Strategic Investment Decisions in Regulated Markets: The Relationship Between Infrastructure Investments and Regulation in European Broadband

243 Pages·2007·1.123 MB·German

by  Christian Wernick (auth.)

Christian Wernick
Strategic Investment Decisions in Regulated Markets
GABLER EDITION WISSENSCHAFT
Markt- und Unternehmensentwicklung
Herausgegeben von
Professor Dr. Dres. h.c. Arnold Picot,
Professor Dr. Professor h.c. Dr. h.c. Ralf Reichwald,
Professor Dr. Egon Franck und
Professorin Dr. Kathrin Möslein
Der Wandel von Institutionen, Technologie und Wettbewerb prägt in
vielfältiger Weise Entwicklungen im Spannungsfeld von Markt und
Unternehmung. Die Schriftenreihe greift diese Fragen auf und stellt
neue Erkenntnisse aus Theorie und Praxis sowie anwendungsorien-
tierte Konzepte und Modelle zur Diskussion.
Christian Wernick
Strategic Investment
Decisions in
Regulated Markets
The Relationship Between
Infrastructure Investments and
Regulation in European Broadband
With a foreword byProf. Dr. Dres. h.c. Arnold Picot
Deutscher Universitäts-Verlag
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detailed bibliographic data is available in the Internet at <http://dnb.d-nb.de>.
Dissertation Universität München, 2007
1st Edition September 2007
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Foreword
The importance of liberalisation, regulation and deregulation on business developments in
various sectors has increased in recent years. Utilities and network industries as well as health
and financial services are all examples for regulated markets. Beside their differences, these
sectors are characterised in a way that strategic scopes of market participants are to a high
degree influenced and governed by regulatory frameworks and decisions.
The author of this book investigates to which extent regulation is affecting strategic
investment decisions on broadband markets. This question is both very up to date and of
fundamental importance as scholarly research and practitioners are controversial on the
benefits of regulation and its impact on infrastructure investments. In particular, existing
research disagrees whether regulation is a necessary precondition for investments or a
hindrance, which displaces investment incentives by opening incumbent networks to
competitors.
To figure out this question, the author concentrates on two markets, namely the German
broadband market and its counterpart in the UK. Despite similar legal frameworks defined by
common Directives established on the European level, different regulatory strategies have
evolved, which makes it useful to contrast these markets with each other. Based on a
thoroughly developed theoretical framework, a large number of interviews with market
experts and various statistical data, three detailed case studies concentrate on the structural
level, business regulator relationships and the consequences of regulatory interventions on
wholesale markets.
The author’s findings underline that simplified “truths” as they are frequently praised by
various interest groups do not hold out against a sophisticated scholarly discussion. His results
emphasise the connection between regulation and the profitability of different business
models, but they also show that rather than having regulatory reasons, strategic investment
decisions are predominantly driven by the overall economic situation, assumed demand for
certain products, access to financial markets, and perceptions about risks and chances
associated with those investments. Building on these insights, ten theses are developed and
some useful policy recommendations are deduced.
Overall, on the edge of economics and business literature, a remarkable contribution to
existing scholarly research is presented here, which is characterised by a thorough research
VI Foreword
procedure and an enormous in-depth knowledge. I therefore hope that this book will be
received positively by the scientific community as well as by professionals and executives
concerned with regulatory issues. It spurs the debate and the understanding of a field which
will gain even more importance in the future.
Prof. Dr. Dres. h.c. Arnold Picot
Preface
A decade after the liberalisation of most telecommunication markets in Europe, operators face
huge challenges due to various drivers including technological progress, changing user
behaviour and capital markets. In the context of these changes, benefits and designs of
regulation are put to test.
High investments associated with fibre and next generation networks challenge existing
regulatory regimes as telecommunications operators call for improved regulatory certainty. At
the same time, the complex of wholesale regulation, unbundling and investment behaviour of
both incumbents and new entrants is controversially discussed. These significant issues are
addressed in the thesis at hand dealing with the relationship between strategic investment
decisions and regulation in European broadband markets.
My book aims to provide explorative insights on this relationship on different levels. I pursue
a positive research aim, which is necessary for developing an overall comprehension on the
complex under observation, and thus to be able to develop hypotheses and deduce policy
recommendations. In this respect, the book addresses scholars in the scientific community as
well as professionals, regulators and politicians dealing within and defining the regulatory
frameworks in a dynamic and turbulent environment.
The thesis at hand was written during my tenure at the institute of information, organisation
and management at the Ludwig-Maximilians-University in Munich. Many insights would not
have been possible without the generous help and support of numerous people.
First of all, I want to thank my academic teacher and supervisor Prof. Dr. Dres. h.c. Arnold
Picot, who played a significant role for the accomplishment of this book. Employing me as a
research assistant and lecturer at his institute and involving me in various research projects in
the context of telecommunications and regulation, he raised my awareness of developments in
a challenging and fascinating industry. Furthermore, he accompanied this project with helpful
suggestions, constructive criticism and steady encouragement.
Next, I would like to express my gratitude to Prof. Dr. Thomas Hess for the co-supervision of
my thesis and to Prof. Martin Cave for inviting me to the Warwick Business School and
conveying me with precious insights on UK’s and Germany’s telecommunication markets.
VIII Preface
Beyond these credits to my academic advisors, I am deeply indebted to my interview partners,
who granted invaluable insights on their experiences and estimations. My discussions with
them and their willingness to support my project were crucial for the success of the empirical
research conducted on behalf of my project.
Furthermore, I owe special thanks to all of my colleagues and friends at the institute of
information, organisation and management, who have contributed to my work in so many
different and decisive ways: Dr. Rahild Neuburger, Daniela Absmayr, Christine Hartig and
Angela Sanganas created an enriching atmosphere at the institute and supported me in various
ways. Jakob Assmann, Oliver Baumann, Beatrix Ertsey, Dr. Marina Fiedler, Nico Grove,
Christoph Janello, Dr. Jonathan Landgrebe, Martin Schmid and Dr. Isabell Welpe overhauled
earlier versions of this manuscript and made lots of precious suggestions. Very special thanks
go to Dr. Till Kruse and Dr. Florian Stadlbauer. In a research circle we engaged in relentless
discussions of methodological and theoretical research issues as well as on football. Although
we often ended up confused, this debate club had large impact on all of our works.
I cordially thank Christina Löser. During the entire project she was a strong pillar and helped
me to remain focused, which is crucial to accomplish such a challenging task.
Above all, I express my deepest gratitude to my parents Karin and Heinrich Wernick. By
educating me and supporting me in so many different ways they have established the basis of
this work and showed me the importance of a stable family in today’s turbulent world. I thus
dedicate this book to them.
Christian Wernick
Contents
Foreword................................................................................................................................................................V
Preface................................................................................................................................................................VII
Contents...............................................................................................................................................................IX
List of Figures...................................................................................................................................................XIII
List of Tables....................................................................................................................................................XIV
