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					                        Comparative View of Layered Telecom Mode
                       Submitted to Telecommunications Policy Journal

Title


Comparative View of a Layered Model for U.S. Telecom Policy


Subtitle


Focus on EU Regulatory Framework




Author                                         Co-Author
Joshua L Mindel                                Douglas C. Sicker

San Francisco State University                 University of Colorado at Boulder


College of Business                            Department of Computer Science

San Francisco State University                 Interdisciplinary Telecom Program

1600 Holloway Avenue                           University of Colorado at Boulder

San Francisco, CA 94132                        530 UCB

Tel: 415.334.1938                              Boulder, Colorado 80309

Fax: 415.405.0364                              Tel: 303-735-4949

joshua.mindel@sfsu.edu                         douglas.sicker@colorado.edu
                         Comparative View of Layered Telecom Mode
                        Submitted to Telecommunications Policy Journal

Abstract


The increasingly prominent debate over the regulatory status of VoIP directly relates to


a debate amongst telecommunications policy analysts that has gone on for years:


What’s the best way to overhaul the current telecommunications legislative framework


in the United States? The legislative framework reflects a patchwork of regulatory


comprises built upon a historical foundation in which specific infrastructures supported


specific services. The European Union is currently implementing a newly adopted


regulatory regime that promises to deal with convergence differently. This paper


compares the new EU model with a Layered Model that has previously been proposed


for U.S telecommunications policy. Both the EU model and the proposed Layered


Model are horizontal models in that they focus on current market characteristics rather


than legacy market structure and/or technological traits of the services.



Acknowledgements
The idea for this paper came about during a discussion at the 30th Annual
Telecommunications Policy Research Conference. The authors gratefully acknowledge
the insight offered by Scott Marcus on an early draft of this paper. As always, all errors
and omissions are the sole responsibility of the authors.

Abbreviated Article Title for use as Running Head
Comparative View of Layered Telecom Model


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1          INTRODUCTION


           The increasingly prominent debate over the regulatory status of VoIP directly

relates to a debate amongst telecommunications policy analysts that has gone on for

years: What is the best way to overhaul the current telecommunications legislative

framework in the United States? The framework reflects a patchwork of regulatory

comprises built upon a historical foundation in which specific infrastructures supported

specific services.


           The European Union is currently implementing a newly adopted regulatory

regime that promises to deal with convergence differently. This paper compares the

new EU model with a Layered Model that has previously been proposed for U.S

telecommunications policy. The intent of this policy essay is to provide the U.S.

telecommunications policy community with a comparative analysis of the European

Union’s Newly Adopted Regulatory Framework for Telecommunications1, and the




1
    Directive 2002/21/EC of the European Parliament and the Council of 7 March 2002 (Framework),


Directive 2002/20/EC (Authorization); Directive 2002/19/EC (Access); Directive 2002/22/EC (Universal


Service); and Directive 97/66/EC (Personal Data and Privacy)



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proposed Layered Model for Telecommunications Policy2,3. While the initial EU intent

was that all Member States would adopt the new legislation in July 2003, 4 a more

gradual adoption is actually taking place.5 Both the EU Framework and the Layered



2
    D. Sicker and J. Mindel, ―Refinements on a Layered Model for Telecommunications Policy,‖ Journal of


Telecommunications and High Technology Law, 2002; D. Sicker, ―Further Defining a Layered Model


for Telecommunications Policy,‖ 30th TPRC, 2002; D. Sicker, J. Mindel, and C.Cooper,, ―The Internet


Connection Conundrum,‖ unpublished FCC working paper, 1999. SHOULD WE ADD THE OTHER


REFERENCES – WERBACH, (THE GUY FROM PENN STATE), AND THE NEW ONE FROM MCI


(WHITT?SP)?



3
    The idea for comparing the Layered Model with the new EU framework originally came from J. Scott


Marcus, though responsibility for any errors in this paper remain the sole responsibility of its authors.


Marcus had previously authored an FCC working paper on the EU Framework. See OPP Working Paper


36, ―The Potential Relevance to the United States of the European Union’s Newly Adopted Regulatory


Framework for Telecommunications,‖ by J. Scott Marcus.



4
    See http://europa.eu.int/information_society/topics/telecoms/regulatory/new_rf/index_en.htm .



5
    Based on a conversation with Scott Marcus, Transatlantic Fellow with The German Marshall Fund of the


U.S.



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model are ―horizontal‖ regulatory models that are based on the principle that

telecommunications regulatory boundaries should focus on service or market

characteristics more than the historical market structure or technological traits of

specific services and infrastructures.


           Directive 2002/21/EC of the European Parliament and of the Council of 7 March

2002 ―establishes a new legislative framework for the electronic communications sector

that seeks to respond to convergence trends by covering all electronic communications

networks and services within its scope. The aim is to reduce ex-ante sector-specific

rules progressively as competition in the market develops.‖ This EU

Frameworkestablishes a single regulatory framework for electronic transmission and

services, and links to a separate regulatory framework for content and information

society services. Respect for cultural and linguistic diversity within the European

Community is cited as one significant reason for the separation of the transmission

regulatory framework from that of the content regulatory framework.


