Regulation and the Evolution of the Global Telecommunications Industry pot

vContents List of contributors vii Foreword by Stephen Schmidt xvi Preface by Erik Bohlin xvii Evolving technologies, competition and the new role of regulation: Anastassios Gentzoglanis

Telecommunications Industry

and guidance in ways they never imagined Also to my colleague and best friend, Gary Lumsdem, who started his successful new business by taking advantage of lucrative opportunities created by the new regulations of telecommunications industry.

Anastassios Gentzoglanis

To my good colleagues at the Center for Communication, Media and Information Technologies (CMI) at Aalborg University in Copenhagen with whom I have cooperated for many years.

Anders Henten

Regulation and the Evolution of the

Global

Telecommunications Industry

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02

v

Contents

List of contributors vii Foreword by Stephen Schmidt xvi Preface by Erik Bohlin xvii

Evolving technologies, competition and the new role of regulation:

Anastassios Gentzoglanis and Anders Henten

PART I REGULATION VERSUS INVESTMENT:

THE BALANCE BETWEEN STATIC AND

DYNAMIC EFFICIENCIES AND THE MAIN

ISSUES OF REGULATORY POLICY

1 Investment in broadband technologies and the role of

regulation 21

Anastassios Gentzoglanis and Elias Aravantinos

2 Intermodal telecommunications competition: implications

William E Taylor

3 Access regulation versus infrastructure investment:

Martyn Taylor

4 Behavioral economics and telecommunications policy 83

Patrick Xavier and Dimitri Ypsilanti

PART II TECHNOLOGY CONVERGENCE AND

THE FUTURE ROLE OF COMPETITION AND

REGULATION

5 The measure and regulation of competition in

Marcel Boyer

6 Preventing harm in telecommunications regulation: a new matrix

of principles and rules within the ex ante versus ex post debate 128

Kenneth Jull and Stephen Schmidt

7 The transformation of telecoms industry structure:

8 From the pursuit of effi ciency to the pursuit of competition in

Bronwyn Howell

9 International regulatory comparisons: the evolution of

Scott Marcus and Dieter Elixmann

PART IV STRUCTURAL SEPARATION AND

REGULATION OF THE

TELECOMMUNICATIONS INDUSTRY

10 Diff usion of broadband Internet and structural separation 211

Arata Kamino and Hidenori Fuke

11 Implementing functional separation in fi xed

Peter Curwen and Jason Whalley

12 Effi ciency and sustainability of network neutrality proposals 253

Toshiya Jitsuzumi

PART V INTERDEPENDENT INNOVATIONS AND

REGULATORY POLICIES: MOBILE NETWORK DEPLOYMENT AND MOBILE INTERNET

DEVELOPMENTS

13 Interdependent innovation in telecommunications: risk,

Bruno Basalisco, Andy Reid and Paul Richards

14 Next generation mobile networks deployment and regulation

Claudio Feijóo, Sergio Ramos and José- Luis Gómez- Barroso

15 Mobile Internet developments in Europe, East Asia and the US 317

Morten Falch, Anders Henten and Karsten Vandrup

Index 341

vii

Contributors

Elias Aravantinos has been Project Manager at the Columbia Institute

for Tele- Information on the Ultrabroadband project since 2004 He is also the Managing Director of ExelixisNet which specializes in high-technology strategies and new media products His clients are carri-ers, governments, academic institutes and media companies in North America and Europe From 2006 till 2008, Mr Aravantinos worked for Queens College and the Metropolitan College of New York, teaching several business and technology courses at graduate and undergradu-ate level He is completing his PhD thesis in Technology Management

at Stevens Institute of Technology, USA with a specialization in Telecommunications His research interests are new technology projec-tions, strategies and business development, with a focus on 4G strategies

He is a frequent speaker at industry and academic events, with numerous presentations and publications Mr Aravantinos holds a BSc degree in Electrical Engineering and Computer Technology from the University of Patras, Greece and an MBA in Information Technology from Oklahoma City University, USA

Bruno Basalisco is a PhD candidate in Economics at Imperial College

Business School, London He conducts research in the fi eld of industrial economics, focusing on innovation, regulation, platforms and business models in the information and communications and network industries in general His work has been presented at several international conferences and workshops in the fi eld of industrial organization, technology strategy and telecommunications policy, and he has served as referee for leading information and communication technology (ICT) economics and strat-egy journals Bruno holds an MSc in Science and Technology Policy from SPRU, University of Sussex and an MA in Economics from Sant’Anna School of Advanced Studies and University of Pisa He has also briefl y worked for NERA Economic Consulting and for Ofcom

Erik Bohlin is currently Head and Professor in Technology Assessment

in the Division of Technology and Society, Department of Technology Management and Economics at Chalmers University of Technology He has published in a number of areas relating to the information society – policy, strategy, and management He is Chair of the International

Telecommunications Society and Chief Editor of Telecommunications Policy He served as Special Advisor to IT and Media Commissioner

Viviane Reding of the European Commission in 2008–2009 He obtained his graduate degree in Business Administration and Economics at the Stockholm School of Economics (1987) and his PhD at Chalmers University of Technology (1995)

Marcel Boyer holds a PhD in Economics from Carnegie- Mellon University

He has taught economics at York University (1971–73), UQÀM (1973–74) and at the University of Montreal (1974–2008) He held the Bell Canada Chair in Industrial Economics in the Department of Economics at the University of Montreal (2003–08) and the Jarislowsky–SSHRC–NSERC (Social Sciences and Humanities Research Council; Natural Sciences and Engineering Research Council of Canada) Chair in Technology and International Competition at l’École Polytechnique de Montréal (1993–2000) He is presently Emeritus Professor of Economics at the Université de Montréal, Fellow of the C.D Howe Institute, Centre interuniversitaire de recherche en analyse des organisations (CIRANO) and Centre interuniversi-taire de recherche en économie quantitative (CIREQ), Academic Affi liate of The Analysis Group, Senior Economist at the Montreal Economic Institute, member of the board of the Agency for Public–Private Partnerships of Québec, member of the Industry Canada Advisory Committee on Business Strategies and innovation, member of the Governance Committee of the Sustainable Development and Socially Responsible Investment Chairs (École polytechnique de Paris and Université de Toulouse) Marcel Boyer has received numerous prizes for excellence in research He is author or co- author of over 250 scientifi c articles and papers and public and private reports Marcel Boyer has acted as an expert economist on behalf of several national and international corporations and government organizations, and has testifi ed as an expert witness before various organizations and tribunals

Peter Curwen is Visiting Professor of Telecommunications Strategy at the

Strathclyde Business School, Glasgow and also researches and publishes

on a private basis He was previously Professor of Business Economics at Sheffi eld Hallam University His primary research interests concerns the manner in which a rapidly changing environment aff ects the structure of the mobile telecommunications industry and its strategic implications for major companies in that sector He has published three books on telecom-

munications, including Telecommunications Strategy: Cases, Theory and Applications (Routledge, 2004) with Jason Whalley.

