Leveraging the EU regulatory framework to improve a layered policy model for US telecommunications markets

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Telecommunications Policy 30 (2006) 136–148 www.elsevierbusinessandmanagement.com/locate/telpol

Leveraging the EU regulatory framework to improve a layered policy model for US telecommunications markets Joshua L Mindela,, Douglas C. Sickerb a

Information Systems Department, College of Business, San Francisco State University, 1600 Holloway Avenue, San Francisco, CA 94132, USA b Department of Computer Science, Interdisciplinary Telecom Program, University of Colorado at Boulder, 430 UCB, Boulder, CO 80309, USA

Abstract What is the best way to overhaul the current telecommunications legislative framework in the United States? This is an ongoing debate among telecom policy analysts and many others affected by the legacy of regulatory compromises that govern US telecommunications (and related information and media) industry sectors. This paper compares a Layered Model for US telecommunications policy with the regulatory framework adopted by the European Union. Both approaches focus on service characteristics rather than underlying technological traits.1 It becomes clear that the Layered Model could be adopted to move away from sector-specific regulation, and could successfully use conventional market analysis criteria. r 2006 Elsevier Ltd. All rights reserved. Keywords: Telecommunications regulation; Policy; Technology; Market

1. Background The initial concept for this policy essay came about during a discussion at the 30th Annual Telecommunications Policy Research Conference (TPRC) in 2002. Two presenters had just described different layered policy models for telecommunications, and the question that was left hanging in the air was how do these two models compare? Frieden (2002) had just described the European Union’s (EU) new approach to regulating markets that reflects ‘‘the convergence of the telecommunications, media and information technology sectors y’’, and Sicker (2002) had followed up with a refinement of a layered policy model previously described by Sicker and Mindel (2002). This latter model was derived from Sicker, Mindel, and Cooper (1999), which used a layered model to specifically examine service provider interconnection issues and, importantly, separated transport and applications into discrete layers. Corresponding author. Tel.: +1 415 338 1175. 1

E-mail addresses: [email protected] (J.L. Mindel), [email protected] (D.C. Sicker). Technological traits refer to the underlying physical infrastructure associated with a given service.

0308-5961/$ - see front matter r 2006 Elsevier Ltd. All rights reserved. doi:10.1016/j.telpol.2005.11.004

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Cuilenburg and Verhoest (1998) argue that the advent of ‘‘layered conceptions’’ for telecommunications ‘‘corresponds to the introduction of competition in the sector’’. The two models compared in this paper reflect this approach.

2. Introduction Legacy legislative and regulatory frameworks for telecom policy tend to heavily reflect the technological traits of their respective service markets. This is particularly true in the United States. Each of the two different layered models for telecom policy discussed in this paper—the EU Framework and the Layered Model—seeks to provide a framework that is suitable for modern telecommunications and related information and media sectors. The aim of this paper is to contrast the two layered policy models, and, in the process, leverage the EU Framework to further improve the Layered Model for US telecom policy. The European Commission’s (2005) informational website for the EU’s regulatory framework for electronic communications states that the ‘‘framework provides a set of rules that are simple, aimed at deregulation, technology neutral and sufficiently flexible to deal with fast changing markets in the electronic communications sector’’.2 Sicker and Mindel’s (2002) Layered Model has the same intent, with a particular emphasis on interconnection arrangements between competing service providers in similar markets (i.e., horizontal interactions) and complementary service providers in adjacent markets (i.e., vertical interactions). The EU Framework is a set of regulations that establishes a single regulatory framework for electronic transmission and services, and links to a separate regulatory framework for content and information society services.3 In contrast, the Layered Model is a conceptual framework for policy makers that provides a structured lens through which interconnection relationships among telecommunications service providers and information service providers can be evaluated anew, but does not prescribe regulations.4 In the language of the EU Framework, the Layered Model encompasses electronic transmission and services as well as content and information society services. The ongoing implementation experience with the EU Framework will (hopefully) demonstrate how the Layered Model can lead US regulators out of a situation in which they must fit current issues into ill-fitting regulatory strictures to one with more conceptual clarity, less regulatory uncertainty, and (hopefully) less legal disputes. The EU Framework and the Layered Model are certainly not the only two layered models that have been developed to specifically rectify the inconsistent treatment of information and communications services by legacy regulatory frameworks. Werbach (2002), for example, described a four-layered model—content, applications/services, logical and physical—with a strong emphasis on the logical layer and a belief that ‘‘regulation is more justified at lower layers, because openness at one layer often allows for innovation at higher layers’’. Whitt (2003) combined the various existing models into a new four-layered model consisting of the physical, logical, application and content layers with access and transport included as sub-layers within the physical layer. Uniquely, the Whitt model advocated fairly specific regulation in the way of a lightly regulated application layer closely mirroring that of the present day information service, a narrowly defined set of social policy requirements (e.g., E911, CALEA, access for the disabled) for voice over IP (VoIP) service, regulation on broadband platforms, and reformation of the present day inter-carrier compensation and Universal Service Fund. Fransman (2002), interestingly, undertook a meta-analysis of layered models in which the benefits and drawbacks of using such an approach to study ‘‘info-communications’’ was analyzed. 2

