The arbitrariness of RLAH regulation

There is a certain level of arbitrariness to the RLAH (roam-like-at-home) regulation, taking effect 170615, looking at it from this perspective:

• Pricing of mobile services is extremely complex, containing all sorts of elements.
• Operators try to balance pricing with their own return, competitiveness, differentiation and fairness (giving the customer a sense of the-user-pays and usage-based or volume-based pricing).

The result is a high degree of opaqueness.

Now, the EC decided to act on the apparent unfairness of the cost of roaming, singling out one of many elements constituting the monthly bill. (Why not act against extortionist SMS pricing?) Operators will not worry. The have many levers to pull, not least raising fixed-line prices in case of integrated (fixed/mobile) operators.

Structural separation revisited

Premise #1: Telecoms market characteristsics

• High entry barriers (network duplication cost, mobile license cost).
• Scale business. The network effect is essential.
• There is ample legacy (incumbent operators inherited formerly state-owned assets).
• Telcos have a tendency to outsource network management to specialised firms such as Ericsson. Apparently, it is not considered core-business by many.

Premise #2: Private company characteristics

• The agency problem: management has its own personal agenda, targeted at personal wealth maximisation.
• Company targets are aligned with private management targets through stock & options rewards.
• Listed companies focus on short-term rather than long-term value creation in order to be able to pay out a predictable dividend.
• They have a tendency to repair instead of replace in order to minimise capex & maximise dividends. This comes at the risk of supporting outdated technology with 'regret investments'.
• Companies strive for low risk i.e. steady returns and hence predictable capex.

Premise #3: Government characteristics

• Civil servants are not entrepreneurs.
• Governments have extensive experience in running passive network grids (electricity, gas, water, roads, railroads).

Premise #4: Infrastructure vs. services

• Grids are vital for the economy & national security.
• They are typically long-lived assets, providing a steady but low return.
• Building a network requires high capex; technology shifts lead to periodical capex spikes.
• Networks thrive at a maximum utility level. More service providers means more business and a higher utility level.
• Services are high-risk business, requiring high opex, in a highly competitive market.

Premise #5: Regulation

• Regulation is a way to repair market failure.
• Market failure occures when cometition is insufficient.
• Insufficient competition leads to sub-optimal prices, quality, service levels, innovation, investment.

Issue #1: How to measure market failure?

• It should not be a matter of opinion, but of thorough & independent research.
• When are prices 'low'? How to benchmark?

Issue #2: How much is enough?

• In fixed, it famously sounds 'two is not enough'.
• In mobile, the OECD recently said 'three is not enough' (please do network sharing instead).
• Does network duplication make sense or destruct value since it undermines the utility level?

Issue #3: Are OTT services full substitutes for managed?

• Are managed services, with 99.999% availability & reliability, required for vital communication (emergency calls)?
• Which level of QoS or QoE is required or sufficient?

Issue #4: Is the active layer part of the network or part of the services layer?

• Active equipment coupled with a passive network raises the technology risk, leads to frequent technology shifts & capex spikes and thus undermines the low risk/return profile of grids.
• Active equipment coupled with the service provider layer introduces technology risk to the services business & raises the entry barrier. It also creates physical space-related & technology issues for service providers trying to compete.

Issue #5: Which role fits a government agency?

• Can a governement-controlled body act as an entrepreneur and run a business?
• Which role suits such a body (passive only, providing permits? or active, investing goverment funds & taking ownership?).

Solution: Structural separation. This model ...

• ... creates a state-owned natural monopoly grid (NetCo), which maximises the utility rate. Goverments are well-equipped for this. It doesn't compete with any company at the services level.
• ... could be a joint venture of market participants in a different model. For instance, all interested Italian telcos (Telecom Italia, Vodafone, Wind, ...) could jointly buy Metroweb and injects their network assets to create a national jointly owned grid. The NetCo in time may be spun off because of its low risk/low return profile that doesn't match the profile of its owners.
• ... frees up funds for services companies (ServCo) to improve services, to innovate & to keep prices low.
• ... creates an incentive to maximise competition at the services level in order to maximise the utility rate. In other words, the NetCo will treat all ServCos equally.
• ... incentivises the NetCo to support net neutrality because it raises the utility rate. As a result, competition is enhanced with pure OTT providers.
• ... connects to operator strategies of outsourcing network management.
• ... probably caters to the markets best if it allows for both access at the passive layer (unbundling) and at the active layer (resale). Service providers can chose what fits them best. This also allows for a specialised OpCo to arise (as in Singapore).

