FixedMobile Substitution and Lessons for Broadband

1
Fixed-Mobile Substitution and Lessons for
Broadband

• Aniruddha (Andy) Banerjee
• Vice President, Analysis Group
• Eighth ACCC Regulatory Conference The
  Evolution of Regulation
• Gold Coast, Queensland, Australia
• July 26-27, 2007

2
Agenda

• What is Fixed-Mobile Substitution (FMS)?
• Trends in FMS
• Substitution and Complementarity
• The Enigmatic and Elusive Cross-Price Elasticity
• Market Definition/Antitrust Policy Implications
  of FMS
• FMS in a Broadband World

3
What is Fixed-Mobile Substitution (FMS)?
4
Background Evolution of Telecommunications
Now
Before
5
Background Evolution of Telecommunications
Now
Before
Fixed Voice
Triple Play
Data
Fixed Voice
Quad Play
Video
Mobile Voice
6
Telecom Competition Tale of Two Strategies
Fixed-Mobile Substitution (FMS)
Mobile
Fixed
Mobile Operator Strategy Displace
7
Telecom Competition Tale of Two Strategies
Fixed-Mobile Convergence (FMC)
Fixed
Mobile
Fixed Operator Strategy Integrate
8
Nature of Substitution in FMS

• Network access vs. usage (calls, minutes of use)
• Price and non-price (lifestyle, mobility) drivers
• Technological factors (leapfrogging)
• Different types of economic substitution
• Cut the cord (ex post, access and usage)
• strict usage substitution
• Straight to mobile (ex ante, choice of service)

9
Trends in FMS
10
Fixed and Mobile Growth
Source ITU
11
Fixed and Mobile Growth Contrasts
Developing Country Example China, India,
Indonesia
Developed Country Example United States
Source Telegeography, FCC
12
Evidence of FMS Empirical Research

• Mixed evidence of substitution (FMS in access or
  usage) and complementarity
• Complementarity findings
• Early years of mobile telephony
• Developed countries
• Substitutability findings
• As mobile telephony has grown over time
• As cross-network externalities have diminished
• Developing countries, now in developed countries
• Mobile is substitute for
• fixed long distance (usage)
• second fixed lines (network access)

13
Substitution and Complementarity The Enigmatic
and Elusive Cross-Price Elasticity
14
Three Questions About FMS Evidence

• Are FMS trends sufficient to draw conclusions
  about
• economic (relative price-based) substitution?
• state of intermodal competition?
• Can econometric studies reliably determine
  whether fixed and mobile
• are substitutes or complements?
• remain so over time?
• How should findings of FMS inform policymaking in
• voice-only context?
• triple or quadruple play context?

15
Substitutes and Complements Commonly Accepted
Diagnostic

• Cross-price elasticity of demand between two
  goods X and Y
• Percent change in demand of one given percent
  change in price of the other
• Positive cross-price elasticity ? substitute
• Negative cross-price elasticity ? complement
• These statements are only true for Hicksian, not
  Marshallian, measures of the cross-price
  elasticity

16
Problem of False Positives Complements Could
Actually be Substitutes!

• Correlations of stocks can be misleading
• if fixed and mobile stocks both rise ?
  complementarity?
• Not necessarily in some circumstances
• rising incomes lead consumers to buy more of both
  with no change in relative prices
• marketing campaigns boost first-time consumers of
  both fixed and mobile even though existing
  consumers dont switch
• strongly downward-trending prices for fixed and
  mobile create parallel surges in demand
• total bill effect (when telecom demand is
  separable)

17
Problem of False Positives Complements Could
Actually be Substitutes!

• Fixed and mobile access are
• apparent complements in developed countries, even
  though usage may be substitutes
• apparent substitutes in developing countries,
  even though usage may be complements or unrelated
• No natural experiment to permit reliable
  resolution of this problem

18
The Cross-Price Elasticity Problem

• Notoriously hard to determine even in best of
  circumstances
• Especially so (as in telecom) when
• prices remain stable over time (regulatory
  reasons)
• move in unison (competitive or technological
  reasons)
• Only Hicksian (compensated) cross-price
  elasticities reveal true substitutes or
  complements, but harder to estimate
• Marshallian (uncompensated) cross-price
  elasticities more commonly used, but can provide
  opposite inference from Hicksian elasticities

19
The Cross-Price Elasticity Problem

• Only Hicksian cross-price effects are always
  symmetric Marshallian cross-price effects need
  not be
• Although Hicksian cross-price effects are
  symmetric, corresponding cross-price elasticities
  need not be
• Marshallian cross-price elasticities may indicate
  substitute in one direction but complement in
  the other
• Even when Hicksian and Marshallian cross-price
  elasticities agree in sign, they are usually
  different in magnitude
• Because cross-price elasticities are asymmetric
  in magnitude, may be important to know in which
  direction the relationship (substitute or
  complement) is stronger

20
Market Definition/Antitrust Policy Implications
of FMS
21
Three Impact Areas

• Product market definition and granularity
• Product market definition from the policymakers
  perspective
• story of intermodal competition
• Complementarity of network access and usage
  demand in granular markets
• regulate or not regulate mobile termination
  charges?

22
Product Market Definition and Granularity
23
Market Definition Policymakers Perspective

• Policy issues
• Relax/repeal regulation of incumbent fixed
  network?
• Evidence of sufficient (intermodal) competition?
• Who/what belongs in the relevant economic market?
• Key indicator
• Demand substitution, e.g., positive (and
  healthy) cross-price elasticity
• Market definition questions
• Single economic market for all voice?
• Separate markets for fixed voice, mobile voice?

