Competition, Regulation, and Convergence

Current Trends in Telecommunications Policy Research

Sharon E. Gillett, Ingo Vogelsang, Sharon E. Gillett, Ingo Vogelsang

• Publisher: Routledge
• Year: 1999
• ISBN:
  9781135661861
• Edition: 1
• Topic: Social Sciences
• Subtopic: Media Studies
• Index: Social Sciences

The telecommunications industry has experienced dynamic changes over the past several years, and those exciting events and developments are reflected in the chapters of this volume. The Telecommunications Policy Research Conference (TPRC) holds an unrivaled place at the center of national public policy discourse on issues in communications and information. TPRC is one of the few places where multidisciplinary discussions take place as the norm. The papers collected here represent the current state of research in telecommunication policy, and are organized around four topics: competition, regulation, universal service, and convergence. The contentious competition issues include bundling as a strategy in software competition, combination bidding in spectrum auctions, and anticompetitive behavior in the Internet. Regulation takes up telephone number portability, decentralized regulatory decision making versus central regulatory authority, data protection, restrictions to the flow of information over the Internet, and failed Global Information Infrastructure initiatives. Universal service addresses the persistent gap in telecommunications from a socioeconomic perspective, the availability of competitive Internet access service and cost modeling. The convergence section concentrates on the costs of Internet telephony versus circuit switched telephony, the intertwined evolution of new services, new technologies, and new consumer equipment, and the politically charged question of asymmetric regulation of Internet telephony and conventional telephone service.

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REGULATION

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An Economic Analysis of Telephone Number Portability

P. Srinagesh

Bridger M. Mitchell

Charles River Associates

We analyze several implications of local number portability (LNP) for competition and economic efficiency. In the first section we present a brief introduction to telephone numbers, the private and external benefits of number portability, and the costs of alternative architectural approaches to implementing number portability. We then describe cost recovery principles adopted by regulators in the United States, the United Kingdom, and Hong Kong. We next discuss the incentives of incumbent operators to engage in anticompetitive behavior and whether an incumbent’s benefits from maintaining a stable directory infrastructure might diminish these incentives and internalize the external benefits of LNP. A brief concluding section summarizes our findings and identifies areas for future research.

TELEPHONE NUMBER PORTABILITY

The North American Numbering Plan

Every telephone (or more precisely, every main station) is assigned a unique address that is used for call setup and call routing and to identify the telephone for billing and other administrative purposes. The hierarchical structure of telephone numbers was developed, in part, to simplify call setup and call routing procedures. Until recently, the North American Numbering Plan (NANP) typically assigned each main station a number of the form N0/1X NNX XXXX. In this notation, N is any integer except 0 or 1,0/1 is either the 0 or the 1 digit, and X is any integer. The first three digits (of the form N0/1X) are referred to as the area code and are shared by all numbers in a numbering plan area. The next three digits are called the central office code. A central office, which houses one or more switches, may be associated with several central office codes, but each central office code is associated with a unique central office. The last four digits are associated with individual lines or main stations. Today, NANP numbers are of the form NXX XXX XXXX, with the first three digits being the area code, the next three the central office code, and the last four the line number.

A virtue of this telephone numbering scheme is that it enables simplified call routing procedures, something that was particularly important for earlier generations of analog switches. Early switches could be programmed to recognize that a dialed number beginning with N (2–9) would consist of seven digits and could be routed locally, whereas a dialed number beginning with 0 or 1 would be followed by 10 digits and would need to be routed to the long-distance network. In general, switching logic could be simplified by structuring telephone numbers to reflect the hierarchical routing rules of the switched telephone network.¹ The structure of the telephone numbers has been efficient from another perspective as well: North American numbers are very densely used, and through judicious assignment, the move to 11-digit numbers to accommodate growing numbers of telephones has been deferred further into the future than would have been possible with less efficient schemes.

One consequence of efficient numbering systems developed by the integrated Bell system is the close link between numbers assigned to customers and the central offices (or switching systems) that serve the specific area where the customer is located. The concept of number portability—the ability of a customer to retain his or her telephone number while moving to a different location of telephone carrier—had only limited applicability. Traditionally, when customers moved outside the serving area of their wire center, they were assigned a new number with a central office code associated with his new serving wire center. Although customers who moved within a serving area were often able to keep their telephone numbers, geographic number portability was inherently limited to small areas around exchanges. Before divestiture, there was no need to “port” numbers across local exchange carriers because different local exchange companies did not share the same exchange areas. However, the lack of geographic portability was viewed by most observers as a minor inconvenience.

Benefits of Number Portability

With the advent of competing suppliers of local telephone service, the lack of LNP is viewed as a major impediment to effective competition. A customer of an incumbent local exchange carrier who decides to switch to a new entrant with a competing offering of local service will (with traditional technology) be required to obtain a new number based on a central office code associated with the entrant’s central office. Most customers, especially those business customers who are disproportionately dependent on incoming calls, are reluctant to change their telephone numbers and incur the expense of notifying their customers and suppliers of the change. Lack of LNP across providers might therefore be a significant barrier to entry in the market for local service. LNP will remove this barrier to entry, and porting customers will not face the expenses of renumbering when they change providers. In addition to providing private benefits to porting customers, LNP has significant public good aspects and generates external benefits. These aspects of LNP complicate the economic analysis of LNP cost recovery.