Dieter Elixmann is head of the Corporate Strategies research group

at Wissenschaftliches Institut fur Kommunikationsdienste (WIK), Bad

Honnef, Germany He has been with WIK since 1985 He is also head

of the Telecommunications Markets research group His recent research

focuses on econometric estimation of production structures of Deutsche

Telekom, demand analysis in the telco sector, internationalization and

globalization in the telco sector, and multimedia business strategies

Morten Falch is Associate Professor at the Center for Communication,

Media and Information Technologies (CMI) located at Copenhagen

Institute of Technology, Aalborg University, Denmark He holds a

Bachelors degree in Mathematics, a Masters degree in Economics and

a PhD Since 1988 his research has been specialized in socio- economic

issues related to information and communication technologies This

includes economic analysis of applications and telecommunication

net-works and services (for example cost analysis of telecom netnet-works),

e- government, regulation of the telecom sector (in particular regulation

of interconnection), information and communication technology (ICT)

and industry policy, the role of competition in innovation of new

serv-ices and spectrum management He has participated in many European

Union (EU) funded research projects in the telematics area He has also

conducted a large number of consultancies for national and international

organizations such as the International Telecommunication Union (ITU),

the United Nations Conference Trade and Development (UNCTAD), the

World Bank and the national telecom agencies in Denmark, Norway and

Sweden

Claudio Feijóo is Professor at Universidad Politécnica de Madrid, Spain

where he researches on the future socio- economic impact of emerging

information society technologies He recently returned from a highly

rewarding two years as a visiting researcher at the Institute for Prospective

Technological Studies of the Joint Research Centre of the European

Commission Since 1993 he has been involved in telecommunications and

information society development from the academic, the practical

imple-mentation and the public administration perspectives

Hidenori Fuke has been Professor of Info- Communications Industry at the

Faculty of Global Media Studies, Komazawa University in Tokyo, Japan

since 2007 He has done extensive research on the info- communications

industry and regulatory policy in the industry as a member of the board

of directors at InfoCom Research and Professor at Kansai University in

Osaka He received his BA in Economics from Tokyo University, and M

Litt from Glasgow University He also received a PhD in International

Public Policy from Osaka University His major areas of specialization

include the economic analysis of the telecommunications industry and

regulatory policy He has written many papers and books in this area in both Japanese and English.

Anastassios Gentzoglanis holds a PhD degree from McGill University,

Canada and is a full Professor of Economics and Finance at the University

of Sherbrooke He teaches and conducts research in the area of regulatory economics He is frequently invited to teach and work on research projects related to the economics of regulation and new technologies in Europe, Asia, Central and Latin America and Africa He has also received many funded research grants from both domestic and international organiza-tions, published in a number of high- quality scholarly journals and partici-pated in many international conferences In June 2008, Dr Gentzoglanis organized and chaired the 17th Biennial conference of the International Telecommunications Society (ITS) in Montreal He is also director of the Centre for the Study of Regulatory Economics and Finance (CEREF) and

he organizes courses for executives in the area of regulation of public ties for the Francophonie

utili-Toshiya Jitsuzumi is a Professor of Industrial Policy at the Faculty of

Economics, Kyushu University, Japan He has earned an LLB from the University of Tokyo, an MBA from New York University, and a DSc from Waseda University, Japan Prior to starting his academic career

in 2000, Professor Jitsuzumi had served for 15 years at the Ministry of Post and Telecommunications (now Ministry of Internal Aff airs and Communication), Japan The research topics of his interest include public economics and communication and Internet economics During 2007–08, he was a visiting scholar at the Columbia Institute for Tele- Information (CITI), Columbia University, as an Abe Fellow sponsored by the Social Science Research Council/Japan Foundation Center for Global Partnership His

research work has appeared in various journals, including Telecommunications Policy, Foresight and Socio- Economic Planning Sciences He is a member of

several academic societies, including the International Telecommunications Society and the Regional Science Association International

José- Luis Gómez- Barroso is Associate Professor at the Universidad

Nacional de Educación a Distancia (UNED), Spain He holds a PhD in Economics, as well as a Masters in Telecommunication Engineering and

a Masters in Law His teaching and research interests lie in the evolution

of the information society and electronic communications under the triple

perspective of technology, economy and regulation, Dr Gómez- Barroso

has contributed signifi cantly in the fi eld of telecommunications by ing many papers in academic journals and international conferences on the subject

author-Anders Henten is Associate Professor at the Center for Communication,

Media and Information technologies (CMI) at Aalborg University,

Denmark He is a graduate in Communications and International

Development Studies from Roskilde University in Denmark and holds

a PhD from the Technical University of Denmark His main areas of

research are service innovation and internationalization, regulation of

communications, standardization, and socio- economic implications of

information and communication technologies, including e- business and

business modeling Anders Henten has worked professionally in the areas

of communications economy and policy for more than 20 years He has

participated in numerous research projects fi nanced by the European

Community, the Nordic Council of Ministers, Danish research councils

and ministries, and in consultancies, fi nanced by the World Bank, the

United Nations Conference on Trade and Development (UNCTAD), the

International Telecommunication Union (ITU), Danish ministries, and

so on He has published nationally and internationally – more than 200

academic publications in international journals, books, anthologies,

con-ference proceedings, and so on

Bronwyn Howell is General Manager of the New Zealand Institute for the

Study of Competition and Regulation, and a faculty member of Victoria

Management School, Victoria University of Wellington, New Zealand

She teaches and researches in the areas of institutional economics, the

information economy and regulation, with specifi c interests in the

devel-opment, implementation and performance of institutions and policies

governing the operation of information technology and

telecommunica-tions markets

Kenneth Jull practices at Baker & McKenzie LLP, Toronto offi ce, in the

area of risk management strategies to promote regulatory and

corpo-rate compliance Mr Jull is the co- author with Justice Todd Archibald

and Professor Kent Roach of Regulatory and Corporate Liability: From

Due Diligence to Risk Management He is an Adjunct Professor at the

University of Toronto, Faculty of Law where he teaches ‘Financial

Crimes’ Mr Jull has an appointment to the Faculty of Graduate Studies at

Osgoode Hall Law School, where he is the Director of the part- time LLM

specializing in civil litigation and dispute resolution

Arata Kamino has been an Executive Researcher of the global information

and communication technology (ICT) industry study group at InfoCom

Research, Inc in Tokyo, Japan since 1995 He has been responsible for

comprehensive analysis of ICT industry using method of comparative

study between major overseas countries and Japan His main interests

cover policies, regulations, market structure and corporate strategies in the fi eld of domestic and global ICT He received his BA in Economics from Tokyo University He has written many papers for books, academic journals and magazines.

Scott Marcus is a Senior Consultant for WIK- Consult GmbH, Germany,

a research institute in economics and regulatory policy for network tries Previously, he served as Senior Advisor for Internet Technology for the US Federal Communication Commission (FCC) Prior to that, he was the Chief Technology Offi cer (CTO) of Genuity, Inc In 2004, Scott was attached to the European Commission (DG INFSO – Directorate General for information Society and Media) as a Transatlantic Fellow

indus-of the German Marshall Fund indus-of the United States Scott is also a newly appointed Fellow of GLOCOM (the Center for Global Communications,

a research institute of the International University of Japan), and a Visiting Fellow of the University of Southern California’s Center for Communication Law and Policy He is co- editor for public policy and

regulation for IEEE Communications Magazine He served on the board

of the American Registry of Internet Numbers (ARIN) from 2000 to 2002, and on the Meetings and Conference Board of the Institute of Electrical and Electronics Engineers (IEEE) Communications Society from 2001

to 2005, and as Chair of the IEEE Committee on Network Operations and Management (CNOM) He is a Senior Member of the IEEE He is the author of numerous papers and of a book on data network design:

Designing Wide Area Networks and Internetworks: A Practical Guide

(Addison Wesley, 1999)

Sergio Ramos gained his PhD degree in Telecommunications Engineering

from the Universidad Politécnica de Madrid, and he holds an MBA from the Stockholm School of Economics He worked for the European Commission as Resident Twinning Adviser of a European Commission (EC) Twinning Project for the Public Utilities Commission of Latvia,

to design and monitor the transposition process of the European Union (EU) framework into Latvian legislation He is currently Deputy Director

at the Spanish Association of Telecommunication Network Operators (REDTEL)

