Lesson 2: Motivation for Network Interconnection

Lesson Objectives

This lesson introduces to a student why network interconnection is a necessary facet in telecommunications. At the end of the lesson the student must be able to appreciate and practically apply in the regulatory industry the relationship between liberalization, competition and interconnection and use the knowledge acquired in effective regulation.

As you go through these sections relate , as mentioned in the course introduction, how access becomes a contentious issue as a concern in the interconnection simulation. All the key role players as mentioned in the course introduction (i.e NCC, Nattel, DomCell, IMN and the Consumers) should be able to consider how access relate to their role in interconnection negotiations.

2.1 Connectivity

A basic premise of communications is that one measure of a network's value is its ability to interconnect the maximum number of users. A competitive market that produces many small, detached networks is undesirable, relatively useless, and essentially counter productive. Users value the ability to reach all other communicators through a single, simple access point, such as the telephone. Thus, interconnection is an indispensable feature of the desired communications network structure.

To the extent that any company has an existing substantially installed network, interconnection permits competition to develop in a less costly manner. New entrants permitted to interconnect on reasonable terms and conditions will not have to invest in duplicating existing plant; investment can be devoted instead to expansion and upgrade of facilities and services. Of course, some duplication will be required to accommodate increases in capacity. The cost of installing additional switches (with the associated software) is enormous; therefore, access to the switch is a critical feature of any effort to develop a coherent and competitive market. Transport lines are becoming less expensive, although the costs of installation, in terms of disruption as well as actual installation work, may be substantial in many areas [5].

2.2 Liberalization and Competition

Consider what the ITU wrote:

"Regulators around the globe consider interconnection to be the single most important issue in the development of a competitive market place for telecommunication services."
(Introduction to Trends in telecommunication Reform 2000-2001 "Interconnection Regulation" -3rd edition, 2000 by the International Telecommunication Union
(www.itu.int/publications/docs/trends2000.htm)

The global telecommunications sector is undergoing major changes. A service that was once considered to be the sole purview of natural and often government -owned monopolies has been privatised and opened to competition, in response to both technological development and the failure of state-owned telecom entities to satisfy the growing telecommunications needs of users and economies. The advent of competition has been accompanied by the creation of National Regulatory Agencies, charged with the responsibility of facilitating market entry by new players, to guard against anti-competitive practices of incumbent monopoly operators, and ensuring that the benefits of competition are passed on to consumers.

All over the globe the introduction of competition in telecommunications has brought tremendous benefits to both consumers and operators. Competition provides consumers with greater choice of service operators, wider variety of services, significantly improved service quality, and more cost reflective tariffs. For developing countries, added benefits include the attraction of badly needed investment, faster network deployment, and wider consumer coverage. In addition, incumbents and other operators are given incentives to make improvements in their efficiency and to exploit opportunities for growth and innovation.

Interconnection is a necessary condition for effective competition since it enables consumers of one network to be able to successfully complete a call to another consumer or service irrespective of whose network the originator of the call is using or to whose network the call recipient or service provider is connected to. This is referred to as the any-to-any principle of interconnection. This requires the interconnection of networks, for example, allowing a cellular customer to communicate not only with existing cellular subscribers but also with the fixed line telephone customers of the incumbent operator and vice-versa. The necessary condition for effective competition is that entrants must not only have access to the incumbent's networks, but access must be on terms and conditions that are fair, non-discriminatory, and transparent.

2.3 Sharing Infrastructure

Extensive infrastructure is required to build telecommunications networks. Key supporting infrastructure includes poles, ducts, conduits, trenches, manholes, street pedestals, and towers. Sharing of such infrastructure can significantly increase the efficiency of telecommunications supply in an economy. The same is true in the case of sharing building space in exchanges to permit two or more operators to co-locate their cable and radio transmission facilities and related equipment collocation permits direct (or near-direct ) access to exchange switches and local access lines .

Availability of infrastructure sharing and collocation can significantly decrease barriers to competitive entry. The acquisition of right of way and other permits required to build pole lines or towers, dig trenches or install ducts and conduits can be very time consuming and expensive. In some countries , only government entities , such as the incumbent operator , have clear legal authority to obtain right of way , occupy public property or expropriate private property. Sharing of infrastructure and collocation can reduce costs for the new entrant, and at the same, time provide additional revenues to incumbents.

An added benefit is reduced environmental impact and public inconvenience. Competitive entry into telecommunications markets has led to a proliferation of cellular and microwave towers, aerial pole lines and road trenches in many municipalities and other local administrations.

Some regulators require incumbents to permit infrastructure sharing and collocation of a new operator's transmission facilities in their exchanges. Other operators, including new entrants, are frequently required to cooperate as well, at least in the sharing of infrastructure that is seen to be environmentally degrading, such as towers. In some countries, third parties that own support infrastructure, such as electrical power utilities, are also encouraged to participate in sharing arrangements.

