Assessing and Managing the Impact of T Elecom Deregulation
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AssessAssessing ing and Managing the Impact of T elecom Deregulation OE CD GlGlobal obal Conf er ence on T elelecommuni ecommuni cationscati ons Policy for the Digital E conomy Scott Beardsley Director McKinsey & Company Brussels Dubai, January 22, 2002 FORCES DRIVING REFORM OF THE TELECOMMUNICATIONS SECTOR Technological change • Innovation no longer dependent on government subsidies • Multiple competing technologies due to digitalization and wireless Globalization effects • Improving cost/benefit ratios Stakeholders’ interests • Increasing international trade and capital flows • Operators • Competition between coun- (incumbents, new entrants) tries for foreign investment Reform of • Customers (business, • Importance of scale and residential) access to capital telecommunications sector • Equipment providers • International agreements – (domestic, foreign) e.g., GATT/WTO • Society (unions, etc.) • Regional integration – e.g., European Union • Goal of generating proceeds from privatization • Desire to withdraw from role in the sector 1 Source: McKinsey Governments’ interests MAIN MESSAGES • Details of deregulation represent potentially the largest value lever for operators and are an important wealth distribution and generation tool for countries • Deregulation’s impact has been-and will continue to be – a critical determinant of industry development, but varies significantly by country • Even in "deregulated" countries, sector reform challenges remain significant for regulators. Regulators need to adapt their approach and philosophy to the objectives and situation at hand REGULATION MUST MAKE COMPLEX GROWTH AND VALUE TRADE-OFFS Consumers • Residential GROWTH • Business InvestorsInvestors Society Operators • Employment • $ to government • Incumbent(s)Incumbent(s) • Service levels • New entrants • Penetration • Technological development Equipment providers • TelephonesTelephones • SwitchSwitch equipmentequipment OVERVIEW OF REGULATORY LEVERS IndustryIndustry Structure Pricing InterconnectInterconnect Regulatory Levers Equal Access Universal serviceservice Performance Levels OVERVIEW OF FIXED REGULATORY LEVERS Example of fixed regulatory levers Industry • Number of competitors structure • Ownership and control rules, including restrictions on foreign investment • Networks and services open to competition • Licensing procedures and conditions • Price caps Pricing • Tariff rebalancing • Access deficit compensation • Pricing regime for local calls • Rights and obligations to interconnect Inter- • Structure and level of charges connection Regulatory • Collocation and infrastructure sharing levers • Conditions for unbundling network elements • Interconnection for ISPs Customer • Numbering plan Number portability access • • Length and ease of carrier pre-fixes • Subscription mechanism for carrier pre-selection • Universal access and service obligation definitions Universal • Universal service funding mechanism Service • Penetration targets Performance • Service quality targets levels 5 Source: McKinsey OVERVIEW OF MOBILE REGULATORY LEVERS Example of mobile service levers Industry • Number of network operators structure • Ownership and control rules • Licensing procedures and conditions • Controls against abusive retail pricing Pricing • Controls against abusive international roaming pricing • Access deficit compensation applied to mobile operators • Rights and obligations to interconnect Inter- • Structure and level of charges connection Regulatory • Collocation and infrastructure sharing levers • Requirements for national roaming • Access for Mobile Virtual Network Operators (MVNOs) Customer • Numbering plan Number portability access • • Length and ease of carrier selection codes • Subscription mechanisms for indirect access • Universal access and service obligation definitions Universal • Universal service funding mechanism Service • Network rollout and coverage requirements Performance • Service quality targets levels 6 Source: McKinsey REGULATORY MANAGEMENT IS BASED ON EUROPEAN INCUMBENT EXAMPLES NOT LARGEST VALUE LEVER MUTUALLY EXCLUSIVE IMPACT PotentialPotential impactimpact ofof leverlever onon valuevalue ofof telcotelco Potential Regulatory management value at stake = 40-50%+ Optimisation of pricing Reduction of capital expenditure Core process redesign Revenue stimulation programme THE IMPORTANCE OF LEVERS EXAMPLE BASED ON EUROPEAN PSTN EXAMPLE AT NO MOMENT OF DEREGULATION VARIES BY PLAYER MUTUALLY EXCLUSIVE IMPACT PotentialPotential valuevalue atat stakestake byby regulatoryregulatory leverlever Incumbent LevelLevel of competition ~40-50% Overall price cap Tariff re-balancing InterconnectionInterconnection chargecharge Equal access arrangements USO funding