Andy Reid has the role of Chief Network Services Strategist at British

Telecom (BT) Prior to this position he has worked in technical as well as product marketing roles in BT His professional interests and expertise cover telecommunications technologies, network architecture, service pricing, and links to regulatory and competition law microeco-nomic analysis He made major contributions to the development of

the telecommunications transmission technology including SONET/SDH

(synchronous optical networking/synchronous digital hierarchy) and more

recently on Ethernet standards, and has co- authored two major textbooks

in this area as well as numerous papers for professional standards bodies

and technical forums

Paul Richards is a Regulatory Economist and has worked for British

Telecom (BT) since 1997 Prior to this position he worked in a variety

of private and public sector roles in the areas of economic modeling and

regulatory analysis

Olaf Rieck is an Assistant Professor at Nanyang Business School,

Singapore His research focuses on telecommunications economics and

policy, as well as on corporate strategy for telecommunications service

providers Dr Rieck studied Industrial Engineering and Management

(Universität Karlsruhe/Germany, University of Auckland/New Zealand)

and Economics (University of British Columbia/Canada) and holds a PhD

in Business Administration (University of British Columbia) Previous

to his academic career he worked for Mercedes- Benz AG on strategic

information technology (IT) projects in the areas of telecommunications

and business process re- engineering Dr Rieck teaches an introduction to

IT, telecommunications industry management, and mobile commerce to

undergraduate students and MBAs He has also held executive teaching

assignments with Korea Telecom and LG

Stephen Schmidt is Chief Regulatory Legal Counsel at TELUS

Communications Company His responsibilities include regulatory,

legal and policy submissions to the Canadian Radio- television and

Telecommunications Commission (CRTC), the Federal Court of Appeal,

the Supreme Court of Canada, the Competition Bureau and other

govern-ment bodies Prior to joining TELUS, he worked at AT&T Canada and

ACC TelEnterprises, with a focus on regulatory and legal matters

respec-tively Mr Schmidt holds a BA (with Distinction) from the University of

Toronto and an LLB from the University of Manitoba He is on the board

of directors of the International Telecommunications Society and lives in

Ottawa, Canada

Martyn Taylor is a Partner in the competition and market regulation team

of Gilbert & Tobin, based in Sydney He specializes in

telecommunica-tions law, antitrust law and international economic law Martyn has been

advising on telecoms law and regulation since 1995, principally within the

Asia- Pacifi c region His clients have included some of the world’s largest

technology and telecoms multinationals Martyn has multiple

postgradu-ate qualifi cations in law, corporpostgradu-ate fi nance and economics, including a

PhD He has published extensively, including a book titled International Competition Law (Cambridge University Press, 2006) and as a contribu- tor to Merger Control Worldwide by Dabbah and Lasok (eds), Cambridge University Press, 2008 He is currently the technology editor for the Australian Business Law Review.

Consulting, where he heads the Communications Practice and the Boston offi ce He received a BA in Economics from Harvard, an MA in Statistics and a PhD in Economics from Berkeley He taught economics, sta-tistics, and econometrics at Cornell, Louvain and MIT and published research in economics, econometrics and telecommunications policy at Bell Laboratories and Bellcore At NERA, he has worked and pub-lished extensively in telecommunications economics on such issues as access charges, costs, regulatory reform, productivity, competition policy, mergers, vertical integration, interconnection pricing and antitrust issues

He has testifi ed on telecommunications economics before numerous domestic and foreign regulatory authorities, courts and legislative bodies

Karsten Vandrup, Director at Litepoint Europe, is currently responsible

for Litepoint’s sites in Israel and Denmark Prior to this position, Vandrup was Vice- President of Engineering at Litepoint’s Headquarters in Silicon Valley, California Before joining Litepoint, Vandrup held several posi-tions at Nokia including Senior Research Manager in the Nokia System Research, Manager of Strategic Planning in the Nokia Research and Technology Access (Espoo, Finland), Global R&D Cooperation Manager

in the Nokia Research and Education Policy Department at the Nokia Head Offi ce (Copenhagen) As a part of the latter, Vandrup was a member

of the Career- Space Consortium He started his career in Nokia as DSP

Design Engineer, later Engineering Manager, and holds an geniør degree in Telecommunication and Electronics from the Technical

akademiin-University of Denmark, supplemented with studies at INSEAD, the University of California, Los Angeles (UCLA) and the Swedish School of Economics and Business Administration in Helsinki

Jason Whalley is Reader in the Department of Management Science,

University of Strathclyde, Glasgow His research interests include the internationalization of mobile operators, as well as the development of telecommunications policy in mountainous developing countries In addi-tion, his research also examines the diff usion of broadband and the regula-tory measures taken to encourage its uptake

Patrick Xavier is Director of Info- Comm Strategies and Adjunct Professor

of Communications Economics, Centre for Communications Economics

and Electronic Markets, Curtin University of Technology, Australia He

has served as consultant to a wide range of national and international

agencies, including the Organisation for Economic Co- operation and

Development (OECD), World Bank, Asia- Pacifi c Economic Cooperation

(APEC) and International Telecommunication of Union (ITU)

Dimitri Ypsilanti is head of the Information, Communications and

Consumer Policy Division in the Directorate of Science, Technology and

Industry at the OECD He has specialized in telecommunication policy

and regulation

xvi

Foreword

TELUS is very proud to have been the corporate host, along with the Université de Sherbrooke as the academic host, of the 17th Biennial Conference of the International Telecommunications Society (ITS): The Changing Structure of the Telecommunications Industry and the New Role of Regulation, which took place in June 2008, in Montreal, Canada TELUS invited the ITS conference to Canada because TELUS believes in fostering high- quality analysis of important public policy issues aff ecting telecommunications both in Canada and around the world

More than 300 delegates from more than 40 countries came together for four days in Montreal to share new ideas and approaches for dealing with pressing issues in telecommunications, including technological change, new sources of competition, new theoretical developments, and the ways

in which government policy can best respond to these issues

This book fl ows directly from the ITS conference and eff ectively tures the character of the conference in microcosm The 15 chapters selected by Drs Gentzoglannis and Henten refl ect the rich, international character and professional diversity of ITS and its members The present volume contains contributions from the academic, private sector and government communities, providing a crucial window into key contem-porary debates in telecommunications I am confi dent that this volume will inform and shape future debate, policy- making, business planning, research and strategic thinking

cap-Stephen Schmidt Chief Regulatory Legal Counsel TELUS Communications

Ottawa, Canada

xvii

Preface

The International Telecommunications Society (ITS) convened its 17th Biennial Conference in Montréal, 24–27 June 2008 The conference was organized by the Université de Sherbrooke, on the initiative of Professor Anastassios Gentzoglanis, Organizing Committee Chair There was also a main sponsor and corporate host – TELUS – represented by Dr Stephen Schmidt, Organizing Committee Co- chair, and supported by Organizing Committee Co- chair Stanford L Levin, Southern Illinois University at Edwardsville, and Program Chair Richard Schultz, McGill University.Looking back, it was in 1997 that a major ITS conference took place in North America The industry and research have certainly moved a long way, facing new technologies and regulatory challenges, but the critical methods and policy analyses remain The title of the conference aptly refl ected both the change and the continuity: ‘The Changing Structure of the Telecommunications Industry and the New Role of Regulation’.The conference was a signifi cant success The theme attracted a large amount of submissions In fact, it drew one of the largest pool of sub-missions to an ITS conference ever, and the was one of the largest ITS conferences ever from all over the world Conference evaluations were very positive after the event The conference also brought to the fore new research and policy agendas

This book is based upon selected and edited conference papers The editors have been careful to select a wide range of chapters in order to capture the convergence issue from a number of perspectives, and to achieve a historical state of the art The volume succeeds in providing a multifaceted and rich view of both changing industry structure and for new roles of regulation The editors and the contributors are to be con-gratulated for a timely book

Erik Bohlin ITS Chair Professor, Chalmers University of Technology, Sweden

1

Evolving technologies, competition and the new role of regulation: introduction and synopsis of the book