           The Layered Model is a conceptual framework that provides a structured lens

through which interconnection relationships amongst telecommunications service

providers and information service providers can be evaluated anew.6              Structured in the

sense that markets and competition are evaluated in a technologically neutral manner.

In the language of the EU Framework, the Layered Model encompasses electronic

transmission and services as well as content and information society services.            One


6
    The reference to existing U.S. regulatory categories is intentional.



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reason that this broader scope of the Layered Model may be more appropriate in the

U.S. context is that whatever cultural and linguistic diversity exists in the U.S., it is

subsumed or overshadowed by a dominant American culture and English language. In

the EU, national boundaries coincide (approximately) with the boundaries of cultural

and linguistic differences. In the U.S., state boundaries do not coincide with boundaries

of cultural and linguistic differences. Thus, if we (in the U.S.) are to take this

opportunity to design a new, harmonizing regulatory framework, there is no need to

establish two separate regimes.


           In both the EU Framework and the Layered Model, the intent is to provide a

structure within which specific markets can be defined, within which the extent of

competition can be evaluated, and within which appropriate regulatory rules can be

established. The EU Commission established guidelines for analyzing markets and

assessing significant market power.7 As later noted in Section 4 of this paper, these

guidelines are not unlike those followed by the U.S. Department of Justice (DoJ), the

Federal Trade Commission (FTC), and the FCC. The EU Commission guidelines are



7
    See ―Commission Guidelines on market analysis and the assessment of significant market power under


the Community regulatory framework for electronic communications networks and services,‖ Official


Journal of the European Communities, 2002/C 165/03, 11/7/2002. URL:


http://europa.eu.int/information_society/topics/telecoms/regulatory/new_rf/documents/smp_guidelines/c_


16520020711en00060031.pdf



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consistent with the spirit of the Layered Model, and in fact, the ongoing implementation

experience in the EU will surely provide valuable insight into how the Layered Model

could be operationalized for U.S. telecommunications markets.


           The EU Commission guidelines identify markets using concepts borrowed from

competition law. First, relevant markets are identified. Second, a determination of

significant market power (SMP) is made regarding firms in each market.

Operationalizing the proposed Layered Model in a similar fashion would reduce

regulatory uncertainty by virtue of reducing the contortions that regulators must

currently undergo to fit current issues into ill-fitting regulatory strictures.8


           We describe the Layered Model and the EU Framework in Sections 2 and 3,

respectively.9 Following that, we compare the models (in Section 4), then map defined



8
    On this point, FCC Chairman Powell was quoted as saying, ―As technology creates grayer and grayer


areas, it’s submitting technology to more legal disputes‖, Communications Daily, Volume 23, Issue 175,


10 September 2003.



9
    Inclusion of comprehensive descriptions of both models are not feasible in this comparative paper. See


references in supra note 2 for a complete description of the proposed Layered Model. See references in


supra notes 1 and 2 for a more complete description of the EU Commission model.




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EU markets onto the Layered Model (in Section 5), and finally highlight regulatory

concerns associated with the Layered Model.


2      LAYERED MODEL


       The aim of the Layered Model is to provide a consistent and modular approach

to telecommunications policy that reflects the reality of network design, market power,

and business arrangements.


       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 broadband access services. The

existing, vertical regulatory model is defined by the Communications Act of 1934 (as

revised by the Telecommunications Act of 1996 and the associated regulations

promulgated by the FCC). Figure 1 depicts a pair of regulatory silos traditionally

associated with voice services in the existing model. Figure 2 depicts a pair of

regulatory silos traditionally associated with television (and radio) services in the

existing model. Each silo consists of the title name, the service consumed, and the

network technology used to deliver the service.


       ========== PUT FIGURE 1 HERE ==========


       ========== PUT FIGURE 2 HERE ==========




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       The Layered Model is comprised of four, horizontal, policy layers: Access,

Transport, Application, and Content. Each layer represents a type of service provision.

Figure 3 depicts the horizontal classification of layers in the Layered Model.


       ========== PUT FIGURE 3 HERE ==========


       Service provision includes technology, public policy, and business issues. This

implies that the layers depicted in Figure 3 represent more than that represented in the

similar looking TCP/IP protocol stack. Structuring the Layered Model in this fashion

facilitates a technologically-neutral approach to market definitions used in public policy.

With the Layered Model, markets can be analyzed and treated in as consistent a manner

as makes sense. For example, facilitating the deployment of new and innovative

technologies is an objective common across all four layers. On the other hand, issues at

the content and application layers are distinct from those at the transport and access

layers. Figure 4 highlights a few representative (not exhaustive list of) policy metrics

that would not be consistently applied across all layers.


       ========== PUT FIGURE 4 HERE ==========




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           For brevity, we provide a synopsis of the proposed layered model here, and refer

interested readers to the authors’ earlier published works for more complete treatment of

the model.10


2.1        Service Categories

           The layers of the Layered Model distinguish between transport and access

services, applications services, content services, and legacy telecommunications

services:


          Access Services

          Transport Services

          Applications Services – including middle services (e.g. DNS, multicasting and

           end-user services (e.g. electronic mail, web hosting, search engines)

          Content services – examples include video, music, and telephony services

          Legacy Telecommunications services – as defined in the Communications Act of

           1934, and including services such as PSTN telephony


2.2        Provider Interconnection Relationships

           This layered stack provides a framework for systematic evaluation of the

interconnection relationships between the layers. From the perspective of




10
     See references in supra note 2 for a complete description of the proposed layered model for


telecommunications policy.