Refer to the official European Union Directives for more formal descriptions of the EU regulatory framework: Europe (2002a) provides an overview of the framework; Europe (2002b) describes access and interconnection; Europe (2002c) describes authorization of electronic communications networks and services; Europe (2002d) describes universal service and users’ rights; Europe (2002e) describes privacy stipulations; and Europe (2002f) describes market competition. 3 Definitions of these services are given in the description of the EU Framework in Section 5. 4 The reference to existing US regulatory categories in Congress (1996) is intentional.

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3. Outline and approach The EU Framework and Layered Model sections of this paper contain overviews of the two models, respectively. The Comparison section describes the differences and similarities of the two models. The comparison begins by contrasting the role that each layered model serves in its respective community. The Services and Layers subsection applies the models to six practical cases that exemplify the differences (and similarities) that the two models would make in practice. The Markets section delves deeper into the specific and systematic identification of markets—within each layer—that is necessary. The main points considered in this part of the comparison are: (1) defining markets; (2) criteria for significant market power; and (3) recourse in the event of significant market power.

4. Layered Model The Layered Model was developed as a framework to assist policy makers in systematically evaluating interconnection relationships between providers of service layers. These relationships encompass interactions between competitors, as well as interactions between service providers in complementary markets. The Layered Model is based on the premise that the existing, technology-specific telecommunications regulatory model creates market distortions that adversely affect the emergence of competition and the deployment of new services. The existing, vertical regulatory model is defined by the Communications Act of 1934, as amended by the Telecommunications Act of 1996; Congress (1996). This model is typified by silos that treat similar services differently, as for example,

 

Voice services based on wireline technology are covered by Title II of the Act—Common Carriers, whereas voice services based on wireless technology are covered by Title III of the Act—Provisions Relating to Radio. Television services based on broadcasting technology are covered by Title III of the Act—Provisions Relating to Radio, whereas television services based on cable communications technology are covered by Title VI of the Act—Cable Communications.

The intention of the Layered Model was to start with the model that technologists use to conceptualize the hardware and software associated with a network (i.e., protocol layers) and to use this as a framework for describing a new way of viewing long-term policy decisions. The direct applicability of the TCP/IP protocol suite5 and the OSI reference model6 to this task was originally examined (Fig. 1). The layers that were typically associated with the various devices in the network were considered, excluding layers that did not directly relate to policy issues or market reality. The layers in the present policy model represent providers of services, not the protocols or the implementation of these protocols. The Layered Model proposed by Sicker and Mindel (first in 1999 and then in 2002) comprises four, horizontal policy layers: access, transport, application, and content (Fig. 2). There is an additional layer to accommodate services based on legacy telecommunications technologies (e.g., PSTN) since this is a large portion of current infrastructure and will continue to be in place for some time. We describe each of the service layers in Section 4.1, followed by service provider interactions. The paper then highlights the influence of broader institutional influences on service provider interactions.7 5