KPN and OPTA are negotiating a deal

My son takes swimming lessons, and I discovered there is something distinctly fishy about it. It has all to do with perverse incentives: the teachers have no interest in making him go through the course in the shortest possible time. That would only endanger their jobs.

No, this story will not lead to the GFC (global financial crisis), but to telecoms regulators. They too are perversely incentivised. They have no interest in deregulation, because it will make them lose their jobs.

I had an interesting email conversation with a highly valued reader on the upcoming regulation (tariff proposal December 19) of the planned KPN/Reggefiber FTTH network. Turns out, political issues and sensitivities are all over the current negotiations between KPN, Reggefiber, OPTA (the Dutch NRA) and NMa (the Dutch competition commission). I have no such sensitivities at all - for that I beg your forgiveness.

Here are the wants & needs of the main parties involved:

KPN:

• First, it wants the joint venture with Reggefiber (Reggefiber FttH, AKA Glashart) approved by NMa. This is expected before the end of the year.
  
• It starts off with a minority interest for KPN, in order to get the whole thing unregulated, or at worst, under NMa's jurisdiction.
• In due course however, KPN wants to exercise its call option to turn its stake into a majority shareholding.
  
• They want to fiber up the country. Multiple sources tell me that KPN suffers a slight (read: severe) form of panic over competition from the Dutch cablecos (Warburg/Cinven's Ziggo and Liberty Global's UPC, mainly), which have near nationwide coverage. FTTH is just one way to stop the bleeding. Beefing up the TV activities is another. Also, they are heavily lobbying for open access to cable networks - which is not going to help (cablecos cannot resell voice on the KPN network, and KPN cannot resell TV on the cable networks; they are supposed to invest in infrastructure and launch their own copycat service, in order to create intermodal competition - this is OPTA policy).
  

OPTA:

• It wants to stay in business. Losing regulation of the FTTH market would put it out of business for a large part.
• It wants to remain independent, not be part of NMa, a political topic.
• Instead, it wants to merge with the Commissariaat voor de Media, the Dutch media authority, to form an Ofcom or FCC of sorts (but without the spectrum jurisdiction, which resides at yet another agency, the Agentschap Telecom).
• On its part, OPTA cannot afford to block progress and Keynes style investments. We are talkings billions of euros here, and a big impact on the economy.
  

There are also cross-sensitivities:

• OPTA can hurt KPN by delaying its decision making. Not a very complicated task for a government agency. See above: KPN wants to move fast in order to stop the bleeding.
  
• KPN can put OPTA partly out of business by staying under the radar (by having a minority interest in the joint venture). The minority interest would imply that the entire access network wouldn't be regulated anymore. This would have huge Europe-wide consequences, which is why the proposed Reggefiber deal is tracked in every telco boardroom and NRA agency in Europe.
  

So, what do you get when you put all these wonderful ingredients together? Answer: a politically negotiated deal:

• OPTA assigns Reggefiber FttH SMP (significant market power), which is legally highly contestable, in order to be able to regulate it.
• KPN accepts this, in order to get NMa approval (for which OPTA gives input, which in itself is legally contestable too). KPN also wants OPTA to copy/paste the Reggefiber business model to arrive at the proposed wholesale prices and caps.
• The call option plays a crucial role. It implies that GNA (Amsterdam) and AFC (Almere) may remain outside the joint venture, because KPN/Reggefiber only has a minority stake.
  

One last word. In case you were wondering how OPTA came up with the EUR 2,50 additition to Reggefiber's line rental price to arrive at the proposed wholesale caps: there was no financial modelling involved. Just politics.

