platform-based vs. service-based competition: how should latin america regulate?

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PLATFORM-BASED VS. SERVICE-BASED COMPETITION: HOW SHOULD LATIN AMERICA REGULATE? D. Mark Kennet, Ph.D. www.MarkKennet.com

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Platform-based vs. Service-based competition: How should Latin America Regulate?. D. Mark Kennet, Ph.D. www.MarkKennet.com. Introduction. As an economist, my position always depends on how we are defining objectives - PowerPoint PPT Presentation

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Page 1: Platform-based vs. Service-based competition:  How should Latin America Regulate?

PLATFORM-BASED VS. SERVICE-BASED COMPETITION: HOW SHOULD LATIN AMERICA REGULATE?D. Mark Kennet, Ph.D.

www.MarkKennet.com

Page 2: Platform-based vs. Service-based competition:  How should Latin America Regulate?

INTRODUCTION

As an economist, my position always depends on how we are defining objectives

For that reason, we economists have the bad reputation among the legal community for not having fixed positions.

As the old joke goes, if you ask a mathematician how much is 2+2, he will tell you “4, as long as we are doing integer math.” If you ask a statistician the same question, he will respond “On average, 4.” But the economist answers, “What would you like it to be?”

The case of ICT regulation is the same.

Page 3: Platform-based vs. Service-based competition:  How should Latin America Regulate?

POSSIBLE OBJECTIVES IN AN ICT REGULATORY POLICY Legitimate objectives might be

Keeping prices low enough so that all users can afford at least some services

Stimulate investment in infrastructure so that coverage increases, technology advances are incorporated, and more services are made available

Maximize operator earnings Obviously, in some ideal world it would be

possible to achieve all of these, but in reality we are forced to choose which objective is most important

Each of these objectives implies a different style of regulation, and each one carries costs and benefits in terms of the other objectives

Page 4: Platform-based vs. Service-based competition:  How should Latin America Regulate?

OBJECTIVE: KEEP PRICES LOW

Behind this idea is a notion of an anticompetitive market

Because there are few service providers, it is necessary to stimulate an artificial competition through the use of resale and free access to infrastructure

According to this largely European notion, “Intra-modal competition” as it is being proposed in many countries leads to the “Investment Ladder” that eventually results in more infrastructure and less need to regulate

Page 5: Platform-based vs. Service-based competition:  How should Latin America Regulate?

INTRA-MODAL COMPETITION POLICY (I) Promotes competition within infrastructures

Impose obligations for resale and unbundled access (ULL) on dominant operators independent of technology (copper, cable, etc.)

Uses the investment ladderOffers of resale and wholesale access are phased

in, gradually requiring a greater investment on the part of a new entrant

Typically, in broadband:

Resale Bitstream

Shared unbundled

access

Completely unbundled

access

Page 6: Platform-based vs. Service-based competition:  How should Latin America Regulate?

INTRA-MODAL COMPETITION POLICY (II) Establishment of transition

mechanisms between the investment ladder steps; and

Elimination of resale or unbundling obligations when competition existsObjective: Increase competition and

stimulate gradual investment in network infrastructure so that penetration increases

Regulation

Competition

Investment

Penetration

Page 7: Platform-based vs. Service-based competition:  How should Latin America Regulate?

ISSUES WITH THE EUROPEAN APPROACH In theory, it sounds fine; and in the application in

Europe, it seems to function well. But: In every one of the western European countries,

they started out with a national fixed network already dispersed throughout the country

Even in the case of mobile networks, there already existed infrastructure to carry signals to switches and controllers

For that reason, the regulatory vision was to figure out how to share the infrastructure so that service competition would be fostered

The cost of investing in a large part of the infrastructure and technology was already paid

In some sense, it wasn’t necessary to think of improving forward-looking infrastructure

Page 8: Platform-based vs. Service-based competition:  How should Latin America Regulate?