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interconnection policy, the most important provider relationships are depicted in Figure

5.


       ========== PUT FIGURE 5 HERE ==========


       Figure 5 shows a conceptual (simplified) protocol stack that providers of IP

infrastructure might employ. From a telecommunications policy perspective – and the

perspective of this paper in particular – these layers are of primary interest.


       Figure 6 depicts relationship G, between providers of the emerging IP

infrastructure and providers of legacy telecommunications services. The diagonal

layering implies that PSTN voice and PSTN transport services are more tightly coupled

than are the modular layers in the emerging IP infrastructure. The upper diagonal in the

depiction of the legacy PSTN infrastructure represents a service that would be

considered an application in the emerging IP infrastructure (i.e. voice services). The

lower diagonal represents what would be considered a physical service (both access and

transport) in the emerging IP infrastructure.


       ========== PUT FIGURE 6 HERE ==========




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3          EU FRAMEWORK


           The aim of the new EU regulatory framework for electronic communications

networks and services is to – ultimately – achieve a situation in which there is full

infrastructure competition between a number of different infrastructures.11


           The EU regulatory 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



11
     Two sources: First, this was paraphrased from statement made by M. Erkki Liikanen Member of the


European Commission, responsible for Enterprise and the Information Society on 12 February 2003:


―The new regulatory framework will promote sustainable facilities based competition as a medium -term


objective, leading to a situation where there is full infrastructure competition between a number of


different infrastructures. Competition will occur within and between platforms, and will grow over time as


existing networks are upgraded to compete with each other (as with the cable and telecoms networks) and


new networks are built.‖ Second, see ―Explanatory Memorandum for Commission Recommendation On


Relevant Product and Service Markets within the electronic communications sector susceptible to ex ante


regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a


common regulatory framework for electronic communication networks and services.‖



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Community competition law is insufficient to assure competition. Ex ante regulation

and competition law, therefore, ―serve as complementary instruments in achieving

policy objectives.‖12 This approach is based on the experience with two particular types

of problems dealt with during the initial phase of liberalization in the EU: 1) ―Need for

market entrant or potential competitor to obtain access to existing networks belonging to

other operators in order to serve customers‖; and 2) ―Fact that the competitive provision

of many electronic communications services also depends on negotiating

interconnection with other networks to facilitate the necessary connectivity‖ 13


           In an earlier analysis of the EU Framework, Marcus characterizes the EU

approach as ―simple and straightforward: 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



12
     Implicit in this comment is that, in the EU, ex ante regulation and ex poste decisions can address the


same actions. In the U.S., there is less overlap between actions covered by ex ante regulation and ex poste


antitrust. Source: Conversation with Scott Marcus in January 2004.



13
     See 2nd source identified in supra note 11, and see EU Commission Recommendation of 11/02/2003 on


Relevant Product and Service Markets within the electronic communications sector susceptible to ex ante


regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a


common regulatory framework for electronic communication networks and services.‖



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methodologies borrowed from competition law and economics. Within each market, the

National Regulatory Authority (NRA) in each member state will determine whether one

or more parties possess Significant Market Power (SMP).14 If SMP exists, the NRA

will impose appropriate obligations … taking into account the specifics of the particular

marketplace in question. These obligations are imposed ex ante, based on the presence

of SMP – it is not necessary to demonstrate that market power has been abused.

Conversely, if the NRA fails to find SMP, then any such obligations that may already be

in place must be rolled back.‖ 15 The December 2002 edition of the Official Journal of

the European Communities identified An October 2002 list – published by the EU -

identifiesehd by the EU published a list of organizations




14
     To see a list of operators that the EU has identified as having SMP, see ―Notification under the


Interconnection Directive 97/33/EC of the European Parliament and of the Council (Status as on 1


October 2002)‖, Official Journal of the European Communities, C 320/4, 20 December 2002. URL:


http://europa.eu.int/eur-lex/en/archive/2002/c_32020021220en.html



15
     See J. Scott Marcus, ―The Potential Relevance to the United States of the European Union’s Newly


Adopted Regulatory Framework for Telecommunications‖, Federal Communications Commission, OPP


Working Paper No. 36, July 2002. Available at


http://www.fcc.gov/Bureaus/OPP/working_papers/oppwp36.pdf .



