VoIP under the EU Regulatory Framework: Preventing Foreclosure?

Bert Sadowski & Bas Straathof

Eindhoven Centre for Innovation Studies, The Netherlands Working Paper 05.16

Department of Technology Management Technische Universiteit Eindhoven, The Netherlands

October 2005

VoIP under the EU Regulatory Framework: Preventing Foreclosure?
[Preliminary version]

Bert Sadowski Bas Straathof

August 2005

Bert M. Sadowski, TM, Eindhoven University of Technology, PO Box 513, 5600 MB Eindhoven, The Netherlands - telephone (31)40 - 247 55 10 - fax: (31)40 - 244 98 75 e-mail:b.m.sadowski@tm.tue.nl Bas Straathof, TM, Eindhoven University of Technology, PO Box 513, 5600 MB Eindhoven, The Netherlands

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Abstract

In June 2004, the European Commission (EC) issued an “Information and Consultation Document” (European Commission 2004) that discussed how the Regulatory Framework of the European Union (EU) should be adapted to accommodate Voice over IP (VoIP) and invited relevant parties to comment on the Consultation Document. In our study, we use the responses of the different market parties to identify how incumbents seek to foreclose the market for VoIP telephony. From these responses we conclude that foreclosure is not only attempted by setting high prices for the use of infrastructure, but also by the strategic choice of infrastructure technology, which raises the cost of entry. We label the latter form of foreclosure “technological foreclosure” – as opposed to “market foreclosure”. A simple modeling exercise shows that regulators seeking to avoid market foreclosure might trigger technological foreclosure. We argue that this has happened with the unbundling of the local loop in the EU, and that it might happen again with the transition to VoIP. We conclude that the current rights and obligations assigned to telecom companies effectively protect incumbents from competition by VoIP entrants. Moreover, the inaction of regulatory authorities when it comes to numbering and communication protocols is advantageous for incumbents and might obstruct the provision of new services in the future.

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1

Introduction

The rising popularity of Voice over Internet Protocol (VoIP) not only challenges traditional telecommunications companies, but also puts National Regulatory Authorities (NRAs) to the test. NRAs have to modernize the regulation of the telecommunication sector and, at the same time, they have to ensure a smooth transition from the Public Switched Telephone Network (PSTN) to VoIP. Swift action is important because the potential gains from VoIP are large – and so are the vested interests of telecom operators. Entry by VoIP providers is problematic for two reasons. First, the regulation of the telecom sector is designed specifically for the Plain Old Telephone System (POTS). A consequence is that it is not always clear what the rights and obligations of VoIP providers are. In addition, some of these obligations, such as in-line powering, do not make much sense and are very costly for VoIP providers to comply with. A second problem encountered by VoIP entrants is that interconnecting their networks with those of the incumbent telecom firms is difficult and costly. In this study we focus on the latter type of problem (although we sometimes also comment on the former). In order to get a systematic overview of what barriers to entry are experienced by VoIP operators, we have conducted a systematic analysis of recommendations for the EU’s telecommunication policy made by VoIP operators, telecom incumbents, Internet Service Providers (ISPs), and NRAs. These recommendations were given in response to the European Commission’s (EC) Information and Consultation Document on VoIP (European Commission 2004). With the publication of this Document, the EC intended to stimulate the discussion about the regulatory treatment of VoIP in Europe. In the Document, the EC applied the EU Regulatory Framework (‘EU Framework’) to the provision of VoIP and characterized the rules guiding the general authorization of VoIP and the public policy requirements that might affect VoIP providers. These requirements are related to consumer protection and public safety, network interconnection and interoperability, as well as numbering. We find that the strategies of the major participants offering or intending to offer VoIP widely differ. We identified three different strategies: new (alternative) VoIP providers, traditional telecommunication operators offering VoIP and (cable) multiple service operators (MSOs). Alternative VoIP providers have indicated that they will benefit from lower regulatory and market barriers to entry. They are opposed to public policy obligations on their VoIP offerings but at the same time in favor of keeping these obligations for traditional telecommunication operators. New VoIP providers consider the problem of interconnection between PSTN operators and VoIP providers as the central problem for their development. Why does VoIP have the potential to cause structural change in the market for telephony? First, VoIP is cheaper than PSTN, has the potential to deliver a higher quality of service (QoS), and enables a wide range of new services. For these reasons it is likely that also major telecom operators will eventually switch to VoIP. Second, VoIP can be applied as a layer over the internet, which makes telephony independent from the physical infrastructure. In particular, VoIP enables telephony over DSL, Cable, and (W)LAN. Not only will this development increase competition for traditional telecom operators because other infrastructures, notably Cable, will also offer telephony services, traditional operators will also face competition on the local loop itself. This kind of competition comes in roughly two forms. First, VoIP can be delivered directly over the internet using a softphone (e.g. Skype) or via an adaptor 3

However. the layered model will arguably offer the best basis for the provision of new services in the future. 1 The unbundling of the local loop has not been successful in Europe (see subsection 4.2) 4 .1 On top of POTS. Although there currently are some drawbacks to this model. like the reliability of internet connections and the lack of access to emergency services. Widespread adoption of the layered model in Europe requires NRAs to be more effective and alert than they were during the unbundling of the local loop.g. The four market structures implied in the discussion above are displayed in figure 1. The layered model is probably the most desirable from the consumer’s point of view. A formerly state-owned operator is in control of the local loop and provides POTS and nowadays often a DSL connection as well. The upper-left panel of the figure shows the traditional (European) structure of the telecom market. The upper-right panel shows a scenario in which telephony becomes a fully layered service. A possible advantage of this model over the layered model is that ISPs have greater control over the reliability and quality of the connection through specific Service Level Agreements (SLAs) with the infrastructure provider. Tiscali). Second.connected to the internet (e. The corebusiness of traditional incumbents then becomes the provision of a (wireline) infrastructure. Vonage). This situation might arise when government regulation effectively prevents the layered provision of telephony. ISPs can offer VoIP as a service parallel to an internet connection (e. the European experience with the unbundling of the local loop demonstrates that incumbent operators can successfully use their control over infrastructure to prevent competition in services based on that infrastructure. or when incumbents are able to foreclose the telephony market.g. The panel at the bottom-right of the figure represents a situation in which ISPs bundle internet access Preselect POTS Other Internet VoIP Internet Other Local loop Traditional (European) market (resale VoIP) Physical Infrastructure Layered market Other Internet VoIP Internet Other VoIP Local loop Physical Infrastructure Telecom operator foreclosure ISP foreclosure Figure 1 Scenarios for the structure of the market for telephony with telephony. carriers like Tele2 offer telephony by means of carrier preselect. for example by keeping interconnectivity difficult and expensive. The lower-left panel displays a scenario in which hardly anything changes – except for migration by incumbents from PSTN to VoIP.