Anastassios Gentzoglanis and Anders Henten

Regulation of the telecommunications industry has traditionally focused

on the supply side of the industry, chiefl y the retail segment of the market Since liberalization of the industry has begun, regulation has gradually shifted to the wholesale segment of the market The regulatory agencies have intervened to regulate access and facilitate entry and, hopefully, investment in infrastructure This asymmetric regulation has had mixed results As an answer to that some regulatory agencies have abandoned wholesale regulation (the case of the USA) and some others have shifted from light- handed regulation to heavy- handed regulation with manda-tory unbundling of the local loop (the case of Australia) Other regulatory agencies have moved to a more gradual type of wholesale deregulation on the grounds that competition in this segment of the market has not yet fully developed, but as it grows the need for regulation is reduced (the case

of Europe and Canada)

Paradoxically, as competition increases in the retail segment of the market, consumers are increasingly ‘impaired’ in their capacity to make decisions in their best interest The array of services and suppliers that competition makes available increases consumer choice and with it the dif-

fi culties for them to make rational decisions with respect to services, quality and prices, and so on If consumers are able to make rational decisions, competition among new service suppliers will increase But if consumers are unable to make rational decisions because of too much choice or poor quality of information or misinformation, competition is dampened and the competitive process is jeopardized In that context, regulation must emphasize the demand aspects of the industry and consumer protection should become a priority for the regulatory agencies

Further, next generation mobile networks (NGMNs) depend heavily

on the existence of ubiquitous broadband (BB) connectivity, tions and content Broadband deployment is uneven within and among

applica-countries Without an adequate deployment of BB technologies the nomic growth of the countries is jeopardized Apparently, regulation is one important factor determining the pace of deployment of BB technolo-gies The regulatory model chosen may impact positively or negatively on investment in BB infrastructure Additionally, ubiquitous BB and mobile applications create new needs for spectrum availability and spectrum management becomes an important function of the regulatory agencies, particularly at this time of rapid evolution of the mobile technologies The NGMNs require a new distinctive regulatory and policy framework which will deal explicitly with the issues and opportunities of the next phase of wireless technologies.

eco-Regulation evolves and its evolution is the result and the impetus of change of the telecommunications industry structure and performance

As the industry becomes more mature and incumbents and new entrants get more familiar with the rules of the game, they become able to develop strategies which increase the value of the fi rm In a competitive context telecommunications fi rms will invest only if their investment achieves an average return which is greater than the weighted average cost of capital (WACC) Projects with positive net present values (adjusted for specifi c risks) are value accretive and therefore it is worth undertaking them They will bring more wealth to stakeholders through dividends and capital gains In a regulatory context the investment decisions, particularly for projects of high risk (sunk investments in BB and NGMNs, for instance) may not occur or may be ‘unreasonably’ delayed Thus, under specifi c reg-ulatory frameworks, deployment of BB technologies may not be optimal, NGMNs may not roll out adequately or optimally, consumers may be

‘impaired’ or harmed; and these are not necessarily the results the tory authorities have sought to achieve in the fi rst place Regulation thus has a role in an evolving global telecommunications industry

regula-This was precisely the main theme of the International Telecommunications Society (ITS) 17th Biennial Conference which was held in Montreal from 24 to 28 June 2008 This book has been prepared

to highlight the main arguments and the richness of ideas about the new issues which arise from the evolving structure of the global telecom-munications industry and the role of regulation The 15 papers from the conference have been peer reviewed and they meet the stringent criteria of the scientifi c papers and those of Edward Elgar Publishing

We are grateful to the publisher and particularly to Alan Sturner for his meticulous work in the preparation of this volume We also thank our colleagues and authors of the 15 chapters of this volume for having contributed high- quality chapters As organizer of the 17th Biennial ITS Conference, Dr Gentzoglanis thanks TELUS, and particularly

Stephen Schmidt, for contributing fi nancially to the publication of this book and its contribution, fi nancial and in kind, in being a corporate host for the very successful ITS Conference Gratitude is also extended

to the Université de Sherbrooke, Offi ce of Research and the Faculty of Business Administration for their fi nancial contribution and support Dr Gentzoglanis thanks the SSHRC (the Social Sciences and Humanities Research Council of Canada) for its generous contribution to the organi-zation of the ITS Conference and the publication of this book He also thanks Emmanuella Gentzoglanis and Andrianiaina Rajaobelina for their help and comments and suggestions This book could not exist

without our many devoted manuscript peer reviewers Sincere thanks to

all the reviewers who dedicated their time and shared their knowledge with the authors and the editors of this book

The fi rst chapter by Anastassios Gentzoglanis and Elias Aravantinos provides an extensive review of the literature on the role of regulation in the deployment of broadband technologies The chapter starts out with

a general introduction to the role of regulation in telecommunications markets and, furthermore, as an input discusses the relationship between competition and investment It is emphasized that this depends on the degree of competition and the development of the market An inverted U- shaped curve is suggested as describing the implications of competition

on investment More specifi cally, the chapter examines whether and how broadband development can be promoted by means of regulation Two diff erent types of broadband competition are discussed, service- based competition (SBC) and facilities- based competition (FBC) FBC is gen-erally seen to be the most desirable situation or goal as FBC provides a dynamic effi ciency while SBC is seen to lead to static effi ciency

The chapter gives focus to the ongoing discussion as to whether the static effi ciency associated with SBC can lead to the dynamic effi ciency related to FBC This is the proposition advanced by the theory of the ladder of investment (LoI) According to this theory, new operators to the market will not generally begin with investing in infrastructure but will be more inclined to enter the market using a service- based model Eventually, such new operators will start investing in infrastructure when they acquire

a better understanding of the market conditions Regulation can facilitate this process by setting the right entry conditions, for example, by start-ing with a relatively low access fee which is later on increased as the new entrants settle in the market

The chapter examines the theoretical aspects of the ladder of investment theory and also refers to papers presenting empirically based analyses of the tenability of the theory Moreover, the chapter introduces the issue

of intermodal or interplatform competition Even though this issue is not

absent per se from the LoI theory, nonetheless, when debating LoI, there

is a tendency to confi ne it within a single type of access network The chapter by Gentzoglanis and Aravantinos contributes to the debate by synthesizing the main arguments pertaining to the LoI theory In addition, the chapter underlines the fact that BB development in diff erent countries

is not the same and this is attributed to the diff erences in the countries’ regulatory policies and the type of their initial technological infrastruc-ture It should be expected therefore that the implications of a LoI policy will be diff erent for countries with basically just one type of infrastructure (PSTN – public switched telephone network) and countries with compet-ing infrastructures (for example, PSTN and cable)

On the basis of the theoretical propositions and the empirical analyses referred to, the chapter concludes that the actual LoI policies implemented

so far have not been successful, but one cannot dismiss the possibility that a LoI policy can work This presupposes, however, that the timing is right and the policy is fi ne- tuned precisely with respect to the types of new entrants Regulators should then ask: Are they fi rst- movers or second- movers? But this sets very high requirements on regulation

In the second chapter, William Taylor discusses the nature of dal competition and its implications for regulation of wholesale services in the context of the US, but given the ubiquity of intermodal technologies, the conclusions of his analysis can fi nd a wider application Taylor notes that demand for wholesale services is a derived demand, in the sense that wholesale services can be considered ‘essential’ in the provision of retail services in the downstream market Competition among retail service providers may curtail retail prices but there is a likelihood of anticom-petitive conduct when the incumbent local exchange carrier (ILEC) is not regulated in the form of mandatory unbundling and provision of essential wholesale services at regulated prices

intermo-When competition is fi erce among dependent wireline competitive local exchange carriers (CLECs), their returns in the retail market cannot be higher than normal and therefore the ILEC monopolist of wholesale wireline services cannot behave anticompetitively and charge high prices for its essential wholesale services Since it cannot exercise its market power at the wholesale level, its profi ts will also be normal This may have some undesirable eff ects on investment in infrastructure The man-datory unbundling of ILEC facilities at regulated rates would reduce the incentive of retail wireline competitors to invest in their own network infrastructures and compete on an end- to- end basis At the same time, the requirement that ILEC facilities be shared with competitors reduces the ILEC’s incentives to introduce and roll out that infrastructure, particu-larly for services associated with investment that will, eventually, be sunk