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           The EU Framework stipulates that -- for market definition purposes -- retail

markets be examined ―in a way that is independent of the network or infrastructure

being used to provide services, as well as in accordance with the principles of

competition law.‖ However, regulatory controls can only be imposed on retail services

where ―relevant wholesale or related measures would fail to achieve the objective of

ensuring effective competition‖.16


3.1        Service Definitions

           Two key services are defined in the EU Framework:


                        An electronic communications service refers to ―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




16
     See sources identified in supra note 13.



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                        communications networks and services; it does not include

                        information society services …‖17

                       An information society service refers to ―any service normally

                        provided for remuneration, at a distance, by electronic means and

                        at the individual request of a recipient of services.‖18 For the

                        purposes of this definition,


                             o ―at a distance‖ is interpreted as a service that is ―provided

                                without the parties being simultaneously present.‖

                             o ―by electronic means‖ is interpreted as a service that is

                                ―sent initially and received at its destination by means of

                                electronic equipment for the processing (including digital

                                compression) and storage of data, and entirely transmitted,




17
     See ―Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a


common regulatory framework for electronic communications networks and services (Framework


Directive)‖



18
     See ―Directive 98/48/EC of the European Parliament and of the Council of 20 July 1998 amending


Directive 98/34/EC laying down a procedure for the provision of information in the field of technical


standards and regulation.‖



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                                conveyed and received by wire, by radio, by optical means

                                or by other electromagnetic means.‖

                            o ―at the individual request of a recipient of services‖ is

                                intrepreted as a service that is ―provided through the

                                transmission of data on individual request.‖


           Commercial services such as video on demand, web hosting, online trade, and

advertising are included in the information society services definition; ―whether or not

the goods or services in question are themselves delivered electronically.‖19 Note that

the regulations do not apply to the goods themselves. Regarding electronic mail, the

provision of commercial communications by email is considered an information society

service, while the use of email or equivalent electronic communications services is not

considered an information society service.20


           Television and radio broadcasting services are excluded from the information

society services category by virtue of the ―at the individual request of a recipient of

services‖ clause.




19
     See paragraph 1.3 in ―A Guide for Business to the Electronic Commerce (EC Directive) Regulations


2002 (SI 2002/2013)‖, Department of Trade and Industry (DTI), London, 31 July 2002.



20
     See paragraph 10 in EU Directive 2002/21/EC.



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3.2        Criteria for defining markets

           Three criteria are used to define a given market. Interpretations of the three

criteria are paraphrased from the EU’s Explanatory Memorandum that accompanies

Directive 2002/21/EC.21


3.2.1      First Criterion

           ―The first criterion is whether a market is subject to high and non-transitory

entry barriers. The presence of high and non-transitory entry barriers, although a

necessary condition, is not of itself a sufficient condition to warrant inclusion of a given

defined market. Given the dynamic character of electronic communications markets,

possibilities for the market to tend towards a competitive outcome, in spite of high and

non-transitory barriers to entry, need also to be taken into consideration‖.


           Relevant barriers are either structural or legal/regulatory in 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. For example, there may be restrictions on the number of

entities that have access to spectrum.




21
     See sources identified in supra note 13.



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3.2.2   Second Criterion

        ―The second criterion …is whether a market has characteristics such that it will

tend over time towards effective competition. This criterion is a dynamic one and takes

into account a number of structural and behavioral aspects which on balance indicate

whether or not, over the time period considered, the market has characteristics which

may be such as to justify the imposition of regulatory obligations as set out in the

specific directives of the new regulatory framework.‖


        The second criterion considers the fact that some markets may tend towards

competition even if structural or legal/regulatory barriers exist.


3.2.3   Third Criterion

        ―The third criterion considers the sufficiency of competition law by itself (absent

ex ante regulation), taking account of the particular characteristics of the electronic

communications sector.‖


        WE SHOULD SAY SOMETHING ABOUT THIS HERE


3.2.4   Sample Scenarios

        Three sample scenarios are identified in which ex ante regulation would be

considered a suitable complement to competition law. First, in situations where the

compliance requirements of an intervention to redress a market failure are extensive –

such as the need for detailed accounting for regulatory purposes and/or an assessment of

costs. Second, where frequent and/or timely intervention is indispensable. Third, where

the establishment of legal certainty is considered crucial.


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3.3        Benefits and Challenges

           A significant benefit of the EU Framework is that it decouples services from the

underlying networks that help instantiate these services. This approach will help the

regulatory framework withstand the rapid pace of technological and market

development.


           The definition of Significant Market Power (SMP) is based on market share.

There will likely be cases in which providers of new services will have significant

market share – due to first mover’s advantage. NRAs will face the challenge of deftly

applying the second criterion for defining markets – that of dealing with dynamic

market conditions that may override readily apparent barriers to entry. The risk is that

inappropriate regulation could either: 1) Crush the new service market or; 2) Preclude

legitimate competitors into that new service market. And across the EU, it is an open

question whether all NRAs will apply this criterion consistently.22


4          COMPARISON OF EU FRAMEWORK WITH LAYERED

        MODEL


           We compare the EU Framework with the Layered Model along structural,

definitional, and implementation lines.




22
     Point raised by source identified in supra note 15.



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           Openness. The term ―openness‖ is commonly used and interpreted differently

by stakeholders in the telecommunications policy discussions.23 This is important to

the extent that policy makers seek to open markets to improve the competitive nature of

a given market. In most contexts, it is relatively easy to view the technological

openness of the Internet; however, the existing regulatory framework makes it difficult

to ascertain the extent of openness in terms of business models. The notion of openness

varies across technology segments and the regulation imposed on these segments. This

becomes particularly interesting when market dominance allows a player to exert

technology choice that might decrease the openness of a network. The question remains

whether the FCC or other Federal or State agency might act to mandate certain

technology characteristics or technology behaviors (e.g., thou shall not selective block

access to a resource on a competitors network).