999% of service availability of traditional telephony is much higher than the 94% availability of the best private data networks (Chong and Matthews 2004). arrive in the right order. If excessive prices for the use of infrastructure (“market foreclosure”) are forbidden by the NRA. 2 The technological characteristics of VoIP From a technological point of view. Instead. Below. This kind of behavior poses a dilemma for the NRA: technological foreclosure might be more harmful for consumers than market foreclosure if technological foreclosure leads to the adoption of an inferior infrastructure technology. VoIP departs from traditional telephony in that calls (or ‘sessions’) do not require a dedicated time slot on a wire. As there’s is no longer a fixed allocation of bandwidth for a session. modular design. Section three contains the modeling exercise that demonstrates how intervention by NRAs can lead to technological foreclosure. The absence of a need for fixed routes substantially reduces the complexity of extending a network (Frey and Zenner 2004 pp. there is no guarantee that voice packets arrive on time.We use a simple modeling framework to get an understanding of how the intervention of NRAs influences the behavior of incumbents. the absence of fixed timeslots implies that silences no longer have to be transmitted. These two features can make packet-based telephony substantially cheaper than circuit-based telephony. it has proven to be challenging for VoIP providers to achieve the same QoS as PSTN. Section five presents empirical evidence on the relevance of foreclosure in the case of VoIP. is another VoIP-specific source of delay. network architecture and signaling protocols. The approach followed by European NRAs during the unbundling of the local loop focused on regulating the prices charged by the traditional telecom operator for the use of infrastructure. We show that there NRAs might be able to simultaneously prevent market and technological foreclosure through strategically regulating the price of infrastructure use. or ‘jitter’. The variation in the interval at which packets arrive. 2. In addition. The 99. Despite these 5 . or arrive at all. The EC’s policy initiatives towards VoIP are outlined in section four. incumbents may choose to base their infrastructure on a technology that raises the cost of entry (“technological foreclosure”). the queuing of packets is a source of delay unknown to circuit-based telephony. and numbering. Our modeling exercise shows that this type intervention of can have unanticipated effects on the incumbent’s choice of infrastructure technology. The next section will discuss how the technological differences between VoIP and POTS matter for the structure of the market for telephony. On a busy network. we provide a detailed description of the differences between VoIP and POTS and their implications for the telephony market. Additionally this section contains a summary of the European experience with the local loop unbundling. For these reasons.1 Data transport The first distinction between VoIP and POTS concerns the way in which (voice-)data are transported. VoIP allows voice packets belonging to the same call to be sent over different routes through a network and at irregular time intervals. VoIP differs from POTS in four important respects: data transport. 203-204). The disadvantage of packet-based telephony is that it is vulnerable. Each of these four factors has the potential to alter the nature of the market for telephony significantly. Also the reliability of IP networks is does not come close to the reliability of traditional networks.

the call-state only has to be known at the endpoints as inactive connections do not use up any bandwidth. In principle.4 The most important signaling A typical VoIP packet is based upon the (Reliable) User Datagram Protocol. With real-time data. while POTS needs a hierarchical network structure.2 Modular design The second aspect that distinguishes VoIP from POTS is layering. The modularity of VoIP makes it a potential threat for incumbent telecom operators. and application. at the higher layers. The difference in operating cost between circuit-based and packet-based technology will probably force even large telecom operators to migrate to VoIP. The state of the call is centrally registered in order to avoid maintaining empty slots. pp. A significant implication of layering is that VoIP can be used for future software applications that might be very different from ordinary telephony. presentation. First. application data is encoded using the Real Time Transport Protocol (RTP). ADSL-based to cable-based internet. telecom operators using VoIP are less dependent on the manufacturers of installed hardware. In a PSTN. people can continue to use a VoIP service when switching from. Second. 4 The protocols for setting up and terminating VoIP calls differ from the protocol used for PSTN. This contrasts sharply with POTS: adding even a trivial new service on a PSTN is complicated and expensive. Unlike POTS. VoIP does not require a hierarchically structured network for two reasons. On top of UDP. A VoIP service only requires a sufficiently fast and reliable connection to the internet. The actual voice data come after the RTP part of the package (Davidson and Peters 2000. link. Being IP based. except for the layers directly below or above that layer. however. transport. The use of open standards not only stimulates competition between suppliers. but it also facilitates innovation e. UDP is less reliable than the Transmission Control Protocol (TCP/IP) as missing or damaged packages are not retransmitted under UDP. This means that VoIP protocols can be designed without having to take into account the characteristics of hardware. As a consequence. VoIP transport protocols2 are part of the network-layer of the OSI reference model. retransmission does not make sense as the retransmitted package will arrive too late to be of any use.vulnerabilities. Similarly. it is likely that further improvements in bandwidth and protocols will eventually cause the QoS of VoIP to exceed that of PSTN. through the entry of new firms. 2.3 The advantage of layering is that for each layer protocols can be developed that function independently of the other layers. however. Its seven layers are physical. but the physical form of this connection is irrelevant for the service.g. VoIP packets do not require a unique timeslot in order to travel to their destination. 3 OSI stands for Open Systems Interconnection model and was developed by the International Organization for Standardization (ISO).3 Network architecture and signaling protocols A third difference between VoIP and POTS is that VoIP can be used in a variety of network architectures. or (R)UDP. 2 6 . session. software can be developed that functions independently from the exact VoIP protocol that is used. network. The architecture of a VoIP network is interdependent with the signaling protocol used for setting up and terminating calls. 2. for example. 181-183). The potential of VoIP to provide a quality of service higher than POTS will only add to this incentive. a hierarchy of switches takes care of assigning time-slots to a call. so no hierarchy is required to set up a call.

