Fixed and Mobile Competition in Transition Economies
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| Fixed and Mobile Competition in Transition Economies
Chris Taubman* and Maria Vagliasindi** Abstract The main aim of this paper is to explore the substitution effects between traditional fixed line and mobile services across Eastern Europe and Former Soviet Union. Whereas there have been some pioneer studies for the US (e.g. Rodini, Ward and Woroch, 2002), empirical evidence for other regions is very limited. EBRD, as the largest financial investor in private sector telecom projects the region, is in a unique position to make an assessment of the evolution of fixed and mobile competition. The focus of this paper will be on the specific challenges that characterise countries that are in the process of moving from command to market economies (“transition countries”). The initial conditions were completely different from the ones characterising the introduction of mobile services in developed countries for many factors, ranging from historical to socio-economic ones. Moreover, in many cases, reforms and technological innovation has been introduced over a much shorter time frame. Transition countries witnessed important trends in the mobile segment of the market. First, mobile penetration rates have been growing at exponential rates, whereas fixed line penetration rates have at best stagnated. The mobile penetration levels of some of the transition countries are close to Western European penetration levels. At the top of the league on the mobile front is Slovenia, with an 86.6 percent mobile penetration rate at the end of 2002, closely followed by the Czech Republic, Hungary, and Slovak Republic, all of which have penetration rates of well over 50 percent. Mobile penetration in Bulgaria and Romania at of the end of 2002 stood at approximately 30 percent. In other countries belonging to South and Eastern Europe (SEE) and Former Soviet Union (FSU), whilst hindered in part by a lower level of disposable income, growth in the mobile sector was also hampered at first by a lack of competition. Crandall and Hausman (2000) have shown that, in regional US mobile telephone markets, one additional operator has been sufficient to bring about significant benefits (including significantly lower prices when compared to a monopoly), while further market entry did not have significant effects on mobile telephone prices. We found even stronger results for transition countries. In Albania, the arrival of Vodafone in the market alongside Albanian Mobile Communications has provided a significant boost to subscriber numbers. The Vodafone launched services in the third quarter of 2001. Just 3 months later, at the end of 2001, its prepaid services had proved so popular that it had gained 118,567 subscribers, helping to increase penetration to more than 25 percent by the end of 2002. This accomplishment is notable in a country whose 2002 per capita gross domestic product was among the lowest in the region. Subscriber bases are made up almost entirely of prepaid subscriptions (99 percent of Vodafone’s Albanian subscribers at the end of 2002 were prepaid) and are attracted by an increasing number of cheap, prepaid offers, particularly as mobile can be bought and used immediately whereas fixed-line operators are still battling to overcome waiting lists. Second, in many countries mobile penetration rates have overturned fixed line penetration rates. This is the case not only for most of the EU accession countries but also for countries of SEE (notably Albania and Serbia and Montenegro) and is expected to come soon for some FSU countries (notably Russia). Finally, not necessarily the mobile arms of the fixed line incumbent operators are always the most successful operators. In Bulgaria and Romania, neither of the incumbent operators holds a leading market position; indeed, the mobile arms of the incumbents in both cases are the smallest and least successful operators. Large foreign players such as Orange in Romania hold the largest market shares through a combination of low-cost, prepaid offers, backed by extensive marketing and branding activity as well as by national distribution networks. Our analysis is based on empirical evidence based on country level data, as well as enterprise level data based on major surveys that the EBRD and the World Bank undertook in 2002 across all transition economies. The analysis will also be complemented by case studies that will focus also on the extensive experience that EBRD had in supporting competition through financing network and capital expansion in telecom operators. Finally, we will review policy recommendations appropriately tailored for transition economies, analysing the type of regulatory barriers that could be removed to facilitate entry in the mobile segment of the market. Spectrum allocation has represented a major barrier to entry across transition economies, particularly in FSU. For example, private property rights in frequency spectrum could be broadened so as to allow spectrum use for different purposes and spectrum trade, as already suggested by Coase (1959). Furthermore, measures such as spectrum caps and the general competition law could also be applied in order to prevent operators acquiring a dominant position in a market or significantly lessening competition. Other candidates for such barriers to market entry are the price and terms of interconnection. Interconnection is critical in providing efficient investment and effective competition in the transition region. Indeed there is extensive evidence that even in advanced countries (such as Poland) that the regulator has faced considerable challenges to enforce effective interconnection rules, based on constraints related to lack of expertise, resources and political independence. If the regulator fails to understand interconnection, distorted market-entry signals, invalidated investments, and the abuse of dominant positions will result, to the detriment of consumers. Hence, those operators with the ability to abuse their market power should be subject to special rules (ex ante regulation) to ensure that they do not abuse their dominance. These rules should include a requirement for the operator to meet all reasonable demands for interconnection services from other network operators (for example, transparent and cost-based interconnection, unbundling of interconnection charges, nondiscrimination, and publication of interconnection offers, including terms and conditions of contracts and prices). From a public policy viewpoint, the resulting interconnection price needs to be economically efficient, to guarantee fair recovery of costs for all operators, and to provide the right entry signals. Customer switching costs can also represent a source of barrier to entry. In this context switching costs consist not only of the direct monetary expenses when changing providers such as a contract penalty when canceling a mobile telephone contract prior to expiry, but also include indirect costs such as the costs associated with giving up one's mobile telephone number. In this context, the introduction of mobile number portability (MNP) that is still lagging behind in our region can reduce consumers' switching costs and thereby not only make market entry easier for new operators, but also strengthen the competition for customers between already established operators. The question is also whether introducing MNP is efficient, given that the system costs of introducing and implementing it can be quite substantial (see Aoki and Small, 1999). In sum, our paper has found important policy implications particularly for the EU accession countries. Whilst the very rapid adoption of mobile telephony in transition countries has led to very significant advantages in terms of increasing coverage and connectivity of the population, enhanced competition and FDI, there remain important concerns. These relate to the challenges for fixed line operators, already constrained by unbalanced tariffs, which face reduced or even declining customer subscription, with consequent negative impact on capacity for capital expenditure and the overall development of data and Internet services. This has been identified as a factor in the observed reluctance of incumbent fixed line operator to facilitate access to their network by competitors (e.g. through cost based interconnection rates). Policy makers need to appropriately address such issues.
Aoki, R. and J. Small (1999), “The Economics of Number Portability: Switching Costs and Two-Part Tariffs”, Working Paper, University of Auckland, November 1999. Crandall, R. and J. Hausman (2000), “Competition in U.S. Telecommunications Services: Effects of the 1996 Legislation, in: S. Peltzman und C. Winston (eds.), Deregulation of Network Industries: What’s next?”, Washington, DC: AEI-Brookings Joint Center for Regulatory Studies, pp. 73-112. Rodini, M., Ward, M. and G. Woroch (2002) “Going Mobile: Substitutability between fixed and mobile access”, Telecommunication Policy, Volume 27, 457-476 * Senior Banker, Telecommunication, Informatics and Media Team, European Bank for Reconstruction and Development, One Exchange Square, London EC2A 2JN, UK; Tel: 0044 207 3387855, Fax: 0044 207 3386674, e-mail: taubmanc@ebrd.com ** Senior Economist, Office of the Chief Economist, European Bank for Reconstruction and Development, One Exchange Square, London EC2A 2JN, UK; Tel: 0044 207 3387213, Fax: 0044 207 3386610, e-mail: vagliasm@ebrd.com Download 14.09 Kb. Share with your friends:
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