In some jurisdictions sharing of infrastructure occurs without regulatory intervention. Both sharing parties can benefit from the arrangements. In these jurisdictions, sharing of infrastructure is often seen as a matter to be freely negotiated between operators. However, as with other interconnection issues, there is often an asymmetrical market situation. In some cases, incumbents resist sharing their infrastructure. In these markets, regulatory intervention will be required to implement efficient sharing and collocation arrangements.

Table 3-2 lists steps regulators can take to promote sharing of infrastructure and collocation.

Table 3-2: Steps to Promote Infrastructure Sharing and Collocation
Develop Regulatory Policy	Publish a regulatory policy encouraging infrastructure sharing and collocation Encourage local authorities such as municipal governments to support and facilitate infrastructure sharing Encourage reciprocity of infrastructure sharing (i.e. new entrants should be required to size and build their facilities to permit sharing with incumbents and other operators) Require incumbent operator to publish a standard offer and price list for access to key infrastructure: poles, ducts, conduits, tower space etc. Incumbents should be required to provide information on the location of infrastructure, and capacity available for sharing (e.g. capacity in ducts, towers, etc.) A joint committee of operators should be established to plan infrastructure capacity, co-ordinate permits from local authorities and improve the mutual efficiency of the infrastructure provisioning process Operators should be able to reserve capacity in advance on reasonable terms
Price of Shared and Infrastructure Collocation	Regulators should encourage development of clear pricing guidelines (the following guidelines are illustrative only) Normally, incumbents and other operators should be able to recover at least their direct incremental costs of sharing, plus reasonable overheads Additional price components may be subject to negotiation and regulatory dispute resolution Prices for collocation and infrastructure sharing should generally be unbundled so that the operator requesting access is only required to pay for the services it uses Cost of new infrastructure should be shared among 2 or more operators in proportion to their use of the infrastructure(e.g. number of antennae located on a microwave tower) Costs of increased capacity and re-location of infrastructure should be shared among those that benefit from works required to accommodate a new entrant, it should normally not pay, unless and until it benefits from such works. An alternative approach is to allocate the costs among sharing operators based on use, with a surcharge for the operator that requests the work. Future sharers of infrastructure should reimburse early entrants for expenditures that benefit them.
Regulatory Safeguards	Shared infrastructures should be made available to all operators on a non-discriminatory basis. This includes the owner of the infrastructure. Capacity should normally be provided on a first come, first served basis. The regulator should approve rationing schemes for scarce capacity New entrants (or other operators) that do not use ordered infrastructure capacity within a set time period should be required to return it. A penalty for excessive orders may also be appropriate Operators that provide shared infrastructure should record and have available for regulatory review : provisioning times for their own operations and competitors Physical separation of infrastructure (e.g. by walls or fences) may be warranted where necessary to prevent sabotage, but operators should be encouraged to share in the most efficient manner.

Once there is clear regulatory direction that infrastructure sharing and collocation must be permitted, operators are sometimes able to negotiate mutually acceptable sharing arrangements. In many other cases, however, regulatory direction or dispute resolution has been required to finalize sharing arrangements. Regulators seeking to expedite sharing arrangements may want to provide advance guidelines on such arrangements, after taking into account the views of incumbents and new entrants.

Some of the main issues that arisen in relation to infrastructure sharing and collocation are:

• Rationing of space between incumbents' future requirements and current and future requirements of various new entrants; reservation of future expansion space for each operator.
  
• Pricing of facilities, and costing basis for the same.
  
• Access and security arrangements for various operators' equipment. Collocation premises of different operators are usually separated physically (e.g. by wire mesh) and locked.
  
• Appointment and supervision process for mutual cutovers and work affecting more than one operator's facilities. Payment and rates for the same.
  
• Provision and pricing of ancillary services such as electrical power and back-up power, lighting, heating and air conditioning security and alarm systems, maintenance and janitorial services, etc.
  
• Negotiation of other lease and/or license arrangements, including issues of sub-licenses on property of third parties (e.g. building owners, right of way owners, municipal and other public property owners), insurance and indemnification for damages

2.4 Case Study: Newly Licensed Mobile Telecommunication Companies in Nigeria

Desirous to be in tune with the global trend of liberalization of the Telecommunications industry and having taken cognisance of the poor state of the telecommunications infrastructure in Nigeria, the Federal government promulgated Decree 75, of 1992, which created the NCC, with the aim among others, to attract private sector investment to the industry.

The decree charged the commission with the responsibility of regulating the telecommunication industry through the creation of an enabling environment, which will encourage growth and speedy roll out of networks in order to support economic development.

