Upload
citi-columbia
View
225
Download
1
Tags:
Embed Size (px)
DESCRIPTION
YoungsunYoungsunKwonKwon (Session 4)(Session4) June 24, 2011June24,2011 Department of Management ScienceDepartmentofManagementScience KK Ad dI tit t fSi dAd dI tit t fSi dT h lThlKoreaKoreaAdvancedInstituteofScienceandAdvancedInstituteofScienceandTechnologyTechnology http://bomun.kaist.ac.kr/~yokwonhttp://bomun.kaist.ac.kr/~yokwon [email protected]@kaist.ac.kr ContentsContents 2 I. Introduction: IssuesI.Introduction:Issues OECD (2010). Mobile communication developments in the OECD area. 3
Citation preview
C t M bil C i tiC t M bil C i tiCurrent Mobile Communications Current Mobile Communications Networks: Network Issues and PoliciesNetworks: Network Issues and Policies
(Session 4)(Session 4)
June 24, 2011June 24, 2011
YoungsunYoungsun KwonKwonDepartment of Management ScienceDepartment of Management Science
KK Ad d I tit t f S i dAd d I tit t f S i d T h lT h lKorea Korea Advanced Institute of Science and Advanced Institute of Science and TechnologyTechnologyhttp://bomun.kaist.ac.kr/~yokwonhttp://bomun.kaist.ac.kr/~yokwon
[email protected]@kaist.ac.kr
ContentsContents
I. Introduction: IssuesII. Government responsesIII. Five noteworthy features of the mobile communications
marketsIV PQ 1 I titi f ibl i thIV. PQ 1: Is competition feasible in the
telecommunications industry?V PQ 2: How to assign spectrum and how to collectV. PQ 2: How to assign spectrum and how to collect
spectrum fees? VI ConclusionVI. Conclusion
2
I. Introduction: IssuesI. Introduction: Issues
• Mobile traffic is skyrocketing.− Growing smart devices− Growing use of streaming services
OECD (2010). Mobile communication developments in the OECD area.
3
I. Introduction: IssuesI. Introduction: Issues
• Mobile data traffic growth− AT&T: its data traffic has grown 5,000% over past 3 years.− Mobile data traffic grew 240% b/t 2008 and 2009. − Korea is not an exception.
• Transition to 4G serviceTransition to 4G service− 2G (Voice) 3G 4G (Data)
4
II. Government ResponsesII. Government Responsespp
• How to encourage MNO’s investment in 4G networks.− Do MNOs have an incentive to invest in 4G networks?− Even if they do, are they able to do it?Even if they do, are they able to do it?
• Providing more spectrum for 3G and 4GAuctioning additional spectrum− Auctioning additional spectrum
− Incentive auction: share auction proceeds with spectrum licensees to induce them to put up unused spectrum for sale
− Korea adopts auction.− Are auctions still a useful means to assign spectrum in the
current mobile service markets?
5
III. Five noteworthy features of the mobile III. Five noteworthy features of the mobile communications marketscommunications marketscommunications marketscommunications markets
1. Saturation and concentration in international mobile markets– Mobile subscription rate exceeded 100%
• In the U.K. in 2005, reached 131.7% in 2009%• In Korea in 2010, reached 103.9% in 2010.
– Mobile subscription rate 96% in the U S in 2010• 96% in the U.S. in 2010
• 95% in Japan in 2010• 116% in Australia in 2010116% in Australia in 2010
6
III. III. Five noteworthy Five noteworthy features of the mobile features of the mobile communications marketscommunications marketscommunications marketscommunications markets
1. Saturation and concentration in international mobile markets– In the U.K., Orange and T-Mobile merged into
Everything Everywhere in 2009: 5 MNOs to 4 MNOs.– In Australia, Vodafone, AU merged with Hutchison in
2010: 4 MNOs to 3 MNOs.I th U S tl AT&T d t i T– In the U.S., recently AT&T announced to acquire T-Mobile: 4 MNOs to 3 MNOs if approved. Korea has 3 MNOs and Japan 3 MNOs are– Korea has 3 MNOs and Japan 3 MNOs are dominating.
