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HKS670 Case Number 1955.0

This case was written by Jorge Tarzijn Martabit, Professor of Management at the Pontificia Universidad Catolica de Chile, and Jos A. Gmez-Ibez, Professor of Urban Planning and Public Policy at Harvard University. The case is based on public documents. HKS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. (January 2012).

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Regulating Broadband in Chile: The Debate Over Open Access

Introduction

In 2011, Chiles Undersecretary of Telecommunications, Jorge Atton, was considering adopting a different

policy toward regulating competition in Internet services than previously applied to voice telephony. As

Undersecretary, Atton headed Chiles telecommunications regulatory agency, Subsecretara de

Telecomunicaciones (SUBTEL). For the past two decades SUBTEL had encouraged the emergence of competition in

telephone services, in part, by forcing the incumbent telephone company to give new entrants to the industry

access to its customers1. And under the previous administration of President Michelle Bachelet, SUBTEL had

circulated for public comment a consultation document that raised the possibility of imposing open access

requirements on the providers of broadband Internet services by forcing them to grant competitors access to their

networks2. But Bachelets center-left coalition had lost the presidential election in December 2009 to a center-

right coalition headed by Sebastin Piera, and President Piera appointed Atton Undersecretary when he took

office in March 2010. Atton, who had been the CEO of a small fixed-line telephone company3

Competition vs. Investment and Coordination

, was concerned that

investment in fiber optic networks in Chile was being discouraged by investors fears that they would eventually be

forced to grant rivals a right to use their networks. His idea was to reassure investors that the government would

not require open access to broadband in the future, so as to encourage investment and thus more competition.

The debate over forcing incumbent infrastructure providers to grant competitors access to their networks

was not confined to telecommunications or to Chile. Similar policies to require open access had been applied to

the electricity, gas and railroad industries in many countries. The basic idea was that only some of the activities of 1 Competition in telephone services was also encouraged by regulations that deliberately handicapped dominant firms relative to new entrants, a practice that was known as asymmetric regulation since dominant firms and their challengers were not treated equally. 2 The consultation document was originally issued in 2004, but shortly after SUBTEL had been distracted by a time consuming controversy over which of several competing digital video standards to adopt. 3 Telefnica del Sur, a company with fixed-line services in the south that had approximately 5 percent of Chiles fixed-line customers.

For exclusive use Pontificia Universidad Cat?a del Per?ENTRUM), 2015

This document is authorized for use only in BE MBA FT XIX - II- MIM by Jos? Acha, Pontificia Universidad Cat?a del Per?ENTRUM) from May 2015 to November 2015.

HKS Case Program 2 of 18 Case Number 1955.0

these industries were inherent or natural monopolies, and that one could introduce more competition into those

industries by opening access to the monopoly elements to newcomers. Usually the monopoly resided in the

infrastructure network that connected the customers but not in the services provided over that network. In

electricity, for example, the wires of distribution network were thought to be a natural monopoly while power

generation was not. Similarly in railroads, the track had the characteristics of a natural monopoly while the trains

that operated over them did not.

At a minimum the reforms required the incumbent infrastructure company to open access to its network.

In some cases the incumbent was allowed to continue to provide a full range of services in competition with

challengers. For example, a railroad could continue to manage both track and trains but would have to allow

independent train companies access to its track. In other cases the incumbent was forced to divest its monopoly

network as a separate company or reorganize the network as a separate ring-fenced subsidiary. Using railroads as

the example again, the incumbent would continue to manage the tracks but its train operations would be hived off

as a separate company or division. Such divestiture or ring-fencing was often called vertical separation or

unbundling, and the idea was to make it more difficult for the managers of the monopoly network services to

favor their old colleagues in the incumbent company.

Not everyone supported the idea of open access and vertical unbundling, however. Critics argued that

such measures were often unnecessary because there was enough competition already. Railroads might not

compete with one another, for example, but they often faced stiff competition from trucks, cars and planes. And

even if open access increased competition, critics claimed it would stifle incentives for investment and innovation

and make it harder to insure the smooth coordination of the infrastructure and the services provided over it. The

lack of consensus meant that open access and unbundling were more common in some industries and countries

than in others. Open access and unbundling was more common in voice telephony and electricity than in

railroads, for example, and in Europe and Australia than in North America or Japan.

Broadband Technologies

The debate over whether to apply open access to broadband was complicated by the variety of

technologies used. Although definitions varied, a connection to the customer with data transmission speeds of

256 kilobits per second (kbps) or greater was generally considered broadband. The Organisation for Economic Co-

operation and Development (OECD) defined broadband as 256 kbps in at least one direction, and Chiles SUBTEL

applied the same standard. The trend, however, was to raise the threshold speed for broadband as the

marketplace rolled out faster services. For example, the industry often referred to speeds between 768 kbps and

1.5 Mega bits per second (Mbps) as basic broadband.

In the beginning of the Internet revolution the most common form of access was dial-up, which




involved a call over ordinary telephone lines to the Internet provider. Dial-up did not provide broadband speeds,

and a variety of technologies soon developed to do so including digital subscriber lines (DSL), asymmetric digital

subscriber lines (ADSL), cable modem, fiber, wireless, satellite and broadband over power lines (BPL)4

DSL and ADSL used special electronic equipment to enhance transmission speeds over the ordinary

copper wires used in the local loop of a telephone network. DSL speeds ranged from several hundred kbps to a

few Mbps, and ADSL could reach 40 Mbps. The availability and speed of a DSL or ADSL service depended on the

distance from the home or business to the closest telephone company facility.

