Competition Issues Arising From Communication Over the Internet - PowerPoint PPT Presentation

Competition Issues Arising From Communication Over the Internet Henry ERGAS

Key points • A fundamental transition is underway towards ubiquitous Internet access and to high levels of broadband connectivity. These changes will reshape the network from its present overlay structure, with multiple technology and service specific access and core components, towards a more uniform access platform and core • Although this process will bring great economic benefits, regulatory interventions have substantial potential to distort it and undermine its outcomes • Far-reaching changes are needed to our regulatory arrangements to avoid this happening

WIRELINE 1 Gb/s Ethernet Billion 10 Mb/s Ethernet 100 Mb/s Ethernet 2.94 Mb/s 802.11g NOMADIC Bits per second Ethernet MIMO 802.11g WIRELESS UMTS Million Ricochet radio modem 9600> b/s 56 Kb/s modem modem 110-b/s GSM Hayes Thousand 28.8 Kb/s modem First modem alphanumeric pager Wide-area paging 6 4 2 0 8 8 9 0 0 7 9 9 9 0 0 1 1 1 2 2

Future networks -- Major changes • Integration of overlays into single core network – Currently overlay involving multiple networks and transport and control technologies – Digital and packet-switched end-to-end – Common underlying transport service and form of the information transported – Move to commonality of equipment, processing and protocols at network layer

Simplifying the access and core networks with a multi-service approach Service Management Service & Application Management Mobile net PSTN VSN Open Apps & Data Services VSN LL/Data Broadband Unified Optical infrastructure Each service has its own Network • Multi-service access • Service deployment requires high upfront investment • Virtual Service Networking • No service interaction • Open Applications and services environment • Multiple customer profiles • Seamless Service Linkage • Multiplied operation costs • Single customer profile • Operational cost rationalisation

Future networks -- Major changes • Greater separation between the network and the services and applications it supports – Intelligence in customer-end devices – Allows far greater service flexibility • Opens opportunities for greater contestability and service flexibility, with increased competition – To be the network of choice, and – In terms of providing services over that network

The gradual replacement of twisted pair access with fibre, first in green fields and then in brown Homes connected to Telstra's Green field fibre deployment Brown field fibre deployment network Start to refurbish Fibre Fibre copper Copper Copper Start of mass Start to network roll out of fibre refurbish to green field copper within estates 2km 2000 2020

5.0 100 4.5 90 4.0 80 3.5 70 Subscribers (M) 3.0 60 Share (%) 2.5 50 2.0 40 1.5 30 1.0 20 0.5 10 0.0 0 2003 2004 2005 2006 2007 2008 Broadband subscribers Dial-up subscribers Dial- up share Broadband share

How well has the regulatory regime coped? • Inappropriate use of competition notices – Internet interconnection (peering) – ADSL pricing • Myriad of declared services • VoIP and LSS

Internet peering • Refers to interconnection arrangements between ISP’s – centres on financing of connectivity • Peering is a situation where two ISP’s each provide similar levels of network reach, so that payments would net out • In contrast, where one network provides another with greater reach, a transit arrangement would be entered into

Peering Arrangements Backbone A Customer A ISP A Peering Traffic Backbone B ISP B Customer B Traffic Flow Payment Flow

Customer X Customer Z Internet ISP A ISP C Transit Arrangement Peering Arrangement Net Payment Flow ISP B Customer Y Traffic Flow Payment Flow

Internet peering outcomes • Provided selected ISPs with an access price of zero • Distorted their investment incentives • Conferred an advantage to these players relative to ISPs not party to the arrangement • ACCC not specified principles to alter the arrangement with a change in circumstances, so that current arrangements are effectively locked in

ADSL competition notice • Aimed at forcing down Telstra’s wholesale ADSL prices to the benefit of competitors • No compelling evidence of a vertical price squeeze • Telstra retail competitors had led prices down that Telstra had not previously matched

ADSL competition notice - economics • ISPs have an incentive to subsidise initial take up through future sales of higher margin services • Behavior is grounded in economics of ‘experience goods’ and in competition to acquire customer base, generally at introductory prices that are very low relative to costs • In early stages of market growth, this implies margins that may be negative for five years or more • Reducing wholesale prices merely serves to reduce the price point at which this negative retail spread accrues • So does not solve alleged problem while harming ADSL infrastructure investment by Telstra and competitors