all the intelligence needed for making a call resides in the endpoints: it is possible to connect one H. which is embedded in a call agent. The call agent uses MGCP to communicate with gateways. Whereas SIP’s design is highly modular and complements existing internet protocols. and Session Initiation Protocol (SIP). P2P applications have the advantage that a connection between two endpoints does not require a central server. as both protocols use RTP for data transport. A piece of modular software called ‘softswitch’. SS7 is an out-of-band signaling method. In this setup. In principle. signaling from one switch to another is done using the Signaling System 7 (SS7. The typical architecture of such a network involves a call agent that controls gateways and manages calls. An H. Out-of-band signaling does not makes sense when both voice and signaling data are transferred as packages. The oldest and most widely used protocol is H. In addition. Only the user directory used often is centrally maintained.323 a complex protocol. or C7 in Europe).323 uses binary encoding. Like H. or softphones. but it also prevents third-parties from developing new H. or SIP (Durkin 2003).323 (Zahariadis and Spanos 2004). There is some resemblance between SIP and H.323. The obvious advantage of this architecture is its flexibility: MGCP enables a smooth transition from a TDM network to a VoIP network. These may use a variety of signaling protocols. SIP can be used for direct connections between SIP enabled phones and for connections via proxy servers. SIP is a text-based protocol similar to HTTP while H. Of particular interest are Peer to Peer (P2P) softphones like Skype. which means that data required for call management are transported as data-packets over a different wire than the TDM voice data are. published by the International Telecommunication Union (ITU).323.323. H. their QoS characteristics are identical. By using software-based phone. Media Gateway Control Protocol (MGCP). people can make VoIP telephone calls over the internet. Out-ofband signaling yields more reliable and faster data exchange than in-band signaling.323 and some of these standards are proprietary. VoIP-to-VoIP calls of this nature are free in the sense that they do not require expenditure on top of the expenditure on the internet connection.protocols are H. One important implication of this is that a separate telephone connection becomes redundant for users with broadband internet access.323. MGCP is a protocol developed by the Internet Engineering Task Force (IETF) that is used in a centralized VoIP network.323 phone directly to another one without interference by a gatekeeper. Of course.323. the popularity of this type of telephony depends to a large extent on the possibility and cost of making a softphone call to a POTS telephone. because in-band signaling requires transmission of tones rather than data-packets. The modular design and open nature of SIP makes it much simpler for outsiders to develop extensions. therefore VoIP signaling usually is in-band.323-based applications: only ITU developed standards are incorporated in H. Within a PSTN.323 functions more as an umbrella for ITU standards. allows the call agent to communicate directly with endpoints. SIP is another protocol developed by the IETF. Furthermore. gateways only transform TDM signals into packets and vice versa – all call management is performed by the call agent. H.323 architecture usually involves gateways that connect to PSTNs or other networks and gatekeepers that manage traffic between gateways and H. H. Another way for connecting one phone to another is through proxy servers. The main distinction between the two protocols is that SIP is much simpler than H.323 and SIP can be used not only on the networks of telecom carriers. but also on the internet.323 enabled phones. Unlike MGCP. The umbrella-approach not only makes H. 7 . such as SS7 (PSTN).

straathof@voip. So in principle. For example.m. wish to get exclusive control over the URIs – just like they control E.However. A VoIP call can only be set up if both endpoints know the IP address of the other endpoint. The benefit of the latter solution is that it enables number portability: it allows you change your VoIP provider without changing your address.arpa domain and will contain the telephone number in reverse order. All these addresses will be part of the e164. This problem can be overcome in two ways: VoIP users can get an email-like address (e. In particular. receive a short text message sent from a cellular phone by email.164 numbering plan. VoIP can be based on a variety of network architectures and signaling protocols. They do this in order to make more efficient use of the IP addresses they own.com) from their VoIP provider or they can request an IP address specifically intended for VoIP. For example.2. no numbering convention is accepted yet.4. Which architecture(s) and protocol(s) will eventually become the industry standards depends for a substantial part on the choices large telecom operators are currently making.arpa address. Obviously. An E.arpa could refer to the following Universal Resource Identifiers (URIs): sip:bas.2. this is also changing.arpa address not only connects an E.5. The ITU and the IETF are currently working on a system called ENUM.tue.m.7. First. but also it can also connect to an email or web address. for example.e164. the internet’s Domain Name System (DNS) system functions as an elementary numbering plan for VoIP. many internet connections use temporary IP addresses. mailto:s. The reasons why ENUM is not yet implemented are political rather than technical. all digits before the last two are the responsibility of the country indicated by those last two digits (here The Netherlands).4.164 number +31402472053 will be associated with the following IP address: 3.4.nl/medewerk/s. ISPs often assign a random IP address whenever a customer connects to the internet.nl.2. for example.2. the E. Goth 2004).tue.straathof/. The original intention of ENUM was to give this authority to end-users (possibly through service providers). The controversy is about who is going to populate the URIs (Huston 2002.tm.com.5 This functionality allows the user to.1. and http://fp. incumbent operators might try to protect their market share by avoiding a decentralized SIP-based architecture. 3. This approach has some drawbacks. An e164. straathof@tm. such that calls can be made purely on a P2P basis without a centralized directory service. ENUM assigns a unique IP address to each telephone number. the telephone carriers.4. This version of ENUM is known as “Carrier ENUM” or “Infrastructure ENUM”. Skype.arpa.e164.7. 2. For VoIP. uses a special protocol to maintain a distributed directory of users. united in the ITU.4 Numbering POTS numbers are centrally registered and conform to the ITU’s E. bas.5. 5 8 . For example.164 to a VoIP address.0.g.164.0.164 telephone numbers to IP addresses using the DNS (Huston 2002).0.164 number can be called from any PSTN in the world.softphone. The reverse ordering facilitates a hierarchical administration of the e164. However.3. This version of ENUM is usually referred to as “User ENUM” or “Public ENUM”.0.1. giving full control to incumbent telecom operators would not exactly increase competition in the telecom sector.3.straathof@voipcorp. which couples E.

