Handling Competition Issues in a Liberalized Telecom Market

Advocacy and Capacity Building on Competition Policy and Law in Asia (7up2 Project)

16-17 August 2005, Hanoi, Vietnam

Advocacy and Capacity Building on Competition Policy and Law in Asia (7up2 Project)

16-17 August 2005, Hanoi, Vietnam

Dong-pyo HongPh.D. in EconomicsKim & Chang, Korea

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Characteristics of Telecom Markets

Network Economy- A good becomes valuable to a user when the users adopt the same good or compatible ones

- A telephone users benefits when other users are connected to the same network- Fair competition issues : interconnection, network sharing

Economies of Scale- high fixed cost for constructing network- Natural monopoly due to decreasing cost function

- Government has license for telecom business to avoid redundant investment- Generally a few service providers in market

- Fair competition issues : entry barrier, predatory pricing, price regulation, collusion

Economies of Scope and High common costs- Providers can save cost by providing bundling service- Providers can distributing common cost across many services- Fair competition issues : cross subsidy, service bundling

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Characteristics of Telecom Markets (cont’d) Essential/Bottleneck facility

- Elements of essential facility - (i)Control of the essential facility by a monopolist, (ii) a competitor’s inability practically or reasonably to

duplicate the essential facility, (iii)the denial of the use of the facility to a competitor, (iv)the feasibility of providing the facility

- Examples: local loop network in fixed telephony service (cf. scarcity of spectrum in mobile service)- Fair competition issues : interconnection, network sharing

Switching cost, lock-in and tipping- Cost and welfare loss in changing service providers

- Inconvenience in number change, expenditure on new terminal, abandoning mileage service etc.- Fair competition issues : entry barrier, bundling

Universal service- Telecom service as public utility - Government should guarantee the widespread access to and affordability of basic telecom

services (ex. residential service, emergence call etc.)

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First-Mover’s AdvantagesFirst-Mover’s AdvantagesInborn (Absolute) Advantages: Holding essential facilities, Preoccupying markets and scarce resources (e.g. high-quality frequency, number etc.)

Derivative (Secondary) Advantages: Economies of scale/scope, Brand power

Fixed Service MarketFixed Service MarketDominant firm retains substantial market share and profits, based on its holding of essential facilities (local loops)Currently, the system of unbundling fixed network elements is not actively utilized

Mobile Service MarketMobile Service MarketDominant firm has accumulated a substantial amount of profits by preoccupying markets and realizing

economies of scale as a first-mover

→ Brand Power established → Consumers ‘locked-in’

Consumer-lock-in effect is deepening by structural entry barriers and consumers’ switching costs

: First-movers maintain their market dominance by combining inborn advantages and derivative

advantages.

First-Mover’s Market Power Sustained/Fortified

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Leveraging market power in new service markets : First mover’s advantage in investment and marketing → transferred to new service market

Fixed marketFixed market

In Korea, KT invested aggressively in VDSL using excess profits from monopoly markets such as LM (Lan

d to Mobile) call and leased line markets, putting pressure on competitors through strong marketing

In the last year, the number of KT subscribers increased while the number of Hanaro decreased

Limitation of new entrantsLimitation of new entrantsLimitation in facility based competition due to matured market and lack of fund

Mobile marketMobile marketProfits from mobile telephone market invested in wireless Internet → advantage in wireless Internet service market

Worries concerning transfer of market power to the IMT-2000 services in the future

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Effective Competition

Specific policies are needed to achieve ‘effective competition’ Effective Competition

- Active competition between suppliers- Absence of persistent excess profit- Absence of market power ☞ Market power: Ability to set prices independent of the behaviors of other carriers and the

consumers Benefits of effective competition

- Satisfactory service quality, prices that reflect costs, innovative services, variety of choices, efficient provision of services, sufficient information for the consumers, etc.

Process of effective competition policy- Market definition - Market analysis: Whether the market is, or expected to be, effectively competitive- Examine whether the policy to promote competition is needed- Abolish or modify the existing policy as necessary, or introduce a new policy

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Interconnection Network Opening Accounting Separation

Fair competition issues on network

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Local Switch

Toll Switch

International Gateway Switch

Undersea Optical Fiber

Satellite

1

2

3

4

5

4Local Switch

Local Switch

Toll Switch Local Switch

Local Area 1

Local Area 2

Foreign Country

Interconnection Why necessary?

- Telecom networks need to interconnect for social welfare- Essential facility (e.g. local loop) should be accessed by many other carriers for

service provision

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Interconnection (cont’d)

How to Regulate? Mandate to negotiate interconnection in (upon request) Obligation to treat interconnecting carriers indifferently

For example, a local carrier should treat other long-distance carriers in the same way as it treats its own long-distance subsidiary

Regulate the interconnection charge to be based on costs Collocation of equipments or facilities required for interconnection Obligation to provide information

Other topics Interconnection between data networks (Internet interconnection), Opening of

wireless Internet access

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Network Sharing

LLU (Local loop unbundling)- Oblige a local carrier to allow other carriers to use its local loop (unbundled)

Unbundling fixed network elements- Oblige a carrier to provide unbundled network elements such as pole, duct and

cable of local loop Roaming

- Sharing of mobile networks MVNO (Mobile Virtual Network Operator)

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Accounting Separation

Concept Typically a telecom operator provides many services Divide costs between different services to determine the cost of each service (Cost

allocation) Need to allocate joint and common costs

Purposes Use the cost for (ROR) price regulation Check if the cross-subsidies exist between the monopolistic service and the

competitive service, etc.