Further, Taylor casts doubts about the necessity of price regulation at multiple stages of production (wholesale and retail) Using examples from the US, he demonstrates that regulation at the wholesale and retail levels becomes a source of unintended consequences in competitive markets Thus, where intermodal competition is present the ILEC’s capacity to exercise its market power is nil and therefore customers cannot be harmed

Accordingly, ex ante economic regulation cannot lead to an increase in

social welfare and there are not any effi ciency arguments that can justify the presence of economic regulation at the wholesale level In the absence

of an ex ante wholesale regulation, customers can be protected from competition authorities which will respond ex post to specifi c complaints

of anticompetitive behavior on behalf of ILEC Thus, where intermodal

competition exists, ex post regulation is a better vehicle to protect

custom-ers than ex ante regulation

In the third chapter Martyn Taylor delves into the question of how to strike a balance between competition, investment in infrastructure and reg-ulation Using the conventional fi nancial framework for project appraisal, Taylor argues that the returns that a fi rm expects to get from investment in infrastructure are constrained by market conditions (consumers’ willing-ness to pay), the presence of substitutable services (wireless broadband, for instance) and regulatory policies These factors increase the perceived risk of the investment in next generation networks (NGNs) and the latter will not materialize unless a fi rm has reasonable certainty that it will earn

a return that exceeds its cost of capital over the project’s life

Taylor argues that well- intended regulation can have unintended adverse eff ects, chiefl y by providing disincentives to investment due to an increase

in perceived risks particularly when regulation is asymmetric Network unbundling and cost- based access regulation are two cases in point While they contribute to allocative (static) effi ciency by increasing the level of competition to which incumbent network owners are subject, they may

do so at the expense of long- term investment incentives The total element long- run incremental cost (TELRIC) approach has been used in the US

and its variant – total service long- run incremental cost (TSLRIC) – in

Australia as a mechanism to regulate prices based on the incremental costs faced by an effi cient cost- minimizing fi rm with an optimally con-

fi gured network that uses the best available current technology Under the TELRIC approach, any investment in network infrastructure would simply earn enough to cover the project’s weighted average cost of capital (WACC), bringing thereby the net present value (NPV) of the project near zero The fi rm would not have an incentive to invest in infrastructure and the desirable long- term eff ects of dynamic competition are sacrifi ced This was the case with Australia which has applied excessive regulation

using the TSLRIC approach The application of TSLRIC pricing by the Australian Competition and Consumer Commission (ACCC) has deterred investment in infrastructure and investment fl ows have been distorted away from regulated (and potentially regulated) services towards unregu-lated services and infrastructure The negative eff ects of excessive regula-tion are illustrated by the example of failed negotiations between Telstra (Australia’s incumbent telecommunications carrier) and the Australian government when the former was seeking exceptions from the current regulation in order to implement fi ber to the node (FTTN) upgrade investments Telstra’s withdrawal forced the government to intervene and proceed with the investment in partnerships with the private sector Taylor suggests that policies such as access holidays and public–private partner-ships (PPPs) may be some interesting techniques to provide incentives to

fi rms to invest in NGN infrastructure

Patrick Xavier and Dimitri Ypsilanti’s chapter (Chapter 4) examines the demand side of the telecommunications industry Since liberalization, the number of new entrants in telecommunications markets has increased con-siderably and service competition has grown signifi cantly In this context, Xavier and Ypsilanti believe that the consumers’ rational decision- making mechanism is seriously impaired amidst the plethora of services and pack-ages off ered by the telecommunications fi rms This contrasts with the neoclassical view of consumer behavior according to which consumers are able to make rational decisions and choose, all the time, the goods and services which maximize their utility In reality, consumers’ behavior departs signifi cantly from the traditional rational behavior assumed by the conventional neoclassical economic theory By using the behavioral approach to consumer behavior and statistical examples, the authors dem-onstrate that consumers choose telecommunications services for a number

of reasons which may not be characterized as a ‘rational’ behavior in the sense of classical theory For instance, consumers are discouraged from switching to a diff erent service provider because of the perceived or real high switching costs (lengthy and cumbersome switching procedures; early exit charges; confusing products and non- transparent pricing; technical incompatibility of equipment; long- term deals that lock consumers into lengthy relationships with their providers)

The barriers to switching service providers can also have an impact on the supply side of the industry New entrants could be deterred from enter-ing the market, fearing that they will be unable to persuade customers to switch from their existing provider ‘This could diminish contestability and the eff ectiveness of competition and limit the benefi ts that consumers would otherwise derive from it’, say Xavier and Ypsilanti The statistics from various countries (the UK, Portugal, Australia and the US) and

from various segments of the market (fi xed line, mobile and Internet) illustrate that competition has made the telecommunications industry quite complex (on the demand side) and consumers facing this complexity prefer to adopt consumption strategies which are not necessarily in their best interests Indeed, consumers will prefer to stay with what they know (no switching) instead of choosing a cheaper alternative.

Xavier and Ypsilanti’s analysis is consistent with the argument of behavioral economics according to which an ‘endowment factor’ serves

to infl uence decisions in favor of the present provider In that context, regulation has an important role Regulators have to take a number of measures to assist consumers to make ‘rational’ decisions in their best interests Educating consumers; increasing awareness about new services and options; requiring that all major operators provide comparable and complete information about the services, quality and prices; targeting information to most vulnerable consumers; could be some of the new responsibilities of the regulatory agencies in an era of increased competi-tion in the telecommunications industry

In the fi fth chapter Marcel Boyer develops a methodological work which is used to characterize properly the level of competition in the telecommunications industry, particularly in the residential local access market He argues that failing to recognize and properly evaluate the nature of competition in the telecommunications industry may lead to an ineffi cient use of regulation In competitive telecommunications markets, regulators play a new role and must undertake three new functions, acting as: generators of information for the consumers; managers of the rules of competition among telecommunication players; and promoters of effi cient investment programs

frame-Boyer argues that the telecommunications industry has changed matically from the mid-1990s onwards and the technological changes have made it appear much more like an emerging industry than a mature industry Therefore, the traditional measures used to determine the level of completion in the industry are less relevant New measures must be used to determine the level of competition in the industry For instance, the use of market shares as an index of competition may make sense in mature indus-tries where there is a relative stability of market conditions, but applying

dra-it to the telecommunications industry characterized by a rapid pace of changes may be misleading Further, even though the pricing schemes used by competitors are diff erentiated so that switching among service providers becomes diffi cult on the part of consumers, the lack of switch-ing does not make the telecommunications markets less competitive On the contrary, the very existence of price diff erentiation indicates that the telecommunications industry is indeed competitive Without it, prices

would have been quite low, making the provision of new services a losing opportunity inviting exit from the industry and an ultimate reduction in the number of fi rms in the industry (less competition).

