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Local Loop Unbundling a Failed Model for Local
Competition?The German Experience
Dr. Bernhard KallenRalph-Georg Woehrl

• International Telecommunications Society
• 14th European Regional Conference August 23-24,
  2003
• Helsinki, Finland

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Contents

• Access regulation Current situation
• EC approach Preference for service competition
• FCCs new ruling Significant relief of
  regulatory measures
• German experiences LLU a success story?

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Access regulationCurrent Situation in Europe and
the US

• Market situation
• The telecommunication sector goes broadband,
  enabling people to make the first steps towards
  the information society.
• Telecommunication network operators have to meet
  extraordinary challenges. A variety of different
  access technologies (DSL, Cable, Fibre, WLAN, 3G
  etc.) is available to serve as the broadband
  connector for the information society.
• Regulatory impact
• Decision-making by existing and new companies is
  strongly determined by sector-specific
  regulation.
• Regulatory authorities are now in a situation
  where intervention in this sector has crucial,
  far reaching impacts on society as ever before.
• Diverging approaches between the EU and the US
• The FCC and the EC seem to have diverging
  approaches as to how to regulate the local access
  market. The two approaches are underpinned by
  opposed convictions.
• The FCC believes in the inter-platform-based
  competition as the only force capable of
  delivering investment and growth.
• In Europe, the opinion is that service-based
  competition and wholesale access to incumbents'
  local networks are the only way forward.

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EU approachCompetition via wholesale access for
service provider

• Objectives of the EU 1998 regulatory package
• Liberalisation break-up of state owned POTS
  monopolies
• ONP regulation to ensure most benefits to
  customers
• network access price regulation strictly
  cost-based to foster competition
• The aim of the New Regulatory Framework (NRF)
• EC recommendation on relevant markets,
  explanatory memorandum p. 25Regulation
  mandating access to existing networks serves as
  transitional measure to ensure service
  competition and customer choice until such time
  as sufficient infrastructural competition exist.
• NRF enables more flexible regulation, AID gives
  NRAs a variety of instruments and remedies to
  chose the one minimum necessary to address market
  failure
• The definition of 12 wholesale market out of 18
  relevant markets shows that EC does not believe
  in platform-competition but service competition
  via wholesale access for narrowband (WLR) as well
  as for broadband services (DSL bit-stream).

WLR Wholesale line rental
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Significant relief for US-IncumbentsILECs and
CLECs benefit from the new FCC rules

• The Federal Communications Commission (FCC)
  delegated more authority to the Public Utility
  Commissions (PUC)
• Intensity of competition on the local markets
  diverges too much to enhance or stabilize it with
  a unique set of regulatory measures
• Therefore No one-fits-all-solution for
  regulation exists
• FCCs decision provides substantial unbundling
  relief to the ILECs for broadband
• Unbundling of new fibre loops, line sharing and
  broadband services at cost based tariffs will no
  longer be required
• Unbundled switching for business customers was
  eliminated from UNE-P, for mass market customers
  the decision was delegated to the PUCs
• It seemed that the conflict between FCCs members
  was primarily induced by the future role of PUCs
• FCCs decision offers both advantages and
  disadvantages to the ILECs and CLECs
• ILECs obtained substantial regulatory relief for
  their broadband facilities
• CLECs will benefit from the stronger role for the
  states, since the PUCs tend to be more regulatory
  and ILECs will be forced to contend with 51
  different sets of rules

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ULL in EuropeEU officials state ULL has been a
flop

• Officials of the DG competition claim
• Although ULL obligations are in place at national
  level since 1998 and at European level since
  December 2000, the market structure has not
  changed significantly.
• Alternative network operators do not make use of
  Unbundled Local Loops.
• What once was described as the big breakthrough
  for local competition has so fare been an
  expensive regulatory experiment almost without
  any effect on competition.
• The reason for that is to a large extent the
  pricing policy of incumbent operators and the
  price regulation of NRAs. Price-squeezing is
  pursued by incumbents and is not adequately
  sanctioned by the regulators.
• Pricing of ULL is not to blame for the poor
  development. The data shows no correlation
  between prices and demand for ULLs.
• The mix of access obligations is responsible for
  the undesirable situation.