The term TCP/IP refers to the suite of communications protocols used to connect hosts in the Internet. The suite consists of a modular set of layers. Cerf (1989) describes the role of TCP/IP in the development of the Internet. 6 The phrase OSI model refers to the Open Systems Interconnection (OSI) seven-layer model. This model is an abstract description of open (i.e. non-proprietary) communications and computer network protocols established by the International Standards Organization (ISO) in the 1980s. ISO (1994) is the authoritative definition of the OSI model. 7 Inclusion of broader institutional influences is not reflected in the earlier Sicker and Mindel work.

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Fig. 1. The OSI and TCP/IP Models.

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Fig. 2. The Layered Model.

4.1. Services The layers of the Layered Model distinguish between access and transport services, application services, content services, and legacy telecommunications services. Physical infrastructure providers fall under the access and transport layers; including both best-effort and QoS services. The transport layer encompasses the ‘‘longhaul’’ or backbone portion of the network, which operates on large scale movement of data in a competitive market, while the access layer encompasses the ‘‘last-mile’’, which is a fairly non-competitive market that uses different technology and operates on a much different scale. These can be distinguished as separate markets that operate fundamentally differently and exist under vastly different market conditions. The application layer relies on the underlying access and transport layers and can be further subdivided into three subcategories: (1) directory service providers (e.g., DNS and other naming/numbering functions); (2) intermediate or middle service providers (e.g., multicasting and caching); and (3) end-user service providers (e.g., voice, email, and hosting). It can be argued that these three subcategories are distinct and should be treated as such, but this broad categorization is sufficient for this context. The point is to distinguish between the provision of a data delivery service and the applications that use or support the data delivery service. The content layer relies on underlying access, transport, application-directory, and application-intermediate services. Examples of content include video and music.

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Again, in consideration of the fact that the legacy PSTN infrastructure is and will continue to be in place for years to come, there is an additional legacy telecommunications services layer in the Layered Model. Service provision involves technology, public policy, and business issues. This implies that the identified layers in the Layered Model represent more than those represented in the similar looking TCP/IP protocol stack. Structuring the Layered Model in this fashion facilitates a technologically neutral8 approach to market definitions used in public policy. With the Layered Model, markets can be analyzed and treated in as consistent a manner as possible. For example, facilitating the deployment of new and innovative technologies is an objective common across all four layers. On the other hand, some issues at the content and application layers are distinct from those at the transport and access layers. For example, the ‘diversity of voices heard’ is a policy metric more importantly applied to content services than, say, to transport or access services. The ‘‘importance of network externalities’’ as a policy metric is more importantly applied to application services than it is to transport or access services. A policy metric that is more easily quantified—‘‘number of subscribers’’—is more usefully applied to access and transport services than it is to content and application services. 4.2. Service provider interactions Services, service providers, and their interactions are the focus of this model. The stack of layers in the Layered Model provides a framework for systematic evaluation of the interconnection arrangements between competing service providers in similar markets (i.e., horizontal interactions) and complementary service providers in adjacent markets (i.e., vertical interactions). The important provider relationships are: A—access provider to access provider B—access provider to IP transport provider C—IP transport provider to IP transport provider D—IP transport provider to application service provider E—application service provider to application service provider F—application service provider to content provider G—internet service providers to telecommunications service provider Fig. 3 depicts the service provider relationships that are of most interest to telecommunications policy. Relationships A through F are depicted in Fig. 3. An application service provider may directly connect with an access provider, but for purposes of simplification we leave this relationship out. Fig. 3 should be viewed as a conceptual model of the service providers. From a telecommunications policy perspective—and the perspective of this paper in particular—these are the relationships of primary interest. For example, an IP transport provider will use applications on its network, but since it offers the transport service to the public for a fee, the transport is the service of interest. Similarly, an application provider will employ network infrastructure (access and transport) to connect its applications to the public network, but the service is the application, not their network. There are also interactions of interest here between layered service providers associated with the emerging IP infrastructure and legacy telecommunications service providers. Since PSTN voice and PSTN transport services are more tightly coupled than are the modular layers in the emerging IP infrastructure, the service providers for any of the four (access, transport, application, content) services can interact with legacy telecommunications service providers. Fig. 4 depicts relationship G, between internet service providers and telecommunications service providers. The diagonal layering implies that PSTN voice and PSTN transport services are more tightly coupled than are the layers in the emerging IP infrastructure. In Fig. 4, services that would be considered an application service in an IP context (e.g., SS7/IN and directory services) are in the upper diagonal, and those services that would be considered a transport service are in the lower diagonal. Both are considered telecommunications services in legacy PSTN regulation. 8