Viviane Reding: how do we get to FTTH?

Viviane Reding delivered this interesting speech at a KPN Forum in Brussels, this week. Thanks to one of the leading Communications Breakdown MUVRs for providing the text.

I am very sympathetic to most views and proposals coming out of the EC, even if the new EU regulator (EECMA) could be a stretch (it remains to be seen how bureaucracy and harmonisation will be balanced).

Here are some quotes that I find particularly interesting, but do read the whole thing (it's not very long):

• "(...) by summer in the mid-term review of the i2010 strategy, I will publish a new indicator of broadband take-up in Europe that compares national performance, not only on broadband penetration but also geographic coverage, speed, competition and price." This is important, since penetration only doesn't tell the whole story. Compare the OECD Broadband Portal.
• "Further service development is likely to result in the need for significantly higher broadband speeds of up to 100 megabit per second or more." There is some room for debate - I have shown some scepticism myself, but 100 Mb/s must be the milestone to focus on. Among the many drivers will also be Web 3.0, which may have significant implications for both bandwidth and storage.
• "I found a widely held view that the European regulatory framework and its emphasis on access obligations to open up competition is not at all the impediment to investment and innovation that some market players claim, (...)." Bravo.
• "How we treat next generation access is therefore the single most important policy question in the telecoms sector today."
• "(...) one of the potential attractions of functionally separating access networks is to make this incentive structure clearer and more operational." Mind you: functional, not structural. KPN is a good example of a telco staving off the 'threat' of structural separation by making functional separation really work (transparancy, good portfolio of services, happy wholesale customers).
• "My worry is that such bundling will, de facto, stifle choice and innovation."
• "Let me be very direct: except where the structure of the market has non-discrimination built into it such as in a well designed system of functional or structural separation the incentive of the telecom company is to design new infrastructures in a way that controls or chokes off competition."

Furthermore, she looks at the "three different models of network upgrade":

1. FTTC + VDSL. "In terms of open competition however there are serious concerns that VDSL could be attractive to incumbent telecom operators, because they require competitive market entrants to substantially scale up their investment in switching capacity." But "(...) unbundling requirements at street cabinet would have to continue to allow competitive access operators to stay in business."
2. FTTB + PON. "But the flexibility in the medium term may be more limited, not least because the end user equipment and the equipment in the network have to be compatible. Unbundling these passive fibre networks is therefore more difficult and the incumbent increases control." (...) "It is unclear that passive optical networks can be unbundled in the way that we see today on copper networks. This requires close attention and probably experimentation with novel architectures, using wave division technology to offer virtual unbundling as a more flexible alternative to bitstream access."
3. FTTH. "The difficulty here is cost: existing ducts are often too small to allow multiple fibres to pass through and therefore major construction spending is required. This is by far the most expensive option." (...) "Point-to-point fibre deployment, meanwhile is rarely being deployed by private market investors. Certainly, this is due to its high cost, but it is also probably due to its openness. Where we do see it being used is in open access schemes initiated by municipalities, in cities such as Stockholm and Amsterdam. These schemes are local partnerships that take a pure 'infrastructure utility' approach by building ducts and end to end dark fibre and then leasing access to service providers. Clearly by so doing these cities have created for their business and citizens a future proof network infrastructure and for the investors in the networks a very long term stable return on their investment given that ducts and dark fibre have a potential operating life of several decades. Under these conditions of guaranteed open access circumstances, perhaps, infrastructural competition is less important than an open and high performance platform. However, the municipal solution seems unlikely to be relevant for all of Europe and could lead to a very fragmented landscape." This highlights the fact that the EC is not a friend of munifiber and is very critical about them. "Whichever infrastructure route we take forward, my conclusion is clear: regulation will have a role to play to keep networks open and to guarantee progress, efficiency and choice."