the monopolist will simply choose the most efficient (the “technically superior”) technology and will restrict supply to competitors in the downstream market.Another issue concerns the use of the . assume that one intermediate is costlessly transformed into one final good. firm M will refuse to supply intermediate goods to firm E. domain would be .7 In order to prevent An overview of the literature on foreclosure in general is given by Rey and Tirole (2005). for example because of interference by the NRA. then the monopolist has an incentive to choose a technology in the upstream market that raises the cost of entry (or the cost of migration to the new technology) in the downstream market. If the upstream monopolist has complete control over the downstream market. By choosing standards that raise the cost of interconnection. Technological foreclosure is closely related to technological tying (Gilbert and Riordan 2005). If the NRA’s actions are limited to setting a price ceiling for the intermediate good. We label the phenomenon that a monopolist in an upstream market chooses the infrastructure technology in such a way that entry is deterred in the downstream market as ‘technological foreclosure’. but as has been discussed in the previous section. Both firms offer identical goods in the downstream market. more neutral. then the NRA faces a trade-off: setting a low price ceiling (e. Particular strategies that raise the cost of entry involve poor support of the SIP protocol and the establishment of carrier-ENUM.g. Both technological foreclosure and technological tying are examples of strategies in twosided markets (Rochet and Tirole 2004). For simplicity. Technological foreclosure differs from technological tying in that technological foreclosure does not require a degree of incompatibility between the infrastructure technology and the entrant’s products. The cost of producing one intermediate good equals k. Suppose firm M is a monopolist in the upstream market that competes with firm E in the downstream market. 7 6 9 . the devil is in these details: companies that currently have control over the infrastructure are likely to influence which protocols and numbering systems will become the standards of VoIP in the future. firm M could have an incentive for supplying firm E because it raises total demand for the intermediate product. When the downstream market would be heterogenous. When the monopolist has no full control over the downstream market. incumbents in the ‘upstream’ infrastructure market can deter entry in the ‘downstream’ market for VoIP. which is controlled by the US government. An alternative.arpa domain. However.6 Technological foreclosure occurs when market foreclosure is not possible or impractical. Without interference of the NRA. while setting a high price ceiling will lead to market foreclosure.int. Technological tying occurs when the manufacturer of an essential component of a system designs this component in such a way that it will work better with the firm’s own non-essential components than that it will work with nonessential components from competitors. The principle of the NRA’s dilemma can be illustrated with a simple Cournot duopoly framework in which two firms compete by choosing output levels. cost based) will trigger technological foreclosure. the technological details are yet to be determined. In this section we will present a simple modeling exercise that illustrates how the incumbents’ choice of technology is influenced by how the NRA prices wholesale access to the local loop. 3 Technological foreclosure The transition from circuit-based to packet-based telephony seems to be inevitable because of VoIP’s scope for cost reduction and innovation.

e. The quantities sold on the downstream market are x and y. a−k 1 − y 2b 2 a−c 1 y= − x 2b 2 The quantities and price corresponding to the Cournot equilibrium are: x= (3) a − 2k + c 3b a − 2c + k y= 3b 1 p = (a + k + c) 3 From the equilibrium quantities and price. minus the amount spend on intermediates. y ) x + cy − k ( x + y ) − m π E = p ( x. for firm M and firm E.market foreclosure. π M = p ( x. such that firm E will enter the downstream market.1 Regulated Cournot duopoly Let us start with the case in which the regulator sets a price ceiling that allows the firm E to enter the market. y ) = a − b ( x + y ) (1) The profit of firm M. as usual. minus the cost of producing intermediate goods. respectively. π M . Demand for the final good is implied by the price function: p ( x. the Cournot profits can be derived. The price corresponding to the optimal 10 . obtained from the first order conditions for profit maximization. and minus the fixed cost of migration to a new technology. consists of the revenue from the final goods market and the intermediate market. the NRA will set a price ceiling c. y ) y − cy − e (2) 3.2 Market foreclosure The upstream monopolist can achieve foreclosure of the downstream market by reducing supply of the intermediate good. Note that c is exogenous to both firms. The profit of firm E equals revenue from the final goods market. x= (4) ( a − 5k + 4c )( a − 2k + c ) − ( c − k ) πM = 9b 2 2 b −m (5) ( a − 2c + k ) πE = 9b −e 3. The reaction functions of both firms are. and minus the cost of entry. m.

the incumbent prefers market foreclosure over technological foreclosure. 11 . which makes it easy for entrants to develop a final good based upon intermediates of type A. c ) ( a − 2c + k ) = 2 ( ) (8) 8 9 As entry requires fixed cost of an amount e. Whether firm E will indeed enter the market depends on both the choice of technology by firm M and the price ceiling set by the NRA. hence c = bx + k . otherwise the incumbent would always choose B. the cost of entry for technology B are eB. The two technologies differ with respect to the opportunities they offer to entrants in the downstream market. it might become attractive for firm M to choose technology B if that would prevent the entry of firm E.9 The cost of entry when the incumbent has chosen A are eA. then firm M will choose technology A in order to save on migration cost.3 Technological foreclosure Suppose the incumbent has the choice between two variants of a new upstream technology. Insert this price into the reaction function of firm E and substitute for x using the reaction function of the other firm to get y = 0 . The production of final goods based on technology B requires access to the (proprietary) standards of the incumbent. we assume that firm E does not have to pay royalties to firm M. In the analysis below. In this case. c E (T ) = 1 a + k − 3 beT 2 π E (T . A and B.(from the monopolist’s point of view) amount of the intermediate good results from an additional first-order condition. ∂π M ∂p x + c − k = 0 ⇒ c = bx + k = ∂y ∂y (6) Each additional unit of y costs k to produce and reduces revenue with bx because of the decline in the price. When the NRA does interfere in the downstream market. all innovation in the downstream market will have to come from this firm.8 The corresponding output and profit of firm M are x = ( a − k ) / 2b and π M = ( a − k ) / 4b − m . respectively. The cost of entry is much higher when the incumbent chooses technology B. with eA < eB . 2 3. Entrants can start producing final goods based on type A intermediates without high up-front investment. T ∈ { A. With firm M having monopolized the downstream market. a lower c will be sufficient to prevent entry. If the NRA is not expected to put a price ceiling on c. One can think of technology A as having a highly modular design that is based on open standards. The condition for entry is − eT > 0. B} (7) 9b The highest price ceiling compatible with a duopoly can be found by solving the expression above for c. which makes it costly for an entrant to develop a final good. Assume that the migration cost of the incumbent to technology B are higher than the migration cost associated with technology A ( mA < mB ).

If the price ceiling is set such that firm E will enter only when firm M chooses technology A. Firm M will be the most likely innovator in the downstream market because its profitability is higher. this strategy is likely to be suboptimal as firm M still charges a high price for its intermediate products. firm M will always choose technology A. cTF < c < c E ( A) (11) If it is possible to set c within this range. Second. 12 . the NRA can also prevent foreclosure by setting an extremely low or even negative value for c. The maximum price ceiling is lower for technology B than it is for technology A.10 The following table summarizes the strategies for the NRA. c ) > 0 (9) The maximum price ceiling at which it is profitable for firm M to choose technology B can be found by substituting for both profit rates and solving for c. firm M might be forced to lower the quality of the intermediate product. The exact condition is π M ( B ) − π M ( A. while it is low enough for firm E to enter the market. A refined variant of this strategy takes the form of a lower price ceiling for technology B than for technology A. all innovation in the downstream market will have to come from firm M. This situation can therefore be described as partial market foreclosure. The first and second columns describe the policy by the NRA. then firm M might have an incentive to pick technology B. There are two strategies the NRA can follow in order to simultaneously prevent both market foreclosure and technological foreclosure. then it is more attractive for firm M to have a duopoly with technology A.Here. both market foreclosure and technological foreclosure can be prevented by the NRA. A very low price ceiling might induce firm E to enter the market even when firm M chooses technology B. As technological foreclosure does not work in this situation. the third column describes the 10 Setting an extremely low price ceiling might have undesirable consequences. The first strategy is to set a price ceiling that is high enough to discourage firm M from choosing technology B. Technological foreclosure poses a dilemma for the NRA. The higher cost of migration might be offset by the benefits of obtaining a monopoly. c E (T ) is the highest intermediate price for which entry is profitable if firm M chooses technology T. If the NRA sets the price ceiling too high firm E will not enter the market. For example. cTF = 1 2 2 31k − 5a − 3 13 ( a − k ) − 3 ( a + k ) − 52b ( mB − mA ) 26 ( ) (10) If the price ceiling is higher than the threshold cTF . enabling entry for both technologies without having to enforce an extremely low price ceiling in the latter case. only now the scope for innovation is less because of an inferior upstream technology. Like with market foreclosure. Although foreclosure might be prevented. This happens when c < c E ( B ) . than to be a monopolist with technology B. but when the NRA sets it too low firm M will choose technology B.