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Price regulation which sets the price ceiling for the market dominant firm after considering price level, productivity, yet providing some degree of freedom for the firms to set price

In the US and the UK, administrative(regulatory) costs have fallen, price have fallen and productivity increased

- Cost reduction and incentive to rationalize management - Prevent cross-subsidization - Remove uncertainty by enhancing transparency of regulation - Reduce regulatory costs such as verifying production cost - Promote stable investment by regulating for a limited period

Price Cap RegulationPrice Cap Regulation

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Price Regulations

Objectives and Principles of Price Regulation

Ex-ante vs Ex-post Regulation

ROR Regulation

Price Cap Regulation

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Universal Service: Concepts

Universal service - In Korea, universal service is defined as “’basic (fundamental)’ telecom services tha

t every user can be provided anytime and anywhere at affordable rates”- Currently, local telephony, local payphone service, insular service, emergency servi

ces, discount services of telephony to handicapped and low-income (See below for other countries)

Universal service policy- Promoting or maintaining universal availability of connections by individual househo

lds to public telecom networks (Source: Hank Intven (ed.), Telecommunications Regulatory Handbook)

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Universal Service: Backgrounds

Access to telecommunications as basic rights of all citizens - Increasing need to solve ‘digital divide’ problems as the informatization of the societ

y progresses

Network externality and universal service- Network externality: Benefit enjoyed by a network user increases as more users are

added to the network- As the socially optimal network size may not be achieved through market functions,

some subsidies for universal service may be welfare-enhancing

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USO (Universal Service Obligations)

USO: Requirement on operators to provide universal service - The revenues from providing services, say, to uneconomic areas (at the same

affordable price) may not cover corresponding costs- A regulator might decide to, or not to, set up specific mechanisms to recover the

‘costs’ from USO In monopolistic era, USO was only implicitly imposed on the monopolist

- The ‘costs’ were usually financed by cross-subsidies (i.e., high prices of long-distance services subsidized low prices of local telephony)

Since the introduction of competition, USO needed to be more specified - Cross-subsidies may distort competition- Clearer definition of universal service- How to finance the associated ‘costs’- Competitive and technological neutrality

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Universal Service : Funding Mechanisms

Mandatory service obligations General taxes Cross subsidies

- Traditional approach- May entail inefficient price structure and distort competition

Access deficit charges- May lead to inefficient interconnection and distort competition

USF (Universal service fund) - Potential to improve efficiency and transparency- Administrative complexity

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Universal Service Fund

Good USF (Intven) - Independent administration, transparent financing, market-neutral, targeted fundin

g, subsidies should be relatively small, competitive bidding - Good collection mechanism needs to be designed (who should contribute to the fun

d on what basis, how to determine the amount of USF, who collects the contributions, etc.)

Cost models for USF- Subsidies to uneconomic areas- LRIC for improved efficiency- Competitive bidding process

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Price cap regulation Non-price regualtion Role Sharing between Regulatory and Competition Authorities

Regulations in telecom industry in Korea

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Only KT’s local call and SKT’s mobile phone tariffs are liable to prior approval and other providers only notify their tariffs

※ Market Share: Local(KT,95.6%), Mobile(SKT, 57%)

- Purport : to regulate consumer predation or predatory price to exclude competitors

↔ Need to allow more freedom in terms of means of competition (lift price regulation) - less price competition - too much competition in non-price area - less incentive for price reduction - price rigidity and incentive for cartel ※ price cap regulation

Price cap regulationPrice cap regulation

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Local loop unbundling introduced in 2002 for local loop networks and broadband Networks

Number portability Local Telephony : Implementing stage-wise from Jun 2003 to Dec 2004 Mobile : Implementing in 6 months intervals in order of SKT(1st), KTF(2nd), and LGT(3rd) from Jan

2004 Obligatory interconnection and provision of facility

Essential facility owners are required to provide interconnection Long-Run Incremental Cost: Assess the connection charge most effectively

Universal service obligation Universal Service Fund was Introduced in Jan 2000. Review the possibility of including the broadband in universal service after 2005

Obligatory donation and accounting regulation Ban on cross subsidy of facility-based service operator

Differentiated frequency use cost Advertisement, standardized contract, membership service and subsidy on phones

Non-price RegulationNon-price Regulation

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Strengthened role of Korea Communication Commission(1995)- Power to approve dominant player’s tariffs, power to recommend business permit, enact notification on regulatory procedures

- Examine the agreement regarding provision of facilities and interconnection

- Investigate unfair practices and arbitrate consumer loss and damage

- Authorize the agreement between telecom operators

- Arbitrate disputes of network sharing and interconnection between operators

Agreed on general principle for role division - General abuse of dominant position, unfair trade practices, cartels KFTC - Industry specific, technical areas reducing consumer welfare MIT

※ OECD conducted an analysis on role division of competition and technical issues in 1998 - Often, regulatory agency deals with technological and economic issues and competition agency

exclusively deals with competition law enforcement

Role Sharing between Regulatory and Competition AuthoritiesRole Sharing between Regulatory and Competition Authorities

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