.

Cable modems enabled cable television operators to provide broadband using the same coaxial cables

that delivered pictures and sound to the television set. Most cable modems were external devices that had two

connections, one to the cable wall outlet and the other to a computer. Speeds were comparable to DSL but

depended on the type of cable modem, cable network and traffic load.

Fiber was a newer technology that converted electrical signals carrying data to light and sent the light

through transparent glass fibers about the diameter of a human hair. Fiber was capable of speeds far faster than

those of current DSL or cable modems, typically by tens or even hundreds of Mbps. Actual speeds depended upon

whether the provider brought the fiber all the way to the home (fiber to the home, abbreviated FTTH) or to an

equipment cabinet some distance away (fiber to the cabinet, or FTTC). Fiber was considered very promising

because of its high speeds, but it was expensive to install. As a result telecommunications providers (mostly

telephone companies) were offering fiber broadband in limited areas (mainly urban areas in the developed world),

although many had announced plans to expand their fiber networks and offer bundled voice, Internet access and

video services.

Wireless broadband connected a home or business to the Internet using a radio link between the

customers location and the service providers facility. Wireless broadband could be mobile or fixed. Wireless

technologies using longer-range directional equipment provided broadband service in remote or sparsely

populated areas where DSL, ADSL, cable modem or fiber services would be costly to provide. This type of

broadband service was becoming more widely available at airports, city parks, bookstores, and other public

locations. Mobile wireless broadband services were also becoming available from mobile telephone service

providers among others. These services required a special PC card with a built in antenna that plugged into a users

laptop computer and were appealing to highly mobile customers. Speeds, while improving rapidly, were still often

slower than those provided by DSL or cable modems.

Satellite was another form of wireless broadband, also useful for serving remote or sparsely populated 4 This section is mainly based on Federal Communications Commission, Consumer & Governmental Affairs Bureau, accessed January - March 2010: http://www.fcc.gov/broadband




areas. Satellite Internet service was used in locations where terrestrial Internet access was not available and for

users who moved frequently. Downstream and upstream speeds for satellite broadband depended on several

factors including the provider, the service package purchased, the consumers line of sight to the orbiting satellite

and the weather. The speeds were typically slower than DSL and cable modem but faster than dial-up.

Finally, broadband over power lines (BPL) was an emerging technology that delivered broadband over

existing low- and medium-voltage electric power distribution networks. Speeds were comparable to those of DSL

and cable modems and BPL could be provided to homes using existing electrical connections and outlets. BPL was

still being perfected and was available in very few areas. BPL had potential, since power lines were installed

virtually everywhere, alleviating the need to build new broadband facilities to every customer.

Chiles Experience with Telephones

The Heritage of Monopoly. Undersecretary Attons proposal not to require access in broadband was a

departure from Chiles policies with telephony. For much of the 20th century, telephone services in Chile and

elsewhere had been provided by companies that enjoyed monopolies in their service areas. Outside the United

States these monopolies were mostly state-owned, while in the United States the monopoly provider was a private

company: American Telephone and Telegraph (AT&T). Monopoly was thought to be natural in this industry

because telephone services had characteristics that made competition unsustainable. One of these characteristics

was that it was cheaper to run one set of telephone lines down a street than several. From an economist

perspective there were economies of scale or traffic density that were so strong that they were not fully exploited

even when only one firm served the market. Another characteristic that discouraged competition was that

customers preferred to subscribe to the firm with more subscribers since it offered them the greatest opportunity

for connectivity. Again, from an economic standpoint, a larger network offered the advantage of network

economies.

In Chile, the telecommunications sector started operations in 1879, when the Edison Company installed

the first telephone line. In 1930, the International Telephone and Telegraph Company (IT&T) bought Edison,

created the Compaa de Telfonos de Chile (or CTC), and negotiated a 50-year (renewable) concession to provide

telephone service in the country. The government of Salvador Allende nationalized CTC in 1971, but between

1987 and 1990 the government privatized the company by selling its shares to private investors. In 1990 the

Spanish telephone company, Telefnica de Espaa, became CTCs major shareholder when it acquired 43.9

percent of the total shares. CTC was later renamed Telefnica Chile, and Telefnica de Espaa increased its

shareholdings in the Chilean company to own 96.75 percent by 2010. Telefnica de Espaa also established a

separate company called Movistar to offer mobile telephone services in Chile.

The decision to privatize the telephone company forced the government to amend Chiles




Telecommunications Law in 1987 to provide for the regulation of private telephone providers and the promotion,

where possible, of competition instead of monopoly. The amendments included provisions for the selective

regulation of tariffs, free entry, and the compulsory interconnection of the networks of incumbents and new

entrants.

Regulation of Tariffs. Under the amendments telephone companies were free to set the prices they

charged subscribers unless Chiles antitrust agency, the Tribunal for the Protection of Competition, found that

there was little effective competition for a specific service and geographical area. In such cases, SUBTEL would

establish a maximum price that the dominant firm could charge subscribers for the type of service and area in

question. In addition, the dominant firm was required to charge the same price for every customer in the service

area. Firms that were not considered dominant could set any price they wanted and could vary prices and

conditions (i.e., composition of fixed and variable charges, hourly discounts, etc.) as they saw fit. Thus the Tribunal

for the Protection of Competition was responsible for determining whether a firm dominated a geographic area

while SUBTEL was responsible for setting the maximum price that the dominant firm could charge.