Robert Klotz, Juan Delgado, Jerome Fehrenbach
(2003), Zugangsentgelte in der Telekommunikation,W
UW 4/2003, Brussels
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German experiencesRegulation has borne two types
of competitors

• Regulatory setting in 1998
• RegTP set framework for competition in a fully
  liberalised sector.
• Implementation of ONP
• Promotion of competition between local fixed
  networks
• The German regulatory approach in 1998 was based
  on two elements
• First, OLOs are able to connect subscribers via
  ULLs.
• Second, no obligation for Telekom to provide
  local carrier (pre-) selection
• Market (regulatory) results creation of two
  types of network operators
• City-carrier Subscriber network operators
  entered the market, with their own local
  infrastructure predominantly between the copper
  loops of Deutsche Telekom.
• inter-exchange network operator Service
  provider, which offer no subscription but
  national and international calls, come into the
  market and eroded former price levels by up to 90
  , because of almost no infrastructure
  requirements.
• RegTP decided that service provider can operate,
  if they have at least one switch and three trunk
  lines (PoI).

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Carrier pre-selection in GermanyCalls for less
than interconnect rates

• What is the Market situation like in 2003?
• Altogether 875 telecommunication licensees exist,
  more than 40 alternative city-carriers and almost
  200 PSTN-service providers.
• Competitive Market for all calls
• National/International calls collapse of prices
  to 1/10 of the initial level in 1998
• 4,5 Mio. Preselection-customer,
• 10 Mio. Call-by-call customer
• since April 2003 call-by-call for local calls
  with prices less than 1 ct. per min.
• Interconnect regime set by RegTP in 2001
• 475 local PoI (10 carrier with nation wide
  presence Arcor(Vodafone), BT, MCI Worldcom,
  Telefonica, tele2, 01051telecom...)
• 23 regional PoI

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ULL in GermanyA story of success?

• Market situation in the local fixed networks
• More than 77 of all customers can choose
  between Telekom- or alternative line
  subscription, i.e. city-carriers are connected to
  77 of all Telekom-MDFs.
• But regional differentiated market development
  Beside the concentration of activity in big
  cities and for business customer, city-carrier in
  the north west of Germany hold a significant
  market share and have according to recent
  business reports positive operating
• PSTN-channels of competitors
• Hamburg 12 ,
• Cologne 21 ,
• Oldenburg 23
• Same picture about the DSL-access market
• national 6
• Oldenburg 15
• Hamburg 34

(Source RegTP, End of 2002 Deutsche Telekom,
End of 2002)
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ULL development
Unique situation Significant market appeal...
...with progressive growth rates
1.200.000
1.048.217
1.000.000
800.000
600.000
400.000
200.000
103.255
89.558
80.232
81.858
74.457
57.780
52.937
35.194
26.247
33.195
0
II/01
II/99
II/00
IV/00
IV/01
II/02
I/03
IV/98
IV/99
IV/02
Source Deutsche Telekom
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ULL succeeded in Germany despite the fact that
tariffs are not the lowest in Europe
COM(2002)695 final Telecommunications Regulatory
Package - VIII Implementation Report Annex I
Corrigendum, March 2003, chart 65

• 1998 10,56 per month
• 1999 12,99 per month
• 2001 12,48 per month
• 2003 11,81 per month

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Instead ULL succeeded by the possibility of
compensatory pricing

• One form of compensation belongs to the variety
  of access and options
• Another form of compensation resulted from the
  exclusive provision of local calls

? Revenue per subscription line
Options
18
ISDN
16
TelAs
14
Calls
ULL
12
10
8
6
4
2
0
1999
2000
2001
May 02
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Conclusion

• Both in Europe and the US politicians, regulators
  and academics agree that only alternative network
  facilities will bring about sustainable
  competition.
• The phasing out of sector specific regulation in
  telecommunication markets therefore depends on
  real alternative infrastructure.
• The question is how to achieve it.
• In our opinion the German experience supports the
  new FCC ruling.
• At the threshold of next generation
  telecommunications a framework for
• competition is needed that creates technological
  progress.

EU approach Service competition sets incentives
for investment
Access
Origination
Services
Conveyance
FCC approach Only investment enables real
differentiated services