Normalised average monthly access fees (combined 256/512/1500 kbps plans) $30.00 $30.00 $25.00 $25.00 $20.00 $20.00 $/ 1000Mb $/ 1000Mb 13-Feb-04 13-Feb-04 $15.00 $15.00 09-Mar-04 09-Mar-04 19-Jul-04 19-Jul-04 $10.00 $10.00 $5.00 $5.00 $0.00 $0.00 Capped Plans Capped Plans Throttled & Unlimited Throttled & Unlimited Total Total

Existing Offers - 512/ 128 kbps plans $120.00 25,000 $100.00 D o w n lo ad L im it (M b ) 20,000 20,000 P rice ($/m o n th ) $80.00 15,000 $60.00 12,00012,000 12,000 12,000 10,000 10,000 $40.00 5,000 $20.00 2,000 2,000 1,000 400 500 $0.00 0 0 0 0 Fro g g y IiN e t U N L IM ITE D U N L IM ITE D U N L IM ITE D B ig P o n d B ig P o n d B ig P o n d O p tu s O p tu s Ip rim u s O p tu s O p tu s Ip rim u s Fro g g y A A P T Price ($/month) IiN e t Dow nload Limit ISPs (MB)

Existing offers- 1500/ 264 kbps plans $160.00 80,000 72,000 $140.00 70,000 $120.00 60,000 Download Limit (Mb) Price ($/month) $100.00 50,000 48,000 $80.00 40,000 $60.00 30,000 $40.00 20,000 20,000 20,000 12,00012,000 12,000 $20.00 10,000 10,000 2,000 1,000 400 1,000 $0.00 500 0 0 AAPT UNLIMITED BigPond IiNet IiNet BigPond BigPond iiNet BigPond Optus Optus Optus Optus Iprimus Iprimus Price ($/month Dow nload Limit (Mb) ISPs

Declared voice band services Declared service Network/medium Service ACCC pricing description approach Local PSTN OTA Circuit switched Voice band carriage Domestic PSTN Circuit switched Voice band carriage TSLRIC (plus OTA contribution to unrecovered CAN costs) Local carriage Circuit switched Voice band carriage Retail minus service Conditioned local Copper wire Voice band loop service transmission capacity

Declared higher capacity services Declared service Network/medium Service ACCC pricing description approach ISDN PSTN OTA ISDN Carriage service supporting 64 kilobits per second unrestricted and no. of other services Transmission Not medium Carriage service TSLRIC flagged as specific >2Mb/s a possibility Unconditioned Copper wire Infrastructure TSLRIC local loop service service Line sharing service Copper or Non-voiceband TSLRIC (no CAN aluminium wire frequency spectrum costs)

Declared higher capacity services (cont’d) Declared service Network/medium Service ACCC pricing description approach Digital data access Not medium Data carriage in service specific digital form, capable of occurring at a X.50 rate using X.50 interfaces; or a n x 64 rate using n x 64 interfaces Analogue Pay TV ‘Lines’ (excludes Analogue pay TV Historic costs wireless/satellite) carriage

Distortions from ACCC LSS pricing • Zero allocation of joint costs • Geographic averaged pricing • Biased demand estimation • Signals to infrastructure investors

Zero Allocation of Line Costs • The ACCC’s pricing principles do not allocate CAN costs to LSS prices. • Substitute services bear an allocation of CAN costs while having to compete against LSS. • The results of this distortion are: – Inefficient substitution away from competing services (ULL, wholesale ADSL, DAR) to LSS – Pressure on Telstra to cut wholesale prices on the competing services – In both cases, preventing Telstra from recovering its CAN costs

Biased Demand Estimation • The ACCC adopted an ‘aspirational’ demand approach tied to a ‘reasonably optimistic’ view of likely demand for broadband services. • ACCC calculated the average ratio of LSS demand to ADSL demand in European Union countries (3.1%) and applied the ratios of 4% and 5% as low and high demand scenario’s. • Difficulties with ACCC approach: – No regard for the demand for substitute services (ULL and Bitstream) which were included in the same dataset used by the Commission. – The results are dependent on potential outliers: • If the highest and lowest values are removed from the sample the ratio is 1.8% • If the two highest and lowest values are removed the ratio is 0.7% – The ACCC provides no reason for marking up the ratio from 3% to 4% and 5%.