The law directed SUBTEL to set the maximum price that was sufficient to cover the costs that a theoretical

efficient firm firm would incur in providing the service; a calculation that was very complicated and often

controversial. The design of the efficient firm involved many assumptions about the optimal technology, cost

structure, management and cost of capital. Moreover, prices were computed for a five-year period, which

required SUBTEL to predict the demand for each service for that period of time. Other complications arose when

the regulated company provided many different services with the same facilities and only some of the services

were to be regulated. For example, the copper wires of a telephone company could be used to offer both fixed-line

telephone services, which were regulated and, DSL, broadband services, which were not regulated. Similarly, the

coaxial cable of a cable TV company could be used to provide cable TV (unregulated) and fixed telephone service

(regulated).

Promoting Entry and Interconnection. The amendments to the telecommunications law also put in place

provisions to encourage entry into the industry so as to increase competition and reduce the need for regulating

prices. The law guaranteed freedom of entry, stating that licenses were to be awarded to whoever applied for

them. However, to allow entry in practice, the law required that telephone companies accept and complete calls

to their subscribers that originated on other telephone company networks. A new telephone company had to

extend its lines to reach points of interconnection with the networks of the others. Once it did, however, the law

required each firm to accept applications for interconnection filed by others, and defined the terms and

procedures used to compute the interconnection tariffs. Interconnection tariffs were set by SUBTEL using the

theoretical efficient firm approach outlined earlier; although in this case the costs were the incremental or

marginal cost of completing a call on the efficient firms network.




Finally, entry was encouraged by regulations that deliberately handicapped dominant firms relative to

new entrants, a practice that came to be known as asymmetric regulation since dominant firms and their

challengers were not treated equally. The most important of these regulations was a requirement that dominant

firms charge the same regulated price for all customers in a given service area. For these purposes, the whole

country was originally divided into only four areas. The requirement to charge the same price reduced the risk

that entry would provoke an aggressive response by the incumbents since the incumbent would have to reduce

prices throughout the entire service area in order to match the prices of a challenger serving just part of the area.

New entrants could skim the cream in the service area by, for example, initially building networks that served

only high volume customers in denser business or residential districts that were less costly to wire up.

Competition and Deregulation. The number of subscribers and the level of competition in voice

telephony increased rapidly due to the combination of the privatization of Telefnica, the regulations that favored

new entrants over incumbents (principally Telefnica) and the development of mobile technology. The spread of

telephone service was also aided by a program to subsidize services in remote rural areas. Chile is highly

urbanized, with almost 90% percent of its 17 million citizens residing in urban areas in 2010. But the country also

had a number of remote rural areas where telephone service was not available until the government began to

subsidize it. During the 1990s the number of fixed lines increased from 5 to 21 per 100 inhabitants while in the

decade that followed mobile phone subscribers increased from 22 to 115 per 100 inhabitants (Exhibit 1).

Telefnicas share of fixed lines declined from 95 percent in 1994 to 56.2 percent in 2010 (Exhibits 2 and 3), but its

share of total lines (fixed and mobile) fell even more precipitously, since by 2010, mobile lines outnumbered fixed

lines more than five to one. In the mobile market, Movistar (a company owned by Telefnica) served 41 percent

of the subscribers but its share was declining (Exhibit 4).

The increase in the market share of the fringe firmswhich mostly deployed their own networks and

facilitiesand the growing penetration of mobile telephony set the stage for the government to do away with the

regulation of consumer telephone prices in 2009. However, SUBTEL still required interconnection and regulated

interconnection prices.

The Evolution of Broadband in Chile

Broadband had spread relatively rapidly in Chile in line with global trends. From 2000 to 2009 the number

of Internet access subscribers worldwide increased from approximately 200 million to more than 1.8 billion

people5

5 http://www.internetworldstats.com/stats4.htm accessed January - March 2010.

. With approximately 9 broadband subscribers per 100 inhabitants in 2008, Chile had the highest level of

broadband penetration in South America, followed by Argentina, Brazil and Uruguay. However, Chiles penetration

rates were only one-half to one-third of those common in developed countries. In 2008, the United States had




approximately 26 subscribers per 100 inhabitants, the OECD countries average was almost 22, and countries like

Denmark and the Netherlands had already exceeded 34 per 100 inhabitants.6

In Chile, as elsewhere, Internet access was provided initially through dial-up, which was quickly replaced

by broadband. In 2000 there were 585,489 fixed Internet connections in Chile, of which 577,809 were dial up; by

2010 there were 1,818,799 fixed Internet connections, of which only a few thousand were still dial up (Exhibits 5

and 6). The two main providers of fixed Internet connections were Telefnica (using DSL) and VTR, the countrys

largest cable TV company (using cable modem). Both companies provided their services only where they had their

physical networks and each had roughly 40 percent of the fixed broadband connections (Exhibit 7). Trends in

mobile Internet connections were complicated because SUBTEL changed its method of counting connections in

2010. But in that year, the 5,838,678 mobile connections outnumbered fixed connections nearly three to one

(Exhibit 8). Only 1,240,707 of the mobile connections were 3G connections fast enough to qualify as broadband,

although 3Gs share of the mobile market was growing quickly. No one was building fiber networks in Chile yet

despite much talk of their potential.

