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DeutscheTelekom

Local Loop Unbundling a Failed Model for Local Competition?The German Experience

International Telecommunications Society14th European Regional Conference August 23-24, 2003Helsinki, Finland

Dr. Bernhard KallenRalph-Georg Woehrl

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Contents

Access regulation: Current situation

EC approach: Preference for service competition

FCC’s 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. 25

“Regulation 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 rulesThe 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 existsFCCs 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,WUW 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

Neubrandenburg

Greifswald

Rostock

Schwerin

Magdeburg

Chemnitz

Dresden

Leipzig

Berlin

Brandenburg

Frankfurt/O

Cottbus

Hannover

Hamburg

Dortmund

Frankfurt/M

Köln

München

Stuttgart

Ulm

GeraErfurt

Bayreuth

Hof

Nürnberg

Regensburg

Passau

TraunsteinKempten

Augsburg

Konstanz

Halle/S

Rottweil

Freiburg/Bsg

Karlsruhe

HeilbronnKaiserslautern Mannheim

Darmstadt

NLZID

Mainz

Trier

Saarbrücken

Würzburg

FuldaGießen

Koblenz

Lübeck

Kiel

Flensburg

Bremerhaven

Bremen

Oldenburg

Leer

Osnabrück

Bielefeld

Paderborn

Göttingen

Kassel

Münster

Lingen

Wesel

Essen

Bochum

Duisburg

Düsseldorf

Meschede

Siegen

Bonn

Krefeld

Aachen

Braunschweig

Offenburg

Wuppertal

Bautzen

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DeutscheTelekom

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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DeutscheTelekom

quarterly growthtotal number

Source: Deutsche Telekom

ULL development

1509 1.556 1.043 1.181 7.300

82.10018.62944.06135.000

1.048.217

0

200.000

400.000

600.000

800.000

1.000.000

1.200.000

GB B F S A I NL DK Fin D

Unique situation: Significant market appeal......with progressive growth rates

33.195

1.048.217

0

200.000

400.000

600.000

800.000

1.000.000

1.200.000

IV/9

8II/

99IV

/99

II/00

IV/0

0II/

01IV

/01

II/02

IV/0

2I/0

3

Number of ULLs

26.2

47

35.1

94

52.9

37

57.7

80

80.2

32

74.4

57

81.8

58

89.5

58

103.

255

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ULL succeeded in Germany despite the fact that tariffs are not the lowest in Europe…

– 1998: 10,56€ per month

– 1999: 12,99€ per month

– 2001: 12,48€ per month

– 2003: 11,81 € per month

COM(2002)695 final: Telecommunications Regulatory Package - VIII Implementation Report – Annex I – Corrigendum, March 2003, chart 65

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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

024

68

10

121416

18

1999 2000 2001 May 02

Options

ISDN

TelAs

ULL

Revenue per subscription line

Calls

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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.

Access Origination Services

EU approach: Service competition sets incentives for investment

FCC approach: Only investment enables real differentiated services

Conveyance