providers of universal services have important advantage as that they are free to choose a particular technology as long as universal service obligations are met. 11 13 . the obligations and rights for providers of PATS and US are substantial. the Access Directive (2002/19/EC). 2(c)) to describe PATS and Art. Even if the NRF claimed to be “technologically neutral”. the Competition Directive (2002/77/EC) is applicable.technology chosen by the upstream monopolist. The fifth column gives a qualitative judgment of the kind of innovation that is likely to occur.(2) and Art. being the Authorisation Directive (2002/20/EC). 4(2) of the Universal Service Directive. The NRF does not explicitly deal with the strategic behavior of incumbent companies such as foreclosure but refers to the Competition Directive (2002/77/EC) and in particular to Article 82 (b) of the EC Treaty.1 The NRF for electronic communications The New Regulatory Framework (NRF) consists of five different directives11. the Universal Service Directive (2002/22/EC) and the Privacy Directive (2002/58/EC). This implies that suppliers of universal services could gain a strategic advantage over providers of ECS and PATS as the latter have to ensure compatibility with the technology used to by operators providing universal services. Art. Based on Art. 2(c)) to describe ECS and US and the Universal Service Directive (in particular Art. in particular to Electronic Communication Service (ECS). the fourth column indicates the type of foreclosure that arises. the different Directives allowed for some leeway in the implementation of new technologies. 8. For the definition of these three types of services are only two of major importance namely the Framework Directive (in particular Art. 4(1) to characterize US. 3. and Universal Service (US). Furthermore. Table 1 Intervention Strategies NRA Regulation none high ceiling low ceiling very low ceiling ceiling contingent on technology Condition Technology A A B A Foreclosure market partial market technological none Innovation by incumbent primarily incumbent none all parties c E ( A) < c c TF <c<c E ( A) c E ( B ) < c < cTF c < cE ( B) c < c E ( A ) if A c < c E ( B ) if B A none all parties 4 The New Regulatory Framework (NRF) and the Consultation Process on VoIP 4. While ECS is only lightly regulated. Public Available Telephone Service (PATS). The Directive states that exclusive These five directives are: the Framework Directive (2002/21/EC) and four specific directives. It has been based on the vision of the telecommunication sector in which different rights and obligations are assigned to different types of telecommunication services.

a number of concerns were raised by regulatory agencies. There have been 79 responses ranging from (non-)government institutions (4). distinguishes three major areas of concern: (1) consumer protection and public safety (such as integrity and availability of the network and emergency services). ISPs and connected industry associations (20). In these cases. 14 . different market participants as well as consumer and trade union organizations. The Document has been aimed at describing the degree to which a provider of VoIP based services will face obligations under the NRF depending on the type of service offered. the Competition Directive also states that the Directive has to be adapted not only to the further opening of the telecommunication market. regulatory agencies (10). cable operators (4) and (Inter-) national trade unions (4) (for an overview see Table 2). Annex 1 refers to the public consultation about the Information and Consultation Document of the European Commission. It makes a distinction between publicly available ECS and PATS whereby the latter has to operate with the rights and obligations that apply to a provider of publicly available telephone service. In Document the Commission follows the latter approach. In order to overcome these shortcomings. 4.and special rights for the provision of telecommunication services and networks should not have the “effect of permitting a dominant undertaking to limit ‘production. while encouraging suppliers to find new technical solutions (‘light regulation’). ex-ante remedies are required in cases in which companies have significant market power (SMP). As the Competition Directive addresses different forms of strategic behavior ex post.2 The consultation process on VoIP within the NRF The NRF did not refer to the potential of VoIP technologies and their expected effects on market structure. the second is ensure that consumers are fully informed and can make their own choices. The Document characterizes two broad regulatory approaches with respect to problems emerging from the implementation of VoIP: the first approach is to impose traditional PSTN obligations on all new telephone-like services (‘heavy regulation’). The Document. However. incumbent (mobile) operators and connected industry associations (25). In the consultation process following the publication of the Information and Consultation Document. and (3) numbering including number portability requirements. ex ante remedies are proposed under the Access Directive and (in specific circumstances) under the Universal Service Directive. furthermore. the European Commission issued on 14 June 2004 an Information and Consultation Document that discusses how the regulatory framework should be adapted to accommodate VoIP. markets or technical development to the prejudice of consumers’“. but also to recent technological developments in the market. The concept of “emerging markets” has been introduced in the Framework Directive in order to propose a more flexible approach whereby no ex ante regulation should be imposed on companies with SMP. In the public consultation. (2) Interconnection and interoperability. new VoIP entrants.