Abbreviations.....................................................................................................................................................XV
1 Introduction...................................................................................................................................................1
1.1 Characteristics of Broadband...............................................................................................................2
1.1.1 Technical Characteristics................................................................................................................3
1.1.2 Economic Characteristics................................................................................................................5
1.2 ResearchQuestions..............................................................................................................................8
1.3 ResearchApproach............................................................................................................................10
1.4 Structure and Further Proceedings.....................................................................................................14
2 Liberalisation and Regulation in Telecommunication Markets..............................................................16
2.1 European Telecommunications Regulation until the 2002 Framework.............................................16
2.2 Telecommunications Regulation in Germany and the UK.................................................................19
2.3 Theories of Regulation.......................................................................................................................23
2.4 The 2002 Regulatory Framework for Electronic Communications...................................................25
2.5 The Process of Market Regulation.....................................................................................................27
2.6 Actors Involved in the Process of Market Regulation.......................................................................34
2.6.1 The European Commission...........................................................................................................35
2.6.2 The European Regulators Group...................................................................................................37
2.6.3 National Regulatory Authorities...................................................................................................38
2.6.4 National Competition Authorities.................................................................................................38
2.7 Interim Conclusion.............................................................................................................................39
3 Theoretical Approaches on Strategic Investment Decisions in Regulated Markets..............................40
3.1 Research on Broadband.....................................................................................................................40
3.1.1 Unbundling and Wholesale Regulation.........................................................................................41
3.1.2 Comparative Research...................................................................................................................47
3.1.3 Assessment of Existing Literature.................................................................................................50
3.2 Theoretical Approaches on Strategic Investment Decisions in Telecommunications........................51
3.2.1 Financial Approaches....................................................................................................................54
3.2.1.1 Traditional Investment Calculation Methods.......................................................................54
3.2.1.2 Real Options........................................................................................................................55
X Contents
3.2.1.3 Contributions.......................................................................................................................57
3.2.2 Strategic Approaches.....................................................................................................................58
3.2.3 Neoclassical Approaches...............................................................................................................60
3.2.4 InstitutionalApproaches...............................................................................................................62
3.2.4.1 Property Rights Theory........................................................................................................64
3.2.4.2 Transaction Cost Theory......................................................................................................66
3.2.4.3 Principal Agent Theory........................................................................................................69
3.2.4.4 Contributions.......................................................................................................................71
3.3 Interim Conclusion.............................................................................................................................73
4 Development of a Framework....................................................................................................................77
4.1 The Analysis of Institutions...............................................................................................................77
4.2 Institutional Conditions in a Regulated Environment........................................................................80
4.2.1 The Institutional Part of the Integrative Framework.....................................................................81
4.2.2 Characteristics of Political Markets...............................................................................................83
4.3 Economic Markets in a Regulated Environment................................................................................85
4.3.1 Retail, Wholesale and Supply Markets.........................................................................................85
4.3.2 Market Entry in Regulated Wholesale and Retail Markets...........................................................88
4.4 The Level of the Firms.......................................................................................................................89
4.5 The Analytical Framework................................................................................................................90
4.6 The Application of the Framework....................................................................................................93
5 Explorative Case Studies on Strategic Investment Decisions and Regulation in European
Broadband...................................................................................................................................................98
5.1 InstitutionalStructures.....................................................................................................................100
5.1.1 The Institutional Stances of European Regulators......................................................................103
5.1.1.1 National Regulatory Authorities and National Competition Authorities...........................103
5.1.1.2 National Regulatory Authorities and the European Regulators Group..............................105
5.1.1.3 National Regulatory Authorities and the European Commission......................................106
5.1.1.4 National Regulatory and Political Authorities...................................................................108
5.1.2 The Stances of National Regulatory Authorities in Germany and the UK..................................110
5.1.2.1 The Stance of Ofcom.........................................................................................................110
5.1.2.2 The Stance of the Bundesnetzagentur................................................................................115
5.1.3 The Independency of National Regulatory Authorities...............................................................121
5.1.4 Consequences of Institutional Structures on Strategic Investment Decisions.............................126
5.1.4.1 The Calculability of the Regulatory Environment.............................................................129
5.1.4.2 The Transparency of Regulatory Processes.......................................................................130
5.1.4.3 The Duration of Regulatory Processes..............................................................................131
5.1.4.4 The Consideration of National Particularities....................................................................132
5.1.5 Findings on Institutional Structures.............................................................................................133