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Telecom & ICT Revolution: a challenge for Regulation Nicolas Curien, ARCEP, France Policy and Regulatory Responses to Convergence and Developing Wireless Technologies ICT for Development, World Bank, Washington January 26, 2009 January 26, 2009

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2 Agenda 1. Dynamics of Regulation 2. Regulation Challenged by NGNs 3. Focus on Mobile Broadband 4. Impact on Economy and Society

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3 1. Dynamics of Regulation Why to regulate ? Why to regulate ? Is regulation a long still river ? Is regulation a long still river ? Regulation and investment Regulation and investment FTTH : optmism vs pessimism FTTH : optmism vs pessimism Specificity of Regulation Specificity of Regulation

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4 Why to Regulate ? Once upon a time were the model of natural monopoly. Once upon a time were the model of natural monopoly. In Europe, after a long process, driven by the EC, the natural monopoly model came to its end at the end of the 90 ies : then, the former State monopolies were converted into autonomous firms, the market was opened up to competition (1998), sectorial regulators were created as administrative agencies independant from Government as a stakeholder. In Europe, after a long process, driven by the EC, the natural monopoly model came to its end at the end of the 90 ies : then, the former State monopolies were converted into autonomous firms, the market was opened up to competition (1998), sectorial regulators were created as administrative agencies independant from Government as a stakeholder. However, opening up a market to competition does not eliminate de facto all the economic characteristics (economies of scale / scope and network effects) that made it a natural monopoly in the first place : excessive duplication of infrastructure still remains inefficient (i.e. not over-compensated by dynamic benefits expected from competition). However, opening up a market to competition does not eliminate de facto all the economic characteristics (economies of scale / scope and network effects) that made it a natural monopoly in the first place : excessive duplication of infrastructure still remains inefficient (i.e. not over-compensated by dynamic benefits expected from competition). Hence, in order to generate a sustainable competition in retail markets, a transparent non discriminatory and cost-oriented access to the bottllenecks inherited from the former monopoly (copper local loop) is duly needed. Hence, in order to generate a sustainable competition in retail markets, a transparent non discriminatory and cost-oriented access to the bottllenecks inherited from the former monopoly (copper local loop) is duly needed. Such was the main goal of regulation in its first period. Such was the main goal of regulation in its first period.

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5 Is Regulation a Long Still River ? In contrast to a widespread opinion, regulation is definitely not a deterministic process that would perform a predefined transition from a monopolistic market towards a competitive one In contrast to a widespread opinion, regulation is definitely not a deterministic process that would perform a predefined transition from a monopolistic market towards a competitive one It is rather a path dependent process subject over time to severe uncertainties about technology and usage. It is rather a path dependent process subject over time to severe uncertainties about technology and usage. Thus, the regulator and/or the policy maker must take a sequence of option values , for the benefit of market competitors (profitable investment) and of consumers (sustained innovation and price cuts). Thus, the regulator and/or the policy maker must take a sequence of option values , for the benefit of market competitors (profitable investment) and of consumers (sustained innovation and price cuts). In such a context, relevant information, transparency and maximal visibility given to the market protagonists appear as major requests (regulator seen as an information processor). In such a context, relevant information, transparency and maximal visibility given to the market protagonists appear as major requests (regulator seen as an information processor).

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6 Regulation and Investment The too much / not enough paradox: The too much / not enough paradox: deregulation (or too light a regulation) leads to under-investment and thus to slow growth of the ICT setor with subsequent low benefits to economy and society. just as would do, at the opposite, too tight a regulation, by inhibiting risk taking in the market. Dynamics helps to solve the paradox: Dynamics helps to solve the paradox: Period 1 : strong regulation of access to essential facilities allows new entrants in the market to climb the investment ladder and thus to undercut the bottleneck advantage of the incumbent; Period 2 : regulation may become lighter after entry, because the incumbent has a natural incentive to invest in new technologies (core and access, wireline and/or wireless), trying to recover part of its initial leadership and because innovation allows its competitors to invest as well, even in he local loop (fibre, WiMax, 3G).

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7 FTTH : Optimism vs Pessimism Optimistic regulation (future oriented) Optimistic regulation (future oriented) to believe in the virtuous circle of innovation driven regulation; to adopt the right mix of asymmetric regulation (horizontal access to civil engineering) and symmetric regulation (vertical cabling in the buildings); to induce an oligopolistic market structure based on infrastructure competition from end to end (or almost). Pessimistic regulation (past oriented) Pessimistic regulation (past oriented) to believe in the curse infrastructure competition will never occur in the fixed local loop,whatever the technology ; to enforce an aggressive remedy such as functional (or even structural) separation between retail services and wholesale access services; thus creating an artificial monopoly , i.e. a monopoly of access entirely induced by regulation when innovation hopefully erased the natural monopoly!

