TELECOMMUNICATIONS

INTERCONNECTION AND INTEROPERABILITY

A framework for competing networks

April 1997

As telecommunication markets get ever more competitive, new and innovative services are becoming available from both network operators and independent service providers.

Consumers will want to be able to use new services whether or not they are customers of the operator which has launched the service, and whatever customer premises equipment they use, and operators will want their services to be available as widely as possible. For this to be possible, services will need to be interoperable across competing networks.

This Statement is about how interoperability should be organised, both at customer interfaces – between networks and customer premises equipment – and at the network interfaces at which network operators interconnect their systems. It follows on from previous consultation on customer interfaces, and extensive industry debate on network interfaces and interconnection.

I would welcome your views on our conclusions.

Based on an Article by: DON CRUICKSHANK

INTRODUCTION

1.1 OFTEL’s objective is to provide the best possible deal for customers in terms of quality, choice and value for money, and it believes that this objective can best be met through a fully competitive market – competition provides choice, drives down prices, and spurs innovation. The regulatory framework must therefore, seek to promote competition both in the provision of services and between alternative networks. Competition at the network level ensures competitive supply of the network services which are inputs to retail services and consequently deepens competition at the service level. It also leads to a market where competition is the driving force at all levels and where regulation can therefore pull back as competition takes over.

1.2 Interoperability of services between the networks of different operators, and between networks and the equipment used by customers to access them, is essential to consumers who need to be able to make calls to other consumers irrespective of whether they are directly connected to the same network. In a monopoly network, interoperability is straightforward – because interworking of the network and equipment attached to it is an internal matter for that organisation, and central to its business. However, where there are competing networks supplied by competing switch manufacturers and there is competition in the supply of customer premises equipment, interoperability is not so easily assured.

1.3 If networks are fully competitive, one would still expect there to be strong incentives for operators to organise interoperability to their mutual commercial benefit because each network will want to ensure that its services are available to as many customers as possible. However, where one network operator has market power, there may be difficulties because it may be commercially attractive to such an operator to make some services available only to its own customers. Where these are services which could be made available to customers on other networks, competition problems can arise.

1.4 This Statement is about how interoperability should be organised in the competitive framework of telecommunication markets. It presents OFTEL’s conclusions on the following two strands of work:

1.5 It identifies those services for which we believe it will be necessary for there to be rules to promote interoperability, and presents conclusions on what those rules should be and how they should work in practice. Consistent with the belief that customers are best served by effective competition, we must seek to propose regulation only where it continues to be needed and will, wherever possible, seek to operate through guidelines rather than detailed licence conditions.

OFTEL was set up under the UK Telecommunications Act 1984.

Which services need rules to ensure interoperability?

1.7 A key part of the analysis of interoperability has been identifying the circumstances in which it is appropriate for there to be rules governing interoperability.

Market power

1.8 OFTEL’s analysis of interoperability has concluded that whether or not rules should apply in different circumstances depends crucially on the market power of the operator. In considering the interoperability of services, OFTEL has concluded that market power results directly from the control of access to ‘addressable customers’ (ie consumers to whom calls can be made). An operator to whose network a large proportion of customers are directly connected therefore has market power in this context because a small operator will need to interconnect with it if the small operator’s customers are to be able to make calls to the large operator’s customers. The same is of course true for a customer of the large operator wishing to call a customer of the small operator, but there is a clear asymmetry in the position because the large operator controls lines to a larger number of customers and lack of interoperability is hence a bigger problem for the small operator than it is for the large operator. The purchasing power of the large operator and its consequent influence on interface standards will also enable it to leverage its market power in the markets for supply of equipment for use in networks and customer premises equipment.  

1.9 Where markets are competitive, there will be no need for any regulatory intervention to promote interoperability because there will be a strong commercial incentive for operators to organise interoperability between themselves for services which require it.

Interoperability and innovation

1.10 Another important consideration in identifying those services for which it is appropriate for there to be rules on interoperability is the trade-off between interoperability and innovation.  In summary, the issue is that there is potentially a conflict between, on the one hand, encouraging innovation – whereby operators legitimately seek rewards through differentiation and exclusive provision of their new innovative services – and interoperability – which ensures wider distribution of the benefits of new services through its availability more widely than just on the network which launches them.

1.11 The analysis  that the promotion of interoperability for certain types of service where the market is potentially distorted by an operator’s market power will not act as a brake on innovation, and that, furthermore, this will only involve intervention to promote interoperability of services for which, in a competitive market, there would in any case be strong incentives for the industry to organise interoperability itself.

Network and Enhanced Services

1.12 OFTEL has identified those services for which it is appropriate for there to be regulatory rules to promote interoperability.

1.13 OFTEL’s Statement, Promoting Competition in Services over Telecommunication Networks published in February 1997 established the distinction between Network and Enhanced Services. Network Services are those which can realistically and economically be supplied only by network operators, and Enhanced Services are those which can be supplied by independent service providers (ie those not building their own network infrastructure) as long as they can get access to the Network Services which they need to deliver the service.

Network Services

1.14 A distinction can be drawn between those Network Services which, by nature, only need to work within one network – for example, services like ‘Call Waiting’ and ‘Call Diversion’ the functionality for which usually resides in the local exchange – and those which need to be interconnected between networks in order to work on calls between customers on those networks – for example, ‘Ring Back when Free’ and ‘Calling Line Identification’. The latter are defined in this Statement as Co-operative Network Services (see definitions).

1.15 Interoperability of Co-operative Network Services is desirable both for customers, who want to be able to use these services in calls to other customers irrespective of whether they are directly connected to the same network, and for the development of competition. Interoperability benefits the development of competition on two levels. Firstly, between network operators because the unavailability of such services on small networks could unfairly hinder their ability to compete. And secondly in markets served by independent service providers because, without interoperability, their services will not be available to all addressable customers and they will be likely to use the operator with market power to carry their services (because it will provide access to the most addressable customers), and hence lose the benefits arising from choice of carrier. OFTEL has therefore concluded that special rules to promote interoperability of Co-operative Network Services at network interfaces are necessary.