The term technologically neutral refers to policy and business decisions of a service being made without basing the decision on the underlying physical plant that delivers the service.

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Fig. 3. Relationships among infrastructure service providers.

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Fig. 4. Relationships between IP and PSTN infrastructure service providers.

4.3. Interactions in the context of broader institutional influences Fransman (2002) observed that an important shortcoming of Layered Models is that ‘‘interacting institutions are left out of the picture’’. Earlier versions of the Layered Model did not explicitly address the influence of institutions, and so the Sicker and Mindel (2002) Layered Model is extended here to include four primary sets of institutional influences on the service provider interactions that are addressed. First, implementation and enforcement of the Layered Model itself will result from dynamic legal and regulatory processes. Secondly, financial markets are tremendously influential through the availability of capital investment funds (e.g., pre Telecom bust) and Wall Street’s quarterly influence. Thirdly, innovation and standards processes led by universities and standards bodies yield tremendous influence, e.g., advancing technology, establishing interconnection rules that affect service provider interactions. Fourthly, demand drivers for the services reflected by the layers are an important influence. For example, increased demand for content and applications will influence transport and access services, as well as their respective service provider interactions. See Fig. 5 for an updated depiction of the Layered Model. 5. EU Framework This section describes the EU Framework, which comprises two directives that cover transmission networks and services, as well as information society services, but not the content of the services delivered over these networks. Europe (2002a) states, ‘‘the convergence of telecommunications, media and information technology sectors means all transmission networks and services should be covered by a single regulatory framework’’. Europe (2002a) goes on to state that it does not cover ‘‘the content of services delivered over electronic communications networks using electronic communications services’’. Europe (2000) describes the

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E C A

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End User Demand Drivers Fig. 5. Relationships in context of broader institutional influences.

‘‘information society services’’ that complement the services covered by Europe (2002a). It is this pair of complementary EU regulatory frameworks on which this paper focuses and refers to collectively as the EU Framework. The EU Framework is based on the premise that there is a need for ex ante regulation in certain circumstances in order to ensure the development of a competitive market. Regulatory obligations should only be imposed in markets where there are one or more entities with significant market power, and where national and community competition law is insufficient to ensure competition. 5.1. Services A significant benefit of the EU Framework is that it decouples information services from the underlying networks that help deliver these services. This approach will help the EU Framework withstand the rapid pace of technological and market development, as services may be carried by new network technology without regulation having to be changed to accommodate this. Europe (2002a) defines an electronic communications service as ‘‘a service normally provided for remuneration which consists wholly or mainly in the conveyance of signals on electronic communications networks, including telecommunications services and transmission services in networks used for broadcasting, but excludes services providing, or exercising editorial control over, content transmitted using electronic communications networks and services; it does not include information society services y’’. Europe (2000) defines an information society service as ‘‘any service normally provided for remuneration, at a distance, by means of electronic equipment for the processing (including digital compression) and storage of data and at the individual request of a recipient of a service’’. 6. Comparison In this section the EU Framework and Layered Model are compared on several bases. First, the role that each layered model serves in its respective community is provided to contrast very important and high level

