The impact of infrastructure and service-based competition on the deployment of next generation access networks: Recent evidence from the European member states

Abstract

This work identifies the most important determinants of next generation access (NGA) network deployment, using data from the EU27 member states for the years 2005–2011. Our results indicate that the more service-based competition is pronounced the more negative is the impact on NGA deployment, while competitive pressure from broadband cable and mobile affects NGA deployment in an inverted U-shaped manner. We further find that there are severe adjustment costs and stickiness towards the desired long-term level of NGA infrastructure. It appears that the approach of the European Commission to force service-based competition via cost-based access regulation will not elicit the huge new investment needed for a comprehensive NGA roll-out.

Introduction

In recent years, fibre-deployment of telecommunications access networks (“next generation access” – NGA) has become a major issue for sector-specific regulators as well as for investing firms. Operators of traditional (“first generation” copper- and coax-based) telecommunications networks have to speed up their networks to meet the growing demand for bandwidth arising from new/interactive multimedia services like streamed video on demand, high definition television, 3-D applications, cloud computing, etc. The renewal of existing networks and their (partial) replacement by fibre-optic infrastructure require high investment volumes of billions of Euros.² Although the future central importance of ultra-high-speed broadband infrastructure as a key socio-economic factor is well recognised, NGA network deployment activities vary significantly in international comparison (see Fig. 1 in Section 2).

Since the beginning of the liberalisation of electronic communications markets in the European Union (EU) in 1997/98, there has been an ongoing debate about the role of infrastructure-based (inter-platform) and service-based competition. Infrastructure-based competition relies solely upon the existence of independent and competing infrastructure platforms. It is deemed to be favourable in the long run as it enables sustainable competition and a gain in dynamic efficiency in terms of investment and innovation. Moreover, it involves a much lower regulatory micro-management of the industry and thus lower administrative costs. Service-based competition hinges on a set of ex ante regulations. Proponents of service-based competition argue that mandatory access is essential to induce market entry in network industries with a quasi-monopolistic market structure and that it has an immediate positive effect on static efficiency. Thus, a key policy question is which mode of competition is preferable in order to lower prices and to achieve high investment in terms of network coverage.

Based on an unbalanced panel of the EU27 member states during the period of 2005–2011, this paper addresses the following research questions: (i) What is the relation between regulation-induced service-based competition on broadband markets and the extent of NGA deployment? (ii) How does infrastructure-based competition in related markets influence the extent of NGA deployment? (iii) Finally, what do the dynamics and the adjustment process of NGA deployment look like? It should be emphasised here that our focus is on NGA deployment/investment only, not on welfare.³

Our paper represents the first European-based attempt to quantify the determinants of recent and actual NGA deployment. Our empirical specification incorporates country-level data where estimates are obtained through various dynamic panel methods. Applying GMM as well as LSDVC estimation techniques explicitly accounts for the endogeneity bias arising from the dynamic investment specification. Furthermore, we argue that there is no endogeneity problem with respect to investment activities and regulation-induced service-based competition in our case, as we relate access regulations imposed on the preceding broadband market years ago to investment activities in an emerging (NGA) market. We therefore acknowledge both potential sources of endogeneity, which are only partly (e.g. Grajek and Röller, 2011), if at all, addressed in the literature.

The remainder of the paper is organised as follows: Section 2 provides necessary background information on the technical and regulatory context of NGA networks. In Section 3 we review the telecommunications-related literature. Section 4 describes our basic hypotheses concerning investment incentives on the one hand and the role of infrastructure and service-based competition on the other hand. Section 5 outlines the dataset underlying our empirical examination. Section 6 presents the empirical specification and related econometric issues. Section 7 describes and interprets the main results. Section 8 summarises and compiles the most relevant aspects for future regulatory policy.