Regulation and Investment in Network Industries: Evidence from European Telecoms

We provide evidence of an inherent trade-off between access regulation and investment incentives in telecommunications by using a comprehensive data set covering 70+ fixed-line operators in 20 countries over 10 years. Our econometric model accommodates: different investment incentives for incumbents and entrants; a strategic interaction of entrants’ and incumbents’ investments; and endogenous regulation. We find access regulation to negatively affect both total industry and individual carrier investment. Thus promoting market entry by means of regulated access undermines incentives to invest in facilities-based competition. Moreover, we find evidence of a regulatory commitment problem: higher incumbents’ investments encourage provision of regulated access.Telecommunications, Access Regulation, Unbundling, Investment

Is America Exporting Misguided Telecommunications Policy? The U.S.-Japan Telecom Trade Negotiations and Beyond

Global telecommunications markets have traditionally been closed to foreign trade and investment. Recent World Trade Organization negotiations resulted in a Basic Telecommunications agreement that sought to construct a multilateral framework to reverse that trend and begin opening telecom markets worldwide. Regrettably, this new WTO framework is quite ambiguous and open to pro-regulatory interpretations by member states. In fact, during recent bilateral trade negotiations with Japan, U.S. government officials adopted the position that the new framework allowed them to demand that the Japanese government adopt very specific regulatory provisions regarding telecom network interconnection and pricing policies. The Office of the U.S. Trade Representative argued that Japanese officials should require their domestic telecom providers to share their networks with rivals at a generously discounted price to encourage greater resale competition. Those interconnection and line-sharing rules were borrowed directly from the U.S. Telecommunications Act of 1996, a piece of legislation that remains the subject of intense debate within the United States. Good evidence now exists that those rules generally retard net-work investment and innovation by encouraging infrastructure sharing over facilities-based investment. Consequently, the USTR has generated resentment on the part of Japan and other trading partners as it has attempted to force them to adopt heavy-handed telecommunications mandates that have very little to do with legitimate free-trade policy. The USTR must discontinue efforts to impose American telecommunications regulations on other countries as part of free-trade negotiations and should instead focus on reforming or eliminating the most serious barriers to foreign direct investment both here and abroad

Incentives for Anticompetitive Behavior by Public Enterprises

We examine the incentives that public enterprises may have to undertake anticompetitive activities. These activities include setting prices below marginal cost, raising the operating costs of existing rivals, erecting entry barriers to preclude the operation of new competitors, and circumventing regulations designed to foster competition. We find that public enterprises often have stronger incentives to pursue these activities than do their private, profit-maximizing counterparts.

Assessing the Network Neutrality Debate in the United States

Over the last decade in the United States network neutrality has evolved from a primarily technical concern to a national debate about the future of American communications regulation as well as technology and innovation policy in general. In October 2009 the U.S. Federal Communications Commission (FCC) issued a notice of proposed rulemaking (NPRM) to codify six principles of network neutrality. This proceeding which is unlikely to be completed before mid-2010 could have profound economic consequences for consumers content and applications providers and network operators.Network neutrality is a shorthand for a series of policy prescriptions that would restrict the ability of broadband internet service providers (ISPs) to manage network traffic. These restrictions include barring network operators from charging content and applications providers (as opposed to end users) for entering into business-to-business transactions for quality-of-service (QoS) enhancements for packet delivery. Although the initial objective for advocates of network neutrality regulation was to secure regulation of wireline networks the debate has expanded since its inception to include wireless networks

Exporting Telecommunications Regulation: The U.S.-Japan Negotiations on Interconnection Pricing

