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UK: Spectrum costs November 29, 2006

Posted by Jasper in Costing, Mobile, Regulation.
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In a letter sent to Ofcom the European Commission expresses concerns as to how wholesale tariffs, charged by the five UK mobile operators for terminating calls to their customers, have been assessed. In the Commission’s view, Ofcom’s proposed tariffs keep termination values higher than necessary due to 3G spectrum cost valuations which risk overestimating the costs. The Commission therefore asks the UK watchdog to reconsider the valuations. OFCOM’s approach would be detrimental to fair competition in the UK’s mobile market and lead to higher consumer prices for consumers. Commissioner Viviane Reding said:

I am concerned that Ofcom’s approach to calculate 3G spectrum costs could hinder the movement towards lower mobile interconnection prices.

The Commission believes that such costs should not be calculated on the basis of prices paid during the spectrum auctions, which are in today’s context inflated. Otherwise, distortions of competition and higher prices for mobile customers could be the result. I therefore ask OFCOM to reassess their method of calculating mobile termination rates in the UK.

I am generally of the belief that mobile termination prices in most jurisdictions are excessive, but I am surprised that the Commission has decided to attack Ofcom on this issue – Ofcom who were the first to create a mobile LRIC model and have been very aggressive on excessive termination rates. There are many assumptions in the UK mobile LRIC model that could be questioned. To pick one, as the Commission has done, tastes of regulatory cherry picking.

The target mobile termination prices are € 0.078 (5.3 pence) per minute for 2G/3G and € 0.089 (6 pence) per minute for 3G operators. According to the Commission, Ofcom has indicated the inclusion of 3G spectrum costs adds, on average, € 0.016 (1.2 pence) per minute to the mobile termination rates for the 2G/3G operators and € 0.028 (1.9 pence) per minute for the 3G-only operator. Even a small reduction in spectrum costs could therefore have an effect on prices.

However, valuation of spectrum on a current cost basis is no easy task. While a re-valuation of spectrum costs is likely to lead to a reduction, it is far from clear that any reduction in cost will be significant. Europe Economics considered how spectrum could valued in a report to the Commission in 2001. In it they noted:

One interesting case of particular importance in mobile telephony is the appropriate valuation of spectrum. Since the spectrum for 2G licenses cannot be traded, the NRV [Net Realisable Value] is zero. It could also be argued that the replacement cost is infinite (since it is impossible to purchase a similar asset), except on the rare occasion when further spectrum licences are offered for sale (e.g. 3G auctions). Even in these instances, spectrum is typically sold in large blocks that may be inappropriate for the replacement of 2G spectrum alone (MEA adjustments would be necessary). Furthermore, such sales are infrequent and therefore not helpful for calculating current costs on an ongoing basis.

The basis for Europe Economics analysis is the value to the owner convention. This defines current cost as the lower of replacement cost (RC) or deprival value (the greater of either selling the asset or using the asset). This can be written as Min [ RC, max [ NRV, NPV] ]. The replacement cost measures the cost of replacing the existing asset with another asset of similar performance characteristics; NRV is the net realisable value, the amount that would be obtained by selling an asset; and NPV is the net present value, the sum of discounted cash flows that an asset is expected to generate during its lifetime.

According to Europe Economics the substantial barriers to replacing 2G spectrum mean that it is not appropriate to use replacement cost for defining the current cost of spectrum. Hence, using the formula above, the current cost of spectrum is the greater of either zero (which is the NRV) or the NPV of the spectrum.

Basing the cost of spectrum on NPV requires the evaluation of the the expected future profits available to the mobile operator in question (after allowing for return on capital), over the life of the spectrum rights. If the future expected profit stream is greater than zero, the current cost of spectrum is the expected future profit stream (allowing for return on capital).

An easier methodology (but also subject to critique) may simply be benchmarking of spectrum value across Europe. This is likely to give the lower value desired by the Commission.

The Commission’s letter is available here.

Australia: Overview November 27, 2006

Posted by Jasper in Uncategorized.
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For those interested in a comprehensive overview of the Australian communications market, I suggest you read the  Australian Communications and Media Authority’s (ACMA) recently released report on the communications industry (for 2005-06).

According to the report reform of the Australian telecommunications sector has resulted in significant economic benefits. Australia now has more than 19.7 million mobile phones – 1.3 million added in 2005-06 – and more than 5.9 million Internet subscribers. 3G mobiles are now used by 8% of Australian consumers, and a third of all households now connect to fast Internet access services. Access the Report here.

Gaming November 25, 2006

Posted by Jasper in Uncategorized.
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I have been looking at the gambling and electronic gaming machine sector lately. A lot of exciting things happening in this sector, in particular online. Interestingly, we may soon be able to do some serious gambling using our mobile phones. According to Reuters, online gaming group 888 Plc is close to signing deals with some of Europe’s bigger mobile phone operators to offer their customers gambling over their handsets, by incorporating 888 mobile into their offering.