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differences. Secondly, several cases are analyzed to exemplify the difference that the two layered models would reveal in practice. Thirdly, criteria for defining markets, assessing market power and using remedial measures in the case of abuse of market power are contrasted for the two models. 6.1. Roles The EU Framework is a set of regulations, whereas the Layered Model is a tool for policy makers to consider a new, unified regulatory framework for US telecommunications policy. The Layered Model was developed to provide the basis for a unified policy model that facilitated consistent, systematic treatment of interconnection issues in the emerging information and telecommunications infrastructure. 6.2. Services and layers—application of models The following section provides practical examples of how a specific service would be mapped onto layers of the EU Framework and Layered Model. Both the EU Framework and Layered Model separate content from conduit. Conduit is addressed by the electronic communications services directive in the EU Framework and by the access and transport layers in the Layered Model. Content is covered by information society services in the EU Framework, and by application and content layers in the Layered Model. Below, six practical cases are provided to exemplify the differences (and similarities) that the two layered models would make in practice by noting how each model would classify the service: electronic communications service or information society service, or access, transport, application or content. Access and transport layers map closely to electronic communications services, while application and content map closely to information society services. It is important to note that since the Layered Model is not itself a set of regulations and is not linked to one, as the EU Framework is, specific services may only be classified into a layer or layers. A specific regulatory outcome cannot be given for a service under the Layered Model as it has not yet been adopted into regulatory use nor has it been determined how regulations will specifically differ from layer to layer. The insight that can be gained from the attribution of a service to a layer is that the intent of the Layered Model is to keep regulation light in the highly innovative Application and Content layers. Similarly, the EU Framework applies very light regulation on its equivalent information society services. 6.2.1. Electronic mail Two types of Electronic Mail services are identified. The first is the vehicle or conveyance service. The second is the use of the conveyance service to distribute content. In the EU Framework, Europe (2002a) states that ‘‘electronic mail conveyance services’’ are covered by the directive defining electronic communications services. Thus, the EU Framework treats conveyance of electronic mail as an electronic communications service, which is equivalent to conduit services at the transport layer in the Layered Model. The Layered Model classifies electronic mail conveyance as an application service, which is a layer between physical network services (access, transport) and content services, a distinction that the EU Framework lacks. The rationale is that electronic mail is an application that leverages underlying physical services (access, transport) to handle content services. Both models treat the use of electronic mail to distribute content similarly. The EU Framework classifies this as an information society service, and the Layered Model classifies it as a content service. 6.2.2. VoIP It should initially be noted that there are several varieties of VoIP that have been defined. The Federal Communications Commission (1998) used a ‘‘functional approach’’ to categorize IP telephony services as ‘‘phone-to-phone’’ or ‘‘computer-to-computer,’’ noting that some phone-to-phone IP telephony services did not have the same characteristics as an ‘‘information service’’. Computer-to-phone or phone-to-computer is another category of VoIP that may also be considered. VoIP is treated differently by the two layered models. Sicker (2003) shows that the Layered Model treats voice services as application services that rely on an underlying physical network to operate. The application service consists of the voice service itself, the directory services, and the signaling functions. The physical