7

Studies in developed countries suggested that consumers considered the different broadband

technologies as fairly close substitutes for one another. For example, a recent study from Austria estimated that

the demand for any one form of access (DSL, cable and mobile) was rather elastic (with a price elasticity of demand

greater than 2.5 in absolute value) in those areas where several types of access were available.

8 Similarly studies

from the United States showed that the demand for DSL was very price elastic with a significant cross price

elasticity between cable and DSL9

In Chile the Tribunal for the Protection of Competition had, in a related hearing, argued that mobile and

fixed Internet connections were not close substitutes due to differences in speeds and reliability.

.

10

6 http://www.websiteoptimization.com/bw/0809/ accessed January - March 2010.

By the end of

2010, 98 percent of Chiles 1.8 million fixed Internet connections had speeds of 512 kbps or higher and 96 percent

had at least 2 Mbps. For the 5.8 million mobile Internet connections, the comparable figures were only 13 percent

7 Mobile operators were apparently building some fiber in their networks, presumably between towers, but none of the firms that offered fixed connections were building fiber yet accessed April June 2011. 8 Substitution Between DSL, Cable, and Mobile Broadband Internet Services. Mlisande Cardona, Anton Schwarz, B. Burcin Yurtoglu, and Christine Zulehner In Telecommunication Markets. Publisher: Physica-Verlag HD. 9 Crandall, R.W., Sidak, J.G., Singer, H.J. (2002). The Empirical Case Against Asymmetric Regulation of Broadband Internet Access. Berkeley Law and Technology Journal 17(1). Rappoport, P., Kridel, D., Taylor, L., Duffy-Deno, K., Allemen, J. (2003). Residential Demand for Access to the Internet. Chapter 5 in the International Handbook of Telecommunications Economics, Volume II, ed. G. Madden, Edward Elgar., pp. 95387. Pereira, P., Ribeiro, T. (2006). The Impact on Broadband Access to the Internet of the Dual Ownership of Telephone and Cable Networks. Working Paper. 10 The case involved a complaint by a small fixed-line telephone company, Voissnet, that Telefnica was offering fixed-line telephone service for free with its fixed-line Internet service and thereby excluding Voisnet, which only offered telephone service, from the market. The complaint assumed that Telefnica had market power in broadband service since otherwise the strategy would be irrational. The Tribunal found that there was limited competition between mobile and fixed broadband service but a fair amount of competition in fixed broadband services within Voisnets service area. See Tribunal de Defensa de la Libre Competencia, Sentencia 97, April 3, 2010.




and 1 percent, respectively (Exhibit 9). Connection speeds strongly affected the times it took to download web

pages, music and videos (Exhibit 10). Moreover, mobile lines suffered more from radio interference that slowed

speeds or led to disconnections; particularly in places where there was an overpopulation of smartphones.

Chilean policymakers thought it highly desirable to reduce broadband prices and increase availability and

penetration since Internet access was increasingly thought to be important to a countrys economic growth.11 A

study commissioned by SUBTEL in the previous administration estimated in January 2010 that 80 percent of all

Chilean households had access to at least one fixed Internet provider including 20 percent who had access to two

providers, and 20 to 30 percent who had access to three or more providers. Mobile broadband (3G or better) was

thought to cover 50 to 60 percent of the population, but was expected to cover 88 to 90 percent of the population

by mid 2011 to match the current mobile voice coverage.12

Broadband still had not achieved the penetration of cable television and fixed telephony even though

Chilean consumers tended to acquire broadband in conjunction with other products (such as triple plays,

combining Internet access, cable television and fixed or mobile telephony). As a result, broadband subscribers

were concentrated in the higher income sectors (Exhibit 11). While higher income people accessed Internet

mainly from home, lower income consumers did so in educational establishments or public places such as

Internet cafes".

Regulatory Options

The two basic options facing countries like Chile were (1) to require incumbent broadband providers to

open access to their networks to independent providers of Internet services, or (2) to encourage or rely on the

development of competing networks perhaps using other technologies such as DSL, cable modem, 3G or fiber. In

the telecommunications sector the open access strategy was often referred to as service-based competition

while the alternative was referred to as facilities-based competition. In practice these two strategies were

sometimes used in combination. Chile had used both strategies in its regulation of voice telephony, for example,

in that its requirements for interconnection opened access while its provisions for open entry and asymmetric

regulation were designed to encourage the building of competing networks.

Service-based Competition through Open Access. Open access was inspired by the observation that

often only some of the activities of an infrastructure company are characterized by such large economies of scale

and scope that they create a natural monopoly. In fixed-line telecommunications services, for example, the 11 Jorge Atton's statement in an interview published in the newspaper "La Tercera" on June 1st, 2011 accessed at http://diario.latercera.com/2011/06/01/01/contenido/negocios/10-71129-9-subtel-critica-barometro-de-la-banda-ancha-y-anuncia-nuevo-indicador.shtml. 12 Analysis Mason, Strategic Review of Broadband Regulatory Policy in Chile, report to the Subsecretaria de Telecommunicaciones, January 11, 2010, slide 13.




economies of scale were thought to be largest in the local loop or last mile of wire, cable or fiber connecting

the home or office and the companys switching facilities. It would be wasteful to encourage competition by

duplicating that local loop. But by requiring the incumbent to grant competitors access to that local loop, one

could encourage competition in the services provided over it. In short, open access exploited the potential for

entry and competition at some levels of a value chain, even if competition was not possible at all levels.