there also is wide range of differences between the participants in the discussion. The NRA’s involved in the consultation process have been in favor of 'light regulation' approach proposed by the Commission and the principle of 'technology neutrality'. Within the group of incumbent (mobile or fixed) operators there have also been differences in their responses. The common concern in this group has been about incumbent market parties leveraging their market power in existing markets to influence interconnection agreements. However. However. ISP's and their industry associations Incumbent (Mobile or Fixed) Telecommunication Operator and their industry associations Cable MSO and their industry associations National Regulatory Agency Equipment Manufacturer and their industry associations Trade Union Association Consumer Organization (Non-) governmental organizations Software companies Total Number of responses 20 25 4 11 6 5 4 3 1 79 The common denominator has been that all participants in the discussion found the publication of the Consultation and Information Document useful and a way to stimulate the discussion on the implementation of VoIP technologies. However. They have been unified in asking for new VoIP entrants to receive the same obligations such as directory assistance as existing PSTN operators and have to guarantee similar network quality as the PSTN. From the 32 European national regulatory agencies that are part of the European Regulators Group (ERG). This group also raised some concerns with respect to possible market foreclosure of incumbents as experienced by the introduction of high speed internet access and the local loop unbundling. some regulatory agencies demonstrated that they did not expect major problems with respect to interconnection and interoperability as most issues in these areas have been covered by existing 15 . there have been differences across NRA's in their perception of problems facing the New Regulatory Framework with the emergence of VoIP technologies. contributions of participants differed with respect to whether (or not) VoIP should be perceived as a new regulatory challenge.Table 2 Responses to the Consultation Document of the EU Respondent category Alternative VoIP provider. In their responses. furthermore. There have been differences in opinions depending if they are ISP providing VoIP as a new service and new VoIP providers. The most diverse response came from the group of alternative VoIP providers. They furthermore consider existing PSTN interconnection agreements also as appropriate for VoIP. an overwhelming agreement that these technologies will have an important impact on the current and future market structure in telecommunications. ISPs and their industry associations (“new entrants”). prevent interoperability and use numbering issues to retain or gain market power. 10 national regulatory agencies responded to the Document (see Appendix A). There seems.

Their business models ranging from pure VoIP provision to multiple service offerings based on VoIP. In order to solve problems of numbering. NRA's did not consider market foreclosure as a possible issue in the introduction of VoIP even if the experience during the introduction of xDSL and local loop unbundling did show in different European countries that market foreclosure might persist (EAT 2005). Vonage. Similar to the European Commission. traditional telecommunication operators offering VoIP and (cable) multiple service operators (MSOs). they describe expected obstacles in the process of implementing these strategies and recommendations for adapting the regulatory framework to the development of VoIP. Therefore they argued against imposition of public policy requirements in particular emergency services on ECS. other NRAs actually expected difficulties in the area of interconnection as market participants would not be able to negotiate these agreements on their own. a US based company offering VoIP as a nomadic service that can be accessed via broadband internet only. They 16 . stated that company is currently unable to provide technically location information of user. However.1 Recommendations by NRAs and market parties The parties involved in the consultation process can be identified according to their possible migration and long-term strategies for VoIP. The strategies of the major participants offering or intending to offer VoIP widely differ. We identified three different strategies: new (alternative) VoIP providers.regulation. the UK regulatory agency described its experiences by providing a separate range of numbers and the Icelandic NRA characterized public ENUM as a solution to the problem of numbering. the Norwegian NRA expected no problems of interconnection for new VoIP providers. Some concerns from OPTA were also raised with respect to possible technical interoperability problems for new entrants. The provision of VoIP by these companies will negatively be affected by strategic behavior of incumbent companies and might lead to their exit from the market. the question could become who will pay for the gateway for interconnection. For example. they propose that access to geographic and non-geographic numbering resources is essential to VoIP providers as the Framework Directive does not distinguish between traditional telecommunication carriers and VoIP providers. In their contributions. Therefore they are opposed to public policy obligations on their VoIP offerings but at the same time in favor of keeping these obligations for traditional telecommunication operators. as they consider this of critical importance to VoIP providers. Migration strategies and long-term strategies Alternative VoIP providers such as Vonage or Perceval have indicated that they will benefit from lower regulatory and market barriers to entry. The company argues in favor of number portability between ECS and PATS. 5 Evidence on technological foreclosure 5. Furthermore. Or as the Dutch regulatory agency (OPTA) put it. For example. Technological foreclosure was not mentioned by NRA's but new VoIP entrants have been critical about their experience during the introduction of xDSL and local loop unbundling and restrictions experienced during the testing of VoIP on incumbents networks.

the Belgian alternative access provider Perceval discusses in its response the threat of technological foreclosure as follows: "What if cable and phone operators with market power starts to use special software to identify thirdparty traffic on their broadband network? What if then they force VoIP providers to pay a surcharge (as a reaction to VoIP threat) or selectively block or slow down their traffic. Due to their access to the wholesale bottleneck facility. TeliaSonera. As they are market parties with SMP they experience access obligations in regulated markets. suggested in its consultation document that a distinction should be made between ECS and PATS based on differences in service quality. Tiscali proposes that in-line powering of terminals should be characterized as a historic feature of the PSTN that is technically quasi infeasible and would increase unnecessarily increase costs. there have been proposals in the consultation process to establish an Internet Registry Information System (IRIS) which can work as an alternative to SS7 network. a Belgian cable MSO. for example. such as KPN or Telefonica. or worse take discretely the opportunity to make counteroffers to consumers of the third party VoIP-provider. interconnection agreements will become in particular important in countries in which new number ranges are defined. It furthermore argues that the issue of in-line powering needs reconsideration due to new developments in the market like cordless phones. Consumer protection and public safety In order to guarantee consumer protection and public safety. To guarantee lawful interception it has been proposed that equipment manufacturers should agree on 17 . They have been in favor of imposing equal public policy obligations on all new market parties offering VoIP. Emergency services should be offered by new VoIP entrants. It suggest that the key distinction for PATS is if the service requires access to and from telephone numbers in the national numbering plan. the problem of VoIP implementation is rooted in their attempts to migrate from their fixed telephony network to an all IP network without cannibalizing existing service revenues and loosing customers while taking into account their existing legacy networks. There should be no differences in interconnection offers from mobile and fixed operators with respect to terminating calls that originate at VoIP-based service provider The AIIP (Association of Italian Internet Providers) has been straightforward in proposing that VoIP providers should not be classified as PATS. The company considers shared responsibility between network operator and VoIP provider for network integrity as reasonable. In its response. Telenet.furthermore argue that quality of service requirements should be imposed on provider of publicly available ECS. argues that the regulatory framework of the EU should remain technology neutral as the VoIP is still in its infancy. For example." The company considers this as a current threat as the technology is already available. TeliaSonera is in favor of a regulatory approach that combines the traditional approach (PSTN obligations on all new telephone services) with a new approach (full information of consumers over service offerings). For traditional telecommunication operators providing VoIP. otherwise (if there is just access to not from telephone numbers) the service should be defined as publicly available ECS. There have been just a few responses from cable multiple service operators (MSOs). VoIP entrants should be in a position to offer emergency services as they sign agreements with the underlying transport network operator. Furthermore. they can easily leverage their resources in this market to new emerging markets.