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network (i.e., access and transport services) carries the traffic generated by the VoIP application. ‘‘Voice telephony’’ in the EU Framework, according to Europe (2002a), is covered by the directive defining electronic communications services. 6.2.3. Video services Video services can be broadcasted, multicasted, or unicasted. Television is an example of a broadcasted service, whereas video-on-demand is typically a multicasted or unicasted (or point-to-point) service. In the Layered Model, all video services are treated as content services. In the EU Framework, point-to-point services such as video-on-demand are considered information society services. Broadcasted services, as stated by Europe (2000), ‘‘are not information society services because they are not provided at individual request’’. This ‘‘individual request’’ clause is taken from the definition of an information society service. Broadcasted services are addressed by an earlier EU directive described in Europe (1989). Thus, the Layered Model does not distinguish between broadcast video services and point-to-point video services, whereas the EU Framework does. 6.2.4. Online information services Online information services are treated similarly by the two layered models. They are treated as content services in the Layered Model, and as information society services in the EU Framework. 6.2.5. Leased line services Leased lines are clearly physical network services, and are treated as conduit in both the EU Framework and Layered Model. Specifically, leased lines are classified as electronic communications services in the EU Framework. Leased lines are classified as access and transport services in the Layered Model; terminating segments are an access service and leased line capacity between a pair of terminating segments is treated as a transport service. Although both models treat leased line services similarly, the Layered Model more specifically delineates whether a particular leased line service is an access layer service or a transport layer service—and views them differently. As stated above, the Layered Model distinguishes between a transport and access layer because this separation maps to the design of networks and these markets operate fundamentally differently and exist under vastly different market conditions. 6.2.6. Mobile services Call origination, call termination, and roaming services are all classified as electronic communications services in the EU Framework. The Layered Model treats call origination and call termination as access services since they leverage the access link between a customer moving in a given service area and the radio base station covering the area. The roaming service is considered a transport service since it entails a live handoff between networks of (potentially competing) operators and would likely involve the long-haul portion of the network. 6.3. Markets The previous section—Services and layers—gave several practical examples of how a specific service would be mapped onto layers of the EU Framework and Layered Model. To employ the models, though, a more specific and systematic identification of markets—within each layer—is needed. The question is what methods and tools are or should be used. The information and communications markets addressed by the two layered models are quite dynamic. Convergence implies that formerly separate markets may now become one, and increasing modularity implies that a given market may fork into multiple, separate markets. Although these markets are dynamic, established or conventional market criteria applied to stable markets can be applied to information and communications markets. Care must be taken that the conventional criteria used to evaluate markets, such as entry barriers and switching costs, are viewed in the context of forward-looking trends. This would be of most concern in defining a market, as this is where dynamic change would most impact a market power analysis.

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Defining a relevant market is made difficult with rapid convergence or splintering of markets. However, once the relevant market is defined, conventional criteria could readily determine market concentration. The current state of US telecommunications policy that motivated the Layered Model, and the former state of EU telecommunications policy that motivated the EU Framework show how inadequate static classifications can be. The EU Framework has a far more developed set of market criteria than that which exists for the Layered Model. The reason is simple: the EU Framework is a set of approved regulations that are currently being implemented by member states, whereas the Layered Model is a tool to help policy makers establish a set of regulations. Two points can be made before proceeding. First, there are existing and relevant guidelines in the US that establish market criteria applicable to the Layered Model. Marcus (2002) describes the relationship between telecommunications regulation and antitrust in the US, the important role of DoJ and FTC (1997) guidelines for defining markets and quantifying market share and the fact that currently ‘‘there is no assurance that FTC/DoJ market definitions and competitive threats will be directly reflected in FCC regulatory policy’’. Given the intent of the Layered Model, it becomes clear that every attempt should be made to reflect FTC/DoJ market definitions and competitive threats when policy makers implement the Layered Model for US markets. Shelanski (2002), and certainly others, argue that telecommunications regulation should be conducted through general competitive law. The second point to be made is that the Layered Model can be further improved by leveraging the legwork on markets already undertaken by the EU Framework.9 Marcus (2002) concisely describes the EU Framework approach to dealing with markets: (1) ‘‘The European Commission will begin by defining a series of relevant telecommunications markets and by providing a set of guidelines for determining the presence or absence of market power, all based on methodologies borrowed from competition law and economics’’. (2) ‘‘Within each market, the National Regulatory Authority (NRA) in each member state will determine whether one or more parties possess Significant Market Power (SMP)’’. (However, the EU can overturn an NRA decision.) (3) ‘‘If SMP exists, the NRA will impose appropriate obligations y taking into account the specifics of the particular marketplace in question’’. The EU Framework is based on the premise that there is a need for ex ante regulation in certain circumstances in order to ensure the development of a competitive market. The circumstances are those in which one or more entities in a given market possesses significant market power and where national and community competition law is insufficient to ensure competition. This approach implies that ex ante regulation and ex poste decisions can address the same sets of issues. In the US, where the Layered Model is intended to aid policy makers, ex ante regulation and competition law can also be used as complementary instruments.10 6.3.1. Defining markets Europe (2002g) specifies the main criteria for defining markets in the EU Framework. DoJ and FTC (1997) criteria for defining markets would (very likely) apply to the Layered Model. In defining markets, the EU Framework considers both demand-side and supply-side substitution and considers the ‘hypothetical monopolist test’ as ‘‘one possible way of assessing any demand and supply-side substitution’’. The DoJ and FTC (1997) state that ‘‘market definition focuses solely on demand substitution factors’’ and consistently applies the ‘‘hypothetical monopolist test’’. Supply substitution factors are considered in the identification of firms that participate in an already defined market. Logically, both identify the relevant product/service of the market first and then determine the relevant geographic scope. 9 Recall that leveraging the EU Framework to improve the Layered Model is one of the objectives of the analysis undertaken in this paper. 10 Competition law—as it applies to mergers—is contained in Section 1 of the Sherman Act and Section 7 of the Clayton Act.