7
III. III. Five noteworthy Five noteworthy features of the mobile features of the mobile communications marketscommunications marketscommunications marketscommunications markets
1. Saturation and concentration in international mobile markets– Implications: no room for new entrants and auctions
will be among incumbents.f f• A two year contract becomes the norm after the adoption of
smart phones mobile markets become more rigid.
8
III. III. Five noteworthy Five noteworthy features of the mobile features of the mobile communications marketscommunications marketscommunications marketscommunications markets
2. Stagnant or falling mobile revenueRecent changes in ARPU since 2005 (units: 100 Yen, $, 1000 Won)
9
III. III. Five noteworthy Five noteworthy features of the mobile features of the mobile communications marketscommunications marketscommunications marketscommunications markets
2. Stagnant or falling mobile revenueRevenue composition of the U.K. telecommunications industry
Ofcom. (2010). Communications market report.Changes in NTT Docomo’s wireless revenues
10
III. III. Five noteworthy Five noteworthy features of the mobile features of the mobile communications marketscommunications marketscommunications marketscommunications markets
2. Stagnant or falling mobile revenue– Additional spectrum and network upgrade to cope
with rapidly increasing data traffic is not likely to bring much additional revenue
Lowering MNOs’ incentive to invest in network upgrades• Lowering MNOs incentive to invest in network upgrades Dampening the growth of content industries.
• Governments need to collect license fees not based on the spectrum quantities MNOs use but on actual revenues Royalties rather than upfront lump-sum fees.
11
III. III. Five noteworthy Five noteworthy features of the mobile features of the mobile communications marketscommunications marketscommunications marketscommunications markets
3. Evolution of wireless network service from voice service to connection service– Wireless communications service is turning into a
wireless Internet connection service – MNOs’ business model is becoming similar to ISPs’
• Stagnant revenue under a fixed monthly charge systemRegulators and MNOs may have to consider adopting a• Regulators and MNOs may have to consider adopting a different charge system
12
III. III. Five noteworthy Five noteworthy features of the mobile features of the mobile communications marketscommunications marketscommunications marketscommunications markets
3. Evolution of wireless network service from voice service to connection service– Changes in NTT Docomo’s subscriber mix
13Source: http://www.nttdocomo.com/about/operating/fomamova.html
III. Five III. Five noteworthy noteworthy features of the mobile features of the mobile communications marketscommunications marketscommunications marketscommunications markets
3. Evolution of wireless network service from voice service to connection service– Regulators need to take into account the changing
nature of MNOs’ business when charging fees for dditi l t f 3G d 4G iadditional spectrum for 3G and 4G services• Charge fees based on actual revenue or not to charge fees
at all• Otherwise, MNOs may merge with competitors or raise the
retail prices
14
III. III. Five noteworthy Five noteworthy features of the mobile features of the mobile communications marketscommunications marketscommunications marketscommunications markets
4. Intensifying economies of scope: multi-purpose network– Reasons of bundled
subscription of communications services
Ofcom. (2010). Communications market report.