Earlier analyses of LNP have identified both direct and indirect benefits from operator (carrier) number portability. For example the Office of Telecommunications (OFTEL) observed:

As well as the substantial direct benefits (e.g., customers do not have to incur the costs of changing stationery, fewer wrong numbers are dialled), portability provides very significant indirect benefits, assisting greatly in the creation of genuine competition for all categories of customers, driving down prices, encouraging innovation and raising quality.²

A more detailed discussion of the benefits of LNP can be found in a Monopolies and Mergers Commission (MMC) Report.³ Citing a 1992 study by National Economic Research Associates (NERA) for OFTEL, the report identifies three types of benefits.

Type 1 benefits accrue directly to porting customers and consist of:

1. Savings from not having to change stationery and other items (such as advertisements that include a business subscriber’s telephone number).

2. The reduced expenses from switching to lower cost operators.

3. The convenience of using the same number and operator for incoming and outgoing calls.

Although the first two benefits are hard to quantify, there is general agreement that the costs are likely to be high enough to have a significant impact on the typical customer’s choice of provider. If numbers cannot be ported, new entrants can be expected to focus on selling some outgoing lines and Centrex (or Virtual Private Network) services to multiline business customers, who will tend to continue buying their inbound lines from the incumbent local exchange carrier (ILEC). Some residential customers, too, may subscribe to more than one operator’s service, using one operator primarily for outbound calls and another for inbound calls.⁴ New entrants may also focus on serving the pay-phone market, as most pay-phones are used primarily for outgoing calls. Competition may be vigorous for these market segments, but weak in other segments. With LNP, however, entrants are not constrained to focus on outgoing traffic. They can, if they wish, cater to customers’ needs for both incoming and outgoing traffic. Customers will benefit from being able to choose a single operator (from many competitors) who can meet all their needs. The convenience of one-stop shopping is a component of Type 1 benefits. Estimates of Type 1 benefits for the United Kingdom have been vigorously debated, and there is no consensus on their magnitude.⁵

Type 2 benefits accrue to all customers through the enhanced competition facilitated by LNP. The benefits of competition will likely include lower prices for standard “commodity” service. In addition to porting customers who switch operators to obtain a better price, other customers who are attracted by a new entrant’s promotional offers may find the incumbent operator willing to meet or beat its rivals’ offers. Furthermore, competition is likely to result in a greater variety of products and services as operators seek to differentiate themselves from their rivals in the marketplace. In this process, operators will discover what customers are willing to pay for and will seek to meet their customers’ needs. To the extent that they are successful, prices and consumer expenditures on new services may rise, but the value received by consumers will rise even more.⁶ On the other hand, as competition lowers prices for subscribers and services that traditionally made disproportionate contributions toward overhead costs, those subscribers who made small or negative contributions to overhead costs may face increased prices or lower quality services. The quantification of Type 2 benefits is difficult, and the MMC views recent estimates for the United Kingdom with some skepticism.⁷ However, there appears to be general agreement that the total benefits of LNP are substantially higher than the costs.⁸

Type 3 benefits, according to NERA, accrue to all subscribers in the form of fewer misdialed calls and fewer calls to directory inquiries.⁹ Although earlier analyses have attempted to quantify the direct benefits to porting customers and the indirect benefits of the greater competition facilitated by LNP, relatively little is said explicitly about Type 3 benefits in the MMC Report.

For a subscriber who has decided to move or change to another operator, the decision to port his or her number confers benefits on other subscribers. These benefits are apparent if we compare two situations in which a fixed number of subscribers change operators. In the first situation, assume that all customers who change operators port their numbers. In the second situation, assume that the same customers change operators but none port their numbers. For each case, consider the costs incurred by other subscribers. The differences in the costs incurred by the other subscribers in the two situations can be considered an external benefit of porting corresponding to a Type 3 benefit.

These external benefits to nonporting customers of other subscribers’ decisions to port include the following:

1. Continued validity of nonporting subscribers’ public and private directories and memorized numbers. This benefit will likely be greater for consumers who need to call many other subscribers.

2. Continued validity of programs for speed dialing, selective call forwarding, or other functions implemented in sophisticated customer premises equipment. This includes some international callback services and broadcast fax services, the costs of which would be higher without LNP, as lists of customer numbers and destination ...

Table of contents

• Cover
• Half Title
• Telecommunications
• Title Page
• Copyright Page
• Table of Contents
• Authors
• Acknowledgments
• Preface
• Introduction
• I Competition
• II Regulation
• III Universal Service
• IV Convergence
• Author Index
• Subject Index