youngsun kwon

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

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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.

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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)

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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?

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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

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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.

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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.

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2. Stagnant or falling mobile revenueRecent changes in ARPU since 2005 (units: 100 Yen, $, 1000 Won)

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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

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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.

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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

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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

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4. Intensifying economies of scope: multi-purpose network– Reasons of bundled

subscription of communications services

Ofcom. (2010). Communications market report.

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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

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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

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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

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• 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.

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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)

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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.

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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.

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• Did MNOs pay an exorbitant amount?– What if they could have paid royalties?

– SKT and KT• Revenue growth: 3%

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• 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.

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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.

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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

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• 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

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• 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

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• 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

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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

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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

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youngsun kwon

Documents

mobile features

issues mobile traffic

noteworthy features

mnos investment

current mobile service

g networks

unused spectrum

spectrum licensees