Regulatory inertia versus ICT dynamics: The case of product innovations

Telecommunications Policy xxx (2017) 1–13

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Regulatory inertia versus ICT dynamics: The case of product innovations☆ Ingo Vogelsang Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215, USA

A R T I C L E I N F O

A B S T R A C T

JEL codes: L43 L51 L86 L96

This article conjectures that the legacy industry-specific regulation that has governed the telecommunications sector for a long time is in basic conflict with the dynamics and product innovations that characterize the modern information and communications technology (ICT) sector. Reasons for the failure of legacy regulation to promote product innovations are explained and proposals for alternatives, such as deregulation and regulatory reform are discussed. Both regulation and competition policy are more difficult for ICT than for other sectors. Therefore both, regulation and competition policy may need reforms in order to deal with new problems. The most drastic and most realistic alternative to legacy-type regulation remains deregulation and a move to competition policy. Symmetric regulation, smart regulation, quasi-Coasean approaches and subsidies all have some limited applicability to specific situations, but are all associated with complications that have to be resolved, while competition policy is a comprehensive alternative. Lastmile access and gatekeeper access are analyzed as two main areas of legacy regulation, which are in danger of being exported to other ICT areas. Such exports may negatively affect the dynamics of the ICT industry. Rather than being exported, legacy regulations should be reduced in order to enhance product innovations.

Keywords: Legacy regulation Information and communications technology (ICT) Product innovations Competition policy

1. Introduction In the early 1980s Stephen Littlechild (1983) wrote a famous paper for the Thatcher government, in which he proposed what later became known as price caps as the form of regulation for the yet to be privatized British Telecom (BT). It basically said that BT‘s regulated prices should on average be adjusted by RPI-X, where RPI stands for inflation and X was a consumer dividend.1 Littlechild suggested to fix X at 3% p.a. and he wrote that the particular X would never have to be revisited, because by its expiration date after only five years BT would have been deregulated. Fast forward 35 years, during which a lot has changed but BT and the telecommunications sector are still being regulated. This, in particular, happens in a very much changed environment for the information and communications technology (ICT) sector, which BT and other telecommunications carriers are part of and intertwined with. The ICT sector is, above all, characterized by dynamic changes in technologies, modes of organization and markets. In particular, continuous product and process innovations in the ICT sector and beyond were made possible by broadband networks. It is therefore no wonder that the European Commission (EC, 2016a, b) has put innovation incentives towards the top of its regulatory agenda for telecommunications. Investment in NGA connectivity has become an explicit objective in the proposed EU directive establishing the

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1

The author would like to thank Wolfgang Briglauer, Martin Cave, Jan Kr€amer, and Marc Rysman for constructive comments on a previous version. E-mail address: [email protected]. Baumol (1982) was the original source for the RPI-X type formula.

https://doi.org/10.1016/j.telpol.2017.09.006 Received 30 August 2017; Accepted 12 September 2017 Available online xxxx 0308-5961/© 2017 Elsevier Ltd. All rights reserved.

Please cite this article in press as: Vogelsang, I., Regulatory inertia versus ICT dynamics: The case of product innovations, Telecommunications Policy (2017), https://doi.org/10.1016/j.telpol.2017.09.006

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European Electronic Communications Code (ECC). This objective parallels the goals of increasing infrastructure-based competition, the internal EU market and the interest of EU citizens. However, in the past, regulation has rarely elicited such innovations but rather retarded changes, largely because of bureaucratic rules governing the participation of stakeholders and because of regulatory capture. In particular, regulatory rulemaking or regulated rate cases can take years to resolve (Owen & Braeutigam, 1978). This can be costly to society. For example, in the U.S. there was a ten year delay of the introduction of cellular services by the Federal Communications Commission (FCC), which according to Hausman resulted in a consumer welfare loss of 24–49 billion 1994 U.S. $ (Hausman, 1997, 2002). Another example was the decades-long delay in the 1950s and 1960s of long-distance telephone competition via microwave communications due to the FCC's capture by AT&T. Regulatory delays signify a clash between regulation and innovation. Regulation is rarely associated with eliciting innovative changes and if so mostly by destroying old regulations like it happened, when telecommunications markets were opened for competition and access granted for competitors to legacy networks.2 In particular, there is a clash in general between technical or organizational innovations and old regulated industries if old regulated markets are challenged or replaced by new unregulated markets. For example, in many countries the sharing economy has broken down regulatory barriers to competition. While the advent of Uber and Lyft may put the well-being of taxi drivers and public safety against customer convenience, it is associated with lower prices, better use of automobiles and new employment opportunities. This should make regulators review old taxi regulations rather than simply stay in the way of innovations. Now is the time to question telecommunications regulation and find the right way forward. Political shifts to the right in the U.S. and elsewhere strongly favor a deregulation movement. As an example the new FCC chairman is currently trying to dismantle net neutrality regulations in the U.S. Even if such political shifts have not occurred in many European countries, similar movements towards deregulation occur because of technical and market developments. The clash between product innovations and old regulated industries alluded to for the sharing economy fully applies to over-the-top services (OTTs), which raise the conflict between keeping old telephone and media regulations and allowing new unregulated services to emerge. Both, industry-specific regulation and competition policy are challenged by such developments. This may yet be their chance to prove and reinvent themselves. Why should there be a change in regulatory emphasis in the Telecommunications sector now? First, the counter-factual of telecommunications regulation is for the most part no longer unregulated monopoly but tight oligopoly. This implies that the static gains from regulation are reduced. Second, network externalities or network effects plus the fact that telecommunications is a general purpose technology (Bresnahan & Trajtenberg, 1995) mean that innovations in telecommunications convey additional benefits and innovations throughout the economy. Competition between countries to stay ahead of others increases the importance of these benefits. These effects are well documented in the survey by Bertschek, Briglauer, Hüschelrath, Kauf, and Niebel (2016) for the move from narrowband to broadband and are conjectured or aspired for the move from mere broadband to ultra-fast broadband via next generation access networks (NGAs). This hope has created a shift in regulatory emphasis from short-term pricing and cost efficiency to long-term investment and innovation. Why without such a shift in emphasis have regulations tended to slow down product innovations?3 First, there is a normative conflict between regulation and innovation, because consumer protection is enshrined in many national telecommunications laws and in U.S. antitrust policy. As a consequence, profits accruing to regulated firms and their competitors are not part of the regulatory objective but only function as an incentive device. Regulators under a consumer welfare standard are therefore less willing to allow price increases for financing product innovations than under a social surplus approach.4 Second, there is a positive conflict between regulation and innovation resulting from an interest group bias against innovation. Entrenched regulation of a legacy industry conflicts with the creation of a new industry, leading to regulatory path dependence resulting from capture by interest groups. This includes that regulators are threatened by deregulation, even though the new service could create a new opportunity for regulation. However, anticipation of the latter would reduce innovation incentives. Thus, both, a regulator being threatened by deregulation and the potential new regulation of a new industry create a bias against innovation. Combining regulation and competition authorities like in Australia and New Zealand may reduce this bias. In the following Section 2 we consider alternatives to legacy regulation, concentrating on competition policy and treating regulatory reform proposals. Section 3 treats two basic types of legacy regulation with their successes and shortfalls and applies the learnings to new issues in the ICT sector. Section 4 concludes.