Since 1997, the U.S. government has attempted to use the World Trade Organization (WTO) agreement on telecommunications services as a vehicle for 'exporting' American principles of telecommunications regulation to other nations. The United States took the position in 1997 that the WTO telecommunications agreement requires its signatory nations to follow the practices of the Federal Communications Commission (FCC) on telecommunications regulatory policy. Subsequently, the Office of the U.S. Trade Representative (USTR) has sought to influence, under the implicit threat of trade sanctions, Japan's domestic regulatory policy on the pricing of mandatory competitor access to the unbundled elements of the local network belonging to the operating companies of Nippon Telegraph and Telephone Corporation (NTT). In this Article, we examine the substantive difficulties of engrafting the FCC's interconnection policy onto the telecommunications marketplace of another nation. For more than five years, many American experts on telecommunications policy have disagreed whether American consumers have benefited from the very FCC policies that the USTR would have Japanese regulators emulate. The USTR's initiative appears to ignore that the transition to costoriented rates for interconnection and retail telecommunications services has been a difficult and unfinished process in the United States; that the cost models used by the FCC to set interconnection prices have significant deficiencies; that actual interconnection prices both within and outside the United States diverge considerably from the estimates of the FCC's cost models; that variations across countries in the prices of inputs have a significant effect on the costs of interconnection; and that, with respect to depreciation in particular, regulators treat this cost differently'and, from an economic perspective, more reasonably'in Japan than in the United States. Such substantive economic considerations suggest why the FCC's policy in this area has generated continuous litigation, including two Supreme Court cases, since 1996 and consequently is too unresolved at this point in the American experience for the United States to force on its trading partners. Next, we ask whether the USTR has the detailed knowledge required to negotiate trade agreements on interconnection pricing. We question the propriety of using the USTR to influence the domestic regulatory policy of another country on a topic as complex as the efficient pricing of mandatory access to unbundled network elements. The USTR's power to formulate trade policy on this subject resides in officials who are unlikely to possess the economic expertise and resources necessary to evaluate the consumer-welfare implications of the policies that they would have Japan and other nations adopt. For these reasons, the USTR cannot credibly make the interconnection pricing policies of another nation a legitimate concern of U.S. trade policy.

Should Internet Protocol-Enabled Video Service Provided over a Telephone Network Be Regulated as a Cable Service?

We examine whether, on legal or policy grounds, Internet protocol-enabled video services provided over a telephone network should be regulated as a cable service. We evaluate the history of cable regulation and the services that Congress envisioned to be regulated when it first drafted legislation establishing a regulatory framework for cable television services in 1984. We then examine numerous differences between the IP-enabled video services delivered over a telephone network and those that Congress envisioned when regulating cable television service in 1984 and in subsequent years when it revised the Cable Act of 1984. Finally, we find that municipal franchise requirements for IP-enabled video services provided over telephone networks would reduce consumer welfare. We estimate that, upon ubiquitous deployment by telephone companies of fiber networks to provide video service, cable customers living in areas not yet overbuilt by a wireline distributor of multi-channel video programming would enjoy the benefits of lower prices of roughly $7.15 per month, or$85.80 per year. A five-year net present value of the annualized savings would be roughly $26.52 billion (assuming a five percent discount rate). To the extent that direct broadcast satellite operators respond to lower cable prices with price reductions of their own, the net present value of the welfare benefits from telephone company entry into the market for multi-channel video programming distribution would increase by roughly 50 percent, to nearly$40 billion. We estimate that, even without considering any welfare gains owing to higher quality, these consumer welfare gains from entry exceed the potential loss in franchise fee revenues to municipalities by a factor of nearly three to one

Video over Telephone Networks: The Case against Regulation

The current wave of telecommunications reform stands to significantly affect the provision of video over telephone networks. Current legislative initiatives are treating video services provided over telephone networks in essentially the same way as traditional cable video services. We examine whether, on legal or policy grounds, video services provided over a telephone network should be regulated as a cable service. We evaluate the history of cable regulation and the services that Congress envisioned to be regulated when it first drafted legislation establishing a regulatory framework for cable television services in 1984. We then examine numerous differences between video services delivered over a telephone network and those that Congress envisioned when regulating cable television service in 1984 and in subsequent years when it revised the Cable Act of 1984. Finally, we find that municipal franchise requirements for video services provided over telephone networks would reduce consumer welfare. We estimate that, upon ubiquitous deployment by telephone companies of fiber networks to provide video service, cable customers living in areas not yet overbuilt by a wireline distributor of multi-channel video programming would enjoy the benefits of lower prices of roughly $7.15 per month, or$85.80 per year. A five-year net present value of the annualized savings would be roughly $26.52 billion (assuming a five percent discount rate). To the extent that direct broadcast satellite operators respond to lower cable prices with price reductions of their own, the net present value of the welfare benefits from telephone company entry into the market for multi-channel video programming distribution would increase by roughly 50 percent, to nearly$40 billion. We estimate that, even without considering any welfare gains owing to higher quality, these consumer welfare gains from entry exceed the potential loss in franchise fee revenues to municipalities by a factor of nearly three to one