15
III. III. Five noteworthy Five noteworthy features of the mobile features of the mobile communications marketscommunications marketscommunications marketscommunications markets
4. Intensifying economies of scope: multi-purpose network– Wireless networks have turned into common
networks for delivering multi-services and effects of i f h b teconomies of scope has become stronger
– Wireless telecommunications industry is becoming more concentratedmore concentrated
• Spectrum auctions combined with upfront lump-sum fees are likely to intensify vicious cycle caused by economies of scope
lead to greater market concentration
16
III. III. Five noteworthy Five noteworthy features of the mobile features of the mobile communications marketscommunications marketscommunications marketscommunications markets
5. Changing revenue structure between services– Mobile communications service is in a transitional
phase from 2G to 3G service, so is revenue structure of MNOs
MNOs had paid either part or the full amount of license fees• MNOs had paid either part or the full amount of license fees for 3G service in a transition period as well as even before they started offering it
• Upfront lump-sum fees do not take into account the changing revenue structures of mobile communications markets
17
III. III. Five noteworthy Five noteworthy features of the mobile features of the mobile communications marketscommunications marketscommunications marketscommunications markets
5. Changing revenue structure between services– Royalties allocate spectrum fees flexibly as the
revenue structure of mobile industry changes• Upfront lump-sum fees increase financial burdens of MNOs
and place full risks on MNOs deter service provision andand place full risks on MNOs deter service provision and proliferation of new content services
18
III. III. Five noteworthy Five noteworthy features of the mobile features of the mobile communications marketscommunications marketscommunications marketscommunications markets
• Summary– Market saturation and concentration, reinforced by
intensifying economies of scope.– Stagnant or falling revenue.– Mission: Facilitating network investment for smooth transition to
4G networks.
19
IV. PQ 1: Is competition feasible in the IV. PQ 1: Is competition feasible in the telecommunications industry?telecommunications industry?telecommunications industry?telecommunications industry?
• No!– History and recent M&As are proofs.
http://www.wikinvest.com/stock/Qwest Communications International (Q)
20
http://www.wikinvest.com/stock/Qwest_Communications_International_(Q)
IV. PQ 1: Is competition feasible in the IV. PQ 1: Is competition feasible in the telecommunications industry?telecommunications industry?telecommunications industry?telecommunications industry?
• Enhancing competition in the telecommunications network service market is merely a myth!
• Policy alternativesy– Functional separation: Openreach in the U.K.– Australian model
• Australia is establishing a monopoly that builds and operates the national broadband network on a wholesale-only open access basisaccess basis.
– 4th player in Korea? Cannot be an option.
21
V. V. PQ PQ 2: How to assign spectrum and how to 2: How to assign spectrum and how to collect spectrum fees?collect spectrum fees?collect spectrum fees?collect spectrum fees?
• License fees under upfront lump-sum fees and royalties– 40 MHz bandwidth per MNO was assigned for 3G
service through a comparative hearing in October 20002000
• KT and SKT were obliged to pay 1.3 trillion Korean Won as license fees
– The U.K. was the first country that auctioned 3G license and it garnered £22.5 billion in 2000.
22
V. V. PQ PQ 2: How to assign spectrum and how to 2: How to assign spectrum and how to collect spectrum fees?collect spectrum fees?collect spectrum fees?collect spectrum fees?
• Did MNOs pay an exorbitant amount?– What if they could have paid royalties?
– SKT and KT• Revenue growth: 3%
23
V. V. PQ PQ 2: How to assign spectrum and how to 2: How to assign spectrum and how to collect spectrum fees?collect spectrum fees?collect spectrum fees?collect spectrum fees?
• Did MNOs pay an exorbitant amount?– UK MNOs
• Revenue growth: currently falling but assumed to be stable.• 3G subscription ratio: assumed to be mimicking Japan’s.
24
V. V. PQ 2: How to assign spectrum and how to PQ 2: How to assign spectrum and how to collect spectrum fees?collect spectrum fees?collect spectrum fees?collect spectrum fees?
• The case of Korea: SKT and KT casesEstimated royalties of KT and SKT in year 2001 value (billion Won, royalty
t i 3%))Discount rates 6.8 5.8 4.8 3.8 2.8 1.8
KT 898.2 996.1 1106.4 1230.9 1371.7 1531.1
rate is 3%))
– The analysis indicates that KT apparently paid much
SKT 1382.5 1539.2 1716.3 1916.9 2144.4 2402.9
larger spectrum fees than it should have in 2001, while SKT paid less than it was supposed to pay.
– Lump-sum fees could help the bigger get bigger and the smaller get smaller.
