The challenges and opportunities of Next Generation Networks: introduction.
Incumbents are attracted to NGN because they offer them a way to address the increasing competitive pressures that they are facing. Perhaps unsurprisingly, incumbents have drawn attention to the wide range of new services that NGN facilitate. Not only do these new services bring with them fatter margins than voice telephony, but they will also play a key role in reducing churn.
The role of NGN in reducing costs is less prominent, but it is one that will be significant over the next few years. By reducing the cost base of the incumbent, NGN will enhance its competitiveness so that it can compete with new entrants. The additional financial resources that would accrue to the incumbent, by reducing operational expenditures, would then be used to fund its move into new services. In other words, NGN become the mechanism that allow incumbents to move away from a business that is voice-centric to one where new services, with their fatter margins, dominate.
Given the pivotal role played by incumbents in telecommunication markets, their move to NGN inevitably has far-reaching implications. One issue is how extensively will NGN be adopted by incumbents; will the transformation be limited to the core network or will the access network be included as well? Whilst there are substantial costs associated with upgrading both the core and access network, there are benefits in terms of the range of services that may be offered and the associated quality of service that may be delivered to end users.
Having said this, incumbents may be reluctant to invest in a next generation access network given the regulatory environment under which they labour. They may interpret unbundling and interconnection regulations, actual and potential, as reducing the return that they would earn to such a point that the investment in an access network becomes unattractive. There is, of course, an inherent tension in the relationship between an incumbent and its regulator. Incumbents, like, it must be said, any other company, wish to maximise their returns from any investment that they make whilst the regulator wishes to encourage the development of competition and ensure that consumers benefit.
The swift implementation of NGN should benefit customers. Not only will prices fall, but users will also enjoy faster Internet speeds and a broader array of services than was previously the case. NGN may also represent an opportunity for alternative operators to move away from the LLU paradigm, especially in metropolitan areas, and to build networks that completely bypass the incumbents. Having said this, the present lack of a 'killer application' could be problematic--the incumbent could be left competing largely on prices without being able to offer new services to compensate.
A defining feature of telecommunications liberalisation has been the emergence of competitors. Regulators need to ensure that the adoption of NGN by incumbents does not place its competitors at a disadvantage. Unbundling and interconnection regulations are one area where regulators need to clarify how they will treat NGN, whilst another is the extent to which the bundling of services will be allowed. NGN encourage bundling. They enable voice services to be combined with content in innovative new packages, which, through being IP based, can be changed more frequently than was hitherto the case.
At the same time, NGN encourage convergence. Voice telephony as well as IP television can all be offered over the same network. Convergence challenges the regulatory models currently used, raising questions as to what model is appropriate. One issue here is whether services rather than underlying technologies should be regulated, whilst another is whether the same regulatory response to NGN is appropriate in all cases. Whilst it is arguably the case that fixed incumbents share a similar set of competitive pressures, the extent to which these have developed varies between countries. Moreover, the regulatory response to any significant market power that incumbents possess differs between countries. This is true for countries within the European Union, as well as those further afield. The question here is whether common regulatory responses are appropriate, as well as what lessons can be learnt from early NGN adopters.
It is clear that many issues regarding NGN remain unresolved. The papers in this dossier vividly highlight the complexity and scale of the challenges that NGN represents. The following papers draw attention to the regulatory and commercial challenges that need to be addressed before the opportunities that they bring can be fully exploited. The papers also highlight the range of responses that have emerged, reflecting how NGN are shaped by the national contexts in which they are located.
An overview of the papers in this dossier
In a comparison between five countries (the UK, the Netherlands, Germany, Japan and the US), Scott MARCUS & Dieter ELIXMANN ("Regulatory Approaches to NGNs: An International Comparison") show that NGNs can be realised in a whole variety of strategies resulting in a set of challenges for regulatory reaction. Other than Amendola and Pupillo who concentrate on the broadband features of NGAN, Marcus and Elixmann use a notion of NGN that focuses on the transition to all-IP networks and comprises the core as well as the access networks. In their view, NGNs are about speed, but they are also about enhancing the possibilities to offer a diversified range of services. Regulatory impacts depend on which strategy is used, where points of interconnection are established and whether core and/or access networks move to NGN technology. The authors identify need for regulation in three cases: (1) the existence of market power, (2) social concerns, and (3) the allocation of scarce resources. From this basis they develop regulatory challenges that are derived from the different NGN configurations. It turns out that there are as many features in NGN that seem to call for less regulation as there are those increasing the need for intervention. With respect to market power little probability of less regulation is seen, while social concerns might be difficult to consider (in terms of universal service obligations) in an NGN environment. The problem of scarce resources is discussed for possible implications of NGNs on the regulation of numbering and on spectrum management.
