Regulatory models for broadband in emerging markets

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1 THINKING TELECOMS SERIES Sydney Auckland Singapore London May 2014 Regulatory models for broadband in emerging markets All governments want to promote broadband access. The key point here is that governments in developed and emerging markets face significantly different contexts for their policy choices. In particular, competition at the level of infrastructure, between wireless networks each with sufficient spectrum to offer services, is possible in emerging markets, in contrast to countries where there is an extensive fixed network with many natural monopoly characteristics. Increased access to broadband internet has become a clear economic objective for governments almost everywhere, driving policy-making. Many governments have adopted national broadband plans, which set out strategies to promote broadband access. In this paper, our main theme is that there are fundamentally different policy contexts for universal broadband access in high income countries as compared to emerging markets. These differences mean that broadband policies suitable for high income countries, which attempt to deal with problems of enduring access bottlenecks in new fibre-rich broadband networks, do not transfer well to emerging markets, where competitive wireless broadband networks will be the norm. Policy makers in emerging markets will need to focus mainly on promoting broadband access through wireless networks as the key driver of consumer welfare and growth. They have an opportunity to achieve widespread wireless broadband access relatively quickly and at relatively lower cost than investment in new fibre networks. These fundamentally different policy contexts mean that the regulatory framework that may be suitable for emerging markets will differ in some important ways from the regulatory frameworks that are suitable for high income countries. In high-income countries, the policy debates have concentrated on the deployment of fibre-rich access networks and, given the significant costs of investment in fibre, on what governments can do to promote and provide investment in these networks. The economic characteristics of fibre networks mean that there is likely to be only one widespread fibre-rich access network in each country. These inherent monopoly characteristics require a strong regulatory access regime to ensure competition at the service level and the construct of this regime is a key focus of policy makers and regulators. The situation is different in emerging markets. In these countries, the key to national broadband penetration will be wireless access networks, as a result of the lack of existing fixed access network infrastructure in most emerging markets and the relative cost efficiencies of wireless access network roll out. A critical benefit with wireless, provided that sufficient spectrum is available to multiple operators, is that operators are likely to invest in upgrading networks from 2G/3G to 4G. This will create infrastructure competition, which is not a realistic prospect with fibre-rich access networks in many parts of high income countries.

2 A particular concern is the application of the single operator wholesale-only model, used with fibre access networks in countries such as Australia, New Zealand, Singapore and Qatar, in an emerging market wireless context. This model is based on the assumption that widespread fibre access infrastructure competition is not possible. However, in emerging markets, there is the probability of infrastructure competition between multiple wireless broadband access networks. The cost of forgoing this opportunity for infrastructure competition, together with the regulatory complexities and transaction costs involved in single wholesale-only models, means the better option in terms of consumer welfare and broadband rollout in emerging markets is to allocate sufficient spectrum to multiple network operators and let them get on with deploying their networks and competing. In the following, we set out a simple description of the anatomy of a broadband network and then consider the economic characteristics of broadband access networks in particular. We show that fixed access networks, in which infrastructure competition has proved difficult to sustain outside relatively small high income urban areas, have different characteristics to wireless networks. We provide an overview of the regulatory approaches that have been considered for fixed broadband access networks driven by these economic characteristics, including the wholesale-only model adopted in certain countries. We conclude by setting out our view that application of the wholesale-only model for wireless broadband access networks carries considerable costs and regulatory complexity, and is likely to slow the deployment of broadband and increase costs to consumers. The anatomy of a broadband network Broadband networks of any type have four key elements, and the prospects for infrastructure competition are different in each element. The key competition problem has invariably proved to be in fixed access networks (although access to some backhaul/transmission routes can sometimes present significant challenges as well): Access network The access network is the last mile which connects the user to the rest of the broadband network. In mobile networks, the access network is wireless, with multiple access networks in most areas. In fixed networks, the access network is usually copper, cable or fibre, with single access networks likely in most areas. Multiple access networks are only likely in densely populated areas. Backhaul network The backhaul network links the access network to the major connecting elements of the backbone. Microwave or fibre is usually used for the backhaul network. Mobile operators usually have their own backhaul networks. With fixed networks, in countries where there is regulated local loop unbundling or bitstream access, there also tends to be multiple backhaul networks to local exchanges. Otherwise, single backhaul networks are the norm. Backbone network The backbone or transmission network links the different backhaul networks, aggregates the broadband traffic and provides connection to the core network. Fibre is usually used for the backbone network, but microwave is also used, particularly in emerging markets. Multiple transmission networks are common between major national / regional centres, otherwise single transmission networks are likely. Core network The core network provides the broadband network s intelligence, which allows the routing of broadband traffic to and from the internet and allows other services to be provided. Fixed and mobile operators will normally have their own core networks. Economic characteristics of broadband access networks With fibre-rich networks, it is generally thought that, outside the most populous, high-income areas, there will be only one single fibre network. Although some countries have competing cable networks, this is relatively uncommon and rarely occurs in emerging markets. The reason why there will generally be only one single fibre network is because of the high fixed costs, due to the substantial civil engineering involved, and low incremental costs. That is, fibre-rich access networks, whether fibre to the premises (FTTP) or fibre to the node or cabinet (FTTN/FTTC), are likely to display strong natural monopoly characteristics in most areas. What s more, the owner/operator of those fibre-rich access networks will normally be the incumbent, due to the very large advantages that come from the re-use of existing infrastructure, such as ducts and poles, and the size of their customer base. On reasonable assumptions about the likely costs and potential revenues in low-income markets, fibrerich access networks are unlikely to be economically or commercially viable in most emerging market contexts. 1 1 See Luke Van Hooft, Building Next Generation Broadband Networks in Emerging Markets in Making Broadband Accessible for All, Vodafone Public Policy paper no. 12, May 2011.

