
competition
ECTA
European Competitive Telecoms Association
Contents
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What drives growth and investment?
What kind of market structure will maximise growth?
What regulatory environment is needed?
How can we build a ladder of investment?
Different ladders for different circumstances?
What drives investment? (1)
 i2010 goal is to drive GDP growth through ICT
 2 main ways for telecoms to contribute to this aim:
• Direct investment in communications networks
• Productivity gains through cheaper services and innovation
 Both are needed to bridge the growth gap
 Both are dependent on effective competition
What drives investment? (2)
Investment as % of
GFCF
Relationship between Regulatory Scorecard and
Investment as Percentage of GFCF
 Clear link
between
regulatory
effectiveness
and total
telecoms
investment
8
UK
6
4
2
NL
DE
0
200
BE
FR ES SE
250
DK
IT
IE
300
350
400
Regulatory Scorecard
Incumbent
capex/revenues 2004
 Both incumbent and new
entrant investment is
stimulated
 Competition has not
deterred investment by
incumbents eg in
broadband, NGN
Regulatory effectiveness impact on incumbent
investment
0.18
0.16
0.14
0.12
0.1
0.08
180
230
280
330
380
Jones Day ECTA regulatory scorecard scoring 2004
430
What drives investment? (3)
Price of basket of business
telephone services 2004
Impact of competition on prices
More competition
Lower prices
Higher penetration
Greater innovation eg
IP MPLS, triple play
broadband
110
100
90
80
70
60
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
Incumbent telephony market share Dec 2003
Source: 10th Implementation Report
Competition and broadband penetration
Broadband penetration
 Dynamic effects on
wider economy
 Spectrum ‘reaping
telecoms dividend’:
potential for £20b from
productivity gains in UK
through increased
competition
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
20%
30%
40%
50%
60%
70%
80%
90%
Incumbent market share of total broadband lines
ECTA Broadband Scorecard March 2005
100%
What drives investment? (4)
 Competition focus still key to investment
"... we need not only to focus on global competition,
but also on competition inside the European Union
and at a national level. It is through competition
that firms innovate, strive to get the best from their
people, make the most effective use of their
resources, push up quality and push down
prices…”
Commissioner Neelie Kroes September 2005
What kind of competition promotes
investment? (1)
 Ongoing debate about what drives effective competition
 Consensus that network competition vital for sustainable
outcome. Requires resources and scale.
 But infrastructure competition alone not always sufficient:
• network duplication may not be viable or efficient
everywhere. Some areas may be ‘natural monopolies’
• If networks are closed, a limited number of large network
operators may not deliver range in content and services
 An effectively competitive market which drives network
investment and service innovation will have competition
both at network and service level
What kind of investment promotes
competition? (3)
Source: Ovum
 Current reality is that last
mile competition, if any, is
limited to densely
populated areas
 Unrealistic to expect
significant change in near
term
 Cannot rely on network
investment alone to drive
competition nationwide
 Some communities and
businesses branches will
be entirely reliant on
service competition
What kind of competition promotes
investment? (4)
Broadband penetration, historic, G7 countries
25
Broadband delivery mechanisms
Canada
Japan
United States
France
United Kingdom
Germany
Italy
20
15
100%
80%
60%
40%
20%
an
y
ly
er
m
Ita
U
S
U
K
an
Fr
pa
n
Ja
ce
0%
10
G
Japan 'new entrant DSL' includes LLU/line sharing Data
source: ECTA, Ofcom, FCC
5
Incumbent DSL
New entrant DSL
LLU/line sharing
Cable
Other
0
2001
2002
2003
2004
Source : OECD, ECTA, Point
 Successful broadband economies have used variety of
measures to stimulate growth from networks through services
 Progress in Japan, UK and France can be associated with
action on unbundling and bitstream access
What kind of competition promotes
investment? (2)
ITU Best Practice Guidelines
for the Promotion of Low Cost Broadband and
Internet Connectivity Dec 2004
We believe that competition in as many areas of
the value chain as possible provides the strongest
basis for ensuring maximum innovation in
products and prices and for driving efficiency.
What is the role of regulation in
achieving effective competition?
 Economic regulation is an essential driver of
competition and therefore investment
 Regulation will promote competition as well as
efficient investment and innovation so long as:
• Returns on investment are sufficient for shareholders
• Regulation is clear and predicable (ie low risk)
 No rationale for ‘moratorium’ on economic regulation
 No rationale for raising threshold for ex ante
regulation. Competition-law based (3 criteria test)
triggers are effective at targeting market failure
Building competition throughout the
value chain (1)
 Promoting effective competition requires close
assessment of each stage of the telecom value chain
 Possible to erode dominance from top down by
building steps on value chain ‘ladder’
 Ladder concept can be applied to all SMP markets
 Ladder should as far as possible be neutral, allowing
efficient buy/build decisions.
• operators should not be deterred from investing (including in
last mile infrastructure) where economically viable
• There should be no ‘obligation’ or artificial incentives to
invest in infrastructure where it would be inefficient to do so
 Pricing of products on the ladder is key to achieving
efficient investment and right competitive balance
Building competition throughout the
value chain (2)
Dominance
Retail
Minimum
Margin
Resale
Wholesale
Component
 Key requirements for
effective ladder are:
• Full understanding of costs and
acceptable return (WACC)
across the value chain
• Non-discrimination enforced at
each level through to retail
• Efficient migration processes
within the chain
• Clear policy on withdrawal of
products. Rungs should not be
removed if undermine
downstream competition
Different remedies for different
circumstances?
Urban
Business
Residential
Rural
 Competition and investment flows to higher return customers
(lower costs, higher revenues)
 Temptation to segment markets and tailor ladders eg fewer rungs,
different prices to reflect cost
 Theoretically pure, but practically complex. Creates scope for
gaming. Requires deep understanding of markets and costs
 Highlights digital divide, with higher prices and less choice for
rural customers. Effects of urban competition are ‘contained’
requiring greater intervention elsewhere
Conclusions
 Competition in telecoms drives investment directly and GDP
growth and productivity indirectly
 Economic regulation has been shown to promote competition
 Regulation will not deter investment providing it is clear and
predictable and returns are sufficient. No need for ‘moratorium’
 Both network and services competition are needed to achieve
growth goals. A few closed networks will not deliver full choice
and innovation. Successful broadband countries use mix of
measures
 Ladder of investment concept can be used in all sectors to
erode dominance from top down, but should be neutral to
promote efficient build/buy decisions
 Theoretically attractive to split geographies and customer
types but requires deep understanding of market boundaries
and costs + rigorous enforcement. Could extend digital divide
Thank you
Ilsa Godlovitch
[email protected]