2. Alternatives to legacy-type regulation 2.1. Competition policy Given the unfavorable track record of regulation for product innovation and considering that product innovation has become an overriding goal for the ICT sector in general, the question arises what the alternatives to legacy-type regulation are.5 We here put most emphasis on the choice between regulation and competition policy, because competition policy is by far the main fallback, when it

2

An exception to the rule that regulation hinders innovation may be environmental regulation (Porter & Van der Linde, 1995). For a more extensive treatment of this subject see Vogelsang (2016). Consumer protection can favor cost-reducing investments and innovations, though. These are, however, outside the current topic. 5 We here do not consider changing the regulatory objective from consumer welfare to social surplus, because the consumer welfare objective is often justified as a balance against interest group pressure and market power of firms. 3 4

2

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Table 1 Properties of regulation and competition policy. Properties of regulation in contrast to competition policy

Advantages

Drawbacks


Ex ante remedies


Potential immediacy
Dependability, precision, prevention of harm
Specialized knowledge, speed of intervention








Specialized industry-specific agency


Prescriptive intervention (affirmative duties)
Pricing
Quality


Strong influence on desired behavior, precision
Dependability
Can treat externalities








Often drawn out decisions, slow to let go of status quo Reduction of freedom to compete and innovate Unjustified interventions Influence of interest groups; concern with distributional issues Too specialized Too much (little?) regulation Reduction of freedom to compete and innovate Inefficiencies from asymmetric information Too much intervention

comes to giving up regulation. Competition policy by default applies to all markets in the economy that are not specifically regulated. The purpose of competition policy is to preserve and enhance competition. Thus, given the above policy goal for the ICT sector the rationale for wanting to deregulate has to be the belief that competition is best for efficiency and innovation. However, quite similar to the goal of competition policy the legacy wholesale regulation in the EU was always meant to create and spur competition in legacy monopoly industries. This is exemplified by the ladder-of-investment approach adopted in European regulation, which envisages regulation as a tool to step-by-step creating higher levels of competition.6 So, why then deregulate? The measuring rod for deregulation is the answer to the question, can competition policy better achieve the policy goals than regulation? In particular, is competition policy better for incentivizing innovations than regulation? The dominant position among economists on the value of competition for innovation seems to be characterized by the inverted „U“ approach, according to which neither too little nor too much competition is good for innovation (Aghion, Bloom, Blundell, Griffith, & Howitt, 2005). In particular, this approach would question the compatibility of monopoly and innovation and would therefore give some justification to regulation as an innovation-enhancing policy tool. In contrast, the current approach is based on Shapiro (2012) rather than on the inverted “U” approach.7 Shapiro (2012) in particular combines the ex ante desire to achieve a winning position in current intensive rivalry with the ex post ability to appropriate a large portion of the surplus created by an innovation. Thus, fierce competition in the traditional sense is helpful ex ante, while monopoly is helpful ex post. This approach therefore combines the famous positions of Arrow (1962) and Schumpeter (1942) on this issue. In addition, Shapiro finds that innovations are aided by synergies between the many activities provided in large firms. So, given that competition policy is supposed to maintain and spur competition, how does it differ from regulation? Table 1 below contrasts features of regulation with those of competition policy, where in column 1 the properties of regulation are emphasized, while competition policy is viewed as possessing the opposite properties of imposing ex post remedies, of being a generalist agency and of being unable to impose prescriptive interventions on pricing and quality. In contrast to regulation, competition policy is very general, which implies great adaptability to new industries and situations, but it has a limited set of industry-specific policy tools. The differentiation brought out in Table 1 is not always sharp but in my view it mostly holds for the relevant application to product innovations. Table 1 brings out the tension between the potential of industry-specific regulation to be effective in having strong influence and in preventing harm and its restriction of the freedom of regulated firms to compete and to appropriate the benefits of innovations. In addition there are examples of fast decisions, such as access to unbundled local loops (ULL) in Germany, and drawn-out decisions, such as the delayed introduction of bitstream access in Germany and of ULL in the UK, which show that policy instruments can be played well or badly. Do the drawbacks of regulation alluded to in Table 1 mean that competition policy is better for ICT than regulation? The answer depends on the corresponding properties of competition policy. Table 2 therefore points out the limitations for a move towards general competition law. In particular if systemic abuses by dominant firms with large, irreparable damages can be expected and if they cannot be deterred by competition policy penalties then regulation remains preferable. This holds, in particular, for genuine essential facilities or bottlenecks, which competition policy cannot deal with adequately (Areeda, 1990). Competition policy also cannot address external effects that do not affect competition. Furthermore, while regulation tends to delay activities by regulated firms that require regulation, competition policy will not necessarily be faster than regulation, although the effects of competition policy delays will be different. They will delay remedies, meaning that competition policy can be subject to substantial uncertainties, but will in most cases be less constraining on the behavior of dominant firms. In the case of infrequent and ambiguous abuses competition policy would normally resort to a rule of reason approach. In that case ex ante regulation is unlikely to be better, because the behavior to be sanctioned can be good or bad, depending on the circumstances. In contrast, in cases of frequent abuses with clearly inefficient consequences competition policy suggests a per se rule. In such cases ex ante regulation may or may not be better than competition policy. It may be better because it prevents abuses directly and can be applied on a continuous basis. However, competition policy in such cases may be very predictable and could therefore effectively use penalties to deter bad behavior.

6 7

For the development of the ladder-of-investment concept see Cave (2014). For more details on the applicability of Shapiro's approach to the problem at hand see Vogelsang (2016). 3

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Table 2 Inappropriateness of general competition law. Property of competition law

Competition law inappropriate if ….