REGULATION://OPTA states VoIP is a telephony service

OPTA, the Dutch telco regulator, has apparently taken note of KPN's shameful behavior regarding the InternetPlusBellen dual play.
The Radar TV show exposed how KPN milks the call center cow, when it comes to dealing with complaints over this VoIP/BB product. Of course, KPN blamed its own success of having to add 20k subs a week, when technical glitches are unavoidable. KPN at first was reluctant to lower the 45 c/min rate for the call center, but has now (temporarily) lowered it to 1 c/min.

OPTA claims the service is a telephony product, and therefore should be subject to telco law, demanding that any conflicts should be submitted to the Arbitration Board ('Geschillencommissie') for Telecommunication. KPN has explicitly locked out this option in the InternetPlusBellen terms. OPTA requires KPN to alter these terms by January 5.

I am not sure why KPN has declined to be subject to the Arbitration Board for this product, but it seems to mirror US regulations, where 'telecommunications services' are treated differently from 'information services'.
KPN claims it is working with ISPs to set up a new Arbitration Board for 'internet services'.

REGULATION://Fully-fledged Alternative for LLU v. Structural Separation

The press in the Netherlands has taken interest in KPN’s statements ahead of OPTA’s decision on its All-IP network. KPN wants to charge competitors for MDF locations that it would have to maintain for their use only; KPN is interested in being a reseller on cableco networks and FTTH networks; KPN says its network has been and always will be open to resellers, so there is no need for structural separation (to any degree, be it the equivalence/Openreach model or full separation as may happen in Ireland and Denmark). Also, the press picked up a statement form OPTA (about looking into splitting up KPN), which wasn’t new at all.

The important thing about this is that it is OPTA who will decide, not KPN. I believe KPN is trying to convince everyone of its reseller potential. I’m sure they have it, but I’m equally sure that KPN in reality isn’t serious about those efforts. I do not believe KPN would limit itself to service-based competition, i.e. competing on price alone. Also, KPN is trying to convey the message that there is nothing wrong with service-based competition.
It’s all about politics and creating some negotiating space. The same goes for those juicy statements of altnets, which unfortunately didn’t get any media exposure.

To name a few (not literal):
- Regulation should be abolished altogether (T-Mobile). Sound familiar? (hint: Deutsche Telekom).
- Selling MDF locations is not necessary for KPN’s All-IP network and it probably is illegal (ACT).
- KPN isn’t investing at all, they are not contributing to the general economy; all they do is relocate assets by selling certain ones (MDF locations) and buying back others (All-IP) (bbned).
- Should KPN be allowed to sell MDF locations, then we want to share in the proceeds (bbned).

By the way, I outlined here where we are right now. OPTA is due to publish the timing (sometime early 2007) of its findings this week: 1. Policy rules (‘Beleidsregels’) related to the closure of MDF locations. 2. A memorandum of findings (‘Nota van bevindingen’) related to a host of other matters, still to be resolved

What it comes down to, I believe is this.
- The All-IP network effectively means that LLU as we know it is coming to an end. This will happen in all markets, eventually, because fiber will be pushed deeper into networks and because everybody will switch over to IP.
- OPTA (or any other regulator) has to decide on a Fully-fledged Alternative (‘Volwaardig Alternatief’). If none is found, structural separation (to some degree) will be considered.
- The outcome will be the result of (1) creativity on the part of OPTA and politics (see above), (2) market conditions. The latter are comprised of several items: cable reach; FTTH reach; scale economies on the side of altnets, necessary for replicating SDF backhaul; KPN’s lead over altnets, since KPN started building the All-IP network in 2004. Of course, at some point regulators could say (as they did in the US): it is time to end regulation; altnets have had their chance; now if they want to compete, they have to build their own networks, or negotiate a reseller deals with network operators.
- In markets such as the Netherlands full separation will probably not happen, for the simple reason that cable networks have very high reach (as is the case in Belgium, Switzerland, Portugal, etc.).
- Partial separation (Openreach is still part of BT, but at an arm’s length) is a possibility.

It remains to be seen if all market participants can work out a Fully-fledged Alternative; if not, splitting up KPN is unavoidable.