Oligopoly competition

The recent telecom downturn has had a severe financial impact on both telecom carriers (incumbents and CLECs) and telecom manufacturers. Deregulation and competition have driven down service prices while the demands for services have not generated sufficient positive cash flow for CLECs. In addition, the compressed technology cycle, which makes the period of return on capital even shorter, further exacerbates the problem. As a result, most

American CLECs have perished. Other CLECs around the world, such as TelstraClear (New Zealand’s number two carrier), StartHub (Singapore’s number two operator), and Energis (UK’s new entrants), continue to struggle in the telecom market. Meanwhile, incumbent carriers continue to dominate and control most of the voice and broadband Internet services (Lynch, 2002).

Recent global economy woes and telecom scandals (such as WorldCom and Global Crossing) ensure that CLECs will have further difficulty in obtaining the necessary capital to compete in the local loop network. At the same time, local incumbent carriers continue to expand their coverage through mergers (such as the merger of Southwestern Bell, Ameritech, and Pacific Bell into SBC) and other investments. Meanwhile, cable, satellite TV, media, and wireless communications sectors also are going through sweeping consolidations. The local loop competition landscape may be very different in the near future. Future major competitors against incumbent carries may be cable operators or wireless carriers (such as 3G operators) and not CLECs. This scenario is of particular relevance to broadband communications. Since these competitors are from different telecom sectors, regulators will need to look at the competition from an oligopolistic perspective (Rosenbush, 2002). In oligopoly competition, incumbent carriers might need to be given less stringent regulations than those required for telecom local loop competition so as to compete with other cross-industry players, such as cable operators.

If the above-mentioned competition does not occur, and the local loop continues to be dominated by the incumbent carriers, alternate options could be considered. A regulator could encourage CLEC’s to consolidate in order to create competition in the local loop. Although an oligopoly may not provide the lowest price to consumers, it offers an opportunity to build ubiquitous broadband networks and some degree of competition.

In summary, depending on each country’s situation, a regulator may have to employ different local loop competition approaches to foster local loop competition. In addition, within a country, different approaches may have to be applied during different competition cycles due to market dynamics. However, no matter what approach is taken, the regulator will play a pivotal role in local loop competition. Table 20 summarizes the different approaches to promote local loop competition.

Table 20. Different approaches to promote local loop competition

Approach Assumption Issues

• Local number portability

• Service resale

• Lease price for unbundled facility

• Interconnection pricing rule Organization

divestiture

Many CLECs viable competitors against the incumbent carrier

• A monopoly local loop company establishment

• Efficiency of the local loop company

• Cross industry sector regulation

• CLECs consolidation and oligopoly competition efficiency

5.8 Summary

The intent of telecom deregulation was to promote competition and the public interest.

Competition in the long distance arena has been a great success. Not only there are large facility-based competitors in the long distance market, but also there are a large number of resellers that buy wholesale service from the facility-based long distance carriers and sell to consumers. Conversely, local access networks have been virtually devoid of competition.

Globally, the “last mile” local loop remains to be largely controlled and dominated by incumbent carriers. The lack of competition in the local loop may be of particular concern in

the offering of services. Moreover, consumers did not enjoy the full price benefits that were supposed to be realized as a result of the telecom deregulation. It will be a significant failure if the interests of entrenched monopolists, rather than public interest, dictate the future of the telecommunications sector.

Various emerging access technologies are being developed to meet the last mile demands.

Based on the successful evolution of LAN technology , it is found that backward technology compatibility is one of the important factors in managing technology trends and evolution.

Therefore, it is deemed that WLAN posses high potential to serve in the local loop access service. From a policy perspective, there are three possible models (infrastructure-based, service-based, and a mix of infrastructure and service) that CLECs can employ to compete with incumbent carriers. Each model has pros and cons. Typically, CLECs have taken the

“mix” approach to compete with incumbents. Consequently, the effectiveness of the incumbent’s ability to unbundle the local loop has become a critical issue in local loop competition. Our analysis shows that several “complementary” issues need to be addressed before full competition can take place in the local loop. Alternatively, a radical local loop divestiture model is also a potential option for local loop competition. Furthermore, in light of the recent telecom bubble and the emerging of cross-industry competitors (e.g., cable operators), if most of CLECs are unable to effectively compete with incumbent carriers, then a CLEC consolidation creating oligopolistic competition could also be a viable option for local loop networks.