The Strategic Implications of VOIP for Regulating the Electronic Communications Markets

Transcription

1 The Strategic Implications of VOIP for Regulating the Electronic Communications Markets Richard Cadman Director Strategy & Policy Consultants Network Ltd

2 Disruptive Potential of VOIP Voice over the Internet has the potential to restructure electronic communications markets making existing regulation redundant, but leaving a new monopoly. To ensure the survival of the competitive gains enjoyed since 1998, NRAs will need to re-evaluate the remedies imposed on SMP operators.

3 Agenda Introduction to SPC Network VOIP s Disruptive Potential Rate of Substitution Implications for Interconnection & Regulation

4 Introduction to SPC Network Regulation Policy Economics Specialist policy and strategy consultancy in electronic communications Rigorous analysis: exceptional advice Built on three key assets: Services Experience People Founded in 2003 Have worked for 19 clients including.

5 Introduction to SPC Network

6 Introduction to SPC Network Presentation paper based on Paper prepared for a client on VOIP and the future of regulation Report being prepared to be published by Market Cohesion Ltd (

7 The Market Review Process Market definition 18 markets determined by European Commission Implemented slightly differently by NRAs Product and geographic markets Voice access, Origination, Transit and Termination Broadband access and conveyance

8 The Market Review Process Market definition Assessment of market power Application of remedies

9 Voice Markets Transit Transit Access Origination Termination Incumbent dominant in Access, Origination and Transit Own network dominance in termination Interconnection charges are distance dependent so incentivise Altnets to build out to DLE

10 Broadband Markets www www Conveyance Conveyance W/sale Access Retail Access Incumbent dominant at wholesale level Bitstream access charges generally capacity based

11 Convergence Current: Separate voice and broadband supplier Voice market measured by connections/minutes Broadband measured by connections Future Integrated supplier of voice and broadband Market measured by connections

12 Convergence Broadband server Service Provider Service Provider www www Access All-IP All-IP backbone backbone PSTN/ PSTN/ mobile mobile Termination Customer premises

13 Convergence Traditional Architecture All-IP Architecture IP ATM SDH DWDM (sometimes) Fibre IP DWDM (usually) Fibre

14 Convergence Then Voice Video Data Storage Telephone Network Broadcast Network IP Network Storage Area Network Now Telephone Network Broadcast Network IP Network Storage Area Network

15 Convergence The impact of IP on the traditional telephony world will be to replace voice services with integrated voice and IP-based applications. These will extend through messaging and e-commerce, supporting applications with which the traditional telephony network architecture cannot compete technically or economically. Trends in IP Technology: Their impact on the the traditional Telephony carrier world OECD March 2002 Currently separated voice origination/transmission and broadband access market definitions will no longer be relevant.

16 Rate of Substitution What will drive consumers to switch from traditional voice services to an integrated Voice and Internet platform? Price Convenience Quality

17 Price Calls to other VoIP phones free Substantial savings on international rates

18 Price (All GB ) Skype Gossiptel (World 500)* BT (Option 3) One-Tel France Germany India USA * 9.99 monthly cost Source: company websites January 2005

19 Price Calls to other VoIP phones free Substantial savings on international rates But.. Less convincing savings on calls to PSTN/Mobile

20 Price Based on calls to Vodafone Skype Gossiptel (World 500) BT (Option 3) Peak Evenings Weekends Source: company websites January 2005

21 Convenience & Quality Both rapidly improving VoIP handsets available no longer an enthusiasts toy Quality related to price but acceptable even at best efforts level

22 Rate of Substitution How quickly will VOIP be taken up? Mercer: 30% of UK homes by 2007 Jupiter Research: 17% of US homes by 2009 Ovum: 197 million users worldwide by end of 2008 Skype: 80,000 downloads per day

23 Rate of Substitution However, Voice over IP-based (VoIP) applications are likely to be best implemented when they are used in opening new sources of revenue for service providers rather than as a means of competing directly against traditional telephony whose vast infrastructure is likely to co-exist and be interconnected to IP-based infrastructure for many years ahead. OECD

24 Implications for Interconnection & Regulation

25 Economics of Competition: Today Size of Network LRAC E LRAC I Current voice interconnect regime encourages building out to DLEs to allow entrant (E) to realise economies of scale and to benefit from more efficient technology. Entrant therefore able to be price competitive.

26 Economics of Competition: Future All-IP networks are built on standard protocols/equipment. LRAC E LRAC I Can entrant gain efficiency/scale advantages over incumbent? Size of Network

27 Wholesale Interconnection Entrant (E) has choice of adding increment i of capacity through own build or buying from the incumbent (I). Assume that I s price for i is regulated at LRIC+ based on I s cost model and data. E s LRIC is likely to greater than I s due to smaller discounts and higher cost of capital reflecting greater risk. E is faced with two prices for increment: I s or its own Always more rational for E to buy rather than build. Incentive to buy is compounded given that there is no advantage in building out to the DLE, as there is no distance related charging so no additional benefit to be gained from a larger network.

28 DANGER DANGER DANGER MONOPOLY RE-EMERGING

29 Is IP access and transit a natural monopoly? Yes Mandate interconnect deep enough in the network to allow service providers to control product differentiation Here? Here? Here? All-IP Architecture IP DWDM (usually) Fibre Civil infrastructure

30 Is IP access and transit a natural monopoly? Yes No Mandate interconnect deep enough in the network to allow service providers to control product quality Do not regulate as if it were a monopoly. Do not impose remedies which discourage competitive investment

31 The national regulatory authorities shall promote competition in the provision of electronic communications networks, electronic communications services and associated facilities and services Framework Directive, Article 8, para 2. But, tools available to NRA, i.e. remedies to apply to SMP operators, are designed to control monopoly behaviour. Can such tools also promote competition?

32 Summary Significant retail uptake of VoIP is likely to lead to restructuring of electronic communications markets Separate voice and broadband markets will converge to form a unitary market Will All-IP networks revitalise scale advantages of incumbent operators leading to a renewed natural monopoly? If yes, regulators must mandate interconnection at a sufficiently low level of the network to encourage differentiated competition If no, regulators must use regulation to encourage, not mimic, competition

33 Rigorous analysis: Exceptional advice