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1
Regulatory Challenges of Next Generation Networks
Regulatory Policy Institute Annual Competition and Regulation Conference 2008Oxford, 15th& 16th September 2008
Marcus Weinkopf, Deutsche Telekom
April 24, 2008Marcus Weinkopf – Deutsche Telekom 2
Invest: 2000 €,Depreciated over 5 yearsNutrition:
500 € p.a.
Output:3000 Liter p.a.
Regulator fixesRate of Return
CalculatesefficientInvestmentDepreciationVariable CostsCommon Costs
divides by output
Price per Liter
Cost-Based Price Regulation: Basics
April 24, 2008Marcus Weinkopf – Deutsche Telekom 3
Next Generation Milk1€
The Next Generation: New Colors for the Market
Next Generation Access
Same starting position for all network operators
Substantial investments needed
High risk of investments
Invest: 2000 €,Depreciated over 5 years
April 24, 2008Marcus Weinkopf – Deutsche Telekom 4
Next Generation Milk1€
Cost-Based Regulation with Multiple Business Models ?
Reseller / “Bitstream Access”
Next Generation Milk1€
“Committed Investor”
Invest: 2000 €,Depreciated over 5 years
Despite strongly differing risks, traditional „cost-based“
regulation would lead to equal prices for both
business models!
!
April 24, 2008Marcus Weinkopf – Deutsche Telekom 5
Next Generation Milk1€
Next Generation Milk1€
When Regulation Makes No Difference: Why Should One Take Risks?
April 24, 2008Marcus Weinkopf – Deutsche Telekom 6
Cost-Based Regulation for New Infrastructures: A Perfectly Regulated Access to Nowhere?
April 24, 2008Marcus Weinkopf – Deutsche Telekom 7
FTTH/B: Europe Lags Behind Asia and the U.S.
Anzahl der Glasfaser-Nutzer in Mio.
0
2
4
6
8
10
12
Europe USA Asia
20041 20061
20041
20061
20041
20061
2007(E) 2
2007(E) 2
2007(E) 2
18
Number of fiber-based subscribers in Mio.
Sub
scrib
ers
in M
io.
Recent trends show: Fiber-based infrastructure grows in all regions, but at significantly different rates.
Only slow increase of fiber access users in Europe. Significantly faster growth in the U.S. and in Asia.
In 2004, European fiber network roll-out was still ahead of the U.S. Since 2006, the picture changed dramatically and with massive fiber investments, the U.S. left Europe far behind.
While Europe passed the 1 million barrier of fiber-connected homes thanks to a 30% increase in 2007, the dynamic is still much faster in the U.S. and in Asia.
1 Source: IDATE (2007). Europe: EU-5 +NL+SW; Asia: Korea, Japan2 Source: Estimates of the FTTH Council for 2007
April 24, 2008Marcus Weinkopf – Deutsche Telekom 8
Demand for Bandwidth Will Increase Significantly
Growth of data traffic in fixed networksDevelopment of network performance
Source: Alcatel Lucent 2006-2007; Cisco, Global IP Traffic Forecast and Methodology, 2006-2011
Ø B
and
wid
th p
er u
ser
Developmentfixed networks
Factor10-25
Factor10-25
Factor10-25
Developmentmobile networks
Time
0
20.000
40.000
60.000
80.000
100.000
120.000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
0
3.000
6.000
9.000
12.000
15.000
18.000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Ter
a B
yte/
Mon
thT
era
Byt
e/M
onth
Growth of data traffic in mobile networksUMTS
HSxPA
LTE
EDGE
IMT AdvancedADSL
ADSL2+
VDSL
FTTH(NG-GPON)
FTTH(GPON)
April 24, 2008Marcus Weinkopf – Deutsche Telekom 9
Next Generation Networks need Next Generation Regulation
Deutsche Telekom starts with close to 100% fixed network market share
Existing State-of-the-art Network
Redistribution of market shares Decreasing retail prices Regulation of existing networks:
Access Wholesale Prices
Regulation
Market
Strong broadband competition Substantial investments in NGA &
NGN needed Same starting position for all
network operators
?
1998PSTN / DSL
2008 NGN & NGA (FTTX)
Regulation
Market
April 24, 2008Marcus Weinkopf – Deutsche Telekom 10
Deutsche Telekom’s Move towards NGA: T-Entertain / VDSL
TV for the mass market launched in 2007
Eoy 2007: IP TV via VDSL in 27 cities, ADSL2+ in 750 cities; Plan 2008: IP TV via VDSL in 40 cities, ADSL2+ in 1000 cities; Mid term: VDSL in up to 50 cities
IP TV “Entertain”: 150 TV channels, 2600 VoD titles
T-Home “Entertain” coverage: 44 % / 17 Mio. Homes. Target for 2008: 20 Mio. Homes
11
German Market: The Fiber Race to the Home has Started
Have you found the bottleneck?
