Infrastructure Sharing: Economics and Competition Law Aspects

Infrastructure Sharing: Economics and Competition Law Aspects: 

Infrastructure Sharing: Economics and Competition Law Aspects Chris Doyle Apex Economics and Department of Economics Warwick University EMERG/NATP-3 Workshop Infrastructure Sharing and Rights of Way Hosted by ANACOM, Cascais, Portugal 20-21 S eptember 2011

Overview: 

Economic objectives Vertical and horizontal dimensions Remedies Remedies: NGA Recommendation Why infrastructure sharing? Sharing existing facilities Sharing new infrastructure (investment) Sharing: concerns Mandated sharing: concerns about discrimination Models of separation Concluding remarks Overview

Economic Objectives: 

Framework Directive sets out goal: effective competition Competition provisions in TFEU Articles 101 and 102 Facilities-based competition Supplemented by access regulations aimed in part at ensuring a ‘ladder of investment’ opportunity Two factors often conflict with immediate goal of facilities-based competition: Legacy market structures: dominant incumbents/first-movers Policy goals on broadband calling for substantial new investments in NGA networks Regulatory and competition remedies may include mandated sharing Economic Objectives

Vertical and Horizontal Dimensions: 

Content & Applications Retail & Customer Devices Core Network Access Network Vertical and Horizontal Dimensions Fixed services Competition is probably weakest in the access network Problems can arise in core networks Mobile services Competition may be constrained by spectrum Numbering issues Access to physical sites for locating base stations Content and applications Issues regarding operating systems, databases, etc.

Remedies: 

Access Directive and Universal Service Directive provide powers Remedies only applicable on dominant (SMP) operators 2009 amendments allow for possible functional separation (preamble 2009/140/EC para. 61): “Functional separation has the capacity to improve competition in several relevant markets by significantly reducing the incentive for discrimination and by making it easier to verify and enforce compliance with non-discrimination obligations. In exceptional cases, functional separation may be justified as a remedy where there has been persistent failure to achieve effective non-discrimination in several of the markets concerned, and where there is little or no prospect of infrastructure competition within a reasonable time-frame after recourse to one or more remedies previously considered to be appropriate .” Remedies

Remedies: NGA Recommendation: 

2010/572/EU “Commission Recommendation of 20 September 2010 on regulated access to Next Generation Access Networks (NGA)” Preamble para. 5: “Demand and supply conditions are expected to change significantly at both wholesale and retail level following the deployment of NGA networks. Therefore new remedies may need to be imposed, and a new combination of active and passive access remedies on Markets 4 [Access to Wholesale Physical Network Infrastructure] and 5 [ Wholesale Broadband Access ] may be necessary.” Access remedies allow for sharing of both passive and active elements on principle of cost-orientation but with a “ a higher risk premium to reflect any additional and quantifiable risk incurred by the SMP operator ” [FTTH termination] Remedies: NGA Recommendation

Why Infrastructure Sharing?: 

It may be the only practical way to realise effective downstream service competition High fixed and setup costs in network/infrastructure layers Mandated sharing may be needed to Counter-balance market power of dominant players Dominant players are typically vertically integrated Meet environmental or other objectives Sharing physical masts Commercial sharing may reflect: Risk management Large up-front investment costs and uncertain demand Market segmentation strategies Price and service discrimination methods Why Infrastructure Sharing?

Sharing: Existing Facilities: 

Motivated by need to level competitive playing field Access regulations applied to favour entrants/smaller players Regulations should be designed to ensure efficient entry and not the subsidy of inefficient competition/entry Examples of mandated sharing Broadband networks and unbundling Have helped to promote competition and lessen the market shares of incumbents Mobile network operator entry and national roaming In some markets MVNO access – sharing of radio access network layer Sharing: Existing Facilities

Sharing: New Infrastructure (Investment): 

Motivated by need to distribute and share risks Access regulations may be modified to encourage investment and entry Geographic markets Risk premium added to access prices Multiple fibre deployment Examples of sharing in new investments Trans-continental fibre networks NGA networks LTE/4G networks Yota , a Russian WiMAX-turned-LTE player has announced a wholesale network deal involving the 4 national MNOs US carrier LightSquared also recently announced a wholesale model for a nationwide wireless broadband network Sharing: New Infrastructure (Investment)

Sharing: Concerns: 

Lower infrastructure costs by eliminating/reducing duplication Competition in the wholesale layer is reduced This may impact adversely on innovation Downstream service competition may be affected as upstream wholesale becomes a focal point to initiate (tacit) collusion Leveraging of market power Regulatory challenge is to ensure shared upstream investments are offered on a non-discriminatory, transparent and cost-oriented basis Sharing: Concerns

Mandated Sharing: Concerns about discrimination: 

If a vertically integrated operator is required to offer access to passive and active elements it may seek to apply non-discriminatory terms Margin squeeze Price discrimination in the form of a margin squeeze can be addressed by detailed accounting regulations Non-price discrimination To counter non-price discrimination regulation may require functional separation Mandated Sharing: Concerns about discrimination

Slide 12: 

Models of S eparation Increasingly invasive

Concluding remarks: 

Infrastructure sharing often motivated by competition objectives and/or need for new investment (FTTH) Mandated sharing allowed via SMP remedies NGA networks pricing allows for appropriate risk premium Commercial sharing models may emerge to support LTE rollout US and Russia models Sharing presents competition concerns, especially as it might enable leveraging of upstream market power Concluding remarks

Slide 14: 

End