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Marcus (2002) points out that technological neutrality is a direct consequence of convergence. This neutrality may result in dissimilar infrastructure technologies being included in the same market definition, e.g., VoIP and POTS both provide voice services. This neutrality may also result in similar infrastructure technologies being placed in separate markets because of consumer perceptions that segment the market; e.g., paging services and mobile telephony text messaging services may be considered separate markets even though both are capable of dispatching short, two-way text messages. 6.3.2. Criteria to define significant market power (SMP) Market share is used as a proxy for market power in the EU Framework and would (very likely) be used for the Layered Model. The threshold considered to be problematic—in terms of significant market power—is similar in both layered models. For example, consider a firm with a market share of at least 50%. Europe (2002g) explicitly states that a firm with this market share is presumed to have SMP.11 In the US, the Herfindahl–Hirschman Index (HHI) is used to calculate market concentration.12 If a given firm had a market share of 50% and all other participants were extremely small, then this would produce an HHI of 2500. An HHI greater than 1800 is considered highly concentrated. If the market was dominated by a duopoly, with each firm having 40% (and all other firms being extremely small), then this would produce an even higher HHI of 3200. 6.3.3. Recourse in the event of SMP A comparison of how the EU Framework and the Layered Model do/would deal with significant market power is more difficult than the previous comparisons of market definitions and quantifying market share. While the EU Framework has specific criteria for determining recourse in the event of SMP, no such guidelines exist for the Layered Model. The previously relied upon DoJ and FTC Guidelines (1997) would (very likely) be an important element of this, but recourse to ex ante regulations cannot be defined until the ex ante regulations exist. To remind readers, the Layered Model is a tool for policy makers to consider a new, unified regulatory framework—it is not the regulatory framework itself; thus, such guidelines are intentionally absent. The EU Framework criteria for recourse—as described in European Commission (2003)—are included here for context: (1) ‘‘High or non-transitory entry barriers’’ are present and given the dynamic nature of electronic communications markets, not deemed possible to overcome within a relevant time horizon. The entry barriers may be of a ‘‘structural, legal, or regulatory nature’’.  Structural barriers can arise when the technology and associated cost structure present asymmetric conditions to new competitors and incumbents; e.g., economies of scale, high sunk costs.  Legal or regulatory barriers are derived from legislative or administrative actions rather than economic conditions; e.g., there may be restrictions on the number of entities that have access to the spectrum. (2) Structure of a market ‘‘does not tend towards effective competition within the relevant time horizon’’. In practice, this criterion ‘‘involves examining the state of competition behind the barriers to entry’’. (3) ‘‘Application of competition law alone would not adequately address the market failure(s) concerned’’. One distinct point of comparison that can be made regarding recourse is that, in the EU Framework, the enforcement authority at the EU level can only act after a member state has not taken adequate measures in response to a prior EU request. For the Layered Model, the FCC may act unilaterally without first having asked states to take appropriate action. In fact, under Section 10(e) of the Communications Act of 1934, states cannot apply provisions from which the FCC had decided to forbear. 11