23
     In an earlier publication, the authors identified eight types of openness related to telecommunications


policy:23 Open standards, Open architectures, Open interconnection, Open interoperability, Open


directories, Open application, Open code, and Open content. Each of these categories can be further


broken down in terms of the degree to which it is open and the pricing at which it is available. See D.


Sicker and J. Mindel, ―Refinements on a Layered Model for Telecommunications Policy,‖ Journal of


Telecommunications and High Technology Law, 2002. This concept was subsequently extended in


―Thinking about Openness in Telecommunications Context:, Shah, Sicker, and Hatfield, 32nd


Telecommunications Policy Research Conference, 2003.



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           Separation of content from conduit. Both the EU Framework and Layered

model separate content from conduit. The Layered Model provides a classification

system that distinguishes between access services, transport services, application

services, content services, and Legacy PSTN services. The EU Framework

classification distinguishes between electronic communications networks, electronic

communications services, and information society services.24


           Imposition of Regulation. Both the EU Framework and the Layered Model

subject a given horizontal layer to regulation only where one or more stakeholders with

market power seeks to distort markets. The metrics by which policy makers evaluate

market distortions imposed by such stakeholders vary across types of markets. Figure 4

highlighted a few representative policy metrics that could be used for the Layered

Model.


           Market concentration measure. Both the EU and the U.S. use market share as

a proxy for market power. Market power is not illegal, it is the abuse of such power that

causes policy concern. In the EU, 40% market share is considered a threshold for

dominance concerns, while 50% market share is assumed to represent significant market




24
     See supra notes 17 and 18 for an explanation of these terms.



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power.25        In the U.S., merger analyses are handled by the DoJ, FTC, and/or FCC.26                     It

is these three organizations that would ultimately implement the Layered Model. When

deciding whether or not to challenge a merger, the DoJ and FTC assess market

concentration as one proxy for violation of antitrust laws.27 The Herfindahl-Hirshman

Index (HHI) is used to quantify market concentration. A market with an HHI in excess

of 1800 points is considered to be concentrated.28 Marcus points out that a market

share of 40-50% implies an HHI of at least 1,600 – 2,500, assuming that all other market

participants have relatively insignificant market power.29 It is worth noting that

regulators and antitrust officials may view the percent market share of concern


25
     See paragraph 75 in supra note 7.



26
     The FCC is primarily concerned with the potential merger’s impact on the public interest.



27
     In addition to market concentration, the DoJ and FTC consider potential adverse competitive effects,


entry and efficiency, and failure and exiting assets. See ―Horizontal Merger Guidelines‖ published jointly


by the U.S. Department of Justice and Federal Trade Commission, issued on April 2, 1992 and revised on


April 8, 1997. URL: http://www.usdoj.gov/atr/public/guidelines/horiz_book/hmg1.html



28
     HHI is obtained by calculated by squaring the market share of each firm competing in the market and


then summing the resulting numbers. See http://www.usdoj.gov/atr/public/testimony/hhi.htm



29
     See page 15 in source identified in supra note 15.



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differently. The point here is that the extent of market concentration that would raise

concern in the EU is similar to that which would raise concern with an operationalized

Layered Model.


           Enforcement authority. 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. The Layered Model is being developed for the U.S.

context, in which 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 decided to forbear.


           Technologically-neutral market definitions. Technological neutrality is

sought in both the EU and Layered Models. This neutrality may result in dissimilar

infrastructure technologies being included in the same market definition (e.g. both cable

and satellite provide access services). This neutrality may also results in similar

technologies being placed in separate markets because of consumer perceptions that

segment the market; e.g. paging services and mobile telephony services are both capable

of dispatching short, two-way text messages.30


           Impact of switching costs on market definitions. The EU Framework

considers the existence of high switching costs as sufficient to distinguish two markets

in what would otherwise be considered a single market if the switching costs were not




30
     See supra note 7.

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high.31 All else being equal, the authors view such switching costs as barriers to entry in

a single market (within a given layer of the Layered Model) rather than delineating two

separate markets


           Electronic mail services. Provision of electronic mail services is considered an

Application Layer service in the Layered Model. The EU Framework appears to include

electronic mail conveyance as both an electronic communications service and as an

information society service. In a discussion of information society services, the EU

Framework Directive 2002/21/EC states that ―Most of these activities are not covered by

the scope of this Directive because they do not consist wholly or mainly in the

conveyance of signals on an electronic communications networks. Voice telephony and

electronic mail conveyance services are covered by this Directive.‖ 32


           Mobile text messaging services. Consistent with electronic mail services, the

Layered Model places the provision of mobile text messaging services in the

Application Layer. A briefing33 prepared by the U.K. Department of Trade and




31
     See paragraph 50 in source identified in supra note 7.



32
     See paragraph 10 in source identified in supra note 17.



33
     See ―A Guide for Business to the Electronic Commerce (EC Directive) Regulations 2002 (SI


2002/2013)‖, Department of Trade and Industry (DTI), London, 31 July 2002.