→ Competition law is inappropriate for …


Requirement to prove violation can take long time, lowering deterrence


Large, irreparable damages (compensated by large penalties ¼ deterrence?)
Difficult and lengthy to prove abuses in changing environment
Frequent and repeated abuses
Lack of comparable markets
Economies of scale and scope
Long duration of intervention in a changing environment
High information requirements
Continuous supervision requirements
Externalities unrelated to competition/ market power


Access to monopolistic bottlenecks
Predation against and foreclosure of competitors
Abuses in fast-changing markets


Inability to set prices


Inability of supervision
Inability to deal with externalities


Access to monopolistic bottlenecks
Market dominance in access market
Monopoly in end-user market





Access obligations Price regulation Interconnection Environmental issues

Regulation is generally ill-suited for ICT, because the flux of innovations and the modularity in ICT change the set of players and situations. This implies that the specialization of regulatory agencies disadvantages them against competition policy agencies, which are used to dealing with all types of agents and situations. In view of the inherent dynamics of ICT (as long as it continues) regulation is handicapped, because it requires established specialized agencies and, in some contrast to competition policy, regulation is subject to interest group pressures. The latter normally interfere with fast changes, because the dominant interest groups tend to be those well established in the past. Regulation therefore simply is slow to let go of the status quo. Also, an innovator can appropriate a larger part of innovation benefits under deregulation than under regulation. A further big advantage of competition policy over regulation is that it uses less intervention. However, not dissimilar to regulation, competition policy also becomes more difficult for ICT. In particular, competition policy dealing with abuse of market power issues requires definition of markets and findings of market power in the first place. Defining markets and determining market power and abuses is hard for the multi-sided markets and fast technical change that characterize ICT. There simply is not enough time for enough quantitative observations before the markets have changed. Applying a direct-effectsapproach could be faster and more effective than first delineating markets and establishing dominance, but this is still largely unproven. In contrast, the usual ex post remedies take a long time to be effective. Cease and desist remedies and compensation payments may therefore come too late to save competition. Compensation payments, financial and criminal penalties may nevertheless prevent abuses. However, the uncertainty and delay of the outcome reduce deterrence (at least for risk-prone but possibly even for risk-averse managers). This raises the question if increased penalties should be applied under competition law in the ICT sector and if competition law procedures can be streamlined. Summing up, both regulation and competition policy are more difficult for ICT than for other sectors. Also, since both, regulation and competition policy are geared towards consumer protection, this reduces the value of innovation, compared to social surplus maximization. Both, regulation and competition policy may need reforms in order to deal with new problems. In particular, softer competition policy and softer regulation appear to be desirable in light of innovation, because policies become less suitable and effective and because market developments more quickly overcome potential negative effects of violations. However, there are at least two caveats. First, market power may continue over several generations of innovations, such as in the case of Microsoft. This would call for strict competition policy remedies. Second, some ambiguity exists, whether soft or hard competition policy favors innovations (Segal & Whinston, 2007). 2.2. Regulatory reform: symmetric regulation Contrary to deregulation, regulatory reform attempts to address particular failures of regulation without abandoning the main properties of regulation altogether. In particular, the following three reform proposals symmetric regulation, smart regulation and stakeholder bargaining are somewhat softer than the characterization of current regulation in Table 1. The first proposal, symmetric regulation, means that all suppliers are regulated the same way. In its ECC the European Commission (2016a) has suggested such a move that would largely replace asymmetric with symmetric regulation. This is supposed to lead to cost reductions, which can improve incentives to invest in new infrastructures, in particular those with high costs of duplication. It also is supposed to establish more symmetry between telecommunications carriers. However, it is at the same time associated with a reduced barrier to intervention. Symmetric regulation has long been established for interconnection of networks and works well for that purpose. However, it would be new for classic bottlenecks in the form of regulated asset sharing. This potentially affects all market participants as infrastructure owners thereby leading to an increase in regulation. The static cost-reducing effects through sharing then have to be evaluated against the disincentive effects for innovation and investment in new infrastructure that may have to be shared with rivals. This lets competitors share in synergies and other innovative advantages of the original asset owners. While this would also happen under voluntary asset sharing, there is a major difference to the case of regulated asset sharing. The former is less likely to reduce innnovation incentives. It may be associated with collusion, though. Regulated asset sharing therefore needs a limiting principle. For example, asset sharing that replaces access regulation should be 4