OBJECTIVE: STIMULATE INVESTMENT

In this notion, there is a vision of a market suffering a lack of access to capital for various possible reasons: The country is less developed economically The country wants to modernize rapidly, including in

the less-favored economic sectors As there are relatively few providers, it is

necessary to stimulate the entry of investors According to this idea, an “Inter-modal

Competition” will attract investors to install the network currently lacking

Most regulation is directed toward interconnection rules in order to permit a free and sustainable competition

Page 9: Platform-based vs. Service-based competition:  How should Latin America Regulate?

INTER-MODAL COMPETITION POLICY Promotes competition between infrastructures

There is a clear preference for operators that own their own network facilities The existence of parallel networks minimizes the possibility of

entry barriers in the market The policy incentivizes the creation of new networks

It is thought that this policy creates sufficient incentives for investment and innovation, permitting facilities owners to be compensated for assuming risks

The envisioned transition is

Ex ante (access)

Network rollout

Ex post (competitio

n)

Penetration

Page 10: Platform-based vs. Service-based competition:  How should Latin America Regulate?

POSIBLE ISSUES WITH THE PRO-INVESTMENT NOTION

Price reductions may not occur immediately There may exist a tendency toward higher

market concentration

Page 11: Platform-based vs. Service-based competition:  How should Latin America Regulate?

OBJECTIVE: MAXIMIZE OPERATOR PROFITS

In this notion, there is a vision of “laissez-faire” – the free market can solve all problems

The theory is that without government intervention, potential operators will be more likely to enter, provide services, and earn money

Supporters of this approach insist that a totally free market can stimulate even more investment than the inter-modal competition model

Page 12: Platform-based vs. Service-based competition:  How should Latin America Regulate?

ISSUES WITH LAISSEZ-FAIRE

Without government intervention, it is likely that private networks will not interconnect

There will likely be price gouging and other sorts of consumer abuses

Page 13: Platform-based vs. Service-based competition:  How should Latin America Regulate?

SO, WHAT IS THE POLITICAL OBJECTIVE IN REGULATING THE SECTOR? The answer depends on how the situation in each

country is viewed If you think that the national network system is

mature and adequate, and that there really isn’t room for more expansion and coverage, and that the technology being used is the best, then it’s not really necessary to worry about future investment In this case, Euro-style regulation might be the best

option Regulating services is necessary so that consumers pay

the lowest feasible price If you think that there is a need for more investment

in order to expand coverage and to permit the introduction of new technologies and innovation, the stimulating investment may be desirable In this case, Euro-style regulation may not work so well It might be worthwhile to look at nearby examples like

Chile and Peru where incentivizing investment has taken priority

Page 14: Platform-based vs. Service-based competition:  How should Latin America Regulate?

A FEW OBSERVATIONS REGARDING EURO-STYLE REGULATION

Emphasis on opening existing networks Insufficient emphasis on stimulating

investment Does not take into account the reality of

convergence and 3G and 4G networks For example, an implication of adopting the Euro-

style regulation is having a tight regulation of triple-play services

If there were more emphasis on stimulating investment in infrastructure, triple-play might arise freely as a product differentiation that is beneficial to consumers

Page 15: Platform-based vs. Service-based competition:  How should Latin America Regulate?

A FEW OBSERVATIONS ON INVESTMENT-ORIENTED REGULATION

In some cases, application of this idea lacks something For example, in the case of the USA, even with

this type of regulatory vision, the problem of federalism and states’ rights leads to the situation in which there are two levels of regulation, one at the national and the other at the state level

We can see another example in Peru, where the creators of the privatization permitted that there be both a vertical and horizontal monopoly in the sense that there was only one company operating the fixed, cable, and mobile networks.

Page 16: Platform-based vs. Service-based competition:  How should Latin America Regulate?

MESSAGES

In designing policy, it is necessary to decide on and take into account the objectives

It is not necessary to adopt the policies of other countries; policies should be designed with national priorities in mind

For that reason, I don’t recommend adopting either the North American style policy or the Euro-style approach in their respective totalities

A well-thought-out policy minimizes unanticipated consequences