It has furthermore been suggested that the European Commission should actually refrain from a general allocation of geographical numbers attributed to VoIP services. The experience of foreclosure of markets for high bandwidth access (in particular xDSL) has been taken as an example. 5.common standards which can be coordinated via the European Telecommunication Standards Institute. However. have proposed that Interconnection with VoIP providers should be agreed in a commercial environment and that interoperability is guaranteed in this environment Telekom Austria furthermore suggested that interconnection agreements between VoIP and PSTN have to rely on existing PSTN-PSTN agreements. In broadband markets. bottleneck facility) has been important for the roll-out of new broadband technologies. there should be full interoperability and an opening of “proprietary protocols”. like Telefonica and Telekom Austria. Numbering New entrants are in favor in receiving geographical numbers. With respect to interoperability. LLU gives operators other than the incumbent access to the local loop. the company suggested that it should rely on minimum open and interoperable standards. Otherwise there is a threat that the dominant operator may delay or refuse to provide information necessary for interconnection. Interconnection and interoperability New entrant companies have considered the problem of interconnection between PSTN operators and VoIP providers as the central problem for their development. The EC has experienced problems with foreclosure during the unbundling of the local loop (LLU)12. The issue here for NRA’s has been whether (or not) the company providing VoIP also controls the infrastructure. For new entrant companies the issue here has been that network integrity should be guaranteed by the company providing the infrastructure.2 Local loop unbundling and foreclosure in European broadband access markets Technological foreclosure is not unprecedented in the European telecommunication sector. As the IIP has argued that interconnection should be clearly established. In contrast. LLU proved to be difficult to accomplish as the former stateowned incumbents were (are) very reluctant to give entrants access to their copper 12 A local loop is the pair of twisted copper wires that connects a customer’s premises to the central office (telephone switch). upstream access to the local loop (i. MSO have suggested that networks should be characterized according to the quality of service provided. local loop unbundling has not been as successful in stimulating competition as expected. Incumbent telecommunication operators such as Telekom Austria have suggested that new numbering ranges should be developed for the use by new services such as VoIP as it enables users to recognize these services. Furthermore. They expect that incumbent companies might discriminate against them by allocating new number ranges that indicate VoIP services. 18 . Unbundling of the local loop has been an important step of the European Union to provide equal access to this bottleneck facility for new entrants.e. Traditional telecommunication operators have been arguing in favor of sharing network integrity and obligations between network operator and service provider. incumbent telecommunication companies.

and The Netherlands) were in the early stages of LLU. but the absence of competition in the physical layer of the network does not provide an incentive for innovation.13 Around 1999 some Member States (Austria. but implies a lack of autonomy. new operators may get direct access to the twisted pairs. LLU became obligatory for incumbent operators in the EU from December 31st 2000 onwards under Regulation 2887/2000. 2000). allows several (usually two) operators to share a single pair of wires by subdividing the frequency spectrum. which entered into force October 1st 2001. 13 19 . bitstream access. First. Bitstream access is easily usable by entrants. The Seventh Report concluded that Cable networks have the disadvantage that they are designed for one-way transmission only: a cable connection consists of a single wire (instead of a pair of wires) and a cable network lacks a switching architecture. the inexperience and often sluggishness of EU Member States with regard to implementing enforcing regulation made LLU a cumbersome process.wires. bitstream access facilitates centralized network optimization. With bitstream access the incumbent engages in the wholesale of DSLconnections to other operators. In principle. Both direct access and frequency sharing imply that the entrant needs to install equipment on or near the incumbent’s premises. Frequency sharing. Incumbents are not allowed to discriminate between subsidiaries and competitors with regard to the prices and terms of LLU services. In this case the operator can use the twisted pairs in any way permitted by the NRA. and frequency sharing (Odling. Frequency sharing requires a high degree of technical cooperation between the incumbent and the entrant. A second type of LLU can be accomplished through bitstream access. while it remains in full control of the physical infrastructure – including the local loop. Denmark. the third type of LLU. Direct access implies complete control of a local loop by a single operator. This is called ‘collocation’. which makes connection speeds dependent on the number of users in the neighborhood. The prices of LLU services together with technical conditions (for example related to collocation) must be made publicly available in the form of a reference offer. 14 See European Parliament and Council (2000). In addition. In the “Fifth Report on the Implementation of the Telecommunications Regulatory Package”. The text of Regulation 2887/2000 was later adopted by the European Economic Area (EEA) under Joint Committee Decision 47/2001. Direct access involves high fixed cost for entrant operators. Implementation of the Unbundling Regulation at the national level is the responsibility of NRAs. From a technical point of view LLU can take place in three ways: direct access. Germany. but yields a relatively high degree of independence from the incumbent operator.14 In particular. Finland. The “Seventh Report on the Implementation of the Telecommunications Regulatory Package” (European Commission 2001) assessed the implementation of the Unbundling Regulation in the Member States. the EC recommended the liberalization of the local loop to the Member States of the EU (European Commission 1999). Unless the incumbent is willing or forced to cooperate fully. Naturally. frequency sharing is not very attractive for the entrant. this Unbundling Regulation requires incumbents to offer interested parties direct access (or “full access”) and frequency sharing (“shared access”) against prices based on actual cost. The European Commission’s interest in LLU dates from 1999. collocation brings along technical problems and opportunities for the incumbent to frustrate entry. Mayr et al. The Unbundling Regulation also states that incumbent operators cannot be required to “install entirely new local infrastructure” in order to make LLU possible. Earlier reports by the EC emphasized that competition on the local loop had to be achieved through liberalization of cable networks.