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subject to the same restrictions governing asymmetric regulation, such as fulfilling the three-criteria test. 2.3. Regulatory reform: smart regulation Regulation economists have for a long time tried to devise significant new and improved methods of regulation, most of which have never been applied. A major exception consists of the above-mentioned price caps, originally proposed by Littlechild (1983) as a simple and flexible regulatory device to replace conventional rate-of-return regulation. Price caps have been quite successfully applied in telecommunications jurisdictions all over the world. They can be credited with cost reductions and rebalancing of cross-subsidized price structures (Sappington, 2002). However, price caps have become more complicated than originally envisaged and over time look more like the regulation they have replaced (Liston, 1993). Part of this has to do with the tension between flexibility and commitment. Price caps save on due process but increase the regulatory lag. Similarly, benchmarking in the form of the long-run incremental cost (LRIC) model is strong on incentives but it is complicated and implies a long regulatory lag. Briglauer and Vogelsang (2011) suggest to give the regulated firm an option of LRIC or margin rule. This is meant to avoid lengthy regulatory decisions on price squeeze. Nevertheless, the European Commission's (2013) recommendation on cost orientation and non-discrimination, which uses a rather similar rule, introduced major complexity and uncertainty in dealing with price squeezes. While my academic papers are largely connected with the design of such regulatory mechanisms, my conclusion on them is that complications invariably arise with their implementation. They can improve market performance, though. 2.4. Regulatory reform: quasi-Coasean approaches A very different approach to industry-specific regulation is based on the Coasean tradition of reducing or eliminating market failures via negotiations between the affected parties. In cases where regulators lack sufficient judgment ability this is meant to deal with complexities and asymmetric information involved in regulation by letting stakeholders negotiate. In the absence of any regulators (but in the presence of limited property rights) pure self-regulation suffers from weak enforcement capabilities and from a lack of representation (of stakeholder groups with many members). Thus, the quasi-Coasean approaches to regulation let stakeholders negotiate, while a regulator enforces the rules of the game. We here differentiate between a passive and an active approach, depending on the role played by the regulator. The passive approach is an arbitrator model (Littlechild, 2009; 2012). In this case the stakeholders among themselves resolve the complexities. Practical examples include electricity transmission in Argentina (Littlechild, 2012) and standard setting in ICT environments. In this case the regulatory authority must oversee self-regulators and enforce outcomes (co-regulation). One issue in this case is that some stakeholders may dominate the bargaining process. While the strict Coasean approach to bargaining is based on property rights, such rights are usually not naturally defined in this regulatory context. The regulator therefore has to define rules of the game and voting procedures to determine outcomes. Such outcomes will not necessarily be efficient but may still improve upon the status quo. Such bargaining may, in particular, be appropriate for regulatory problems that require substantial information, that are not fully adversary and that are too complex for regulators, such as issues of standardization. The active quasi-Coasean approach is a platform model (Brousseau & Glachant, 2012). Here, the regulatory issue at hand is viewed as a coordination game with possibly many equilibria. The regulator has to resolve some of the complexities. In particular, the regulator manages externalities between players and tries to find a good equilibrium as the focal point for the coordination game between stakeholders. This is a highly ambitious task for regulators that yet has to be shown to work. Overall, quasi-Coasean approaches will not work well for cases with a large number of stakeholders, such as retail markets. Legitimate representation of consumers by regulators is therefore the reason for the consumer protection approach to regulation. 2.5. Subsidies as ultima ratio? In spite of deregulation or regulatory reform proposals innovative new products or networks will not always appear, even if their expected benefits to the economy far exceed their costs. In particular, in certain geographic areas, where new networks cannot be built profitably, subsidies for innovative investments may be justified, for example because of large spill-overs to other sectors. However, subsidies are costly to society both in terms of redistribution and deadweight loss. Politicians and/or regulators may pick the wrong winners. A particularly bad example here has been the FTTH build-out in Australia (Sorenson & Medina, 2016). A main contention against subsidies for new telecommunications networks has been the potential crowding out of private investments in dense areas.8 This comes in addition to the costs from distortions created by raising funds for subsidies (or by diverting funds from other important uses). Thus, a high hurdle is needed for subsidies in telecommunications network building. While (superfast) broadband has considerable positive impacts on economic growth, employment and regional development, productivity and firm performance (Bertschek et al., 2016), consumers do not seem to value it enough to justify the cost of the upgrades to them. This is the case because of high switching costs and because of low willingness-to-pay differentials between different speed levels (Grzybowski, Hasbi, & Liang, 2016). Thus, the justification for subsidies has to come from spill-overs and indirect network effects. They may also have to be accompanied by demand-expanding policies for new networks, including for investments in complementary services.

8

However, in practice crowding out may be quite limited (Wilson, 2016). 5

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While infrastructure subsidies in rural environments have been common place in many countries, subsidies in urban areas have been quite contentious. In fact, subsidized rural and municipal NGA are two very different animals. As discussed in the next section below, rural areas are so-called “white” areas, where investments in new networks would otherwise not happen, while municipal areas are usually “gray” or “black” so that profitable investment is generally possible. In fact, infrastructure competition often follows municipal investment. However, without municipal investment private networks often abstain from or delay investment, because they have financing constraints that limit their speed of growth (Penrose, 1959) and because Arrow effects from sunk costs may prevent private carriers from undertaking profitable investments. As a result, private carriers let some municipalities wait with their investments, which disadvantages these municipalities. Municipalities should therefore have the right to invest in NGA (potentially as public-private partnerships ¼ PPP), provided they give private firms a right of first refusal (bidding). Furthermore, municipalities have synergies with NGA construction. Those can be used for co-investment or co-operation with commercial providers. The latter is done extensively and with much foresight by one of my home cities, Santa Monica. It also can happen in combination with a subsidy, after a bidding process for the lowest required subsidy. 2.6. Conclusions on alternatives to legacy-type regulation The most drastic and most realistic alternative to legacy-type regulation remains deregulation and a move to competition policy. Symmetric regulation, smart regulation, quasi-Coasean approaches and subsidies all have some limited applicability to specific situations, but are all associated with complications that have to be resolved, while competition policy is a comprehensive alternative. 3. Legacy applications with ICT implications After the general approach in Section 2 we now treat in some detail two legacy applications, “last-mile access” and “gatekeeper access”. This treatment brings out why such regulation continues or why it may vanish soon. These legacy applications bear strongly upon the issue to what extent new problem areas in the ICT world may or may not warrant regulation and why some already pursued regulation, such as net neutrality, should be revisited. Last-mile access is the access of a service provider to an input supplier in order to gain subscribers. This is the classic bottleneck input provided by a network supplier, for example, in the form of unbundled local loops (ULL). In this case the bottleneck is the access network. In contrast, gatekeeper access is the access of an ISP or service provider to somebody else's subscriber. This can also be seen from the subscriber's perspective as the access of a user to a service supplier. The subscriber chooses the network but the subscriber's choice of network supplier makes this supplier the gatekeeper for call terminations. This has been the basis for the regulation of termination charges. The rationale of the termination bottleneck extends to OTT and net neutrality (NN). 3.1. Last-mile legacy access Last-mile access regulation via ULL and bitstream access can be credited with having created service competition, when the legacy network was the only game in town. This led, in particular, to low end-user prices and innovative pricing options. In contrast, there is little indication that it increased sustainable infrastructure competition. Also, the effect on innovative investment by the incumbent has been mixed.9 However, independent of regulation, the installed base of legacy access networks slows down the emergence of new networks. This is the sunk-cost trap of networks. A large installed base that is sunk raises cannibalization and cost coverage issues. Replacing an advanced DSL network with an FTTH network can lead to a substantial write-off and lost profit contributions on the DSL side. This comes out quite clearly in the form of a substantial head-start that low-income EU countries had over high-income countries in the build-out of FTTH next generation access networks. The large installed base of high-quality copper access networks has been a handicap, when it came to building new FTTH access networks. Although Briglauer (2015) has shown that both the installed base effect and regulation are at fault for slowing down innovation, in policy discussions the latter usually gets all the blame. Last-mile access networks are therefore caught in the tension between slow change of physical and human capital and fast change of markets through disruptive innovations. 3.2. Rationale for legacy access regulation Legacy access regulation has in the past mostly been justified by the last mile as an essential facility or bottleneck. The main property of such a bottleneck is that access to it is necessary for firms to compete in retail subscriber access and that it cannot economically be duplicated. The first of these properties means that the access is used in fixed proportion to the output (and therefore cannot be substituted by another input), while the second property means that there is a natural monopoly in the production of last-mile access. This rationale for potential access regulations is supply-related. There are economies of scale and scope that generated a classic natural monopoly as the low-cost market structure. This type of natural monopoly is usually related to long-lived sunk investments and to exogenous sunk costs. The latter means that the natural monopoly generates barriers to entry, but that the natural monopoly property weakens or even goes away as the market grows in size.

