1JRN 930 • Fall 2003Public NetworksPart IIndustry overview(c) 2003 J. M. Bauer 3Industry revenues (US$ million)0500001000001500002000002500003000003500004000001992 1993 1994 1995 1996 1997 1998 1999 2000 2001CableMobileTollLocalSource: FCC(c) 2003 J. M. Bauer 4Service diffusion (no. subscribers)0200004000060000800001000001200001400001600001800002000001992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002FixedMobileCableInternetSources: FCC, NCTA, CTIA, Nielsen(c) 2003 J. M. Bauer 5Stock market indices01002003004005006007001/2/19967/2/19961/2/19977/2/19971/2/19987/2/19981/2/19997/2/19991/2/20007/2/20001/2/20017/2/20011/2/20027/2/2002^IXUTDowNas daqTelecom industries: basic data47%--->25Internet backboneN/AN/A>10010-20ManyFewDevicesz Fixedz Mobile100%22Satellite TV50%19,950Cable TV61%3-6180Mobile voice78%64%1-3>61,500780Fixed voicez Localz TollUS market share of top 3Effective no. of choice optionsNational no. of suppliersSources: FCC, NCTA, CTIA, own research.2(c) 2003 J. M. Bauer 7Economics of telecom Economies of scale (upfront investment, technological change) Economies of scope (enhanced by digitization and convergence) Network effects and externalities Coordination, complementarities Public and merit good aspects Layered structure (physical, logical, content)(c) 2003 J. M. Bauer 8Recurring policy issues Prevention of abuse of market powerz Avoid exploitative pricing practicesz Prevent unfair competitive strategies Facilitate innovation Secure the provision of universal servicez Availability of basic service to all Americansz Affordability of telecommunication servicesPart IICo-evolution of technology and regulation(c) 2003 J. M. Bauer 10Historical highlights Phases of monopoly and competitionz Monopoly by patent (1876-1893/6)z Competition (1893/6-1907)z Consolidation (1907-1934)z Monopoly (1934-1970s)z Transition to competition (1970s to present)z Competition (1996-present) Telecommunications industry embraced regulation early in 20thcentury Very gradual de-regulation process(c) 2003 J. M. Bauer 11Technological basis Switched (or routed) networks; traffic flows along pre-speci f ied pa t h s Digitalization, storability of information Multiple technological platformsz PSTN, wireless, cable TV, can provide voice, data, audio, video services (“convergence”)z Different technology and cost conditions Interactive, retrieval, push services Continued rapid technological changeDifferentiationTelegraphTelephoneTelegraphTelephoneTelegraphRadioTelephoneTelegraphTelexFacsimileRadioTelevisionTelephoneTelegraphTelexFacsimileDataMobile radioRadioColor TVCable TVSatelliteTelephoneVOIPTelex/FacsimileBroadband dataNarrowband dataVideoconferencingInternetCellular/PCSMobile dataDigital radioHDTVDigital cableDBS1850 1880 1910 1940 1970 1990s3(c) 2003 J. M. Bauer 13Past: monopoly networkLocal service Intrastate toll Interstate toll Local serviceState jurisdiction State jurisdictionFederalCOCOTOCOCOEnd-user servicesInterconnectionFirmsT TTandemOfficeCentralOfficeTollOfficeLocal Bell Operating Company ALocal Bell Operating Company BAT&T Long LinesIndependent Telcos(c) 2003 J. M. Bauer 14Key policy issues Coping with market power of big telephone companiesz Avoid exploitative pricing practicesz Prevent unfair competitive strategies Secure the provision of universal servicez Availability of basic service to all Americansz Affordability of telephone servicesPresent: network of networksFiber Ring(CAP)SatellitesCOCOTO COLEC ALEC BMultiple IXCsPrivate LineDedicated line COLEC CFirmWirelessPOP POPInternetbackboneCableheadend(c) 2003 J. M. Bauer 16Key policy issues Delineation of monopoly and competitive parts of industry z Customer premises equipment (1956-1980)z Private networks (1959-1976)z Value-added/information services (1966-1989)z Long distance and international (1968-1984)z Mobile communications (1983-present)z Local services (late 1980s-present) AT&T divestiture (1984 - - DOJ, not FCC) Maintenance of seamless networkIntegrationPSTNTelexCircuit dataPacket dataLeased linesLANsConferencingSound & TVISDN(IntegratedServicesDigitalNetwork)Leased linesLANsConferencingSound & TVB-ISDN(BroadbandISDN)Sound & TVIntegratedBroadbandCommunica-tions (IBC)Time1980sFuture: distributed networkOther IP networksVoice E-mail Content Transactions GamesTCP/IP or other protocolsBackbone networkPhysical layerLogical layerContent, applications layerFixedMobileAccessAccessAccessCATVSpecial purposenetworks4(c) 2003 J. M. Bauer 19Key policy issues Facilitation/preservation of competition and maintenance of seamless network Regulatory measuresz Interconnectionz Unbundling of networks and servicesz Third party access (platforms, application program interfaces, …)z Limited price regulationz Universal service support Antitrust measuresPart IIIInstitutional and legal framework(c) 2003 J. M. Bauer 21Constitutional framework Free enterprise and the protection of private property (5th & 14th Amendment) Federal regulation is rooted in the commerce clause of the constitution  State regulation is rooted in the police powers of the states Federal structure of U.S. government:zInterstate and internationalissues federal jurisdictionzIntrastate issues state jurisdiction(c) 2003 J. M. Bauer 22U.S. Supreme Court decisions Between 1877 and 1934 gradual shift from a narrow interpretation of a “business affected with a public interest” to a broad endorsement of the power of legislatures to regulate private industryzMunn v. Illinois(1877)zGerman Alliance Insurance v. LewiszTyson & Brother v. Banton(1927)zWilliams v. Standard Oil Co. (1928)zNew State Ice Co. v. Liebman(1932)zNebbia v. New York(1934)(c) 2003 J. M. Bauer 23Supreme Court decisions ... Initially, the Court also attempted to define substantive guidelines for public utility regulation (e.g., standards for valuation of utility plant) However, in the Hopecase (1944), the Court decided that it is the end result and not the method that needs to be considered in judging whether a regulatory outcome is compatible with the constitution (“end result doctrine”) The Court also upheld that regulatory agencies are “creatures of the legislature” and have only the authority vested in them by statute(c) 2003 J. M. Bauer 24Obligations and rights Obligation to serve on