Although competition may be limited in terms of prices, cation service providers may compete in a number of other areas, such as coverage, type of transmission (digital or analogue); interplatform provi-sion of services (DSL – digital subscriber line; cable modem), security, and so on Therefore, traditional measures of measuring competition such

telecommuni-as relevant market, relevant (substitutable) services available to ers, relevant set of actual or even potential competitors, and so on, are less relevant during this changing phase of the telecommunications industry

consum-In that context, Boyer proposes a diff erent regulatory mechanism He argues that, to achieve a proper balance between static (short- term) and dynamic (long- term) goals, regulators must rely on competitive proc-esses, in a sense that instead of micro- managing prices and quantities, they must make sure that these prices and quantities emerge from a competitive environment Thus regulators have an essential role: they have to act as effi cient generators of social effi ciency by safeguarding the competitive process in the telecommunications industry This is achieved

by making sure that inter- access to essential facilities is available at discriminatory conditions and prices so that only new, more effi cient entrants enter the industry In that way, consumers benefi t from the entry

non-of effi cient competitors Thus, viewing the emerging structure of the ecommunications industry as a process, regulators must act as: (1) trusted generators of information for consumers; (2) managers of fair conditions for access to the local loop; and (3) promoters of investment programs which should contain pricing rules designed to include all network access costs and guarantees safeguarding the integrity and reliability of the entire network

tel-The sixth chapter, contributed by Kenneth Jull and Stephen Schmidt, intends to off er an alternative framework that can be used as a basis for new approaches to the regulation of the telecommunications industry The

authors make a distinction between ex ante and ex post regulation and they use examples from other industries to illustrate that ex post regulation

can be an option for the telecommunications industry Traditionally, the

regulatory systems in the telecommunications industry have been ex ante

systems, but the latter are increasingly criticized as ineffi cient since they are perceived as being a blunt ‘one- size- fi ts- all’ mechanism In Canada, there are suggestions (Telecommunications Policy Review Panel) to replace this mechanism by a new regulatory framework which would set out broad

principles to prohibit anticompetitive conduct instead of detailed ex ante

rules

Jull and Schmidt propose three principles that ought to govern the

balance between ex ante and ex post systems in the application of the

regu-latory policies According to them, regulators focus ought to be on: (1) the prevention of harm and attainment of specifi c social objectives; (2) strate-gies for managing risks; and (3) the adoption of fl exible mechanisms (use

of multiple models) to refl ect the diff erent needs of the stakeholders

Each system, being ex ante or ex post, might have two subsets within it,

being rules- based and principles- based A rules- based system (whether it

is ex ante or ex post) is better suited to industries which are stable,

techno-logically simple and where the economic and fi nancial stakes are relatively low The telecommunications industry is undergoing rapid technological and market structure changes, so this industry is neither simple nor stable and the economic stakes are very high Because rules are infl exible, they can be overtaken by changing circumstances in fi elds such as telecom-munications In such a context, a principles- based approach may be more appropriate As a matter of fact, the choice between principles- based and rules- based systems is a function of social and economic priorities and the level of maturity of the industry Rules- based systems are more suit-

able for cases of social regulation where serious harm may be prevented

whereas principles- based systems are generally more suitable for cases of

economic regulation Jull and Schmidt propose the same type of regulation

for the Canadian telecommunications industry as the one proposed by Boyer in Chapter 5 but each author draws his conclusions using a diff erent analytical framework

The seventh chapter by Olaf Rieck analyzes, from the industry’s spective, the strategic activities of the telecommunication carriers to integrate vertically the various segments of the value chain Few studies examine quantitatively the new strategic directions that telecommunica-tion fi rms take in the rapid changing environment, and Rieck’s study falls into this category He divides the telecommunications industry into

per-fi ve layers and then uses Fransman’s (2007) value chain simpliper-fi ed layer model to assess empirically the impact of various strategic initiatives on the valuation of telecom operators Rieck is interested in the evolution of the structure of the telecommunications industry and in the strategies of industry players to extend their market power to more layers This is quite interesting when one views the recent changes in the telecommunications industry structure and its trend to convergence

Nowadays, the telecommunications industry has many fi rms which entered from outside the traditional telecommunications services industry, and many are quite new or did not even exist back in 1998 For instance, Google emerged as world leader for online searches and has established itself as a signifi cant player in the telecoms value chain Google is also

involved in the roll- out of broadband infrastructure and the provision of content Apple launched the iPhone which threatens various traditional players in the value chain By off ering hand phone devices, Apple has eff ectively become a new player in the hand phone equipment market (Layer 1) By tying Apple’s handsets to iTunes (Layer 4) and by strik-ing content deals with content providers (Layer 5), Apple has extended its market power in almost all layers of the value chain Nokia and Sony Ericsson have followed Apple’s lead by launching their own content plat-forms Traditional telecommunications carriers, while under threat from all sides to be reduced to ‘bit- pipes’, have tried to counter the threats by engaging in activities in vertically related markets This includes initiatives like joining the open handset alliance, the development of mobile portals,

or striking deals with content providers such as to strengthen their tion in the content integration layer Do these strategies help to increase the telecommunications fi rms’ reach and market power, or will they reduce their role in the future? Rieck answers these questions by examining the reactions of fi nancial markets to the strategies adopted by the telecom-munications companies, particularly Mergers and Acquisitions (M&A), after rival fi rms have announced their decisions to extend their reach in the vertical value chain of the industry

posi-Chapter 8, authored by Bronwyn Howell, asks the question whether an

industry- specifi c regulatory regime (a telecommunications regulator) is more able to pursue an economic effi ciency (static and dynamic) objective than a competition authority (non industry- specifi c) without falling into the trap of regulatory capture To answer this question, Howell examines New Zealand’s telecommunications sector in the 1990s and 2000s She notes that the initial goal of New Zealand’s government was to preserve the telecommunications industry’s long- run incentives to invest in new networks and technologies using a ‘light- handed’ regulatory regime Unfortunately, the objectives of regulators often do not coincide with those of politicians The latter are subject to more pressures from vested interest groups and more inclined to satisfy their demands by adopting new and/or modifying existing legislation to pursue diff erent sectoral objectives Given that regulators are the agents of political principals, they may lose their power when politicians decide to change objectives and move from effi ciency objetives to distributional ones, as was the case with New Zealand’s government in the 2000s Indeed, prior to the competition law review in 2000, New Zealand had adopted ‘light- handed’ regulation for its telecommunications sector Despite this regulation, the telecommu-nications industry was far from unregulated Under a contractual arrange-ment, the incumbent monopolist, Telecom Corporation of New Zealand Limited, had rural–urban universal service obligations, free local calling

and a price cap on residential services This contractual arrangement,

known as the ‘Kiwi Share’, was a type of regulation capable of achieving

economic effi ciency

The objectives of regulation have been changed with the change of

gov-ernment in 2000 and the adoption of the Telecommunications Act in 2001

The Act established an apparently independent Telecommunications

Commission (within the Commerce Commission) and TSLRIC pricing

for ‘designated services’ This creation of an apparent independent

regu-latory body free from risk of capture by vested interests was seen as an

‘enlightened’ form of industry- specifi c regulation Nonetheless, its

inde-pendence was tested when the Commission undertook a revision of local

loop unbundling (LLU) The Commission, applying dynamic effi ciency

principles, decided not to proceed with unbundling By contrast, the

Commission used a diff erent approach when it had to examine the mobile

termination market where serious concerns have been raised concerning

the exercise of monopoly power In a surprising decision, the Commission

asserted that the sector’s objective was to pursue competition rather than

effi ciency, and therefore short- run objectives were prioritized Although

making effi ciency an explicit regulatory objective is rationally justifi ed

from an economic perspective, viewed from a political perspective the

effi ciency objective is unsustainable in the long run The New Zealand case

clearly illustrates that ex ante regulation can be inferior compared to ex

post regulation – competition law – particularly when the risks of

regula-tory capture cannot be avoided

Scott Marcus and Dieter Elixmann contribute the ninth chapter They

argue that the migration of current networks to next generation networks

(NGNs) and the issues arising from their access to the fi xed network bring

new challenges to regulators and policy makers alike For instance, the use

of local loop unbundling (LLU) as a solution to the problem of

incum-bent’s market power is particularly challenged by the migration to FTTC/

VDSL (fi ber to the curb/cabinet/very high speed digital subscriber line)

or to FTTH/FTTB (fi ber to the home or fi ber to the building) networks

The migration to NGNs is very diff erent from country to country and

these diff erences are due to the existence of various regulatory regimes and

the market evolution in each country Germany and the Netherlands, for

instance, have a regulatory framework which incentivizes incumbents to

be the ‘fi rst- movers’ to replace the traditional fi xed access network with

VDSL- capable networks In France, the NGNs’ deployment has been

undertaken by the incumbent as well as its competitors In Japan,

deploy-ment is realized not by the incumbents but by other independent

compa-nies In the US, a change in regulation in 2003 put an end to mandatory

broadband unbundling and allowed broadband services to be off ered over

cable Such a policy gave incentives to incumbent operators AT&T and

Verizon to make substantial investments in fi ber The authors compare the performance of each country trying to identify whether competition and/or regulation are the most important factors for change After having analyzed in detail the level of deployment of the fi ber- based NGNs and the regulatory regimes determining the access conditions in Germany, the Netherlands, France, Japan and the United States, they conclude that regulation is an important input in the deployment process of NGNs but there is no unique model of regulation which fi ts well to every country Rather, a number of factors – demographic, geographic and historical (availability of alternative last mile infrastructure) – determine the for-mulation of the regulatory policy Once the latter is well conceived and put into play, it is the force of competition which determines the pace of NGNs deployment Thus, country- specifi c regulation and competition are

the sine qua non conditions for a wider deployment of NGNs.