9

For literature reviews of the empirical evidence see Cambini and Jiang (2009) and Briglauer et al. (2015). 6

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Natural monopoly could, however, also be demand-related. This can happen if there are direct and indirect network effects, which are also called demand-side economies of scale. Such a demand-side natural monopoly is the consumer surplus maximizing market structure.10 It is related to endogenous sunk costs. This is a global property so that in contrast to the classic supply-side natural monopoly the strength of the demand-side natural monopoly can grow with the market size.11 The natural monopoly property legitimizes monopolies as efficient market structures. Because of sunk costs, classic natural monopolies are typically not contestable and at the same time they are essential facilities. They are therefore candidates for industryspecific regulation. The classic natural monopoly goes away as markets grow and new technologies develop. One of the few advantages of being older is that I can still remember, when the natural monopoly property of telecommunications markets was first challenged by MCI and others in the 1970s. In the last decades rationales for legacy access regulations have declined or are vanishing. Knieps (1997) has noticed a shrinkage of the classic natural monopoly sphere that reduces the scope of regulation. While the natural monopoly was originally viewed as governing the whole value chain of telephony, including end-user equipment and long-distance services, it next shrank to local services, then from retail to wholesale. These steps acknowledged the modularity of the industry that has required interconnection and interfaces, something that incumbents like AT&T fought tooth and nail. Now, based on digital convergence, new technologies break the link between infrastructure and service (Brousseau & Glachant, 2012; Spulber & Yoo, 2009). In addition, due to IP convergence the separation of the network and service layers led to an expansion of the size and scope of the market for network infrastructures. Formerly non-competing cable-TV and telephone networks now compete with each other. In fact, new infrastructure-based competitors already signal an end to the rationale for legacy access regulation. Where present, cable-TV networks destroy the essential-facility property of last-mile access. While wholesale access seekers in most countries still do not have the choice between legacy telephone access and cable TV access, it is the available retail competition that counts for the elimination of the essential facility property. Furthermore, mobile broadband is now a substitute inside or outside the market for legacy access. While discussions persist if mobile is already in the same market as fixed network access, mobile poses an indirect constraint on the market power of legacy fixed access. There may, however, be countervailing effects from co-ownership of fixed and mobile networks and from complementarities between fixed and mobile that favor quadruple play options. Last, NGA succeeds legacy networks. To the extent that the two exist in parallel and are separately owned this creates further competition. 3.3. Should and will last-mile access regulation persist? In the context of increasing infrastructure competition for last-mile access the question arises if legacy access regulation should persist and if NGA should be regulated.12 The answer to this question depends on the interaction between several effects. The replacement effect means that legacy regulation makes the legacy service less attractive for the network owner and therefore reduces cannibalization from introducing the new service (Bourreau et al., 2012). The cannibalization argument states that the incumbent will only innovate if the expected profit under innovation is greater than the quasi-rents from the sunk legacy network. The replacement effect is therefore large under sunk costs of the legacy network.13 However, even deregulation of the legacy service may increase innovation incentives if the incumbent's fears to be foreclosed by innovation of rivals eliminate the replacement effect (Stackelberg effect). Contrary to the replacement effect works the migration effect, which means that the low price of the legacy service caused by legacy regulation makes it unattractive for consumers to switch to the new service (Bourreau et al., 2012). On the NGA side works an appropriation effect. If the NGA investor is not regulated he/she can appropriate the benefits of investment. This ability would be reduced or eliminated by NGA regulation. However, the migration effect could also work via NGA regulation: A low price of the NGA service makes the new service attractive for consumers to switch. Nevertheless, without regulation the innovative firm can adjust the NGA price to optimally balance or internalize migration and appropriation effects. We can now answer the questions, whether legacy access regulation should continue and whether NGA access should be regulated. It turns out that the effect of legacy regulation on innovation of new service depends on parameter values, because the replacement (¼ Arrow ¼ cannibalization) effect and the migration effect co-exist and work in opposite directions. Empirically, on average the migration effect seems to dominate so that less legacy regulation would increase NGA investment (Briglauer, Frübing, & Vogelsang, 2015). In contrast to the ambiguity on legacy regulation, not regulating the new service provides unambiguously positive innovation incentives for the incumbent and others, because it is largely governed by the appropriation (¼ Schumpeter) effect alone. Will legacy access be deregulated and will NGA access not be regulated? In answering this positive question one has to notice that deregulation of the legacy network and non-regulation of the NGA network are opposed by access-dependent entrants and by

10 Shaffer (1983) defines demand-side natural monopoly by a “super-additive” demand function versus the “sub-additive” cost function for supply-side determinants of natural monopoly. 11 Besides demand-side natural monopolies there can also exist externalities in the absence of market power. They often require symmetric regulation, such as in the case of positive network externalities and positive call externalities. Such symmetric regulation is justified if the public depends on the service and if competing firms do not voluntarily reach agreements to overcome the externalities. Such regulations take the form of requirements for interconnection and inter-operability. Vertical integration and universal service policies also can overcome such externalities. Externalities can also become negative, such as in the case of congestion, information overload or spam. Van Zandt (2004) suggest that in such cases of negative call externalities one might want to tax the senders. 12 This is the main topic of Vogelsang (2016). We here only present the main conclusions. 13 Sunk assets also have a strong effect on innovation in unregulated industries. Due to sunkness an incumbent can lower its price in response to innovation by others, and due to sunkness the profit foregone by innovating in a new network is large. Therefore the sunkness of a legacy network can present a large innovation hurdle in unregulated markets.