The government faced a variety of choices in implementing open access. In the case of broadband, four

types of access could be required and they differed in the amount of investment the new entrant had to make and

the control it could exercise over the characteristics of the services offered:

o With an unbundled local loop, the new entrant leases the right to use the copper or fiber loops of the incumbent. This gives the entrant the most control over services offered but requires that it invest in

electronics and switching deep within the incumbents network.

o With shared access, the entrant leases only the right to use high frequency portions of the local loop, not those frequencies used for voice telephony. The flexibility is high but so too are investments.

o With bitstream access, the entrant pays the incumbent to transmit data. This gives the entrants less control over the technical characteristics of the service, because the incumbent supplies the DSL equipment,

which in turn defines the parameters of the DSL services that can be provided.

o With wholesale offering, the incumbent provides a finished service but sells it to entrants at wholesale rates. The entrants can try to improve administrative efficiency, marketing or customer service but cannot

innovate on the technical characteristics of the service.

Since open access did not eliminate monopoly, the government would still need to regulate prices and

quality. The focus would shift, however, from regulating retail (consumer) prices and quality to regulating

wholesale (access) prices and quality. The regulator may ask that the network provider and the access seeker

negotiate terms, but the regulator must be prepared to intervene in the event of an impasse as long as the

network provider has monopoly power.

Setting the price for access was challenging. Access prices should be high enough to allow a fair payment

for the network and to keep incentives for investment, but low enough to allow competition in the final product

market. The price must include a reward for the opportunity cost of capital, which must consider that the risk

involved is higher when the rate of technological change is greater. Access pricing should also consider that, by

using access, an entrant could provide services without making any long-term commitment to remain in the

market. In contrast, providing these commercial options has significant resource costs for the access provider.

Networks must be dimensioned to carry traffic, including traffic resulting from uncertain demand for access




services, and investments that have a rather significant risk of obsolescence. Why invest, network providers may

ask, if one will be forced to share the benefits of any new networks you build with competitors, at regulated rates?

Regulation typically must govern the quality of access as well as price. Open access often limits the

control that an entrant has over the product it offers consumers, since part of it depends on the quality of service

provided by the dominant firm. And if the network provider is not vertically unbundledthat is if it competes at

the retail level with the access seekerthe incumbent may use its control over the network to reduce the quality

of service or raise the cost of its rival. In Chile, for example, new entrant telephone companies would complain

that the incumbent Telefnica did not always complete their calls, particularly during peak calling hours.

Facilities-based Competition. The basic assumption in facilities-based competition is that firms with

strong bases in different but competing telecommunications technologies can discipline each other. To the extent

that facilities-based competition is effective, the need for government regulation is reduced or perhaps eliminated

entirely. There would be no need to regulate access price or quality, or to monitor the network providers

behavior to prevent it from discriminating against access seekers who are also rivals.

Facilities-based competition also promised to strengthen incentives for investment and innovation. Firms

could build their networks without fear that they would be obliged to open them to competitors, and since the

firms would not be reliant on using the networks of others to deliver services, they would have greater flexibility in

pricing, services and technologies. Flexibility to experiment may be particularly important in a rapidly changing

field like telecommunications and there may be significant external, economy-wide benefits by having a variety of

platforms and technologies. Each new technology is a potential starting point for the development of other new

technologies, since multiple platforms and technologies allow more rapid search for new innovations.

The main risk of facilities-based competition is that entry can be slow or uneven so that competition does

not arise quickly or in all markets. Another possible cost is the wasteful duplication of investments, particularly if

the technology has strong economies of scale. If asymmetric regulation is employed, it may encourage the entry

and development of companies that are less efficient than incumbents, worsening resource allocation and

increasing social costs.

The Experiences of Other Countries

The experiences of other countries with service- and facilities-based competition were suggestive but not

conclusive. Often the comparison was made between the United States and Europe, Korea and Japan. The United

States had open access for telephone service but had relied on facilities-based competition for broadband Internet

services; while most of the developed countries in Europe and Asia had adopted open access for broadband, as

well as telephones. Advocates of open access pointed out that the United States had only 28 broadband




subscribers per 100 inhabitants in 2009, about the average of the OECD countries. The countries with much higher

broadband penetration included the Netherlands, the Nordic countries and France, all of which had implemented

open access. However, the successful market penetration of broadband by new entrants was due to utilization of

incumbents established lines. Open access proponents also argued that facilities-based competition was more

viable in the United States than it was in most other countries because the United States had a much more

extensive cable television industry. While most American households could choose between DSL, cable and 3G,

European households often could choose only between DSL and 3G.

Advocates of facilities-based competition pointed out that Switzerland was among the OECD countries

with the highest levels of penetration and that it was also one of the few that had relied on facilities-based

competition. More generally, it was argued that there were many other factors besides the access policy that

determined broadband penetration, including the population density, per capita income and how many years since

broadband was introduced in the country. This observation had stimulated nearly a dozen statistical analyses of

the determinants of broadband penetration among OECD countries. Different studies came to different

conclusions, in part, because there were typically only two-dozen countries in the sample, which limited the

number of explanatory variables that could be included. Nevertheless, the studies that estimated that open access

had little impact on penetration out numbered the studies that estimated that it was influential.

