Competition and Regulation in the Telecommunications Industry in ...

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Competition and Regulation in Telecommunicationsadvantages, acted to preserve the essentially monopolistic character ofthe old system in the core area of network operation”.• Customer switching costs – customer switching costs include the cost ofchanging numbers only, as equipment will have a common standard.Costs are usually considered higher for business than residential. Thesecosts are seen to be significant enough for customers not to switch often.Given the history of monopoly, switching costs are likely to provide theincumbent with a significant advantage. Further, full number portability isunlikely to be granted by an incumbent interested in maintaining marketpower and would need to be regulated. Armstrong et al (1995) note thatthis has proved important in inducing cable providers to enter the localtelecommunications market in the UK.• Interconnection pricing – the reality of competition at the local access levelis that calls may originate or terminate at the competitor’s network. When acall is made from a subscriber of one network to a subscriber of anothernetwork, then an interconnection charge is imposed to route and terminatethe call. The implication is that interconnection costs will have a significantinfluence on the price of calls for both networks. This applies equally tointerconnection charges with foreign networks and with domestic mobilenetworks. The key issue is whether the pricing of interconnection canaffect the ability of a competitor to compete in the market. Clearly, ifinterconnection affects the price of their product, then it must be able toaffect their competitiveness. There are two possible scenarios that allfavour the incumbent.First, a common interconnection price is agreed. In this case it wouldfavour the incumbent to overprice interconnection. The reason is simple.The primary problem faced by an entrant is that on balance there will bemore traffic terminating at the incumbent’s network than on their own, dueto the fact that the incumbent has more subscribers. High interconnectioncharges will therefore affect a far greater amount of calls made bysubscribers of the entrant, than those subscribers of the incumbent. Theresult is a higher average price for local calls for the entrant relative to theincumbent.Second, an interconnection price for each network is negotiated. Theincumbent again has far greater market power and so will be able to usethis to get better terms out of the entrant than they are willing to offerthemselves. Again the result is higher average call costs for the entrant’ssubscribers.Another strategy for the incumbent would be to delay the reaching of anagreement, which would prevent the entrant from launching their service.Although the ICASA rules would then call on the regulator to break thedeadlock, the decision on what the interconnection level would be couldensure further delays. These time delays would impose heavy costs on theentrant.Regulation can overcome these problems to an extent by stipulating alevel of interconnection charges that come into effect if better terms cannotbe negotiated. This lowers the incentive for the incumbent to delay40
Competition and Regulation in Telecommunicationsproceedings and ensures that further regulatory delays do not occur if nonegotiated terms are agreed. The problem is estimating theinterconnection rate. The nature of network industries is that many costsare common costs and so there is discretion in how they are allocated. It isin the interests of the incumbent to allocate as much of its costs to theservice where they expect the least competition, and where they are ableto negatively influence the price of their competitors the most. This is ofcourse local access. The incumbent is therefore likely to try pass off asmuch of the costs into local access to justify high interconnection pricesthat penalise both other local access providers and all other services thatinterconnect (long-distance, VANS, mobile).Interconnection pricing can also be used to compensate for otherincumbency advantages to facilitate entry. The usual strategy is to forcethe incumbent to offer interconnection rates that are below cost to providethe entrant with some advantage of their own. Either way, failure to resolvethe interconnection issue satisfatorily will result in greater uncertainty forpotential entrants in all other services as local access is the essentialfacility in telecommunications. Uncertainty can only lead to lowerinvestment incentives, especially when there are high sunk costs.• Current network coverage and universal service subsidies – given highsunk costs and customer switching costs, there are low incentives to enterdirectly into competition with the incumbent where the incumbent has alocal loop in place. The exception to this is high usage customers(especially long distance usage) that have high density – i.e. businesscustomers. However, for lower usage customers, the entrant may havemore incentive to enter areas that are not currently served by theincumbent. The exception would be areas that are not serviced becausetheir usage is very low (usually poor households) and/or where installationcosts are very high per subscriber (i.e. rural areas). This can be overcomeif the entrant has access to the universal service subsidy to part fund theinstallation of local loops in these areas.If the unserviced areas are a large part of the market, then access touniversal service subsidies and rapid entry into the market are important inestablishing a viable local access base for the entrant. Regulation can helpby favouring the entrant in the provision of universal service subsidies andservicing new property developments.Likelihood of EntryThe high barriers to entry at the local access level have made this the last‘natural monopoly’ component of the telecommunications system. Entry thathas occurred in other countries has tended to be in the business componentof the market as high usage and density serve to lower installation costs, andallow investments to be written off quickly. Their high use of long-distanceservices provides the capacity to make investments in the more lucrative longdistancemarket. Entry takes the form of establishing long-distance networksand local bypass of the PSTN to these networks.Competition that has emerged in the residential component of the market hasgenerally been from cable companies using their economies of scope. As41
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