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Industry for businesses affected by the EU Electronic Commerce Directive34 implies

that there is a very fine line drawn between regulatory treatment of mobile phone

services and mobile text messaging services. EU Electronic Commerce regulations ―do

apply to online trade and advertising (e.g. on the Internet, by email, by mobile

phone)‖35, yet the ―Regulations do not define what is meant by email, but mobile text

messages are not considered within its scope.‖ 36


           Television and radio broadcasting. The EU and Layered Models treat these services

differently. In the Layered Model, we classify both television and radio broadcasting as content

services to treat them consistently with content that is available over the Internet. In the EU

Framework, television and radio broadcasting services are excluded from the information




34
     See ―Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain


legal aspects of information society services, in particular electronic commerce, in the Internal Market


(Directive on electronic commerce)‖.



35
     See paragraph 1.3 in source identified in supra note 33.



36
     See paragraph 5.11 in source identified in supra note 33.



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                                 Comparative View of Layered Telecom Mode
                                Submitted to Telecommunications Policy Journal

society services category37 by virtue of the ―at the individual request of a recipient of services‖

qualifying phrase in the information society services definition.38


           There appears to be a lingering and somewhat artificial distinction based on the

underlying infrastructure and the influence of the broadcasting industry. It appears that the EU

Framework diverged from its harmonizing purity to what (most likely) reflects practical

compromises in establishing the regulatory framework.                Broadcast services are not considered

an information society service, while unicasted or multicasted services with the same content

are considered information society services.


5          MAPPING OF EU FRAMEWORK TO LAYERED MODEL


           The Layered Model defines four layers (Access, Transport, Application, and

Content) in the emerging IP infrastructure, plus a separate layer that represents the

Legacy PSTN infrastructure. By and large, information society services map to the

application and content layers in the Layered Model, whereas the electronic

communications networks and services categories in the EU Framework can be mapped

to the Access, Transport, and Legacy PSTN Layers in the Layered Model. As noted

earlier, the Layered Model does not distinguish between voice and non-voice services in

the Access and Transport layers.



37
     See Article 1 in supra note 18.



38
     See Annex V in supra note 18.



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                                Comparative View of Layered Telecom Mode
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           The purpose of the EU Commission Recommendation on Relevant Product and

Service Markets ―is to identify those product and service markets in which ex ante

regulation may be warranted.‖39 In this section, we provide a mapping from EU-

defined markets to layers in the Layered Model.


5.1        Services provided at fixed location
5.1.1      Retail markets


           EU Directive 2002/21/EC (Framework Directive) defines six retail markets that

provide the ―provision of connection to and use of the public telephone network at a

fixed location.‖ These six markets (listed below) map to the Access Layer and the

Legacy PSTN Layer in the Layered Model.


          Access to public network at fixed location for residential customers

          Access to public network at fixed location for non-residential customers

          Publicly available local/national telephone services at fixed location for

           residential customers

          Publicly available local/national telephone services at fixed location for non

           residential customers

          Publicly available international telephone services at fixed location for non

           residential customers




39
     See sources identified in supra note 13.



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                           Comparative View of Layered Telecom Mode
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       Publicly available international telephone services at fixed location for non

        residential customers


        Also at the retail level, EU Directive 2002/22/EC (Universal Service Directive)

defines a ―minimum set of leased lines (which comprises the specified types of leased

lines up to and including 2Mb/sec).‖ This market maps to the Access Layer, Transport

Layer, and Legacy PSTN Layer of the Layered Model. The relevant interconnection

relationships (from the Layered Model) are: 1) Access provider to Transport provider;

and 2) Transport provider to Telecommunications Service provider.


        Figure 7 depicts an overlay of the interconnection relationships -- associated

with the mentioned EU retail markets -- onto the Layered Model.


        ========== PUT FIGURE 7 HERE ==========


5.1.2   Wholesale level


        Wholesale call origination and termination markets are defined in EU Directive

97/33/EC. These two markets map to the Access Layer or the Legacy PSTN Layer,

depending on the technology that underlies the service. The relevant interconnection

relationships from the Layered Model are: 1) Access provider to Transport Provider; and

2) Transport provider to Telecommunications Service Provider.


        The same EU directive defines a wholesale transit services market that maps to

the Transport Layer or the Legacy PSTN Layer; again depending on the technology that

underlies the service. The relevant interconnection relationships for the transit services


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                        Comparative View of Layered Telecom Mode
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market are: 1) Transport provider to Transport provider; and 2) Transport provider to

Telecommunications Service Provider.


       A market for providing wholesale unbundled access to loops for the purpose of

providing broadband and voice services is defined in EU Directives 97/33/EC and

98/10/EC. This market maps to the Access Layer or the Legacy PSTN Layer,

depending on the underlying technology. The relevant interconnection relationships for

this market are: 1) Access provider to Transport provider; and 2) Transport provider to

Telecommunications Service Provider.


       A wholesale broadband access markets map to the Access Layer. The relevant

interconnection relationship is that between the Access provider and the Transport

provider.


       The wholesale terminating segments of leased lines market maps to the Access

Layer and the Legacy PSTN Layer. The relevant interconnection relationships in the

Layered Model are: 1) Access provider to Transport provider and 2) Transport provider

to Telecommunications Service provider.


       Lastly, a market for the ―wholesale provision of leased line capacity to other

suppliers of electronic communications networks or services‖ is defined in Directive

2002/21/EC. This market maps to the Transport Layer and the Legacy PSTN Layer.