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Fig. 1. Fulfilled expectations demand (adapted from N. Economides, The Economics of Networks, 1996).

disadvantaged labor and consumer groups. It may therefore be difficult to get rid of regulations, even if they are no longer justified by efficiency objectives. This may also be the reason why European regulators are considering to regulate the tight oligopolies arising for legacy access. However, comparison between regulation in the EU and deregulation in the U.S. shows that a duopoly without regulation in the U.S. tends to provide superior investment incentives along with high prices than regulation in the EU (Yoo, 2014). Empirical evidence also shows that regulation does not generate a second infrastructure (no full ladder effect), but a second infrastructure may be less efficient than a second-life infrastructure.14 An oligopoly with deregulation means new policy issues, such as collusion or joint monopoly. However, competition policy should be able to handle those. Most likely, there will be regional differentiation of last-mile access regulation in the foreseeable future based on the observation that unregulated monopoly is politically unacceptable and that NGA externalities abound (Briglauer & Vogelsang, 2017). Following the EC's differentiation of black, gray and white areas, we are likely to see infrastructure competition between NGA networks in black areas. This in particular means replacement of regulation by competition policy for NGA access. A uniform pricing constraint over black and gray areas could act as a competitive safeguard in gray areas. Otherwise, there will be an infrastructure monopoly for NGA networks in gray areas. In this case co-investment in new network elements can be free from regulation if competition policy is strong and there are more than two co-investors or there is other competitive pressure from non-NGA technologies. Such competitive pressure from non-NGA technologies on an NGA monopolist is very likely. This would suggest an open access policy for NGA networks without price regulation under a non-discrimination, no price-squeeze provision. In white areas we can have no self-financed NGA network. Does this justify subsidies for universal service? Problems of subsidies have been alluded to above. The tension between the effects of NGA on growth, productivity and employment and the lack of success of subsidized expansion of NGA and low willingness-to-pay for NGA means that subsidies have to be well thought out. White areas are also likely to shrink and become gray over time, due to increased willingness to pay for super-fast broadband and due to emerging wireless and wireline alternatives. 3.4. Learnings from legacy access regulation for the innovative ICT sector What can be learned from legacy access regulation for the new ICT sector that is characterized by demand-side economies of scale? In particular, are there any demand side natural monopolies in ICT? We cannot gain the answer to this question by trying to find monopolies in the ICT sector. There may exist monopolies without them being “natural”. On the other hand, monopoly is not the necessary outcome of natural monopoly. Competition can therefore be an inefficient market structure. Demand side natural monopoly requires network effects that favor a single network. This would, for example, be the case if the fulfilled expectation demand curve of a network has an upward-sloping portion, such as shown in Fig. 1. Here the bold convex line shows the fulfilled expectation inverse demand p(n,n). Fulfilled expectations mean that the actual number ‘n’ of members of the network coincides with the number that the members themselves had expected (ne ¼ n). The straight lines capture the willingness to pay by members if they expect the number of members to be given at n1, n2, n3, and n4. As a result, the larger the fulfilled expectation number the larger is the corresponding consumer surplus. Thus, by combining networks the largest consumer surplus can be achieved for a given price.15 Network externalities can quite easily create demand side natural monopolies if the services are homogeneous. A perfect example of this has been the telephone system. If network effects are not internalized they lead to sub-optimally sized networks and distinct user groups. In the early days of telephony this led to the necessity for end-users to subscribe to different networks at the same time, something that increased costs and caused major inconveniences. Thus, network effects cause inefficiencies besides market power. In the early case of telephony the result, however, was a monopoly by AT&T. Now, in case of homogeneous networks the demand side natural monopoly can be regulated efficiently and in a competitively neutral way through a requirement for mutual interconnection between networks. Such interconnection (compatibility) and sharing for homogenous services is the old telecommunications model (“any-to-any” principle), which has worked well, but raises the gatekeeping issue discussed in the following Section 3.5. Thus, demand side natural monopoly is an unlikely justification for legacy-type access regulation for homogeneous networks.

14 15

For the evidence on the ladder of investment see Bacache, Bourreau, and Gaudin (2014) and Nardotto, Valetti, and Verboven (2015). For an extensive treatment see Economides and Himmelberg (1995). 8

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Simple interconnection, however, is no easy solution for heterogeneous services, such as for OTTs. It is thus comforting to recognize that demand side natural monopoly should be much less common for heterogeneous than for homogeneous services. Heterogeneous services can be the result of consumer heterogeneity or of the heterogeneity of functions served by a network. In the case of heterogeneous services the consumers have to choose between being in a large network with many other members and being in a network that more closely caters to their preferences or applications. Even if there are demand side economies of scale those have to be weighed against the efficiency advantages of catering to different demands. This is the tradeoff between product differentiation and network diversity on one hand and demand side economies of scale on the other (Spulber & Yoo, 2009). In spite of the heterogeneity of services offered by new ICT networks or platforms could there still emerge new potential access bottlenecks in the ICT sector? For example, a combination of demand-side and supply side economies of scale could create a potential natural monopoly for search engines (and possibly big data). This could provide a chance for new regulation. However, for search engines we observe a common case of multi-homing with low switching costs. Furthermore, even if search engines were natural monopolies they would be more like NGA networks than like legacy networks, because ICT is characterized by successive generations of new services. This implies a high importance of the appropriability of surplus and of synergies16 that avail ICT companies of data, technologies (including patents) and other know-how that is helpful for creating product innovations. In this context regulations of the new service of today would generate the expectation that the new service of tomorrow becomes the legacy service of the day after tomorrow and would therefore also be regulated. This means that the replacement effect of regulating existing ICT services would reduce the expected appropriability of new services. Furthermore, because of the heterogeneity of services new access regulation would be highly complex implying a high cost of regulation. New regulation would create new beneficiaries as new interest groups with entrenched positions. This would make it difficult to change course in the future and deregulate. In view of multi-homing even with significant switching costs the competition problems caused by search engines are likely to be solvable for competition policy. Thus, search engines (and big data) are more appropriate for competition policy than for access-type regulation. At most, there could be softer regulation creating market transparency. In summary, in the new ICT areas competition policy should be preferred over regulation for search engines and similarly situated ICT services, unless irreversible damages and/or systematic repeated violations occur. 3.5. Gatekeeper access: the classical termination issue The classical termination issue of competitive bottlenecks arises in the context of interconnection as the basis for network competition. Interconnection is associated with call termination on other networks. It has been known for about 20 years that wholesale call termination is an essential facility even in or particularly in the presence of competing networks, as long as end-users single-home (competitive bottlenecks, Armstrong, 2002). The subscriber's choice of network makes the chosen network the gatekeeper for call terminations to the subscriber. This theoretical insight was in line with the empirical evidence of high unregulated mobile termination rates in Europe of 20–40 cents per minute in the 1990s compared to regulated rates of 1–2 cents today. The classic mobile termination issue is closely linked to today's issues with OTTs and net neutrality (NN). OTTs (such as Skype) have undermined traditional termination by offering services not subject to termination charges, and gatekeeper access is the basis for the net neutrality (NN) debate. There are three potential anti-competitive consequences of mutual termination between networks. In case of symmetric firms with equal market shares and symmetric calling patterns price collusion can arise, because termination charges are marginal costs but they largely cancel out (Armstrong, 1998; Laffont, Rey, & Tirole, 1998a). Furthermore, double-marginalization can arise under independent price setting (Economides, Lopomo, & Woroch, 1996). In case of asymmetric firms with diverging market shares higher termination charges can be used as a vehicle by dominating firms to increase their market power through on-net/off-net price discrimination (Laffont, Rey, & Tirole, 1998b). Because of network externalities, call externalities and reciprocity the right price for regulated termination is hard to find and has been quite contentious. In the U.S. voice termination rates have been all over the map, depending on geography and type of provider, but are now converging to Bill & Keep (B & K ¼ zero reciprocal prices), which mimic barter arrangements. In the EU voice termination rates have also been declining over time, but B&K is not the official end state. Termination regulation has reduced some call prices, but may have increased other prices.17 The empirical effect of termination regulation on network investment is unknown. If termination regulation reduces overall profit lower investment could result. B&K usually means strict but simple regulation with low transaction costs. It is good for capturing call externalities (as opposed to network externalities). This makes it advisable if there is already a high subscriber penetration so that increased usage becomes more important than increased penetration. B&K reflects short-run costs better than usage prices, unless capacity is tight. However, B&K is associated with free rider and “hot potato” issues. This means that under B&K small networks benefit from terminating into large networks without having to invest in network build-out. While B&K has been contentious in Europe (and less so in the U.S.) as a regulatory termination charge arrangement, it has a long history in the unregulated Internet in the form of unpaid peering among backbone networks. It has, however, over time partially been replaced by paid peering.