3 The economic characteristics of wireless access networks are plainly different from fibre-rich access networks. The fact that wireless networks are characterised by relatively lower fixed costs and are able to serve multiple users from a single base-station means that virtually all countries have seen vigorous infrastructure competition in wireless access networks. To enable competing wireless broadband networks, the key ingredient is the allocation of sufficient spectrum to network operators by the government or the regulator. To provide broadband services, the operators need spectrum for both coverage and capacity. With a new network, the first requirement is to provide coverage and then, as uptake occurs, to increase capacity. Coverage typically requires lower frequency spectrum (lower than 1 GHz) and capacity can be provided in a separate and higher frequency band (higher than 1 GHz). In the spectrum bands concerned (700/800MHz, 1800MHz and 2600MHz), there is normally sufficient spectrum available for multiple wireless broadband networks. High income countries are likely to see intra-platform competition between fibre and wireless broadband networks. This will not happen in emerging markets outside the wealthiest urban areas, at least for the foreseeable future, mainly because of the lack of existing fixed access infrastructure that could be re-used for fibre access networks and the small fixed network customer base. The result for emerging markets is that competitive broadband access networks will rely upon wireless technologies. The importance of regulatory context In high income countries, the uncomfortable reality for policy makers is that the transition from a copper world to a fibre world in fixed networks will probably mean a swap-out of one monopoly access network with another, most likely controlled by the same incumbent operator. The lack of competing infrastructure means that, to ensure the continuation of competitive delivery of broadband services, access regulation will endure for these new fibrerich networks. The exact form of this access regulation is still subject to debate, with policy makers in high income economies being highly conscious of the negative impacts on investment of heavy forms of regulation (such as cost-based access pricing) and attempting to deal with the regulatory impact of new technological developments (such as vectoring). The continuation of this regulatory debate, which seems to be intensifying in Europe, is debilitating for investment. Some policy-makers in high-income economies have gone further and fundamentally changed the structure of the fixed market by requiring that new fibre access networks only operate at the wholesale level, selling wholesale services to competing retailers. Singapore, Australia, New Zealand, and Qatar have adopted a model with the deployment of government-sponsored, national fibre to the premises or node networks. The opportunity to make these structural changes in the market has arisen from the significant government involvement in these new fibre networks, from full government ownership of the fibre network in Australia and Qatar (noting that in the future it is envisaged that operators and other parties may become shareholders in the fibre network company), to forms of public private partnerships and government grants in New Zealand and Singapore. Importantly, these changes have only been considered necessary because there is no realistic likelihood of competing fixed infrastructure in the timeframes envisaged by the governments concerned. 2 In emerging markets, we are likely to see multiple wireless broadband access networks. This has been the pattern in the 2G/3G era in virtually every country and there is no reason why it will not continue into the 4G wireless broadband era. There will also be multiple wireless broadband networks in high-income countries, of course, and we are not seeing wholesale-only models being proposed in these countries either. In most parts of emerging markets, the only government role that is likely to be needed is the allocation of sufficient spectrum to the licensed operators and then let them get on with it. There should be roll-out obligations on operators taking into account universal service objectives, but otherwise the heavier forms of access regulation that are bound to be a fundamental feature of fixed markets in high income economies for years to come are not required for wireless broadband. Wholesale-only models for wireless Wholesale-only models only really have a place where monopoly networks are involved. This means that the wholesale-only models that have been used for the fibre networks in Singapore, Australia, New Zealand and Qatar would, in the context of wireless broadband networks, be unnecessary and could be counter-productive. Each of these projects has required highly complicated, detailed and timeconsuming processes. 2 The exception is unprofitable rural areas in some countries (e.g., Australia and New Zealand) where the economic characteristics of a widely dispersed population mean there is likely to be only one wireless broadband network.