The Proposal

Undersecretary Jorge Atton was concerned that investment in fiber broadband networks was being

discouraged by fears about open access. Fiber was important, Atton thought, because it offered speeds much

higher than DSL, ADSL, cable modems or 3G. Installing fiber was very costly with payback periods of ten years or

more, much longer than that for DSL or cable modem equipment. The president of an important

telecommunications company had supposedly told the Chilean authorities that he would not invest in fiber

networks if, once built, they would have to grant access to competitors. Atton reasoned that the Internet was

different from voice telephony; in that interconnection was not an issue. Through the Internet, a subscriber

connected to the Internet by one company was automatically connected to the subscribers of other companies.

Moreover, open access makes more sense to Atton when a country has already made important investments in

physical networks to provide Internet and there is enough capacity to provide high speed broadband in most of the

country, but not when the problem was an insufficient amount of investment in those networks.

Atton had already announced the governments intention to pass a law promising not to force open

access to broadband networks. In response, big telecommunications companies had announced plans to invest US

$7 billion in fiber to the home and 4G wireless over the next five years.

In addition, Atton proposed to encourage the development of carriers of carriers; companies that




invested in infrastructure to provide telecom services to other companies that served final customers. An example

of carriers of carriers was American Towers, a U.S. firm that had a global portfolio of 30,000 wireless and

communications sites, and leased spots on those towers to various wireless companies. The prices these

companies charged for their services would not need to be regulated since the companies needed clients to

recover their investments.

Attons position made some people nervous. Chiles telephone policies had been successful in greatly

improving coverage, reducing tariffs and increasing subscribers, and open access, in the form of requirements for

interconnection, had been imposed from the beginning. Moreover, while 80 percent of Chilean households had

access to at least one fixed-line broadband provider, 20 to 30 percent had access to only one provider and another

20 to 30 percent had access to two. With mandated open access, 80 percent of households would have access to

six or more providers.

What regulatory policies, if any, were responsible for Chiles success in telephones? Was broadband

different from voice telephony in ways that might make comparisons misleading? What could one make of the

mixed experience in the OECD countries? Which was more likely to bring increased broadband penetration and

quality of service in Chile; open access or facilities based competition?




Exhibit 1

Fixed and Mobile Lines in Service, 1989-2010 Fixed lines Mobile lines

Year Lines in service Lines per 100 inhabitants Lines in service

Lines per 100 inhabitants

1989 691,324 5.25 4,866 0.04 1994 1,634,393 11.60 115,691 0.82 1997 2,693,286 18.30 409,740 2.80 2000 3,302,498 21.33 3,401,525 21.97 2001 3,478,492 22.21 5,100,783 32.57 2002 3,467,013 21.90 6,244,310 39.44 2003 3,252,063 20.32 7,268,281 45.41 2004 3,345,102 20.67 9,261,385 57.24 2005 3,460,645 21.17 10,569,572 64.65 2006 3,383,597 20.49 12,450,801 75.39 2007 3,459,611 20.74 13,955,202 83.66 2008 3,529,645 20.93 14,796,593 87.83 2009 3,564,351 20.95 16,450,223 96,70 2010 3,457,506 20.13 19,852,242 115,61 Note: Figures are for December of each year. Source: Data for 2000 to 2010 adapted from tables available on SUBTEL website at: http://www.subtel.gob.cl/prontus_subtel/site/artic/20111206/asocfile/20111206175426/1_series_lineas_telefonicas_sep11_291211_v1.xlsx (Tab 1.14_Men_Lineas_Emp) accessed on January 5, 2012 via Series lineas telefnicas and Abonados mviles links on http://www.subtel.gob.cl/prontus_subtel/site/artic/20070212/pags/20070212182348.html Data for 1989, 1994 and 1997 adapted from data at http://www.subtel.gob.cl/prontus_subtel/site/artic/20070523/asocfile/20070523160750/iest_1.pdf (page 10) accessed January 5, 2012.

Exhibit 2 Market Share of the Dominant Firm (Telefnica) in Fixed Telephony, selected years 1994-2010

Year Market Share

1994 95%

2000 81.77%

2004 72.56

2010 56.25% Note: Figures are for December of each year. Source: Data for 2000 to 2010 adapted from data available on SUBTEL website at http://www.subtel.gob.cl/prontus_subtel/site/artic/20111206/asocfile/20111206175426/1_series_lineas_telefonicas_sep11_291211_v1.xlsx (Tab 1.14_Men_Lineas_Emp) via Series lneas telefnicas link on http://www.subtel.gob.cl/prontus_subtel/site/artic/20070212/pags/20070212182348.html accessed on January 5, 2012. Data for 1994 adapted from Memoria Annual Telefnica CTC Chile (Annual Report 1994, Telefnica CTC Chile).




Exhibit 3 Companies Providing Fixed-Line Telephone Service, selected years 2000-2010

Telefnica

Chile VTR Entel Telsur Claro Others Total

Lines 2000 2,700,536 135,500 101,556 144,973 219,933 3,302,498 2004 2,427,564 342,893 154,426 171,892 248,527 3,345,102 2010 1,944,739 638,176 195,972 180,759 101,218 396,642 3,457,506

Share 2000 81.8% 4.1% 3.1% 4.4% 6.7% 100% 2004 72.6% 10.2% 4.6% 5.1% 7.4% 100% 2010 56.2% 18.5% 5.7% 5.2% 2.9% 11.5% 100%

Note: Figures are for December of each year. Source: Adapted from data available on SUBTEL website at http://www.subtel.gob.cl/prontus_subtel/site/artic/20111206/asocfile/20111206175426/1_series_lineas_telefonicas_sep11_291211_v1.xlsx (Tab 1.14_Men_Lineas_Emp) via Series lneas telefnicas link on http://www.subtel.gob.cl/prontus_subtel/site/artic/20070212/pags/20070212182348.html accessed on January 5, 2012.

