Information Technology Reference
In-Depth Information
THE TELECOMMUNICATIONS
MARKET AND STRUCTURAL
SEPARATION
back from useful investment. Vertical integration
will solve this kind of hold-up problem.
The second merit relates to the coordination
problem and transaction costs. When separate
firms are operating in the upstream and down-
stream markets, it is essential to adjust between
them specifications and qualities of the input
goods or services in producing the final goods
or services. As analysed in detail in the following
sections, the coordination between incumbent ac-
cess facilities providers and their competitors in
the service market is more complicated. Various
new technologies are developing in the broadband
market and huge investment in unstable technolo-
gies is required on the part of incumbents. The
coordination between incumbents and competitors
is complex and accompanies considerable transac-
tions costs. Vertical integration will eliminate the
coordination between firms and reduce transaction
costs. Therefore, structural separation should be re-
evaluated by taking transaction costs into account.
It seemed that the FCC understood this point
as it performed balancing analyses between ef-
ficiency and public interests in the investigation
of merger cases in the U.S.A. (Kamino (2009)). In
the case of the EU, ADSL offered on POTS facili-
ties dominates the broadband market. Therefore,
structural separation of incumbents is still being
discussed. In contrast, new technologies such as
FTTx are widely deployed in the Japanese broad-
band market. However, structural separation of
the incumbent NTT is still on the discussion table
without paying due attention to the considerable
transaction costs involved. I will analyse the dif-
ferences in the broadband market structure in the
U.S.A, the EU and Japan and evaluate structural
separation policy from the view point of transac-
tion costs in the following sections.
In the case of the telecommunications industry,
former monopolistic government institutions were
privatised with the introduction of competition
in many countries
2
. New entry began from the
long-distance market because of the cost and
tariff structure of the industry. New entrants in
the long-distance market could not offer their
services without interconnecting with the local
facilities of the incumbents. At the same time, a
dominant carrier in the local market that is inte-
grated into the long-distance market competes
with new entrants that utilise its local services as
input (Armstrong (1998)).
Vertical foreclosure by former state monopolies
was a focus of regulation. There was a temptation
for former monopolies to engage in such anti-
competitive behaviour as the refusal to intercon-
nect or setting higher interconnection charges to
exclude new entrants. Therefore it was necessary
to prevent vertical foreclosure by the former
monopolies in order to secure fair competition.
The measures adopted to avoid these problems
are largely classified into 'conduct regulation'
and 'structural separation'. Conduct regulation
includes the imposition of the obligation to in-
terconnect and the regulation of interconnection
charges. Structural separation means the separa-
tion of a monopolistic division (local businesses)
and competitive division (long-distance busi-
nesses) as independent legal entities.
The actual interpretation of structural separa-
tion in the telecommunications industry ranges
from narrowly defined separation with ownership
unbundling to mere accounting separation as clas-
sified by Cave (Table 1). As the European Com-
mission (EC) defines separation with ownership
unbundling as 'structural separation' and separa-
tion without ownership unbundling as 'functional
separation' in the EC 2007 telecommunications
regulatory reform (EC (2007a)), I follow this EC
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