The country-by-country analysis shows that the UK has adopted the most radical approach to ease regulatory problems including those emerging or persisting with the introduction of NGNs by functionally separating the network from the services layer. However, it seems too early to say whether this will result in truly innovative solutions in regulation. In the Netherlands the concepts for the migration to NGN is based on negotiation between the incumbent operator and its competitors that reduces the need for regulatory intervention. The situation is more complex in Germany, as the incumbent has linked its investment decision with 'regulatory holidays', a claim that is fiercely opposed by the European Commission. Japan is distinguished from other countries by a high penetration of fibre access. The regulator has confirmed the need to guarantee competitive conditions in an all-IP context. At the moment, however, the exact conceptualisation of this claim is being discussed in various expert groups. The US stands out from other countries because of the absence of regulation of access networks. Hence NGN is not discussed very much in terms of regulatory problems. However, investment by competitors in telecommunication infrastructure, a pre-requisite for infrastructure competition and a driver for the establishment of NGN, is far from being satisfactory.
Balancing investment incentives with the stimulation of competition remains one of the core challenges for regulation, and MARCUS & ELIXMANN show how countries deal with this in a variety of ways. They conclude that in the core network interconnection problems are likely to persist after the transition to NGN; and regulation is complicated by the fact that payment per minute of use does not make sense in an IP environment, as it does not reflect incremental cost. Discussions are still ongoing, and despite broad awareness of the problem and intense discussion, not many decisive new regulatory solutions seem to be in sight.
Wolfgang REICHL & Ernst-Olav RUHLE ("NGA, IP-Interconnection and their Impact on Business Models and Competition") approach the NGN theme from the perspective of business models. The different players in telecommunication markets have shaped their business models on the basis of existing networks and existing access and interconnection rules in these networks. The emergence of a new network with fundamentally different technical and economical features means that these business models are challenged. Additional insecurities and risks are caused by the uncertainties surrounding which regulatory measures that will be imposed for NGNs. RUHLE & REICHL discuss the impact of various regulatory measures for existing business models. Of course, the technical and regulatory conditions of NGN may require new business models. On the other hand, regulators should shape regulatory intervention in a way that does not hinder the emergence of economically viable and innovative business strategies.
RUHLE & REICHL's approach also sees the distinguishing feature of NGN being the migration to all-IP networks. Their analysis differentiates between access and core networks and identifies more severe regulatory challenges in the core than in the access network. It is the strategy of the incumbent which determines the shape of future NGN markets. Therefore, alternative operators and service providers are concerned that essential inputs to their business models, such as wholesale access or unbundled local loop will not be available any more, and ask the regulator to intervene. In a new scenario, the strategies and business models of incumbents and competitors have to be compatible, and regulation should not challenge this compatibility. Regulation also has to be careful not to jeopardize the cost savings made possible by new technology and new services. Finally, regulation is to respect customer interests by not imposing measures that affect the quality of service and result in higher than (assumed) market prices. The transition to IP-based networks will also challenge the current practice of market analysis within the European Regulatory Framework. Markets will have to be defined differently, and current differentiations will become obsolete.
A severe problem for alternative network operators arises when the establishment of NGN goes along with a reduction in the number of points of interconnection as these developments may challenge their business models. Apart from the number of interconnection points, calculating the costs of interconnection will be a task that is equally difficult to handle for operators who need to define their business models, as for regulators who--ideally--wish to impose cost-based prices.
NGNs are a testbed for the principle of technological neutrality. Even if technologically neutral, the regulator needs to react to the new market conditions established by a new technology. Ruhle and Reichl conclude that safeguarding competition remains the main concern, but regulators need to be careful to safeguard competition and not competitors, as not all competitors will be able to adjust their business model to the changed environment.
In their article "Regulation of NGN: Structural Separation, Access Regulation, or No Regulation at All?", Christian HIRSCHHAUSEN & Fabian KIRSCH discuss the various regulatory options in response to the emergence of NGN spanning a wide array of possibilities from the most drastic intervention (structural separation) to less interventionist instruments, such as access regulation, to the complete termination of sector specific regulation. They argue within the context of the New Regulatory Framework and derive regulatory needs for NGN following the procedures laid down in the Commissions' directives. In this rationale, the starting point of the analysis is whether the emergence of NGN affects the definition of relevant markets. The trend towards converging service markets based on converging technologies implies indeed a great challenge for market analysis as foreseen by the commission.