16

The meaning of synergies here is the one used by Shapiro (2012) as a determinant for innovations besides contestability and appropriability. An increase of other prices as a result of reduced regulated termination charges is known as waterbed effect. While it seems to have occurred in European mobile markets, it seems to have vanished later. See Genakos and Valletti (2011) versus Genakos and Valletti (2015). 17

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3.6. Relationship of gatekeeper access to OTT Digital convergence has led to the distinction between transport networks and the services delivered over them. OTTs compete successfully with ISPs in these services and have thereby destroyed the synergy advantages previously enjoyed by the network providers. To the extent that OTTs are themselves not subject to ISP termination charges those charges become less and less viable, because OTTs can out-compete the legacy services. Thus, substitute OTTs are likely to destroy this type of ISP gatekeeping, making B&K the probable future of legacy terminations. This is likely to occur in the short run under deregulation. While there could be a slight danger of the reappearance of market failures that originally gave rise to regulation, there has been good experience with Internet peering (unpaid and paid). If termination charges vanish and if ISPs lose out against OTTs on the services provided with ISP networks then ISPs have to finance themselves largely by selling the naked network access and transport services. This will probably require them to raise prices for those services, which would go along with higher willingness to pay by end-users who benefit from getting all these OTT services over the ISP networks. Now, it is not clear from the outset that ISP services are inferior or less economic than OTT services. ISP services are handicapped by being subject to more regulations (such as backup, universal service, emergency calls) than OTTs. This has led to the call for a level playing field for ISPs and OTTs. OTTs have entered these substitute services because of wide acceptance by end-users. They definitely do not exploit their customers. So, why should they be regulated? Would the non-regulation of OTTs leave legacy ISPs as carriers of last resort, who have to supply unprofitable customers with heavily regulated services? To avoid such an outcome the possibility for regulation of certain OTTs is already considered via a proposed new service definition in the EU (European Commission, 2016a), which can include certain OTT services (OTT-0 and OTT-1) under the new category of “interpersonal communications services”. This would bear some similarity with the much discussed U.S. Title II regulations. OTTs therefore force a rethinking of traditional telephone and media regulations. This is the chance to get rid of interest group-based regulations and concentrate on those regulations that fulfill a valuable purpose. Keeping in mind that OTTs are imperfect substitutes for legacy services, which regulations are necessary for old services, which for OTTs? Tradeoffs need to be considered. Regulating certain OTTs as telecommunications service providers would complicate regulation. Taken together with less necessity of regulation because of increased competition the question arises, should legacy services provided by the ISPs be deregulated and be put under competition law together with OTT? This question is very closely related to the sharing economy issues raised by Uber and Lyft. The taxi industry in most countries has been overloaded with interest group-based regulations. In the U.S., for example, taxi licenses were traded at high prices. Regulators failed to increase the number of licenses for fear of expropriating existing license holders. Uber and Lyft now have reduced the scarcity of licenses and their price without regulatory decision. Consumers are significantly better off with lower prices and better services. Only new market developments can overcome those regulations. That does not mean that regulations should necessarily be thrown out altogether. Remaining regulations should, however, be efficient and fair to stakeholders, who should not be expropriated by maintaining legacy regulations for them and by not extending those to the new services. Applied to the issue of OTT regulation versus ISP regulation one could force the issue by establishing a burden of proof to show (a) which if any current ISP regulations have to be kept for efficiency reasons and (b) that such remaining regulations shall be extended to OTTs. 3.7. Network neutrality as a gatekeeping issue Network neutrality (NN) is a gatekeeping issue, because it is about the conditions of access of content providers to ISP customers. NN homogenizes the Internet. Under NN content providers are simply viewed as customers, not as networks such as in peering or transit agreements. NN's main properties are, (1) no charges for content delivery, i.e. no gatekeeping charges, (2) no price discrimination, and (3) no quality of service (QoS) differentiation, in particular, no prioritization over best effort. These are unusual requirements for the service economy even under common carriage. Applied to railroads the NN approach would, for example, not permit 1st class vs. 2nd class train services. In contrast, the usual requirement of common carriage is for no undue discrimination. Thus, the Internet under a strict NN approach is treated very differently from other service industries, almost like a holy cow that may not be touched. In my view, heterogeneity of demands justifies QoS and price differentiation. Such differentiation can well be designed in such a way that it is neutral between players. Neutrality of QoS and price differentiation along with a transparency rule (information about discrimination) could well be a fair requirement for NN regulation. Abuse of market power in spite of such requirement would then be the subject of competition policy. In spite of that it could happen that under price and/or QoS differentiation ISPs could extract some innovation rents from content providers. While this could suppress content innovations it may as well increase network innovations. How would competition policy address NN violations? Clearly, QoS differentiations accompanied by price differences or general access charges for content providers or price differentiation based on objective criteria would not run afoul of general competition laws, unless they were accompanied by foreclosure of rivals or by other abuse of market power, both of which would have to be proven. Competition policy in NN cases would typically use a rule of reason rather than a per se approach. Clearly, prioritization over best effort could favor large content providers that would thereby gain competitive advantages over their smaller rivals or startups. But that would require that prioritization is associated with non-linear or discriminatory pricing. If prioritization is sold under linear non-discriminatory pricing small content providers should not suffer such disadvantages. How to judge the uniform quality standard associated with NN in its application to the controversy about competition between ISP 10