One of the first assignments the Board was directed to address by the Federal Government was that of Licensing of four digital mobile operators, through a transparent auction process.

An issue considered very critical to the success of the licensing exercise was the choice of a credible process. The NCC as a commission proceeded to consider various ways of licensing operators for mobile network, despite the fact that government had expressed preference for an auction process.

Two options came up for consideration as follows:

a) An auction process and
b) A comparative selection process a.k.a Beauty contest selection process

After careful evaluation of both processes, the Commission concluded that the auction process was the best way of allocating these scarce national resources as transparently and as fair as possible.

The auction ran very smoothly with the rounds conducted on schedule. Similarly, at the end of each round the world was advised through the media and the internet of the outcome of the concluded round

The auction lasted for three days, from January 17th, 2001 to January 19th, 2001 with three companies emerging as winners for the three licenses. The winning bid price for the successful companies was Two Hundred and Eighty Five (285) Million US Dollars. This was announced as thee licence fee to be paid within fourteen - (14) business days as stipulated in the information Memorandum. The successful companies were:

a) Communications Investment Limited
b) ECONET Wireless Limited
c) MTN Communications Nigeria Limited

The three companies and NITEL (four companies in total) were issued letters of provisional award of licence and given fourteen (14) business days within which to effect payment after which the licence will be confirmed.
(Report on the Digital Mobile Licence Auction Exercise, Nigeria Communication Commission, March 2001)

2.5 Introduction to Game Theory

There are many methods that humans have used to make decisions over contentious issues. One of them is described here: Game Theory.

Game Theory

This is the theory of rational behaviour for interactive decision problems. In a game, several agents strive to maximize their expected utility index by choosing particular courses of action, and each agent's final utility payoffs depend on the profile of courses of action chosen by all agents. The interactive situation, specified by the set of participants, the possible courses of action of each agent, and the set of all possible utility payoffs, is called a game; the agents 'playing' a game are called the players.

In degenerate games, the players' payoffs only depend on their own actions. For example, in competitive markets (competitive market equilibrium), it is enough that each player optimises regardless of the behaviour of other traders. As soon as a small number of agents is involved in an economic transaction, however, the payoffs to each of them depend on the other agents' actions. For example in an oligopolistic industry or in a cartel, the price or the quantity set optimally by each firm depends crucially on the prices or quantities set by the competing firms. Similarly, in a market with a small number of traders, the equilibrium price depends on each trader's own actions as well as the one of his fellow traders.

Whenever an optimising agent expects a reaction from other agents to his own actions, his payoff is determined by other player's actions as well, and he is playing a game. Game theory provides general methods of dealing with interactive optimisation problems; its methods and concepts, particularly the notion of strategy and strategic equilibrium find a vast number of applications throughout social sciences (including biology). Although the word 'game' suggests peaceful and 'kind' behaviour, most situations relevant in politics, psychology, biology, and economics involve rather strong conflicts of interest, competition, and cheating, apart from leaving room for cooperation or mutually beneficially actions.

Based on a model of optimising agents that plan individually optimal course of play, knowing that her opponents will do so as well, the basic objects of interest in strategic (or 'non-cooperative') game theory are the players' strategies. A player's strategy is a complete plan of actions to be taken when the game is actually played; it must be completely specified before the actual play of the game starts, and it prescribe the course of play for each decision that a player might be called upon to take, for each possible piece of information that the player may have at each time where he might be called upon to act. A strategy may also include random moves. It is generally assumed that the players evaluate uncertain payoffs according to von Neumann Morgenstern utility. In addition to the strategic branch of game theory, there is another one that focuses on the interactions of groups of players that jointly strive to maximize their surplus. While this second branch represents the analysis of coalitional games, which centers on notions of 'coalitionally stable' payoff configurations, we focus here on strategic game theory (from which coalitional games are derived).

Given a strategic game, a profile of strategies results in a profile of (expected) utility payoffs. A certain payoff allocation, or a profile of final moves of the players is called an outcome of the game. An outcome is called an equilibrium outcome if no player can unilaterally improve the outcome (in terms of his own payoff) given that the other players stick to their equilibrium strategies. A profile of strategies is called a (strategic) equilibrium if, given that all players conform to the prescribed strategies, no player can gain from unilaterally switching to another strategy. Alternatively, a profile of strategies forms an equilibrium if the strategies form best responses to one another. (Unfortunately, it is impossible to describe what is an equilibrium other than in such a self-referential way. The best way to understand this definition is then to take it literally.) Only equilibrium outcomes are reasonable outcomes for games, because outside an equilibrium there is at least one player that can improve by playing according to another strategy. An implicit assumption of game theory is that the players, being rational, are able to reproduce any equilibrium calculations of anybody else. In particular, all the equilibrium strategies must be known to (as they are computed by) the players. Similarly, it is assumed that the whole structure of the game, in much the same way as the players' social context, is known by each player (and that this knowledge itself is known etc.)