Exhibit 4

Companies Providing Mobile Telephone Service, selected years 2000-2010

Movistar Entel PCS Claro Nextel Inter-export Total Lines

2000 1,836,516 1,273,977 264,032 3, 401,525 2004 4,452,149 3,270,725 1,538,511 9,261,385 2007 5,902,245 5.532,612 2,520,345 13,955,202 2009 6,911,730 6,299,268 3,225,329 13,896 16,450,223 2010 8,129,251 7,229,289 4,465,518 27,557 627 19,852,242

Share 2000 54.8% 37.5% 7.8% 100% 2004 48.1% 35.3% 16.6% 100% 2007 42.3% 39.7% 18.1% 100% 2009 42.0% 38.3% 19.6% 0.1% 100% 2010 41.0% 36.4% 22.5% 0.1% 0.0% 100%

Note: Movistar and Telefnica Chile are both owned byTelefnica Espaa. Figures are for December of each year. Source: Adapted from data available on SUBTEL website at http://www.subtel.gob.cl/prontus_subtel/site/artic/20111206/asocfile/20111206175426/1_abonados_moviles_sep11_291211_v1.xlsx (Tab 3.5_Abonados por empresa) via Abonados Mviles link on http://www.subtel.gob.cl/prontus_subtel/site/artic/20070212/pags/20070212182348.html accessed on January 5, 2012.




Exhibit 5 Internet Fixed Connections (Excludes Mobile), 2000-2010

Number of subscribers Penetration

Dial-up Broadband Total Per 100

inhabitants Percent of

households

2000 577,809 7,680 585,489 3.78 15.01%

2001 631,404 66,723 698,127 4.46 17.56%

2002 569,306 188,454 757,760 4.79 18.70%

2003 483,773 352,234 836,007 5.22 20.24%

2004 326,433 478,883 805,315 4.98 19.18%

2005 197,515 708,564 906,079 5.54 21.23%

2006 76,092 1,011,646 1,087,738 6.59 25.08%

2007 29,609 1,302,310 1,331,919 8.13 29.70%

2008 11,831 1,427,178 1,439,009 8.54 31.02%

2009 5,993 1,689,041 1,695,034 9.96 35.30%

2010 1,346 1,818,345 1,819,691 10.60 36.60% Note: Figures are for December of each year. Source: Adapted from data available on SUBTEL website at http://www.subtel.gob.cl/prontus_subtel/site/artic/20111206/asocfile/20111206175426/1_series_conexiones_internet_sep11_291211_v1.xlsx (Tabs 7.1, 7.7, and 7.14) via Series conexiones internet link on http://www.subtel.gob.cl/prontus_subtel/site/artic/20070212/pags/20070212182348.html accessed on January 5, 2012.




Exhibit 6

Fixed Broadband Connections by Technology, 2000-2010

Total ADSL Cable Other 2000 7,680 - - 7,680 2001 66,723 25,351 36,669 4,703 2002 188,454 72,909 93,475 22,070 2003 352,234 160,448 161,623 30,163 2004 478,883 239,999 210,250 28,634 2005 708,564 379,918 303,428 25,218 2006 1,011,646 584,098 424,224 3,324 2007 1,302,310 760,482 537,603 4,225 2008 1,427,178 816,702 605,889 4,587 2009 1,689,041 905,787 758,943 24,311 2010 1,818,345 947,731 847,459 22,295 Note: Figures are for December of each year. Source: Adapted from data available on SUBTEL website at http://www.subtel.gob.cl/prontus_subtel/site/artic/20111206/asocfile/20111206175426/1_series_conexiones_internet_sep11_291211_v1.xlsx (Tab 7.2.Conex Acceso) via Series conexiones internet link on http://www.subtel.gob.cl/prontus_subtel/site/artic/20070212/pags/20070212182348.html accessed on January 5, 2012.

Exhibit 7 Companies Providing Fixed Internet Services, 2007 and 2010

Telefnica VTR Claro Telsur GTD Entel Others Total Lines

2007 617,462 522,624 0 62,564 29,180 41,899 47,550 1,331,919 2010 788,996 698,146 127368 92,759 37,831 21,644 47,471 1,818,799

Share 2007 46.4% 39.2% 0.8% 4.7% 2.2% 3.2% 3.6% 100% 2010 43.4% 38.4% 7.3% 5.1% 2.1% 1.2% 2.6% 100%

Note: Figures are for December of each year. Source: Adapted from data available on SUBTEL website at http://www.subtel.gob.cl/prontus_subtel/site/artic/20111206/asocfile/20111206175426/1_series_conexiones_internet_sep11_291211_v1.xlsx (Tab 7.17. CO_EMPR_FIJAS) via Series conexiones internet link on http://www.subtel.gob.cl/prontus_subtel/site/artic/20070212/pags/20070212182348.html accessed on January 5, 2012.




Exhibit 8

Companies Providing Mobile Internet Services, 2009 and 2010

Movistar Entel Claro Total Lines

2009 2,324,900 4,040,100 866,467 7,231,467 2010 2,989,725 1,771,221 1,077,726 5,838,678

Share 2009 32.1% 55.9% 12.0% 100% 2010 51.2% 30.3% 18.5% 100%

Note: In 2010 SUBTEL changed its definition of mobile connections to count only the accounts that had been active in the last month rather than all accounts. This reduced the number of lines counted since many prepaid accounts were used only occasionally. Source: Adapted from data available on SUBTEL website accessed first quarter 2011 from http://www.subtel.gob.cl/prontus_subtel/site/artic/20070212/pags/20070212182348.html (Go to: Serie conexiones Internet Tab CO_EMP_TEC_MOVIL).