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8 Specificity of Regulation Regulation is not universal : Regulation is not universal : it is dependent on sectorial characteristics; it must be adaptative over time. In the particular case of telecoms, the main driving force is an outstanding pace of innovation, with a double effect: In the particular case of telecoms, the main driving force is an outstanding pace of innovation, with a double effect: on the one hand, regulation is made more complex, because of deep uncertainties about technology and usage; on the other hand, regulation is made more simple, because of the virtual spiral : strong initial regulation/ entry / innovation / new investment cycle under lighter regulation .

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9 2. Regulation Challenged by NGNs Adaptability Adaptability Convergence Convergence Symmetrisation Symmetrisation Larger scope? Larger scope?

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10 Adaptability The job of the regulator is not to make NGN technological choices in place of operators : freezing the regulatory framework too early would certainly prove inefficient very soon, because of the high innovation pace. The job of the regulator is not to make NGN technological choices in place of operators : freezing the regulatory framework too early would certainly prove inefficient very soon, because of the high innovation pace. The job of the regulator is, through its decisions, to give to the market as much previsibility as visibility about future technologies and usages allows. The job of the regulator is, through its decisions, to give to the market as much previsibility as visibility about future technologies and usages allows. Ex 1. Evolution of fixed and mobile termination rates (harmonization + change in cost structure, B&K ?) Ex 1. Evolution of fixed and mobile termination rates (harmonization + change in cost structure, B&K ?) Ex 2. Interoperability of services, management of QoS vs best effort (measurement of QoS ?, giving the right incentives to invest, avoid on-net / off-net discrimination). Ex 2. Interoperability of services, management of QoS vs best effort (measurement of QoS ?, giving the right incentives to invest, avoid on-net / off-net discrimination).

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11 Convergence Increased transversality accross telecom sub-markets (fixed voice, fixed broadband, mobile voice, mobile broadband) requires an evolution of the regulatory framework in order that replicability of services by all competitors is effective. Increased transversality accross telecom sub-markets (fixed voice, fixed broadband, mobile voice, mobile broadband) requires an evolution of the regulatory framework in order that replicability of services by all competitors is effective. The game between (i) network operators, (ii) content producers and (iii) consumers is a win-win-win game ! The game between (i) network operators, (ii) content producers and (iii) consumers is a win-win-win game ! The issue is then : how to share the global added value between the three ? The issue is then : how to share the global added value between the three ? Net neutrality : unjustified discrimination should be prohibited but differentiated pricing of QoS should be allowed ? Net neutrality : unjustified discrimination should be prohibited but differentiated pricing of QoS should be allowed ? Audiovisual content : to share the value efficiently, a relevant design of the industry organization is an important prerequisite (vertical functional separation, no discriminatory exclusivities). Audiovisual content : to share the value efficiently, a relevant design of the industry organization is an important prerequisite (vertical functional separation, no discriminatory exclusivities). Piracy : public good & commoditization vision vs copyright enforcement. Piracy : public good & commoditization vision vs copyright enforcement.

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12 Symmetrization Less rules exclusively imposed to the incumbent, but still some, used only as dissuasive weapons! Less rules exclusively imposed to the incumbent, but still some, used only as dissuasive weapons! More rules imposed to all, entrants + incumbent More rules imposed to all, entrants + incumbent Wireline : mutualization of the terminal part of the fibre access networks, management of QoS in core networks Wireline : mutualization of the terminal part of the fibre access networks, management of QoS in core networks Wireless : sharing passive and/or active network equipment, coverage obligations, QoS, number portability, spectrum neutrality Wireless : sharing passive and/or active network equipment, coverage obligations, QoS, number portability, spectrum neutrality

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13 Larger Scope? Political regulation of broadcasting (plurality, cultural diversity) is a specific domain with no close relation to the Economic regulation of the ICT markets Political regulation of broadcasting (plurality, cultural diversity) is a specific domain with no close relation to the Economic regulation of the ICT markets Conversely, significant economies of scope do exist between economic regulation of pipes and economic regulation of content (audiovisual + Internet) : convergence + allocation of spectrum. Conversely, significant economies of scope do exist between economic regulation of pipes and economic regulation of content (audiovisual + Internet) : convergence + allocation of spectrum. User genarated content blurs the natural boundaries of the telecommunications territory : should regulation deal with the interoperability of social networks or, more likely, of instant messaging systems? User genarated content blurs the natural boundaries of the telecommunications territory : should regulation deal with the interoperability of social networks or, more likely, of instant messaging systems?

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14 3. Focus on Mobile Broadband From Broadband to Ultra-broadband From Broadband to Ultra-broadband The Path towards 4G The Path towards 4G Wireless Access : the Convergence Wireless Access : the Convergence Complementarity of Frequencies Complementarity of Frequencies Spectrum Allocation over Time Spectrum Allocation over Time

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15 Fixed broadband 17,1 M subscribers (30/09/08) Mobile 55,1 M subscribers (30/09/08) Mobile broadband 7,6 M 3G subscribers (30/06/08) Fixed 40 M subscribers (30/09/08) Trs haut dbit 10 - 50 kb/s 100 - 400 kb/s 512 kb/s 5 Mb/s 50 Mb/s 100 - 300 Mb/s Ultra-broadband From Broadband to Ultra-broadband Ultra-broadband