Delaying entry of competition De-averaging of price DETAILS UNDERPINNING COST-ORIENTATION DRIVE HUGE IMPACT ON INTERCONNECTION RATES Single tandem interconnection rates US cents per minute Rationale LRIC*-based • Aggressive implementation of LRIC* rates in U.S. for 0.5 - 0.8 concept mobile and CLECs* • Aggressive cost orientation allows entrants enormous LRIC-based rates room to cut retail price Aggressive LRIC plus ADC* in U.S. for IXCs* 1.5 - 1.8 • • Good incumbent management must • Limited efficiency adjustments ensure a staged LRIC-oriented (Implicit) transition/negotiation allowance transition by using rates in EU 1.5 - 1.7 • • Alternatively: European benchmarks ADC and realistic efficiency adjustments Historical cost-based • Other factors such as 1.5 - 2.5 Historical cost rates • WACC or traffic density can radically alter outcome Retail tariff-based 3.0 - 5.0 • No cost orientation rates • Alternatively: ADC included * LRIC: Long Run Incremental Cost; CLEC: Competitive Local Exchange Carrier; IXC: Inter-Exchange Carrier; ADC: Access Deficit Contribtution Source: FCC; EU; Ovum; Team analysis THE DETAILS OF EACH LEVER ARE INTERCONNECTION CRITICALLY IMPORTANT EXAMPLE Necessary points of interconnection Deutsche Telekom was required to offer • Germany double-tandem call origination service* France • Few qualification criteria to receive cost- based tariff 86 Number of Competitor can have national presence with entrants only one interconnection 44 point 45 Incumbent • France Telecom offers call origination share loss service only at single-tandem and local Percent levels 32 • Minimum interconnection points to quality for cost-based tariffs 60 Competitor must have Long distance 18 Interconnection price declines points to have national 40 presence * Operator required to build new points of interconnection if traffic in switch exceeded a specified Erlang limit Source: Ovum; European Commission; ART; RegTP; McKinsey AREAS OF IMPACT OF INTERCONNECTION EXAMPLE MUST BE THOUGHTFULLY CONSIDERED Area of impact (for incumbent) Lower interconnection revenues due to lower prices Lower Lower long-distance and intentional interconnection receive due to retail price erosion price Loss of retail volume / market share and replacement with interconnection traffic Less points of Quicker loss of market share interconnection and origination at CRIC allowed Lower prices due to less new entrant investment 11 Source: McKinsey MAIN MESSAGES • Details of deregulation represent potentially the largest value lever for operators and are an important wealth distribution and generation tool for countries • Deregulation’s impact has been-and will continue to be – a critical determinant of industry development, but varies significantly by country • Even in "deregulated" countries, sector reform challenges remain significant for regulators. Regulators need to adapt their approach and philosophy to the objectives and situation at hand INCUMBENTINCUMBENT MARKETMARKET SHARESHARE DECLINESDECLINES TELECOM DEREGULATION HAVE BEEN SIGNIFICANT EXAMPLE After 3 years Incumbent loss of market share, from end 1999 Number of years International (%) Long distance (%) since liberalization Chile (end 1998) 61 67 (share 59 67 9 01/91 recovered) Germany ~60 ~65 2 01/98 Finland (end 1998) 33 72 59 63 6 01/94 Japan (NTT, KDD) 13 34 4 50 13 01/87 USA (AT&T) 10 38* 18 52 16 01/84 Australia 12 42 12 28 8 01/92 Sweden 13 38 5 14 6.5 07/93 UK 1 56 1 34 16 01/84 New Zealand 18 25 18 28 9 01/91 * End 1996 Source: Press searches; EU, NRA, FCC; Team analysis DEREGULATION DRIVES RAPID PRICE DECREASES IN MOST COUNTRIES TELECOM EXAMPLE Percent cumulative real price change over 3 years after deregulation* InternationalInternational Long distance Local Finland** 2 -12 -24 Japan -30 -39 -6 UK (post-1992) -42 -30 -9 USA -12 -36 -12 Australia -15 -24 0 Sweden** -15 -63 78 UK (pre-1992) -9 -36 9 Germany -50 -40 0 * Price changes in local currency corrected for inflation ** Price changes only over 2 years after deregulation in Finland, 18 months in Germany DEREGULATION DRIVES INCREASE IN TELEPHONY USAGE PER LINE % increase of telephony minutes per line Annual usage increase over 3 Annual usage increase over years prior to deregulation 3 years after deregulation Chile -4 52 Finland 5 21 Japan 25 26 USA 12 15 Australia 9 10 Sweden 4 14 UK (pre 1992) 8 13 New Zealand 10 13 Germany* 916 * 1 year before and after deregulation DEREGULATION DRIVING MOST INCUMBENTS TO REBALANCE ACCESS PRICES, AND ELIMINATE CROSS-SUBSIDIES Percent (local currency) Residential Business FT (F) BT (UK) Telia (SWE) Telecom Italia DT (D) 1997-2000 1990-2000 1992-2000 1997-2000 1997-2000 International -33 -69 -77 -35 (to US) -83 -31 -28 -37 -85 -30 Long distance -60 -44 12 8 130 -12 Local 0 2 48 33 19 5 Access 0 (rental) 27 35 -19 4 * Metropolitan, Peak time, excluding