It should be noted that SMP was at 25% under the former EU Framework. HHI is calculated by summing the squares of the individual market shares of all market participants. A market with an HHI below 1000 is considered unconcentrated; between 1000 and 1800 is moderately concentrated; and greater than 1800 is highly concentrated. 12

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7. Conclusions and closing remarks The two motivations for undertaking the analyses included in this paper were to (1) understand how the EU Framework and the Layered Model compared; and (2) Leverage the EU Framework where possible to improve the Layered Model for US policy makers. The most fundamental difference between the two models, and one that serves as backdrop to the entire analysis, is that the EU Framework is a set of regulations, whereas the Layered Model is a tool for policy makers to consider a new, unified regulatory framework for US telecom policy. The EU has been able to move from sector-specific regulation to competition regulation, separating content from conduit, with directives that encompass non-technology-based, service-based classifications and accompanying regulations. This supports the belief that the Layered Model could be adopted to move from sector-specific regulation to competition regulation by providing a classification scheme that separates content from conduit.13 The Layered Model even offers a more granular approach by identifying two conduit layers and an application layer separate from either conduit or content. It has been shown that while both the EU Framework and the Layered Model separate content from conduit, the line between specific types of services is drawn differently. Electronic mail and VoIP services are two examples of this distinction. The EU Framework treats conveyance of electronic mail and voice services as electronic communications services, which are equivalent to conduit services at the transport layer. The Layered Model classifies them as application services, which is a layer between physical network services (access, transport) and content services, a distinction that the EU Framework lacks. Thus, the Layered Model allows for more refined classification and granular treatment among services. Additionally, the criteria for defining markets and for assessing the existence of significant market power is expected to be similar for both the EU Framework and the Layered Model. The phrase ‘‘is expected’’ is used to emphasize that the Layered Model would (very likely) operate under the FTC/DoJ guidelines for market definitions and competitive threats. Thus, this leads one to the conclusion that if the EU was able to adopt similar conventional market analysis in moving away from sector-specific regulation, the US could also do so if adopting the Layered Model. In summary, this comparison takes away the lessons that the EU has successfully moved from sectorspecific regulation to competition regulation with a new scheme that classifies by service, not underpinning technology, and separates content from conduit, as the Layered Model does, and that the EU is able to use conventional market analysis with the adoption of this new regulatory directive. This supports the conclusion that the Layered Model could also be adopted to move away from sector-specific regulation and separate content from conduit (and offer even more granularity) and could successfully use conventional market analysis already in place. Finally, the comparison analysis has improved the Layered Model by expanding its breadth to more examples, by more clearly stating how markets would (very likely) be defined and assessed and by standing it up against the EU Framework whose implementation is ongoing. Acknowledgements The authors would like to express their appreciation for the substantial input that the reviewers provided on an earlier draft of this policy essay. Incorporating these suggestions has significantly clarified the arguments that the paper seeks to express. As always, all errors and omissions are the sole responsibility of the authors.

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This is of course, with the consideration that adoption and implementation would be vastly different, owing to the different regulatory and legal establishments. In the case of the US, a complete over-haul would more than likely require an Act of Congress.

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