The tenth chapter is by Arata Kamino and Hidenori Fuke, and is the

fi rst of three chapters to discuss functional and structural separation and its eff ects on the roll- out of BB technologies and platforms and NGN applications Their analysis is a case study of the Japanese telecommunica-tions industry demonstrating that the deployment of BB technologies and the implementation of the world’s fastest and cheapest DSL technologies

in Japan are attributed to the particularities of the Japanese regulatory regime and market conditions Indeed, Japan was one of the fi rst indus-trialized countries to implement the most rigid open network policy for the promotion of service- based competition For instance, unbundling obligations have been imposed on both copper and fi ber loops and the competition that this regulation has entailed resulted in very low LLU fees particularly for shared lines Given the rapid increase in competition in LLU, no bitstream access competition has been developed in Japan The European Union (EU) and the US have implemented a similar type of copper LLU but they have not experienced the same degree of DSL as in Japan Although there is no simple answer to this conundrum, the authors advance the arguments according to which the diff erence in performance may be attributed to the way this regulation has been applied in diff er-ent countries and continents For instance, in Japan, the LLU fees were

fi xed at an extremely low level favoring service- based competition by new entrants In addition, the Japanese entrepreneurs may be driven more by

a kind of ‘animal spirit’ which contributes to intensify competition even when profi ts are not as high as they could be Indeed, Japanese DSL com-petitors continued to provide very cheap alternative DSL services despite long- standing fi scal losses during the early 2000s Competition is eff ec-tive and works when it is fair and transparent But it is not entirely clear

whether competition is more eff ective when conduct regulation is imposed

on the incumbent or when structural separation is applied Given that

Japan adopted in 1999 the same level of conduct regulation as the EU, but

that competition and the deployment of BB technologies have developed

faster in Japan than the EU, the authors argue that Japan’s structural

separation was an eff ective means to foster competition in the market

Nonetheless, the introduction of FTTx (fi ber to the x) and NGNs raises

additional issues in the discussion of vertical separation in the

telecom-munications industry, such as the ‘hold- up’ and ‘coordination’ problems,

and one should analyze the perspectives of competition which will emerge

between traditional carriers and content providers on the basis of new

business models before the implementation of a structural separation

Peter Curwen and Jason Whalley continue the theme of the

implemen-tation of functional separation in Chapter 11, this time using the UK

experience In the EU, the implementation of functional separation within

fi xed telecommunications markets is increasingly seen as a way to resolve

the tensions that exist between incumbent operators and those other

service providers that require access to incumbents’ networks to deliver

their own services In 2005, functional separation was implemented by

the British incumbent, British Telecom (BT), after pressure by Ofcom,

the regulatory authority, thereby making the UK the de facto European

leader in functional separation Under this agreement, BT created a new

company – Openreach – to run BT’s local access network The creation

of Openreach was possible after BT has agreed on a series of

undertak-ings Curwen and Whalley’s chapter focuses on the implementation of

these undertakings and highlights the diffi culties encountered to make the

functional separation eff ective The authors demonstrate that functional

separation is not a simple task On the one hand, regulators encountered

enormous diffi culties in making the undertakings operational and, on the

other hand, Openreach had diffi culties in implementing them

One of the major tasks in implementing functional separation is to

selectively separate those parts of the network that are diffi cult for other

operators to replicate but which they need to access in order to provide

their own services To interpreter such a separation as simply a division

of the incumbent’s wholesale and retail businesses from one another –

either in the form of accounting, corporate or type of service (local from

long distance; mobile from fi xed; local from broadband, and so on.) – is

completely misleading The way functional separation is defi ned – in a

broad or narrow sense – has important implications for the actual form

of separation Regardless of the extent to which functional separation

is implemented, regulators should provide incentives so that the

sepa-rated network could act in the interests of all its customers, internal and

external, and not in the interest of its parent company BT’s separation was driven by the need to incorporate EU directives into the UK regula-tory framework, the failure of competition to develop as anticipated in the

UK, and the establishment of Ofcom in 2003, which undertook a strategic review of the telecommunications market in order to examine the level of competition of the telecommunications industry in the UK and identify the regulatory options available Ofcom concluded that deregulation was not possible because sector- specifi c regulation was faster and more precise than the alternatives – competition Ofcom opted for a functional separa-tion called ‘real equality of access’ under which independent purchasers of BT’s wholesale products could buy these products under the same terms

as BT’s own retail operations In practice, the ‘real equality of access’ took the form of equivalence of outcome and equivalence of input Under the former, wholesale customers receive products that are comparable to those off ered to BT’s own retail operations, but the underlying processes are dif-ferent Under the latter, wholesale customers receive the same products

as BT’s own retail operations using the same set of underlying processes Despite the delays and the defi nition problems, the period subsequent to the adoption of functional separation has seen the emergence of signifi cant broadband competitors LLU played a central role in the strategies of entrants and off ered incentives to other service providers to invest in other parts of the ‘ladder of investment’ The emergence of LLU as a vehicle for the deployment of broadband services lifted the importance of BT in the market and made sure that the relationship between BT and those compa-nies using its network was functioning as planned

Toshiya Jitsuzumi is the author of the twelfth chapter This chapter provides a theoretical justifi cation and an econometric analysis of the hypothesis that LLU is contributing to the deployment of new technolo-gies such as FFTx He emphasizes the need to take into account social and economic aspects of the issues arising from the network neutrality debate, and he concentrates his analysis on the solutions that are most effi cient from an economic point of view in the short term and long term In the short term, it is assumed that entry does not occur and the market is served

by the existing network operators In the long term, entry occurs, tion is more intense and network congestion becomes a less acute issue The proposed solutions are dependent on the assumptions made

competi-For instance, when the network capacity is fi xed in the short run, the problem becomes one of static effi ciency maximization In that case network operators have market power and regulators have to fi nd effi -cient solutions to discipline incumbents who control bottleneck facilities But given that content providers depend on the presence of other fi rms in the industry in the provision of their own content, it is unlikely that they

will exercise their market power and foreclose the market from

competi-tion Indeed, in this industry, a fi rm is interested in the internalization of

complementary effi ciencies (ICE) arising from applications created by

others This behavioral characteristic – the ICE in conjunction with the

costs associated with regulation and information asymmetry – makes the

competition solution a more desirable solution than regulation Knowing

that a profi t- seeking bottleneck monopolist acts to maximize its effi ciency,

regulators should not use rules- based regulation but rather

principles-based, unless there is pressure arising from the exercise of signifi cant