Australia: The saga continues November 20, 2006

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According to the The Autralien, Telstra and the Australian Competition and Consumer Commission (ACCC) are attempting to keep pivotal documents about the aborted deal to deliver high-speed broadband out of public sight in a hearing about access to Telstra’s network.

Telstra is appealing the ACCC decision to turn down Telstra’s bid to charge its rivals $30 per month for its raw copper wires and wants the wants the judge to not admit four emails. These emails contain discussions between Telstra’s public policy chief Phil Burgess and ACCC chairman Graeme Samuel on the scraped $4 billion residential FTTN deal. Telstra’s competitors have applied to have the documents made public because they might shed light on a FTTN deal.  But Telstra has pushed for another document – advice from the ACCC to the Government about its decision on the charge for raw copper – to be made public. According to Telstra this document is central to the company’s case against the ACCC.

The Australian Competition Tribunal will decide on what documents will be considered and made public today.

Butan: Spectrum auction November 15, 2006

Posted by Jasper in Mobile.
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According to TeleGeography, Bhutan’s telecoms regulator is preparing an auction process for the country’s second national mobile operator. There are some unusual aspects to this process.

First, under the auction rules current monopolist B-Mobile must match the winning bid in order to renew its own license, which expires next July. B-mobile is wholly owned by state-owned fixed line operator Bhutan Telecom and has so far been leasing wireless spectrum and has not had to pay for its concession. Hence worries have been raised that it may struggle to meet the financial demands. I think not. If it does, there is something very wrong in the market or with the auction mechanism.

Second, the auction will start by firms (there are currently four who have shown interest) submitting sealed bids, the highest of which will become the minimum price for the second round, and this will be conducted as an open auction. Why have sealed bid round if you are going to have open auction afterwards? The bidders have no incentive to bid anything in the first round. Something close to zero will do. The competition will only begin once the open cry auction is underway.

Third, in order to try to limit the price of the new 15-year license, the regulator – Bhutan Infocomm Media Authority (BIMA) – is requiring bidders to pay at least 51% of the license fee from their own funds; the remainder can be paid with the help of financial backers. Why try and limit the price in this way unless you are trying to protect the incumbent.

Australia: Telstra’s AGM November 14, 2006

Posted by Jasper in General.
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A Telstra shareholder was physically thrown out of the telco’s annual general meeting (AGM) today as he disrupted the opening remarks of chairman Don McGauchie. The shareholder, Kenneth Ivory of Brisbane, stood up in the meeting and threw a handful of papers at the feet of McGauchie. McGauchie asked Ivory to leave and when he did not, Ivory was physically removed from the meeting by security guards. This of course was all over the news. See one news spot here. Clearly Ivory is a loon, but funny how Telstra always seem get the oddest media coverage, e.g. when Sol and friends were drenched by fire sprinklers on two separate concurrent occasions.

Body of Knowledge November 14, 2006

Posted by Jasper in General, Regulation.
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I recently became aware of a website developed by the Public Utility Research Center (PURC) at the University of Florida, in collaboration with the University of Toulouse, the Pontificia Universidad Catolica, the World Bank and a panel of international experts. It is called the Body of Knowledge (BoK) on Utility Regulation. In the about section they state:

The site provides summaries of and links to the more than 300 references, an 80+ page glossary and self-testing features to facilitate learning. The references include publications and decisions by regulatory agencies and other governmental bodies; policy advisories by think tanks, consultants, donor agencies, and others; and research by academics, consultants, and other experts.

I have only looked at a few selected pages so I can’t say if the site is any good, but what I have seen certainly looks interesting.

France: Share fibre costs November 13, 2006

Posted by Jasper in broadband.
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Arcep has called for operators to co-operate and share the burden of investing in fibre access networks. Some exerpts from the Reuters article below:

In a speech delivered to a conference, Paul Champsaur, head of Arcep, estimated the cost of a national roll-out of such a network at “several tens of billions of euros” over a decade.

“The economic equation is challenging. On the one hand investments required to develop super high-speed networks are quite significant, and on the other hand questions are raised about the additional revenues that can make these networks profitable,” Champsaur said.

As a solution, Champsaur called for operators to cooperate and pool together their investments.

“The pooling of civil engineering infrastructure work and of the cabling of buildings is to play a fundamental role,” Champsaur said, adding that Arcep would encourage such pooling.

“It is absolutely necessary to establish a genuine cooperation between different players from the audiovisual and telecoms worlds so as to develop new economic models, new usages and innovative services,” Champsaur said.

See the Reuters article here.