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19902000 1G : analog systems 2G : GSM & volution 3G & evolution, Wimax ~10 kbit/s~30-40 kbit/s 384 kbit/s Voice, multimedia, broadband Internet Voice Narrowband data Voice Data (packet mode) Always on Voice Services Bandwidth & Traffic Technologies 2010 2Mbit/s 10 Mbit/s 100+ Mbit/s 4G : LTE 2020 Crest bit rate Traffic : x2 every5 years The Path towards 4G

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17 Coverage Mobility Home wireless connectivity Wifi & evolution Mobile Networks UMTS, LTE, Wimax Radio Local Loop Wimax Wireless Access : the Convergence Mobile & fixed access tend to converge Femto-cellules contribute to coverage

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18 Complementarity of Frequencies All frequencies are not equivalent: high frequencies (>1MHz) and low frequencies ( 1MHz) and low frequencies (< 1 MHz) are complementary, the latter holding better diffusion properties. The lower part of spectrum is used for coverage of low density areas and indoor penetration; The higher part of spectrum is used for increasing capacity in cities and dense areas. Today, 2G & 3G use the 900 MHz band in low density areas and the 1800 MHz and 2100 MHZ bands in cities. 2G penetration reaches 99% of the French population. Today, 2G & 3G use the 900 MHz band in low density areas and the 1800 MHz and 2100 MHZ bands in cities. 2G penetration reaches 99% of the French population. Tomorrow, 4G ultra-broadband wireless will require additional frequencies in order to upgrade bandwidth : the 2600 MHz band in cities and the 800 MHZ band (digital dividend) in low density areas. Tomorrow, 4G ultra-broadband wireless will require additional frequencies in order to upgrade bandwidth : the 2600 MHz band in cities and the 800 MHZ band (digital dividend) in low density areas.

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19 3,5 GHz2,1 GHz900 MHz2,6 GHz 800 MHz Time 2,4 GHz5 GHz3,7 GHz1800 MHz GSM RLAN Wifi RLAN Wifi RLL 4G ? 4G? UMTS 26 GHz RLL Spectrum Allocation over Time Digital Dividend UMTS

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20 4. Impact on Economy & Society Some Basic Statements Some Basic Statements Assessing the impact of ICTs Assessing the impact of ICTs LECG Connectivity Scoreboard LECG Connectivity Scoreboard Which Lessons? Which Lessons?

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21 Some Basic Statements ICTs do impact economy & society at three levels,the relative weights of which are country-specific : ICTs do impact economy & society at three levels,the relative weights of which are country-specific : Business growth and efficiency; Government productivity; Quality of life of citizens; Infrastructure, usage and related services and skills are complementary factors. Infrastructure, usage and related services and skills are complementary factors. Investment in ICT is correlated to rate of GDP growth. Investment in ICT is correlated to rate of GDP growth. Incremental impact strongly depends on the current level of development. Incremental impact strongly depends on the current level of development. 2 billions more people in the world should be connected by 2015. 2 billions more people in the world should be connected by 2015.

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22 Assessing the Impact of ICTs An econometric study by Roeller & Waverman (2001) measures the impact of fixed lines penetration on economic growth : An econometric study by Roeller & Waverman (2001) measures the impact of fixed lines penetration on economic growth : Social rates of return ranging from 30% to 60%; 1$ invested in telecoms has a life-time benefit of 2$ to 6$. Impact of broadband is not assessed so far, but it could be much more, because: Impact of broadband is not assessed so far, but it could be much more, because: Innovation pace accelerates; Telecoms become more and more central to economic activity; The transition from connectivity 1.0 to connectivity 2.0 bears huge potential social and economic benefits, although being highly disruptive to the business models within the communications and media industries.

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23 LECG Connectivity Scoreboard Innovation Driven Economies Innovation Driven Economies USA 6.97 Sweden 6.83 Japan 6.68 Canada 6.56 UK 6.13 Finland 6.10 Australia 5.90 Germany 5.52 France 5.07 Korea 4.73 Hong Kong 4.46 Italy 3.85 Spain 3.56 Hungary 3.18 Czech Republic 3.10 Poland 2.33 Efficiency & Resource Driven Economies Efficiency & Resource Driven Economies Malaysia 7.59 Russia 6.60 Mexico 5.54 Brazil 5.28 South Africa 5.26 China 4.45 Philippines 3.00 India 1.83 Nigeria 1.07 (2008 update)

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24 Which Lessons? No country with outstanding score ! No country with outstanding score ! Some surprises : France, Korea Some surprises : France, Korea Diagnosis: Diagnosis: Innovation driven economies do not fully exploit the current telecoms revolution so that productivity of ICTs remains beyond opportunity. Resource and efficiency driven economies lack of basic access to education and infrastructure, which severely hampers connectivity. Recommendations: Recommendations: For innovation driven economies, optimizing connectivity through developing usage is the best source for future economic growth. For resource and efficiency driven economies, connectivity technologies do not only provide access, they transform life. Thus, the opportunity cost of not taking that option is huge!