Normal Form vs. Extensive Form Game:

In normal (or strategic) form games, the players move (choose their actions) simultaneously. Whenever the strategy spaces of the players are discrete (and finite), the game can be represented compactly as an NxM-game (see below). By contrast, a game in extensive form specifies the complete order of moves (along the direction of time), typically in a game tree (see below), in addition to the complete list of payoffs and the available information at each point in time and under each contingency. As any normal form can be 'inflated' to an extensive form game, concepts of strategic equilibrium in general relate to extensive form games. Whenever the exact timing of actions is irrelevant to the payoffs, however, a game is represented with more parsimony in normal form.

NxM Game:

A normal form game for two players, where one player has N possible actions and the other one has M possible actions. In such a game, the payoffs pairs to any strategy combination can be neatly arranged in a matrix, and the game is easily analysable. NxM-games thus provide an easy way to gain an idea of what the structure of a more complex game looks like.

Prisoners' Dilemma:

Consider the following story. Two suspects in a crime are put into separate cells. If they both confess, each will be sentenced to three years. If only one of them confesses, he will be freed and used to witness against the other, who will receive a sentence of ten years. If neither confesses, they will both convicted of a minor offence and spend just a year in prison. This game is easily put in matrix form as a 2x2 game (see above). Once this is done, it is pretty obvious that each prisoner (player) has a dominant strategy to confess. The unique equilibrium of this game thus leads to the (Pareto) inefficient outcome (efficiency). This provides the most famous example that strategic equilibrium typically implies inefficient outcomes, and even can lead to the worst possible outcome. The prisoners' dilemma game illustrates the structure of interaction in an oil cartel, or any oligopolistic industry of quantity competition, where each firm has an incentive to 'spoil' the market by unilaterally increasing its own output. The same structure of interaction characterizes the problem of providing public goods (free rider problem), i.e. of voluntarily paying taxes.

Matching Pennies:

Extremely simplistic, symmetric, two player 2x2 game (which is said to be played by children), in which each player chooses either Head or Tail. If the choices differ, player 1 pays a dollar to player 2; if they are the same, player 2 pays player 1 a dollar. This game does not have an equilibrium in pure strategies, but the unique equilibrium involves each player selecting one of the two actions with equal probability. The game illustrates that interactively optimising behavior may create the need to take actions randomly, in order not to be predictable by the opponent. For the exact determination of mixed equilibrium strategies, the assumption of expected utility is important. For a real-world situation closely resembling this game, think of penalty shooting in sports: both the goal-keeper and the player who shoots the ball play randomised strategies. They randomise their actions (left or right, upper corner or not) in a way such that the other player cannot improve by either action he takes, given the own probabilities of selecting the actions.

Constant-Sum Games:

Games in which for every combination of strategies the sum of players' payoff is the same. For example, auction games for risk neutral bidders and a risk-neutral seller are constant-sum games, where a fixed social surplus from exchange is to be divided between the bidders and the bid-taker. More generally, all exchange situations which do neither allow for production nor for destruction of resources are constant-sum games.

Coordination Games:

Normal form game where the players have the same number of strategies, which can be indexed such that it is always a strict Nash equilibrium for both players to play strategies having the same index.

Game Tree:

Time structure of possible moves describing an extensive form game. A game tree is a set of nodes some of which are linked by edges. A tree is a connected graph with no cycles. The first move of the game is identified with a distinguished node that is called the root of the tree. A play of the game consists of a connected chain of edges starting at the root of the tree and ending, if the game is finite, at a terminal node. The nodes in the tree represent the possible moves in the game. The edges leading away from a node represent the choices or actions available at that move. Each node other than the terminal node is assigned a player's name so that it is known who makes the choice at that move. Each terminal node must be labelled with the consequences for each player if the game ends in the outcome corresponding to that terminal node.

Repeated Game:

Super -game where a fixed group of players plays a given game repeatedly, with the outcome of all previous plays observed before the next play begins. Repetition vastly enlarges the set of possible equilibrium outcomes in a game, as it opens possibilities to 'punish' or 'reward' later actions such that certain strategies form an equilibrium which would not form one in the single, unrepeated (one-shot) game. For example, repeating the prisoners' dilemma game (often enough) gives rise to many equilibria where both prisoners never confess.

Literature: Binmore (1992), Fudenberg & Tirole (1992), Gibbons (1992), Osborne & Rubinstein (1994)

Entry by: Aner Sela and Jan Vleugels

2.6 Learning Activity

How can game theory be applied in negotiations involving interconnection? Do this as a group activity.

Suggest the optimum place for point-of-interconnection (incumbents, new entrant, neutral?) and discuss the advantages and disadvantages.