24
Case ATT Wireless/Cingular Merger 2004

• FCCs issue
• Fixed voice belongs in market for mobile voice?
• Mobile voice belongs in market for fixed voice?
• BellSouth testimony in favor of merger
• In 2004, no evidence that fixed voice constrains
  mobile voice pricing, does not belong in mobile
  voice market
• FCCs decision
• Agrees with BellSouth
• limits relevant market to mobile voice providers
  only
• finds sufficient competition in that market
• approves merger

25
Case Deregulation of BellSouths Fixed Voice
Services 2004

• State regulators issue
• Mobile voice belongs in market for fixed voice
  (intermodal competition)?
• BellSouth testimony in favor of deregulation
• Strong evidence that
• mobile voice constrains fixed voice pricing
• FMS
• mobile voice belongs in fixed voice market

26
Case Deregulation of BellSouths Fixed Voice
Services 2004

• CompTel/ASCENT testimony opposing deregulation
• If fixed voice does not belong in mobile voice
  market (citing BellSouth testimony in ATT
  Wireless/Cingular merger), then opposite also
  true (argument of symmetry of cross-price
  elasticities)
• Confusion of symmetry of cross-price effects with
  that of cross-price elasticities!
• State regulators decision
• Reject claim of symmetry and arguments based
  thereon
• Favor direct evidence of substitution
• Grant deregulation with conditions

27
Access-Usage Complementarity Regulation of
Mobile Termination Access Monopoly

• Problem
• In Calling Party Pays (CPP) countries,
  unregulated mobile operators enjoy termination
  access monopoly
• High mobile termination charges (MTC),
  particularly detrimental for fixed-to-mobile
  (FTM) voice calling
• Possible policy responses
• Direct regulation of MTC
• Receiving Party Pays (RPP)
• Bill and keep

28
Direct Regulation of MTC

• In favor
• Regulators in many CPP countries (UK, Japan,
  Australia, New Zealand)
• Not much cross-network externalities left to
  lose, given high penetration rates
• Pass-through of lowered MTC
• reduces cost of FTM calls
• Increases FTM call volume
• increases demand for mobile subscribership
  (access-usage complementarity effect)
• Effective with or without waterbed effect

• Opposed
• Many economists
• High MTC enables
• subsidies to mobile network access
• Increases mobile subscribership
• Generates greater FTM calling (access-usage
  complementarity in opposite direction)
• What if lowered MTC are not passed through into
  retail FTM calling prices?
• Waterbed effectexists
• MTC profits competed away
• Unsubsidized access may suppress mobile
  subscribership

29
Direct Regulation of MTC

• Can it be effective?
• Clearly, an empirical issue
• Access-usage complementarity
• Cross-price elasticity between demand for FTM
  calling and demand for mobile network access
• Does complementarity exist in both directions
  (symmetric in sign)?
• How strong is the complementarity (symmetric in
  magnitude)?
• Can pass-through of reduced MTC into retail FTM
  price be assured and monitored?
• What are the indirect costs of regulation and
  monitoring relative to bill and keep?

30
Direct Regulation of MTC

• Can be shown that the following matter
• Own-price elasticity of demand for mobile network
  access
• Cross-price elasticity of demand for FTM calling
  with respect to MTC (which affects FTM price)
• Number of mobile subscribers (network
  externalities)
• Volume of FTM calls (call externalities)
• Effective price (net of subsidy) of mobile
  network access
• Profit margin from mobile network access (can be
  negative if subsidized))
• Profit margin from terminating FTM calls (can be
  zero if MTC set at cost)

31
FMS in a Broadband World
32
Broadband Access

• High-speed, packet-based access to voice, data,
  video services
• Definitions (based on speed of access) vary
• Broadband delivered over fixed (wireline, cable,
  powerline), mobile, and satellite systems

33
Broadband Technologies Examples

• Mobile Systems
• Fixed wireless (LMDS)
• Wi-Fi (UMA)
• Wi-Max
• HSDPA (3G successor to GSM)
• EV-DO (3G successor to CDMA)

• Fixed Systems
• DSL
• Cable modem
• Power line
• Fiber (FTTH/FTTP)

34
FMS in Broadband

• Important developments
• IP-based service provision
• Need for higher-bandwidth access networks
• Fixed systems
• VDSL
• GPON (control and intelligence shifts to edges of
  network)
• Mobile systems
• Wi-Fi (WLAN) and fixed and mobile WiMax
• Picocells (enterprise customers) and femtocells
  (SOHO)
• Consequence New substitution opportunities
• fixed vs. fixed wireless
• fixed vs. mobile
• fixed wireless vs. mobile

35
FMS in Broadband Policy Implications

• Service definition
• Electronic communication (triple or quadruple
  play) vs. voice, data, or video individually
• Imperfect, but close, substitutes develop under
  the service level (e.g., voice, email, text
  messaging, social networks)
• Impetus for deregulation or regulatory
  re-direction?
• Competition based on access rather than service
  (commoditized)
• Consumers have greater access/service options and
  control
• Terminating access monopoly in CPP countries
  dissipates
• Network externalities resurgent as consumers
  become originators and storers of content
• Danger that continuing ex ante regulation can
  pick winners and losers among technology
  platforms

36
Contact Information

• Aniruddha (Andy) Banerjee, Ph.D.
• Vice President, Analysis Group, Inc.
• 111 Huntington Avenue, 10th Floor
• Boston, MA 02199, USA
• Tel [phone]
• Fax [phone]
• abanerjee_at_analysisgroup.com
• www.analysisgroup.com