4 In each case, the period from policy inception to finalisation of the wholesale-only structures took at least several years and many millions of dollars of transaction costs. 3 This is not including the cost or period of roll-out of the network. The terms on which assets are transferred or leased to the wholesale-only operator need to be determined, wholesale access products need to be designed, interfaces for retailers need to be developed and the terms of access need regulatory control and oversight. Another layer of complexity arises where consortia are investing in the wholesale-only operator, such as in Singapore. In each case, they would have been among the largest corporate projects ever undertaken in those countries. It concerns us to see moves being made to replicate the wholesale-only fibre network market structures adopted in these countries into the wireless broadband world elsewhere. This structure has been mooted in Kenya and South Africa, for example, where proposals have been made for a single wholesale-only wireless broadband network, providing access to multiple retail service providers (who will also be shareholders in Kenya). This is at a time when existing mobile operators in these countries are asking the governments and regulators to allocate wireless broadband spectrum, so that they can invest and upgrade their networks and launch 3G and 4G services. If this approach is followed, it will represent a missed opportunity for competition in broadband networks. A monopoly network operator does not have the same incentives as a network operator in a competitive environment to operate efficiently and provide a high quality service at a competitive price. These opportunities for network competition, which maximise innovation and therefore consumer benefit and which are not available in the case of fibre networks, should not be forgone lightly. There would need to be compelling reasons for policy makers to miss the opportunity for infrastructure competition if it is feasible. Furthermore, emerging market regulators have largely escaped the regulatory burden that has been necessary for regulating fixed network access in high-income economies. In many cases, this has required the establishment of entirely new regulatory structures to supervise non-discrimination or equivalence of inputs provided by the monopoly access network to operators. The mobile sector in emerging markets has required some regulation in the case of termination rates, number portability and so on, but this level of regulation is far less complex than that required by monopoly fixed network access for broadband services. A single wholesale-only wireless broadband access network would undoubtedly require this same intensive level of regulation. But regulators will not have available to them any precedents or benchmarks which will help them in the complicated task of establishing a novel wholesale access regime, since even the appropriate framework for regulation of fibre-rich networks is far from settled and there are few examples around the world of regulation of wireless broadband access networks. This means two things. First, it will take some time for policy makers in emerging markets to determine what the appropriate framework for regulation of wireless broadband access networks should be, in the absence of settled models from other countries. Second, with the increased burden of heavier forms of access regulation comes the need for greater regulatory sophistication and higher levels of monitoring and enforcement by regulators. This all comes at a cost for the government and the industry, both upfront in settling the policy and ongoing. These costs need to be factored into the equation of whether consumers in emerging markets will be better off as a result of going down this path. Allocation of spectrum is the key Such a high degree of regulatory complexity and intensity is unnecessary, however. For emerging markets, we believe the most important thing that can be done to achieve universal broadband access is to put in place a spectrum policy to enable the allocation of sufficient spectrum to operators who can deliver broadband services on a competitive basis. If the spectrum policy is right, it is highly likely that competition between operators will deliver substantially higher benefits to consumers through competition on coverage, pricing and innovation. The right spectrum policy will also remove the need to implement more demanding forms of economic regulation since they will be unnecessary to achieve the goal of increased broadband access. Regulators in emerging markets have an important opportunity to put in place a simple, straightforward policy framework for spectrum, driving increasing broadband access through competing wireless broadband offers, without the need for large-scale fibre investments or complicated regulatory structures unsuited to the economic characteristics of their markets. 3 For example, in Australia, the Federal Government established NBN Co in April The main regulatory instrument that governs NBN Co, the Special Access Undertaking, was only approved by the regulator, the ACCC, in December 2013.

5 Webb Henderson is an international law firm, with a specialist focus in the telecommunications sector. We have nine partners and 25 other legal staff in our offices in Sydney, Auckland, Singapore and London. Our telecommunications work spans complex corporate, commercial and regulatory matters for operators, investors, governments and regulators around the world. Over the last year, we have operated in over 25 countries throughout the Asia Pacific, Middle East, Africa, Europe and Latin America. Our partners are among the most respected practitioners in the field internationally. Webb Henderson has extensive experience in advising operators, governments and regulators on mobile broadband policy, regulation and corporate and commercial transactions around the world. Contacts Malcolm Webb Angus Henderson Ara Margossian Gordon Moir Direct: Mobile: [email protected] Direct: Mobile: [email protected] Direct: Mobile: [email protected] Direct: Mobile: [email protected] Level 18, 420 George Street, Sydney NSW 2000, Australia Level 3, 110 Customs Street West, Auckland 1010, New Zealand 8 Eu Tong Sen Street, #23-85 The Central, Singapore , Singapore Parchment House, 13 Northburgh Street, London EC1V 0JP, United Kingdom