The relevant interconnection relationships are: 1) Access provider to Transport

provider; 2) Transport provider to Transport provider; and 3) Legacy PSTN provider to

Transport provider.


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           Figure 8 depicts an overlay of the interconnection relationships -- associated

with the mentioned EU wholesale markets -- onto the Layered Model.


           ========== PUT FIGURE 8 HERE ==========


5.2        Services provided at non-fixed location

           Directives 2002/21/EC, 97/33/EC, and 98/10/EC define two wholesale mobile

voice markets: 1) Access and call origination, and 2) Call termination.             Each of these

markets maps to the Access Layer in the Layered model. The relevant interconnection

relationships are: 1) Access provider to Transport provider; and 2) Access provider to

Telecommunications Service provider relationship.


           In a paper that describes the structure of mobile services markets,40 Arnbak

describes layers that are similar to those in the Layered Model. ―In mobile markets, the

lowest layer …typically comprises the access link between a customer moving in a

given service area and the radio (base) station or low-earth orbiting satellite (LEOS)

covering that area, in which various customers are active from time to time.‖ This layer

―also includes the fixed transmission links connecting the base stations or satellites to

their corresponding controllers and switching/service centres, which are connected by

high-capacity transport links (where impressive economies of scale can now be reaped

with optical technologies).‖ The next higher layer ―comprises these centres, other fixed


40
     See Jens Arnbak, ―Regulation for Next Generation Technologies and Markets‖, Telecommunications


Policy Online, Vol. 24, No. 6/7 (July/August 2000). http://www.tpeditor.com/contents/2000/arnbak.htm



                                                       31
                          Comparative View of Layered Telecom Mode
                         Submitted to Telecommunications Policy Journal

network nodes and the associated intelligence to control, route and tariff the traffic to

and from the appropriate user terminals.‖


       An international roaming market is defined in Directive 2002/21/EC that maps to

the Transport Layer in the Layered Model. The relevant interconnection relationship is

Transport provider to Transport provider.


       Arnbak’s paper goes on to state that mobility management is also exercised at

the next higher layer – which is equivalent to our Transport Layer – ―where required to

identify and serve mobile users …both for the network operator’s own subscribing

customers moving across the service area, and for roaming visitors from other operators’

service areas. Generally, interconnection between networks of competing operators and

with foreign networks takes place at …‖ this layer. The phrase ―this layer‖ is equivalent

to the Transport Layer in the Layered Model.


       Figure 9 depicts an overlay of the interconnection relationships -- associated

with the mentioned EU non-fixed location markets -- onto the Layered Model.


       ========== PUT FIGURE 9 HERE ==========


5.3    Broadcasting

       The EU Commission also defines a market for broadcast transmission services

that deliver broadcasted content to end users. This market maps to all four layers of the

Layered Model since it involves both the physical transport of content, the decoding of

such content, and the content itself. Similarly, interconnection relationships amongst all

service providers at all layers are key.
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                                Comparative View of Layered Telecom Mode
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6          REGULATORY CONCERNS FOR THE LAYERED MODEL


           EU and U.S. contexts are different. In Marcus’ analysis of the relevance that

the EU Framework has for existing U.S. regulation,41 he identifies three issues that are

also relevant to the Layered Model. First, the shorter history of telecommunications

regulation in the EU makes it easier to pull-off a major overhaul than it would in the

U.S.


           Second, the EU Framework is ―elegant in its simplicity and directness, but it

does not capture those nuances‖, where the phrase ―those nuances‖ refers to the balance

of deregulation vs. regulation, and of federal, state, and local jurisdictional tensions.

The Layered Model provides a conceptually consistent lens through which markets can

be identified and analyzed in a more technologically neutral manner than is possible

with the existing U.S. regulatory structure. The ability of the Layered Model to

accommodate the ―balancing nuances‖ mentioned for the EU model depends on the

intralayer market distinctions that have not yet been made for the Layered Model.42


           And third is the ability of regulatory authorities in the EU and in the U.S. to

acquire sufficient data to determine significant market power is key. Marcus points out



41
     See page 28 in source identified in supra note 15.



42
     Such intra-layer market distinctions are necessary to the further development of the proposed Layered


Model, but are beyond the scope of this paper’s comparison of the EU Framework to the Layered Model.



                                                          33
                               Comparative View of Layered Telecom Mode
                              Submitted to Telecommunications Policy Journal

that the EU framework depends on the acquisition of sufficient data to enable National

Regulatory Authorities to determine relevant markets and to assess the significant

market power. Similar information requirements would also exist for the Layered

Model. The DoJ is an investigative agency that has the authority to request information

and keep its content in strict confidence. The FCC is not an investigative agency,

though it does have the statutory authority information when necessary.43                  In addition,

parties to a merger may have an incentive to share information to advance their

argument. One drawback to this information flowing to the FCC - whether voluntarily

or by statutory authority – is that it may not be protected from public disclosure.