The article presents case studies on regulatory solutions of NGN access problems for four countries, the Netherlands, Korea, the UK and the USA. The Netherlands stand for a self-regulation approach, while Korea combines public infrastructure support with an open access concept. The UK and the US represent two extremes of regulatory concepts; functional separation in the UK as an example of intense regulation is contrasted with the abolition of access regulation in the USA. The authors interpret these regulatory patterns as 'focusing on infrastructure investment' (Korea and the US) and against 'focusing on competition' (Netherlands and UK). This might imply that investment centred concepts might neglect the aim of establishing a competitive environment, while competition centred approaches bear the risk of destroying incentives to invest. Hirschhausen and Kirsch see an active role of regulators in an NGN environment in order to avoid discrimination, because it seems unlikely that true competitive structures will emerge due to the fact that doubling infrastructures would be inefficient. However, there is still room for the three approaches distinguished earlier, as in some countries population density might encourage the establishment of a second access infrastructure. Hence the key criterion for easing regulatory pressure remains the existence of infrastructure competition.
In their article on "The Economics of Next Generation Access Networks and Regulatory Governance: Towards Geographic Patterns of Regulation", Giovanni AMENDOLA & Lorenzo PUPILLO argue for a geographical differentiation of regulation beyond the national level. Their article concentrates on large-scale fibre investments as an essential feature of NGN. It analyses the regulatory implications of next generation broadband access for Europe. The authors identify the strategic positions of actors in the NGN game with respect to different regulation measures: incumbent operators and other investors are ready to engage in risky investment, if they can be sure that regulation will not prevent them from harvesting the returns on this investment. Regulators, on the other hand, fear that the particular technical features of the new access networks will tend to generate new monopolies and thus harm the newly established competitive regimes in most countries.
AMENDOLA & PUPILLO take a different view and argue for regulation that considers the peculiarities of the individual market instead of imposing one regulatory regime in every country. They go as far as to suggest geographically differentiated regimes, thus defining markets below the national level. They argue that the competitive situation differs from region to region, in particular with respect to the functioning of unbundling obligations. The scenario developed for the derivation of regulatory needs starts from the technical characteristics of next generation access networks (NGAN) or--as the authors put it--from fibre technology. The possibility to integrate electronic communication with information services in individual and mass communication applications in one fibre optic network implies the need for new business strategies, but also for new policies and new approaches in regulation.
Even if the same technology is used, results in terms of competitive patterns may differ between regions, since every region is characterised by an already existing competitive situation, a certain population density, network configuration patterns and demographic features that result in different conditions for the implementation of the technology and for a possible emergence of economies of scale. These economies of scale--together with the competitive situation that already exists--determine the market conditions that will emerge from the transition to NGAN. The resulting diversity can be addressed with different strategies of network access providers who use the technological options to develop business models that are efficient and respond to diverse customer needs. Essentially regulation should interfere as little as possible with this diversity of strategic options. As a consequence, only a diversified approach in regulation will allow for the exploitation of the technical and economic advantages of NGAN.
Similarly to MARCUS & ELIXMANN, AMENDOLA & PUPILLO point out the differences in realising NGNs depending on the different levels at which fibre is introduced, where points of interconnection are established and where, thus, investments are substantial and where cost advantages may occur. As the choice of strategy depends very much on geographical factors, such as population density and construction requirements related to existing networks and geographical features, one regulatory approach to all regions seems inadequate. The authors illustrate this convincingly with examples of diversified investment strategies in Europe referring intensively to the Italian example. Reference to some major studies conducted in this respect supports the arguments in favour of a diversified view.
The authors argue that a mere extension of existing regulation to NGAN is not an adequate answer to the emerging market situation as it may be an obstacle for investment in infrastructure. On the other hand they do not believe that models based on forbearance or on temporary forbearance are always the best solution. Their conclusion of the superiority of regional approaches, which they also find supported by the intentions and rules of the NRF, leads to the essential question of the definition of geographical markets. Here the criterion of homogeneity of conditions (with all its difficulties of practical adoption) seems still the most useful one. The authors then hint at possible regulatory measures that consider the different conditions in a regionally diversified technical and economic scenario. In addition to addressing regulatory issues more reasonably, regional differentiation would also allow for a more flexible approach, as changes in competition at a regional level could be answered by a change in regulatory measures more promptly.
The articles in this dossier cover various features of the upcoming NGN world. However, they also show that much is still unknown, and some problems might only arise when the new systems have started working. The same holds for regulatory impacts of NGN. Only when new market configurations emerge from new technical possibilities, can the need for (de)regulation be assessed.
ZBW--Deutsche Zentralbibliothek fur Wirtschaftswissenschaften, Hamburg
University of Strathclyde