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legacy services and OTTs? Under traditional voice termination QoS issues no longer play a big role. If OTT services are not classified as communications services they would fall under and benefit from the NN regulation and would be free from termination charges. However, QoS differentiation is relevant for OTTs that are competing with services offered by ISPs. OTTs cannot benefit from the noprice rule of NN without accepting the homogeneous Internet associated with it. Or can they? They can, because in practice, as an unintended consequence, NN regulation as a strong regulatory intervention gets circumvented. NN tries to make the Internet into a demand-side natural monopoly. However, in view of heterogeneous demands on the Internet the no prioritization rule potentially gets bypassed by separate virtual networks (“future networks”), by content disguised as network (Netflix) or by content delivery networks. Although content delivery networks do not work for real-time VoIP or streaming video, already 50% of Internet traffic passes through them (CISCO, 2017), and a large fraction of that is vertically integrated with content. The no price and no price discrimination rules get circumvented via waterbed effects. In particular, ISPs increase and differentiate charges for end-users. Also, content providers charge or increase charges for end-users. Furthermore, last-mile access regulation and gatekeeping access regulation interact via the waterbed effect (Bourreau & Lestage, 2017). NN regulation thus affects demand for and probably should affect the price of subscriptions. The possibility for circumvention of the NN rule is greatest for large content providers. Thus, it is not surprising that such companies favor NN regulation. Because of circumvention they do not suffer the disadvantages of homogenization that is associated with NN. At the same time, NN provides them with access to end-users via the last mile, over which the ISPs can exercise control in spite of the circumvention techniques. Also, NN disadvantages small competitors of the large content providers that cannot use the circumvention to get prioritization or other QoS advantages. Overall, NN circumvention is usually inefficient, because it prevents ISPs from using an integrated approach to QoS and price differentiation and it thus can lead to more expensive solutions in network integration and in pricing. The NN issue has created a puzzle. The Internet has evolved largely free from regulation. It has been an enormous innovation and created many more innovations. If innovations in and through the Internet are due to the absence of regulation then NN regulation would be bad for innovation. However, violations of NN have so far played little or no role. If innovations in and through the Internet are due to the absence of NN violations then NN regulation could be good for innovation. NN has been the first big regulatory interference in the Internet. Most likely, in spite of the rarity of NN violations, NN regulation will have behavioral effects with diverse consequences for innovation in the network versus the periphery. The economics literature has found many possible good and bad effects of NN violations and of NN regulation, depending on the circumstances (Kr€amer, Wiewiorra, & Weinhardt, 2013). Sometimes there are externalities that competition policy might not capture. Therefore, per se regulation of NN should not be a good approach. Competition policy under a rule of reason with some regulatory measures on transparency and possibly minimum QoS standards will suffice. 4. Conclusions The balance between type I and type II errors of regulatory interference has changed over time. At the beginning of the liberalization process in telecommunications deregulation would have cemented the incumbent's monopoly, while regulation fostered competition. Today deregulation is more likely to induce innovation and to be compatible with vigorous competition. In contrast, continued regulation is likely to hinder innovation and sustainable competition. The continuing stream of innovations in ICT creates new situations and eliminates old problems (Schumpeter's creative destruction). This implies that policy interventions will be less beneficial in ICT markets than in less innovative and less complex markets. Regulators have recently made innovation an important part of their objective function. While this would favor deregulation and abstention from new regulations, working against this are strong influences from interest groups benefiting from legacy regulations and from adaptations of those regulations to new networks. Working against deregulation may also that both regulation and competition policy are more difficult for ICT than for other sectors. Both, regulation and competition policy will therefore need reforms in order to deal with new problems. Regulatory reform, such as symmetric regulation, smart regulation, quasi-Coasean approaches and subsidies all have some limited applicability to specific situations, but are all associated with complications that have to be resolved, while competition policy is a comprehensive alternative. Thus, softer competition policy and softer regulation appear to be desirable in light of innovation, because policies become less suitable and effective and because market developments more quickly overcome potential negative effects of violations. Above in Section 3 these general insights were applied in more detail to two legacy applications, “last-mile access” and “gatekeeper access”. This treatment brings out why such regulation continues or why it may vanish soon. Furthermore, these legacy applications bear strongly upon the issue to what extent new problem areas in the ICT world may or may not warrant regulation and why some already pursued regulation, such as net neutrality, should be revisited. The fact that Littlechild (1983) underestimated the longevity of telecommunications regulation does not mean that such regulation will continue indefinitely or will even find a new life in ICT services. While Littlechild's prediction of quick deregulation of telecommunications proved premature, conditions for legacy deregulation have by now improved considerably. Last-mile access deregulation will occur due to competition from mobile broadband and cable TV networks, possibly against the regulators' wish to regulate tight oligopolies. In case of call-termination and other ISP services OTTs are likely to undermine the base of their regulation. The history of telecommunications regulation tells us that deregulation can take a long time. Overcoming interest group pressure and their own self-interest to continue regulation is difficult for regulators. It can therefore be helpful if OTTs do part of this work for them. In this context one could level the playing field by establishing a burden of proof to show (a) which if any current ISP regulations have to be kept for efficiency reasons and (b) that such remaining regulations shall be extended to OTTs. 11

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An extension of legacy-type access regulation to new ICT areas, such as search engines, would provide strong signals to other new ICT areas that successful innovations may be penalized through regulation. Applying competition policy instead would have much less innovation-reducing effects. New gatekeeper regulations, such as strict NN obligations, are dubious from an economic perspective (Katz, 2017). In the case of NN they are already being circumvented via other technologies available to large players who need, for example, higher QoS. In the future such bypass technologies are likely to be available to more players and will be associated with lower costs so that NN policies are likely to lose their effects. The NN issue shows that regulators want to regulate the ICT sector. In spite of the NN precedent, further regulation of ICT may, however, be preventable.

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