Not yet..
Sou
rce:
Wilh
elm
.tel p
rese
ntat
ion,
Nov
embe
r 20
06 ,
bubb
les
by D
T
Roll out Start: July 2006 Current Coverage: 10 – 20,000 HH in
Cologne Plan: up to 800,000 HH in 2011
Roll out Start: October 2007 Current Coverage : 600 HH in Munic und
Augsburg; in 2008: 110,000 HH Plan: up to 400,000 HH in 2011
Roll out Start: August 2006 Current Coverage : 90,000 HH in
Norderstedt and Hamburg Further roll out planned
Roll out Start: 2005 Current Coverage : 2000 HH in
Westerstede; Lohne under construction Plan: Roll-out in Oldenburg beginning in
2008
Other announc-ements by
12
FttH: Strong Economics of Density,Nation-wide Roll-out requires Enormous Investments
FTTH Coverage (in %)100
No economically viable roll-out
One FTTH Network + Cable
Infrastructure Competition FTTH/Cable
20 40 60 800
Req
uire
d I
nves
tmen
t pe
r H
H
Region 1
Region 2
Region 3
Next Generation Regulation: Regionalization Appropriate
13
Service-based competition through access to NGA-
network
Infrastructure competition FTTH/cable
Symmetric opening of ducts as enabler
No regulation
Priority for commercial solutions
Subsidiary price- and access regulation with risk-
sharing possible
No economically viable network roll-out possible
Structural fundsPPP/tenders
Non-discriminatory access
Region 1 Region 2 Region 3
Increasing costs per access line
Regulatory decisions must reflect regional/local conditions of competition
Decisions on access and prices for NGAs must be long-term – no regular short term review of conditions every 2 years
Access conditions must allow for flexible pricing by the regulated operator and fair risk sharing between investor and access seeker
14
Next Generation Regulation: Network Access
Today: Regulated Access to each Element of the value chain
In-House Sub-Loop
Unbund- ling
ULL Col- location
Leased Lines
Resale &BSA
ZISP & Gate & OC
IC & Carrier
Selection
Access Network Operators ISP Telephone SP
In-House Ducts BSAor
Tomorrow: Regulators should focus on only one Type of Access, …
( … and leave room for alternative commercial arrangements.)
Wholesale Prices: Investment Risk Must be Taken into Account
15
Proposal for the Review
No risk sharingNo mechanism to adequately reflect
the investment risk Investor fully bears the risk of
sufficient network utilization Investment is not profitable in early
market phase whereas access seeker can make a profit right from the beginning
Market entry possible anytime (free “option value“)
Risk sharing through: Long-term contracts with
committed duration and quantities per time period or
Up-front paymentsAccess seeker partly takes over the investment risk
Risk sharing through risk premiumAccess seeker pays price basis plus risk premium for “option value“
Risk premium decreases with growing market penetration
Price squeeze test must reflect the Risk Sharing Mechanism: Wholesale Price > Retail Price
Priority of commercial solutions!
Regulation of NGA under current regulatory regime
Committed Output/ Time
Retail price
Output/Time
averagecosts
regulated
price
Wholesale price
Output/Time
Price according to supposed network capacity utilization
x**x
Retail priceRetail price
x1
P1
Price depending on duration and quantity of contract
Wholesale price
averagecosts
Ris
k pre
miu
m
price basis
Wholesale price
Price incl. risk premium
averagecosts
Amount of risk to be shared between access seekers and investor
x*
P2
x2
16
Conclusion: NGAs call for fundamental changes of the regulatory framework
Required changes for NGA
Network Access
Symmetric: Opening all ducts No regulation in case of existing or
potential infrastructure based competition
Access obligations only for one step of the value chain (ducts or BSA)
Longer approval periods (up to 10 years)
Appropriate risk sharing mechanisms Stable wholesale pricing also for the
remaining life of the copper network
Wholesale Price
Regulation
Retail No regulation
Current Framework
Asymmetric obligations for access to ducts to DTAG only
Regulation also in regions with infrastructure based competition
Parallel network access on several steps within the value chain
Maximum validity period of regulated prices: 2 years.
No mechanism for risk sharing through wholesale pricing
Constant pricing pressure
Regulation
17
Thank you for your attention.
Marcus Weinkopf
Vice President Regulation Wholesale and Networks
Head Office T-Home, Deutsche Telekom AG, D-53105 Bonn