market power (SMP) by some service providers ICE makes regulation less

desirable and government intervention is kept to a minimum

In the long run, the issues become more challenging than in the short

run In the long run, market conditions must be such that incumbents and

new entrants have the appropriate incentives to invest in new technologies

and maximize dynamic effi ciency Investments, being in the form of virtual

capacity, better protocols – peer to peer (P2P), proactive network provider

participation for P2P (P4P) – and/or better network management, must

be fi nanced but the problem is that, as yet, there is no any sound business

model that provides incentives to stakeholders to invest in infrastructure

Network neutrality proponents suggest the use of a subscription model –

that is, through additional monthly subscription revenues such as

of- service (QoS) surcharge from end- users – while the opponents suggest a

business model according to which investment in infrastructure is fi nanced

by charging content and application providers Neither of these models

can assure the collection of suffi cient revenues for capacity expansion or

the quality of the transmission of the content These solutions may be

utility- decreasing and unsustainable in the long term

In order to verify whether the subscription model is sustainable in the

long run, Jitsuzumi conducted a survey of Japanese broadband users using

an e- mail and web- based system His data and econometric analysis

indi-cate that such a business model is not sustainable in the long run unless

there are positive expectations concerning the future technological

devel-opments and the existence of a fund allocation mechanism His results are

quite informative and useful for other countries

Bruno Basalisco, Andy Reid and Paul Richards contribute the

thir-teenth chapter, delving into the interesting question about the eff ects of

regulation on innovation and on evolving technologies, most of which

emerge outside the domain of the telecommunications industry Departing

from the self- evident fact that the main objective of innovators is the

com-mercialization of their innovations, they argue that such

commercializa-tion is more successful when various parties across sectors coordinate

their activities The converging nature of new technologies requires a keen

interplay between innovation and regulation and makes the latter less desirable, particularly when the boundaries of the industries are merging.

In an increasingly competitive world, erstwhile competitors realize that innovation requires more than large market shares and market domi-nance, it needs ‘co- opetition’ The latter is used to create a competitive advantage in innovation processes involving all ‘co- opetitors’, that is, their network of suppliers, users and customers Collaborative ventures with other industry stakeholders lead to greater coordination of the innovative activities and reduce the uncertainty associated with technological changes across sectors Innovation interdependence delivers maximum benefi ts

to their participants The standardization of technologies through laborative ventures and interconnectivity minimize the level of risk of the entire value chain and not just one part of it But regulatory decisions may contribute negatively to the tendency of collaborative innovative agree-ments and thwart the appearance of new business models The presence

col-of network spillover eff ects in the various processes col-of innovation provide incentives for diff erent networks to interconnect Further, the presence of path- dependence in innovations implies that successful innovation by one

or more player(s) is likely to infl uence future technological choice across the industry Co- opetition, path- dependence, spillover eff ects and stand-ardization add considerable complexity to the exploitation of network- based innovations, but reduce the risks associated with innovations in converging industries Basalisco, Reid and Richards argue that the regula-tory frameworks should be operated in such a manner that diff erent risks associated with diff erent innovations are treated diff erently in regulatory terms Failing to recognize this means the current regulation may provide disincentives to fi rms to commit resources to invest in innovative activities and infrastructure

The penultimate, fourteenth, chapter by Claudio Feijóo, Sergio Ramos and José- Luis Gómez- Barroso adopts an interesting approach to examine the impact of regulation on the pace of deployment of the next generation mobile networks (NGMNs) They argue that regulators may adopt either

a stable and coherent framework which provides incentives to ment in broadband technologies, or a framework which may retard the deployment of these new technologies by amplifying all techno- economic uncertainties According to the authors, spectrum management is one

invest-of the most important areas where regulation may have an immediate impact Referring to the regulation of spectrum in the EU, the authors urge regulators to make spectrum management more fl exible in order to be able to accommodate the next generation mobile networks (NGMNs) and other fast- evolving technologies They also suggest a better harmonization

of spectrum management mechanisms across member states for easier

deployment of ubiquitous broadband infrastructure and faster

realiza-tion of the benefi ts of the NGMNs Drawing from the US experience and

the relative failure of the Universal Mobile Telecommunications System

(UMTS) as opposed to the great success of Global System for Mobile

Communications (GSM) in Europe, the authors argue that

harmoniza-tion should be subtler and focus mostly on the new condiharmoniza-tions for use of

spectrum and particularly on the ‘converging competition’ which emerges

from the fi xed–mobile convergence of NGNs Uncertainties caused by an

ill- conceived regulatory framework which does not take into account the

conditions for investment in NGMNs, or the conditions for competition

and the conditions for innovation, will retard the NGMN deployment

and it will result in a loss of the EU’s competitiveness Regulation has an

important role to play in the intensity and speed of the NGMN

deploy-ment and can contribute signifi cantly to the creation of value through the

arrival of new applications and services To do so, regulation must be swift

and adaptive to the requirements the new technologies bring about

In the fi nal chapter, Chapter 15, Morten Falch, Anders Henten and

Karsten Vandrup address the deployment of mobile data in Europe, East

Asia and North America in order to identify reasons that may explain

the diff erence in performance among these regions The chapter focuses

on the market conditions that prevail in each geographical market but

it also addresses the role of policy in the deployment of data and mobile

Internet It is argued that to promote mobile data one needs to

encom-pass a wide variety of policy areas since the development of mobile data

depends on structural factors in the markets, particularly those pertaining

to the supply side of the industry and the take- up factors like the general

e- readiness of the potential users on the demand side

The chapter notices and documents that the East Asian countries,

Japan and Korea, are ahead in the global development of mobile data

While Europe took the lead in the 1990s with the second generation GSM

system, the East Asian countries have been the front- runners with respect

to mobile data, fi rst on 2.5G platforms and later on 3G and 3.5G

plat-forms The US has been trailing somewhat behind in the 2G development

but seems to catch up regarding mobile data The question is what

expla-nations there are for this development and what one can learn from it

In order to examine this question, the chapter fi rst discusses the reasons

for the East Asian lead as compared to Europe and North America The

chapter includes explanations of a structural kind on the supply side as

well as diff usion issues on the demand side Theoretically, the chapter

therefore takes its points of departure in theory on innovation systems

and theory on diff usion Secondly, the chapter examines empirically the

development of mobile communications more generally, and mobile data

more specifi cally, in the East Asian countries, Europe and North America Focus is on the terminal markets, network infrastructures, and services and content The numbers show that the US is forging ahead regarding mobile data and that the European lead over the US in mobile communi-cations is disappearing.

The prime reason put forward in the chapter for the North American catch- up is the position of the US in the information technology (IT) area, hardware as well as software The US is positioned very strongly regard-ing Internet technologies and services, and the hypothesis is that the US can leverage this position onto the mobile fi eld The Internet innovation system and the mobile communications innovation system have to a large extent been separate The East Asian countries have managed to merge them to a certain degree However, the competences on the supply as well

as the demand side in the US with respect to Internet technologies tute a strong point of departure for developing mobile Internet in the US

consti-In sum, Regulation and the Evolution of the Global Telecommunications Industry is a collection of 15 chapters that bring a variety of theoretical perspectives and empirical evidence to the question of how regulation could be applied (even eliminated) to the deployment of BB technolo-gies and NGMNs in an era of dramatic changes in the structure and performance of the global telecommunications industry The material well illustrates the diversity of thoughts and research that characterize this important area of academic and business research We hope that this volume will spur others on to research this challenging topic

Regulation versus investment: the balance between static and dynamic effi ciencies and the main issues of regulatory policy

indus-Some countries have applied ‘light- handed’ regulation while some others have even decided to go further and liberalize entirely a few seg-ments of the telecommunications industry by introducing full competi-tion while keeping others under a regulated monopoly regime The latter was generally applied to the incumbent while new entrants enjoyed more favorable entry and access regimes The duality created by this type of regulation has sparked a heated debate as to what is the ‘appropriate role’ of regulation and its impact on investment and innovation.2 The main issues concern the capacity of the regulatory agencies to promote investment in infrastructure, especially in broadband technologies, and what are the best mechanisms to increase consumer choice at reason-able prices This debate has arisen because more and more specialists (Aron and Crandall, 2008) believe that the telecommunications industry has entered into a maturity phase, where competition can work really well In that case, innovation and dynamic effi ciencies are viewed as the