Exhibit 9

Fixed and Mobile Internet Connections by Speed, 2007-2010

To 56 kbps

56 kbps to 512 kbps

512 kbps to 2 Mbps

2 Mbps to 100 Mbps

100 Mbps to 1 Gbps

Over 1 Gpbs Total

Fixed lines 2007 38,100 636,403 621,656 35,745 4 11 1,331,919 2008 18,219 188,008 921,142 311,578 45 17 1,439,009 2009 9,561 30,797 58,373 1,214,478 275,648 106,177 1,695,034 2010 2,498 27,811 40,546 911,843 341,166 494,935 1,818,799

Share

2007 2.9% 47.8% 46.7% 2.7% 0.0% 0.0% 100.0% 2008 1.3% 13.1% 64.0% 21.7% 0.0% 0.0% 100.0% 2009 0.6% 1.8% 3.4% 71.6% 16.3% 6.3% 100.0% 2010 0.1% 1.5% 2.2% 50.1% 18.8% 27.2% 100.0%

Mobile lines 2009 2,058,073 4,795,510 377,884 0 7,231,467 2010 2,643,999 2,417,915 727,774 48,990 5,838,678

Share 2009 28.5% 66.3% 5.2% 0.0% 0.0% 0.0% 100.0% 2010 45.3% 41.4% 12.5% 0.8% 0.0% 0.0% 100.0%

Note: Figures are for December of each year. Source: Adapted from data available on SUBTEL website at http://www.subtel.gob.cl/prontus_subtel/site/artic/20111206/asocfile/20111206175426/1_series_conexiones_internet_sep11_291211_v1.xlsx (Tab 7.21.CO_ANCH_FIJAS) via Series conexiones internet link on http://www.subtel.gob.cl/prontus_subtel/site/artic/20070212/pags/20070212182348.html accessed on January 5, 2012.




Exhibit 10 Theoretical time to download data online at different connection speeds

Download type 56 kbps 256 kbps 2 Mbps 40 Mbps 100 Mbps Google home page (160 KB) 23 sec. 5 sec. 0.64 sec. 0.03 sec 0.01 sec. ITU home page (740 KB) 107 sec. 23 sec. 3 sec. 0.15 sec. 0.06 sec. 5 MB music track 12 min. 3 min. 20 sec. 1 sec. 0.4 sec. 20 MB video clip 48 min. 10 min. 1 min. 4 sec. 1.6 sec. CD, or low quality movie (700 MB)

28 hours

6 hours

47 min.

2 min.

56 sec. DVD, or high quality movie (4 GB)

1 week

1.5 days

4.5 hours

13 min.

5 min. Source: Broadband: A platform for progress. A report by the broadband commission for digital development (page 33). ITU. www.broadbandcommission.org/report2/full-report.pdf

Exhibit 11 Penetration of Telecommunications Services by Household Income, 2006

Income quintile Internet broadband Other services in the home

Home subscribers

Home plus other access

TV cable or satellite

Telephone fixed line

Mobile telephone

I 3.2% 4.4% 9.4% 22.4% 35.9%

II 5.6% 7.7% 14.6% 34.9% 46.2%

III 9.8% 13.0% 21.5% 47.8% 53.0%

IV 18.4% 24.7% 33.7% 60.2% 63.0%

V 38.5%

48.9% 55.8% 73.5% 77.5%

All quintiles 15.1% 19.7% 26.9% 47.8% 53.8% Source: Jorge Quiroz C. Consultores Asociados, Situacin de Chile en Materia de Precios de la Banda Ancha: Informe Final, 30 de Mayo de 2008 - Cuadro 5: Penetracin de servicios tecnolgicos en el hogar, segn quintil de ingreso (2006), p. 33. http://www.paisdigital.org/documentos/docstelecomunicaciones/2008/Informe_final_Precio_Banda_Ancha_Chile.pdf, accessed on January 5, 2012.



Competition vs. Investment and CoordinationBroadband TechnologiesChiles Experience with TelephonesThe Evolution of Broadband in ChileRegulatory OptionsThe Experiences of Other CountriesThe ProposalFixed and Mobile Lines in Service, 1989-2010Data for 1989, 1994 and 1997 adapted from data at http://www.subtel.gob.cl/prontus_subtel/site/artic/20070523/asocfile/20070523160750/iest_1.pdf (page 10) accessed January 5, 2012.Exhibit 2Exhibit 3Companies Providing Fixed-Line Telephone Service, selected years 2000-2010Exhibit 4Companies Providing Mobile Telephone Service, selected years 2000-2010Exhibit 5Exhibit 6Exhibit 7Companies Providing Fixed Internet Services, 2007 and 2010Exhibit 8Companies Providing Mobile Internet Services, 2009 and 2010Note: In 2010 SUBTEL changed its definition of mobile connections to count only the accounts that had been active in the last month rather than all accounts. This reduced the number of lines counted since many prepaid accounts were used only occasio...Exhibit 9Fixed and Mobile Internet Connections by Speed, 2007-2010Exhibit 10Exhibit 11

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