25
V. PQ 2: How to assign spectrum and how to V. PQ 2: How to assign spectrum and how to collect spectrum fees?collect spectrum fees?collect spectrum fees?collect spectrum fees?
• The case of the U.K. 3G auctionEstimates of U.K. MNOs’ royalties in year 2001 value (£, million)
Royalty rates 2% 3% 5% 10% 20%
Royalties 1,963.0 2,944.5 4,907.5 9,815.0 19,629.9
– U.K. MNOs paid exorbitant license fees in 2000.• They actually paid as much in license fees as they would y y p y
have paid when the royalty rate was more than 20%• The hypothetical royalty rate of U.K. MNOs is about seven
times higher than that of Korean MNOstimes higher than that of Korean MNOs
26
V. PQ 2: How to assign spectrum and how to V. PQ 2: How to assign spectrum and how to collect spectrum fees?collect spectrum fees?collect spectrum fees?collect spectrum fees?
• Are auctions still a useful means to assign• Are auctions still a useful means to assign spectrum?
Auctions were supposed to increase efficiency in– Auctions were supposed to increase efficiency in spectrum use and further competition in the mobile communications market.communications market.
– Auction is no longer effective in the current environments
• Auctions to assign additional spectrum for increasing data traffic are likely to be a competition only among incumbents.Wh t if ll i b t d t i dditi l t ?• What if all incumbents need to acquire additional spectrum?
• Today, the only purpose served by the auction method is to extract spectrum fees p
27
V. PQ 2: How to assign spectrum and how to V. PQ 2: How to assign spectrum and how to collect spectrum fees?collect spectrum fees?collect spectrum fees?collect spectrum fees?
• Are upfront lump-sum payments still a useful way of collecting spectrum fees?– Royalties are superior to upfront lump-sum fees
• Upfront-lump sum fees do not distort market outcomes in the short-run but they have the effect of intensifying economies of scale in therun but they have the effect of intensifying economies of scale in the long-run
– Royalties do not hinder the evolution of mobile communications service
• Under upfront lump-sum fees MNOs will be manipulative in determining evolution speeddetermining evolution speed
• Royalties will be flexibly adjusted as subscribers and revenues immigrate from old to new service
28
V. PQ 2: How to assign spectrum and how to V. PQ 2: How to assign spectrum and how to collect spectrum fees?collect spectrum fees?collect spectrum fees?collect spectrum fees?
• Should MNOs pay spectrum fees?– Japan has not levied license fees on MNOs and is the first
country to have completed 3G service transitioncountry to have completed 3G service transition.– License fees are nothing but a money spinning tool to raise
public funds• Function of spectrum fees as a screening device is withering away
– Spectrum fees can be justified only when the government can use public funds more efficiently than MNOsuse public funds more efficiently than MNOs
– Argument that MNOs have no incentive to economize on spectrum use without spectrum fees is fallacious.
• Economizing of spectrum use ex-post facto does not reduce spectrum fees
– It may be better not to charge spectrum fees at all that could possibly deter network upgradesp y pg
29
VI. ConclusionVI. Conclusion
• Present mobile communications market situation– Markets are saturated
The number of MNOs is declining– The number of MNOs is declining– Mobile revenues are stagnant or falling– MNOs are becoming wireless ISPsg– Economies of scope are strengthening
• Upfront lump-sum fees can be exorbitant– Reducing rather than boosting competition by increasing fixed
costs and placing unbalanced fees on MNOscosts and placing unbalanced fees on MNOs– Deterring a smooth transition of mobile service from 2G to 3G,
and then 4G
30
VI. ConclusionVI. Conclusion
• Governments need to consider assigning additional spectrum to incumbents without auctions and adopting royalties as a way of collecting spectrum feesroyalties as a way of collecting spectrum fees– Collecting spectrum fees in and of itself cannot and should not
be the first objective of the governments– It may be better to assign additional spectrum to incumbents
without charging at all
• It is time to admit that the communications network business is really a natural monopolybusiness is really a natural monopoly
31