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be offered via broadband access and VoIP technology, the open-access regulation of
switching devices will no longer be required.122
8.3.2 The extent of the monopolistic bottleneck in next generation networks
There is a controversial debate over the regulation of infrastructure investments that
incumbents are currently making into so-called next generation networks (NGNs).
The goal of NGN migration is to merge the previously separate voice and data networks into one fully converged network with all IP-based transmission technology.
This network will replace the current public switched telephone network (PSTN)
and the IP networks. NGN providers plan to offer “triple-play” (voice services, Internet and TV) to their end-users. To this end, NGNs have been defined as networks
with bandwidth sufficient to support services that are not supported by current
broadband technologies (i.e. simultaneous transmission of high definition television,
broadband Internet and voice services). Convergence will decrease network costs as
(1) only one network needs to be managed, (2) existing capacity is used more effectively with all-IP transmission, and (3) network maintenance costs are lower in IPbased networks compared to PSTN networks.
For the migration to an all-IP NGN network, investments are necessary in local
communications infrastructures as well as in long-distance communications infrastructures. In the local network, high-capacity lines need to be built out closer to the
end-user. Here the attribute “next generation” generally refers to bandwidth offers of
up to 50 Mbps. Generally this is realized by building fiber lines up to the street cabinet (FTTC = fiber-to-the-curb) or up to the end-user premises (FTTH = fiber-to-thehome). In the case of FTTC the bandwidth of the remaining metallic local loop between the street cabinet and the end-user is enhanced with xDSL transmission technology (generally ADSL+ or VDSL). In the long-distance infrastructure of an NGN
the existing voice switches need to be replaced by routers and Voice over IP equipment (Marcus, 2006a: 5).
The prospects of competing technologies in the local communications infrastructure of NGNs, the so-called next generation access networks (NGA), are not yet
clear. In theory, Cable-TV networks, wireless technologies and in some regions even
the copper cables can be upgraded to provide bandwidth that would substantially
exceed current standards. It is still an open question what types of new applications
will be developed for NGNs and what kinds of demand these applications will place
on the bandwidth in the access network. Therefore, it is not yet decided which
access technologies will be able to compete with FTTH or FTTC in quality and
price.
The problem for policy makers in regulating investments into FTTH and FTTC
facilities in areas, in which they are considered to be monopolistic bottlenecks, is
122 Chapter 9 analyses how regulation of local access has responded to network convergence.
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that, if these investments do not prove successful, the investing incumbent will be
the one bearing the capital losses. However, if the investments are successful, then
regulation allows competitors to share the facilities at regulated, cost-based access
prices. Hausmann (1999) calls this a “free option” for competitors. The incumbent
suffers the consequences of market uncertainties regardless of whether the price of
capital goods is falling, whether demand is changing, or whether technological progress will make an investment obsolete, etc. Entrants do not bear any investment
uncertainties or at least to a far lower degree (for the investments they make to interconnect with the incumbent’s investment). As a result, the level of investment by the
incumbent is lower than would be economically efficient. Incumbents argue for
“access holidays”, that is a temporary suspension of access regulation, such that
their incentives for investment are increased (Heinacher and Preissl, 2006). They
point out that the rents that can be earned during the regulation-free period will induce efficient investments.
From the point of view of the disaggregated regulatory approach there can be no
economic justification for access holidays (Knieps, 2006: 68f. and Knieps, 2005b:
88ff.). Access holidays can only be meaningful in cases where regulation would be
justified due to ownership of monopolistic bottlenecks. And if such a bottleneck
would be identified, so the disaggregated regulatory framework argues, regulation
would be necessary from the very beginning. Otherwise consumers suffer a welfare
loss from delayed competition in the market. To provide for investment incentives,
the disaggregated approach implies that the regulatory contract needs to commit the
regulator ex-ante to a proper compensation for the risks involved in making irreversible investments (Knieps, 2005b: 90).123 Blankart et al. (2007: 8) state that “the
reference point for economically efficient investment signals is a market rate of
return and not a monopolistic profit.”
For practical regulatory purposes, Hausman (1999: 25f.) suggests calculating a
mark-up on the TSLRIC (total service long-run incremental cost) price for assets
affording irreversible investment using assumptions about the economic depreciation rate of capital, about the economic lifetime of an investment, a factor for changes in demand and changes in total factor productivity, and a variance for the stochastic process that determines the uncertainty. Since in the context of the disaggregated regulatory framework price-cap regulation is preferred over TSLRIC regulation, the risk compensation for new investments into irreversible assets should lead
to a reduction of the factor x which reflects the expected productivity increase in the
regulatory period.