Canada: Punctuation November 13, 2006

Posted by Jasper in Uncategorized.
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It is some time ago (July 2006), but this has to be one of the more peculiar determinations there have been in a while. A dispute between two Canadian telecom companies (Bell Aliant and Rogers Communications) has been decided by the use of a single comma in a 14-page contract. Rogers believed it had a 5-year contract allowing it access to power poles for a certain annual fee, until Bell Aliant cancelled the deal and announced new access rates. Aliant submitted that:

…based on grammatical rules of punctuation, since the comma in section 8.1 closed the clause “and thereafter for successive five (5) year terms”, the subsequent qualifier “unless and until terminated by one year prior notice in writing by either party” qualified all of the preceding section.

The Commision agreed:

The Commission is of the view that the wording in section 8.1 of the SSA [Support Structure Agreement] is clear and unambiguous. The Commission notes that based on the rules of punctuation, the comma placed before the phrase “unless and until terminated by one year prior notice in writing by either party” means that that phrase qualifies both the phrases “[the SSA] shall be effective from the date it is made and shall continue in force for a period of five (5) years from the date it is made” and the phrase “and thereafter for successive five (5) year terms”.

The Commission further notes that the phrase “unless and until terminated by one year prior notice in writing by either party” does not specify any triggering event from which to give notice. The Commission agrees with Aliant Telecom that had the intention been to limit the right to terminate to the end of the current and any renewal term of the SSA, clear wording would have been included specifying by what date the notice was required. The Commission considers, therefore, that notice of termination under section 8.1 of the SSA is not limited to any specific period in time. In light of the above, the Commission is of the view that the plain and ordinary meaning of section 8.1 of the SSA allows for the termination of the SSA at any time, without cause, upon one year’s written notice.

In other words the placement of the comma allowed for the termination of the contract at any time, without cause, upon one-year’s written notice. Access the CRTC Decision here. Just goes to show the art of correct grammar is still very valuable.

New Zealand: Inspired Networks November 9, 2006

Posted by Jasper in Uncategorized.
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I received a mail yesterday from CA*net 4 which had excerpts from an e-mail from James Watts of Inspired Networks in Palmerston NZ. Inspired Networks has been working with contractors and city water people to throw in a fibre duct every time they open a trench. Some rather refreshing excerpts below.

Inspired Networks has been laying duct and/or fibre around our town for the last several years, we have done it in a variety of ways, the cheapest way is by providing kegs of beer to Christmas functions etc for contractors, and they keep me informed of where they are digging. They also often throw our 100mm duct into the trenches they dig at no or minimal charge (sub $10NZ/metre). Consequently we keep a stock of duct in each contractors yard that we can locally, and they just let us know what they have layed… Its also a sweetener to them for jobs where we will often pay them to dig an extra 10 or 20 metres off the end of their job to hook up to our closest duct, meaning they can make a bit more money while they have their diggers/trucks on site, and also meaning we get away with not paying things like traffic management fees and road closures etc, as they have already been done.

My latest initiative is I have our local council finally onboard (at the lowest levels anyway) and have done a deal with the city water planner, and he is charging me $10/metre to lay duct where ever they are laying watermains…

I must mention another of our current finance options, we have been talking to a lot of the people building subdivisions and the local monopoly Telco has fixed rates for putting copper into new subdivisions, a recent example is one about 40km out of town, they quoted $3500/section to provide service, and it’s a requirement for resource consent to have it. They used to get away with this due to no competition, so I made the suggestion we could do fibre with a phone service at $450/section, and they matched the cost. This saved the subdivider $3000 per section, and he agreed that in exchange for us helping him get the cost down that he paid us to put in our fibre also. So therefore instead of $3500/section he paid $450 to us and $450 to the monopoly provider, and all his houses have both services, a win for everybody.

Well there you have it, a few kegs of beer will get you far and monopolists always pay themselves too much.

Network Neutrality papers November 8, 2006

Posted by Jasper in Regulation.
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Recently a number of prominent economists have commented on network neutrality.

In a lengthy paper entitled “A Consumer-Welfare Approach to Network Neutrality Regulation of the Internet,” Professor J. Gregory Sidak, maintains that network neutrality regulation would prevent broadband service providers from offering a guaranteed, expedited delivery speed in return for the payment of a fee. In his analysis, Professor Sidak concludes that,

economic welfare would be maximized by allowing access providers to differentiate services vis-a-vis providers of content and applications in value-enhancing ways and by relying on existing legal regimes to protect consumers against the exercise of market power, should it exist.

Professor Alfred Kahn has published a paper titled “A Democratic Voice of Caution on Network Neutrality.” The piece originated as a comment Kahn posted to a PFF blog entry commenting on the opposition to network neutrality regulations by Bill Kennard. Kahn suggests we put our trust in competition, reinforced by the antitrust laws and direct regulation only when institutions prove inadequate to protect the public.

