Competition and Regulation in the Telecommunications Industry in ...

Competition and Regulation in TelecommunicationsTable 1.2 examines the cost structure of different network types. As it reveals, thecost structure in fixed line networks (PSTN or cable) is geared towards sunk andfixed costs making it largely insensitive to traffic volumes. For this reason it is oftennoted that the marginal cost of making a phone call is negligible. In fact, the marginalcost/revenue decision for the PSTN operator is whether to connect a new customeror not (Laffont & Tirole 2000). If the new customer is expected to generate morerevenue than it costs to install the line, then the PSTN will install the line. The resultof this cost structure is that economies of scale and density are reasonably large andthere is a large initial investment required to begin operating local access.The sunk costs are largely the trenches and ducts for wire that can make up to 40%of annualised costs (Caves 1995). Allowing the distribution through poles aboveground does lower costs. These sunk costs are the reason that lower cost entrantsare companies with a local transmission network already in place – e.g. cable TVcompanies or electricity companies. In these cases there are economies of scope asmany of the additional costs of rolling out a network are already incurred. Thedifficulty of course is allocating these costs between the different services. The otherservice that cable can enter once upgraded for telephony is data transmission.Cave (1995) notes that in the comparison of costs between cable and PSTN, thefollowing conclusions may be drawn:• Cost per home passed (the local loop) is higher for a CATV network• The incremental cost of provision of a telecommunications service by a CATVoperator with an established local loop is a small fraction of the total cost faced bya PSTN• For the subscriber already connected to the CATV local loop the cost disparitywith a telecommunications provider is even greater.Table 1.2 assumes that the cable provider already has a local loop in existence andis providing both video and telephony (hence exploiting their economies of scope).The conclusion one can draw is that cable can in all likelihood be considered in thesame market for telecommunications once established.Table 1.2: Cost characteristics of local access technologies for telecommunicationsFixed line CATV network Fixed wireless Mobile wirelessFixed/variable ratio High Medium Low LowSunk/salvageableratioTrafficsensitive/non-trafficsensitiveHigh Medium* Low LowLow Medium* High HighEconomies of scale Medium Medium Small SmallEconomies ofdensityLarge Large Small SmallEconomies of scope Possible Yes No PossibleInitial investmentrequiredRequires specialhandsetLarge Medium Small SmallNo No No Yes*Based on some economies of scope by offering video and telephony services6