With the built-out of NGNs, regulators need to answer the question whether the
extent of the monopolistic bottleneck identified in current PSTN network architecture is altered by the new network design. From the perspective of the disaggregated
regulatory approach, the number of network elements, which competitors need
access to, decreases once FTTH or FTTC are built out as a basis for offering VDSL
123 The Access Directive of the European Regulatory Framework (2002/19/EC, Art. 13(1))
explicitly allows taking account of investment risks in the price regulation of access.
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connections to end-users. In the case of FTTC projects, for instance, the network
upgrade consists of building fiber-optic cable closer to the customer premises. The
incumbent draws a fiber-optic cable through the existing ductworks between the
MDF site and the street cabinet. For this, the incumbent relies on ductworks and
ducts that are part of the existing monopolistic bottleneck network infrastructure. It
must be argued, that the extent of the monopolistic bottleneck network area is not
increased by this investment of the incumbent, in the sense that entrants should be
granted access to the new fiber cable. As long as both firms have the same opportunities for attracting customers in the retail market, the investment into additional
fiber can be expected both of new entrants as well as of the incumbent. The prerequisite, that both have equal opportunities in the retail market presupposes that no
entry barriers hinder competitors from entering the new market. Focusing again on
long-run cost asymmetries between the incumbent and the competitors, it remains
necessary that competitors are granted access to the ductworks and the ducts between the street cabinet and the main distribution frame as well as to the copper
cable from the street cabinet to the customer premises for them to operate on the
same cost function as the incumbent (Blankart et al., 2007: 14). Using these assets,
the entrant can invest into fiber cable between the MDF site and the street cabinet at
same costs as the incumbent. In the case of FTTH projects, competitors need equal
access to the cable ducts which connect the end-user premises with the MDF site
and to in-house cables. They can then draw their own fiber-optic cable to the enduser’s premises.
To summarize, the extent of the monopolistic bottleneck network area will decrease in an NGN environment. When the metallic local loop is (partly) replaced
with fiber-optic cables, then this is an investment, which can be undertaken by either
the incumbent or its competitors. The ductworks and the cable ducts which connect
end-user sites with higher-level network infrastructure remain monopolistic bottlenecks to which competitors must be granted equal access. Incumbents will face new
regulation in that they must open their network infrastructure at points which were
previously not regulated.
8.4 Conclusions
This chapter clarified the importance of regulation in the Internet periphery for effective competition in Internet core markets by referring to the theory of marketpower leveraging. The principles of disaggregated regulation were presented. It was
argued that minimally invasive regulation begins with a clear demarcation of the
monopolistic bottleneck network area. The extent of the monopolistic bottleneck in
local communications infrastructure was analyzed from the perspective of a regulator wanting to ensure non-discriminatory terms and conditions in broadband Internet
access services. It was argued that in current PSTN networks competitors need to be
able to co-locate their own transmission technology at the MDF site of the incumbent and need access to the bare copper cable leading to the end-user. In the future
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References
Zusammenfassung
Die Konvergenz der Netztechnologien, die dem Internet, der Telekommunikation und dem Kabelfernsehen zu Grunde liegen, wird die Regulierung dieser Märkte grundlegend verändern. In den sogenannten Next Generation Networks werden auch Sprache und Fernsehinhalte über die IP-Technologie des Internets transportiert. Mit den Methoden der angewandten Mikroökonomie untersucht die vorliegende Arbeit, ob eine ex-ante sektorspezifische Regulierung auf den Märkten für Internetdienste wettbewerbsökonomisch begründet ist. Im Mittelpunkt der Analyse stehen die Größen- und Verbundvorteile, die beim Aufbau von Netzinfrastrukturen entstehen, sowie die Netzexternalitäten, die im Internet eine bedeutende Rolle spielen. Die Autorin kommt zu dem Ergebnis, dass in den Kernmärkten der Internet Service Provider keine monopolistischen Engpassbereiche vorliegen, welche eine sektor-spezifische Regulierung notwendig machen würden. Der funktionsfähige Wettbewerb zwischen den ISP setzt jedoch regulierten, diskriminierungsfreien Zugang zu den verbleibenden monopolistischen Engpassbereichen im vorgelagerten Markt für lokale Netzinfrastruktur voraus. Die Untersuchung zeigt den notwendigen Regulierungsumfang in der Internet-Peripherie auf und vergleicht diesen mit der aktuellen Regulierungspraxis auf den Telekommunikationsmärkten in den Vereinigten Staaten und in Europa. Sie richtet sich sowohl an die Praxis (Netzbetreiber, Regulierer und Kartellämter) als auch an die Wissenschaft.