           Inconsistent government oversight. Broadcasters face the strictest oversight

of economics and content, followed by cable television operators (due to their potential

impact on broadcasters). Due to their status as common carriers and control of access,




43
     See U.S. Code Title 47, Chapter 5, Subchapter IV, Section 409(e), ―the Commission shall have the


power to require by subpena (sic) the attendance and testimony of witnesses and the production of all


books, papers, schedules of charges, contracts, agreements, and documents relating to any matter under


investigation,‖, U.S. Code Title 47, Chapter 5, Subchapter IV, Section 409(e), URL:


http://www4.law.cornell.edu/uscode/47/409.html



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                                Comparative View of Layered Telecom Mode
                               Submitted to Telecommunications Policy Journal

telephone companies also face tremendous government oversight. Oversight of Internet

communications is treated gingerly, but of increasing focus.44


           The historical rationale for inconsistent treatment of communications-related

service providers is well-documented, but no longer suitable. For example, the

distinction between treatment of cable and broadcast was related to the (perceived)

scarcity of bandwidth: Cable systems carried lots of channels, so they were afforded

more latitude than broadcast systems that had fewer channels.


               The intent of the Layered Model is to evolve past this historical precedent to a

new legislative/regulatory model that reflects the current and future state of

telecommunications markets. Significant market power in rationally defined markets

would be a key to whether ex ante regulatory action was required. If neither

broadcasters nor cable television operators had significant market power, then they

would both receive comparable government oversight.45


           How much regulation is enough? Telecommunications history is rife with

examples of how regulation has encouraged or stifled innovation. The issue is whether


44
     See R. Frieden, ―Adjusting the Horizontal and Vertical in Telecommunications Regulation: A


Comparison of the Traditional and a New Layered Approach‖, TPRC 2002.



45
     The authors recognize that political influence shapes legislation and regulation as much as (perhaps


more than) conceptually consistent analyses such as this.



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                              Comparative View of Layered Telecom Mode
                             Submitted to Telecommunications Policy Journal

or not exposing the layers in the Layered Model will bring on regulation that encourages

or stifles regulation in defined markets.


           Through most of the 20th century, telephone companies had complete control

over what equipment was attached to their networks, and to which networks they chose

to interconnect with. Landmark decisions between the late 1960’s (e.g. Carterphone)

through the early 1980’s (e.g. MFJ) required that telephone companies behave more

neutrally. It was this regulatory context that stayed out of the way of Internet pioneers

who applied the end-to-end design principle. This is an example of regulation that

fostered innovation and competition.          A counterexample is that government regulation

itself enabled the establishment of the AT&T monopoly that stifled competition during

most of the 20th century.46


           The case of online music is clearly one in which the courts served vested

interests at the expense of innovation. Consider the following excerpt from Lawrence

Lessig:47


               ―Before the Internet, the production and distribution of music had
       become extraordinarily concentrated. In 2000, for example, five companies
       controlled 84 percent of music distribution in the world. The reasons for this
       concentration are many—including the high costs of promotion—but the effect


46
     Consider the Kingsbury Commitment in 1912.



47
     See Lawrence Lessig, ―The Internet Under Siege‖, Foreign Policy Magazine, November/December


2001.



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                         Comparative View of Layered Telecom Mode
                        Submitted to Telecommunications Policy Journal

    of concentration on artist development is profound. Very few artists make any
    money from their work, and the few that do are able to do so because of mass
    marketing from record labels. The Internet had the potential to change this
    reality. Both because the costs of distribution were so low, and because the
    network also had the potential to significantly lower the costs of promotion, the
    cost of music could fall, and revenues to artists could rise.‖

            ―Five years ago, this market took off. A large number of online music
    providers began competing for new ways to distribute music. Some distributed
    MP3s for money (eMusic.com). Some built technology for giving owners of
    music easier access to their music (mp3.com). And some made it much easier for
    ordinary users to "share" their music with other users (Napster). But as quickly
    as these companies took off, lawyers representing old media succeeded in
    shutting them down. These lawyers argued that copyright law gave the holders
    (some say hoarders) of these copyrights the exclusive right to control how they
    get used. American courts agreed.‖

ADD SOME ANALYSIS OR COMMENT TO THIS PASSAGE.

7      CLOSING REMARKS


       This paper provides a brief comparison of the EU Framework and the Layered Model.

We show that both approaches seek market definitions and regulations that are technologically

neutral, and seek to only constrict firm behavior where significant market power can be

exercised. Infrastructure competition is sought in access markets. From the mapping of EU

services onto the Layered Model, we see that both models encompass the same set of

communications services.


       In terms of implementation of the models, there are interesting contrasts between the

challenges that the EU faced in doing so and in what the U.S. would face in establishing a

Layered Model of regulation. The EU is a loose confederation of sovereign Member States that

work together to achieve certain goals, such as uniform competition policy and a single




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                                 Comparative View of Layered Telecom Mode
                                Submitted to Telecommunications Policy Journal

currency.48 The U.S. is a tighter confederation of less sovereign States.49 The extent of this

confederation affects the tension between centralization and decentralization of regulatory roles.

Also, as noted earlier there is greater regulatory history here in the U.S. to be overcome prior to

establishing a Layered Model of telecommunications regulation.




48
     See source identified in supra note 15.



49
     Prior to the ratification of the current U.S. constitution (in 1788), the U.S. Articles of Confederation


(1787) described a loose confederation of States that (it could be argued) more closely resembles the loose


confederation of Member States that constitutes the EU today.



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