In essence it is Kahn’s hope that existing regulatory mechanisms – from the FCC and in particular to the Anti-trust Division at the Department of Justice – will prevent abuses. While I am skeptical of the ability to prevent anti-trust abuse in the US, I am nevertheless sympathetic to Kahn’s argument. At least in Europe where the network neutrality debate has had little air-time I think Kahn’s starting point is probably reasonable. Here powers related to Significant Market Power assessment will likely assist in combating any abuse of network neutrality.

Bangladesh: GrameenPhone November 7, 2006

Posted by Jasper in General.
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According to press release on the GrameenPhone website they have recently reached 10 million mobile subscribers. The achievement coincides with the 10th anniversary since the company received its operating license in November 1996. The company started the year with 5.5 million subscribers, after having registered a growth of 130 percent in 2005.

Bangladesh is presently one of the top 10 mobile phone growth markets in the Asia-Pacific region with about 16 million mobile phone subscribers. However, the telephone penetration rate still remains low at around 12%.

What I found particularly interesting about the press release was the brief reference to their GrameenPhone Village Phone Program, which provides business opportunities for more than 260,000 Village Phone operators, mostly poor rural women, all around the country. A Bangladeshi woman can obtain a cell phone kit through a micro-credit loan, and then become the operator of a phone service for the rest of her village. The founder of the micro-credit movement Muhammad Yunus, along with his Grameen Bank has of course recently been awarded the Nobel Prize in economics for 2006. Here is the Yunus story. See also this New Yorker article.

GrameenPhone has also recently started an ambitious program to establish 500 Community Information Centers by the end of the current year. These centers provide shared high-speed Internet access and other information-based services in the rural areas through GrameenPhone’s EDGE network. Another recent community service initiative is the HealthLine Service, a 24-hour Medical Call Center manned by Registered Physicians and accessible to all GrameenPhone subscribers.

GrameenPhone is jointly owned by Telenor of Norway (62%) and Grameen Telecom Corporation of Bangladesh (38%).

UPDATE: Economonitor has a post about a forthcoming paper by Shahe Emran, Mahbub Morshed and Joseph Stiglitz that discusses the large interest rates on micorcredit, why it is possible that demand for loans seems to be unrelated to the interest rate charged and why borrowers seem to have little if any interest in medium-sized loans.

It turns out that the main factor to explain these issues is the place of women in society, and especially extreme illiquidity in the market for women’s labour. A little bit of credit acts as a catalyst for women outside the labour market, turning them into economically productive individuals. Once they become economically productive, they can pay back small loans. However, they are not productive enough to pay back medium-sized loans.

In other words, the interest on a micro-loan is not return on capital, but a return on labour. Without a tiny bit of capital, the labour is nascent and cannot be tapped. That is why microcredit works, and why larger loans are much less popular.

The Netherlands: Cable unbundling November 2, 2006

Posted by Jasper in broadband, Regulation.
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This is slightly old news, but nonetheless important. On 24 October Dutch parliamentarians voted to approve a proposal that forces domestic cable TV companies (CATV) to share their networks with rivals. The new proposal is effectively a cable network unbundling (CNU) initiative and replicates the local loop unbundling (LLU) scenario in traditional telecoms networks. It also sets a precedent as this is the first time that authorities have succeeded in bringing forth legislation that would harmonise regulations for cablecos and their telco counterparts. Hence after years of insisting on a privileged classification, the cable industry may come under the same regulations as the telecoms industry.

Presently, the EC is silent on CNU, focusing instead on LLU in traditional telephone networks and the new fibre access networks incumbent telecoms companies plan to roll-out in future. Prima facie, the arguments for intervention in the CATV may not hold for the CATV industry, so it will interesting to see how this develops.

Hong Kong: Freedom of speech November 1, 2006

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A telecommunications authority in operation…..

Maverick legislator “Long Hair” Leung Kwok-Hung, was arrested a couple of weeks ago by officers from the Office of Telecommunications Authority (OFTA) during a ‘Citizen’s Radio’ broadcast for suspected use of unlicensed radio transmitters. Mr Leung will appear in court on 17 November, charged with contravening section 8 of the Telecommunications Ordinance, which proscribes the possession or use of any apparatus for radio communications or any apparatus of any kind that generates and emits radio waves. If convicted, Mr Leung Kwok-Hung will face a maximum penalty of a HKD 50,000 fine and 2 years’ imprisonment. 

The arrest has reignited freedom of speech debate in Hong Kong. Parliamentarian Mr Chan Wai Yip has responded by stating that the actions of the OFTA constituted the suppression of freedom of speech, vowing to table a motion to the legislative council to require the government to open up radio stations and frequencies to all residents of Hong Kong.