International Telecommunication Union

Competition Policy in Telecommunications Background Paper Eric Lie Strategy and Policy Unit International Telecommunication Union 1

The views expressed in this presentation are those of the authors and do not necessarily reflect the opinions of ITU or its Membership. The author can contacted by e-mail at [email protected].

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Outline • Why competition? • Trends in telecom competition • The basic framework: sector-specific regulation and competition law • The trend toward convergence: A new framework? • Some challenges: Access to the Internet • Mergers and acquisitions 2

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Competition as a policy tool … Why competition?

… to reduce prices… OECD, trends in average residential prices, 1990=100 140 Fixed charges 120 Total charges

100 80 Number of OECD countries permitting f ixed-line competition

60 40

22

20 0

4 1990

3

Usage charges

5

6 1992

Source: OECD, Teligen

7

8 1994

8

9 1996

23

24

11 1998

2000

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Competition as a policy tool … Why competition?

… to increase mobile penetration … Mobile penetration rate, per 100 inhabitants 90 Six additional PCS licences awarded in 1996

80 70 60 50 40 30

Hongkong SAR: Mobile competition introduced in 1988 for analogue

Additional competition introduced with digital mobile in 1993

Singapore: Mobile competition delayed until April 1997

20 10

Comparison between the growth of mobile penetration in Hong Kong, China and Singapore, 1988-2000

0 1988

4

1990

1992

1994

1996

1998

2000

Source: ITU World Telecommunication Development Report 2002, Reinventing Telecoms

Trends in telecom competition

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Where competition is allowed % of countries allowing competition in selected services Monopoly

Competition 81%

78% 62%

86%

80%

62% 52% 38%

48% 38% 22%

Basic services

Leased lines Wireless local loop

Cellular

19%

Cable TV

20%

14%

VSAT

Source: ITU Trends in Telecommunications Reform 2002: Effective Regulation

ISPs

Trends in telecom competition

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Competition just keeps growing Countries 140 120 Cellular mobile 100 Local

80

Int'l

60

Growth in countries allowing competition in selected sectors

Long distance

40 20 0 1995

1997

2000

2001

Source: ITU Trends in Telecommunications Reform 2002: Effective Regulation

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Allowing competition may not be enough … • Competition is absent when there are no service providers in the market • Competition is absent when there is no competitor to the incumbent in the market • Effective competition may be absent when the incumbent dominates the market 7

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This is in part due to ... • Strong network externality effects • Large sunk costs involved • Numerous advantages enjoyed by the incumbent

Competition policy 8

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Basic Framework

The basic framework Telecommunications regulation • •

•

•

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Industry specific Multiple policy objectives Precise in setting acceptable behavior Ex ante and ex post

Competition law • • •

•

Economy wide Focus on preserving competition Specific complaint or investigation driven Predominantly ex post

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Competition law prohibits … Basic Framework

• Anti-competitive agreements

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•

e.g. bid rigging, price fixing, group boycotts

• Anti-competitive behavior by dominant firms •

e.g. refusal to deal, predatory and excessive pricing, tying and bundling, cross-subsidization

• Mergers and acquisitions that have a strong negative impact on competition

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Relevant markets and dominance Basic Framework

• Market definition • • •

• Dominance •

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Product and geographic dimension Demand substitutability analysis Hypothetical monopolist test; application of a small but significant non-transitory increase in price (SSNIP) Quantitative and qualitative factors; e.g. market share, barriers to entry, size, etc.

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A new framework

Toward a new framework: Deregulation and re-regulation • Why deregulation? •

• But is competition law sufficient? • •

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Benefits of competition, risk of regulatory failure, resistance by business, globalization Uncertainty - Fact specific, focus on illegality, Delay - Costly and lengthy litigation

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A new framework

A converged approach to competition policy

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• Regulatory adoption of competition law concepts and principles • Forbearance from regulation in competitive markets • Realignment of regulation with principles of competition e.g. USO • Extension of competition law to telecommunications markets

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Asymmetrical regulation A new framework

• Market definition •

Service classification based approach

• Dominance •

Emphasis on quantitative thresholds

Certain negative effects e.g. regulatory distortions, arbitrage

A need for greater flexibility? 14

e.g. July 2002, EC guidelines on market analysis and assessment of SMP

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A new framework

Some common principles

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Telecom regulation

Competition law

• Mandatory interconnection • Non-discrimination in terms & conditions • Cost-oriented pricing • Sufficiently unbundled • Prohibition against cross-subsidization

• Essential facilities doctrine • Non-discrimination • Prohibitions against: •

•

•

Anti-competitive pricing Tied sales and unbundling Cross subsidization

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Institutional implications A new framework

• Who should apply competition policy?

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•

Relative advantages and disadvantages •

•

e.g. sector specific expertise vs. cross-sector flexibility, risk of capture, etc.

Other considerations •

Costs of existing institutions have already been sunk

• Need for cooperation and coordination •

e.g. clear lines of competence, procedures to resolve overlaps, institutional mechanisms for collaboration and co-ordination

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Challenges: Access to the Internet Some challenges

• Local level access •

Local loop unbundling •

•

Inter-modal competition •

Tilting the regulatory framework?

• International Internet access •

Internet backbone services •

•

Charging practices

International Internet connectivity •

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Service vs. facilities-based competition?

A possible role for competition policy?

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Mergers and acquisitions

Mergers and acquisitions

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Who approves mergers? Num ber of Countries

40

30 25

23

9 0 Sector Other Regulator Operator Ministry Ministry *other: mainly the Competition Authority

Other*

Not regulated

Source: ITU Trends in Telecommunication Reform, 2002 Effective Regulation

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Mergers and acquisitions

Merger notification and review • Market definition • Substantial lessening of competition • •

•

• Merger efficiencies and public benefit • Merger approval •

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Market share and concentration Barriers to entry, import competition, dynamic market characteristics Vertical merger concerns

Behavioral vs. structural conditions

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Thank You

http://www.itu.int/competition 20