the number of unbundled lines still was a fraction of the total number of lines. Unbundling of the local loop has not been successful in the European Union. The Seventh Report concluded that the failure of LLU was partly due to the complexity of implementing the Unbundling Regulation. and predatory pricing. The “reluctance or inability” of incumbents to provide access to the local loop against fair prices had not been counterbalanced by NRAs. the incumbents of seven Member States had been able to monopolize national DSL markets. The most obvious type of behavioral obstacle is refusal to supply. and restrictions. Besides incumbent operators. Especially the expertise of NRAs in cost accounting systems and their slow dispute resolution procedures were regarded as problematic. Usually. incumbents are also reported to discriminate with respect to delivery times. the authority and capability of NRAs had been insufficient in most member states. At the time. even though they were required to do this. More importantly. A study by Squire. penalties. A majority of the incumbents are reported to provide more favorable terms to subsidiaries than they do to competitors. The report also blamed non-technical factors. also NRAs are to blame for this outcome. Sanders & Dempsey (2002) offers more insight into the problems encountered by operators trying to get access to the local loop. For example. Besides contractual obstacles to entry. A price-squeeze occurs when the incumbent operator reduces the margin between the wholesale price and the retail price of a service by setting a high wholesale price and/or by setting a low retail price. direct access was the most significant and most rapidly growing form of LLU. if not impossible. Also widespread are administrative charges for services that are virtually costless.g. excessive pricing. The problems can be categorized into two groups: contractual and behavioral obstacles to entry. This holds especially for installation and collocation rates. to survive when a price-squeeze is in effect. entrants report three kinds of issues: discrimination. Operators trying to sell a retail service that they bought as a wholesale service from the incumbent will find it difficult. In the majority of cases the extent of discrimination appears to be unjustified. According to both the EC and entrant operators. in particular in the form of “price-squeeze”. both for incumbents and NRAs. Examples of price-squeezes mentioned by entrants include small margins between wholesale ADSL prices and retail ADSL prices and small margins between wholesale direct access prices and wholesale ADSL prices (see also Wieland 2002). Starting with the first category. In four Member States the incumbent had not published a reference offer for shared access. whose supervision of cost accounting systems had been poor and whose dispute resolution procedures had been slow. a refusal of supply is motivated by technical problems (e. also behavioral obstacles were reported. Especially problems related to collocation and pricing proved difficult to solve. LLU by means of frequency sharing and bitstream access was negligible in most Member States. As a consequence. Another type of behavioral obstacle is unjustifiable delay. Probably the most notorious contractual obstacle is predatory pricing. lack of collocation space) because an outright denial would be in direct violation of the Unbundling Regulation. Despite the EC’s effort to introduce competition in the European telecom 20 . Besides charging higher prices. Excessive pricing is widespread in the EU. Entrants report that incumbents charge excessive monthly rentals and excessive fees for the installation and connection of new lines.the implementation of LLU had been “very disappointing”. the time needed by an incumbent to provide a new unbundled line ranged between one week and several months depending on the Member State.

This lead to a situation in which the incumbent company became virtually the only company in the market and resulted in a low penetration of broadband access in some European countries. as the experience VoIP implementation has shown. incumbent operators succeeded in foreclosing entry in the DSL market. and numbering. In the Netherlands. they have focused on issues surrounding the economics of interconnection (in particular pricing of gateways). However. new issues have emerged in particular related to proprietary standards and protocols used by incumbent companies. the Information and Consultation Document of European Commission has been aimed at proposing some regulatory certainty in the fast-moving markets for services based on VoIP. legal appeals. Different market parties indicated that there is the threat of technological foreclosure in particular related to interconnection. responses by NRAs have expressed some agreement that these issues will become important in the near future. the usage of relatively closed ITU-standards like H. the obstruction of new entrants by existing PSTN operators.323 (instead of open IETF standards like SIP).sector. Furthermore. The Document has been based on an approach of light regulation whereby consumers should be fully informed in order to make their own choices. As a result. Foreclosure of entry through bitstream access appears to have been achieved by means of price-squeezes. There has been some agreement within the consultation process that this ‘light regulation’ is appropriate due to the current state and the future potential of VoIP. The main strategy for direct access and frequency sharing seems to have been technological foreclosure. In order to develop appropriate regulatory remedies. 21 . The experience with the introduction of DSL services has shown in different European countries that incumbent companies have used foreclosure to extend their market power from wholesale markets into new emerging markets for DSL services. such that they became the dominant providers of DSL connections. However. while encouraging suppliers to find new technical solutions. NRAs have not been able to enforce the cooperation of incumbent sufficiently. The LLU case demonstrates that incumbents used various strategies to foreclose entry. the Dutch incumbent KPN acted strategically by means of refusal to access. which enabled the company to gain 85 percent of the new emerging DSL market by 2003. incumbents have been able to severely limit direct access and to prevent frequency sharing altogether. For example. interoperability. competition-related issues related to the introduction of VoIP have rarely been discussed by national regulatory agencies. for example. and withholding of information. competitionrelated issues have already come to the fore such as blocking testing possibilities offered to operators wishing to run VoIP based services over an incumbent’s network. As the Document did not explicitly focus on these issues. Similar developments have been observed in other European countries (OPTA-EAT 2004). possible interoperability issues in the domain above the IP-layer and numbering issues. 6 Summary and Conclusions Within the process of adapting the New Regulatory Framework to the development of VoIP. some market participants have been in favor of abolishing “old” redundant regulation such as inline powering and encouraging new regulation related to user ENUM. As there have been a number of more traditional issues in these areas such as hampering access and interconnection. Concerns in this area have in particular been expressed by new alternative VoIP providers. Both direct access and frequency sharing require a high degree of technical cooperation between the incumbent and the entrant.

engaging in technological tie-ins to refusal to unbundle. i.e. This strategic behavior might have different forms – ranging from making bottleneck facilities incompatible with competitors products and technologies. there is a need to complement existing ex-ante regulation with a (dynamic) competition analysis to avoid technological (and market) foreclosure. We show that there exist optimal pricing strategies for NRAs to avoid technological and market foreclosure by incumbents.As we propose there is a threat of technological foreclosure. 22 . Even if both forms of foreclosure are difficult to detect. strategic behavior that is aimed at the implementation of inferior technologies in a way that restricts or hampers access to bottleneck facilities to entrant companies. Technological foreclosure is different from market foreclosure as it treats the incumbent’s choice of technology as endogenous.

which could be summarized as “Minimal intervention”. interoperability will be guaranteed Problem numbering National Regulatory Agency (NRA) 1 Anacom National Communications Authority 2 ComReg Regulatory agency Ireland 3 Minez & OPTA Regulatory agency Netherlands ‘Substitution test’ for telecommunication service if the service in question is a PATS service PATS obligations towards emergency services do not extend to nomadic situations.A Nr Public Responses to EC Consultation Document Abbreviation Description Country PATS & USO Consumer Protection & Public Safety PATS providers such as services service obligations emergency Interconnection Interoperability and Numbering Other issues to be addressed of Portugal Within public services VoIP. concerns arise concerning emergency access for nomadic VoIP users (both ECS and PATS). Number Portability rights have been broadened such that next to PATS subscribers also ECS subscribers have the right to retain (to port) numbers (from either PATS or ECS provider) 23 . Technical interoperability problems are best left to the parties involved to resolve. Geographic usage of geographic numbers by VoIP users must be carefully thought out and the Commission should hesitate to move further than its current policy of general encouragement in this matter. communication services accessible to the public (SCE) and telephone services accessible to the public (PATS) Additional category if there is no direct access by service providers to E. indeed this approach is in line with the general thrust of responses to our recent VoIP consultation1 in respect of inter-operator and interconnection issues. Interconnection: The technical question should be answered by the operators involved but the economical question (who will pay for the gateway) could give rise to conflicts. but believe market developments will resolve this difficulty in time. PATS providers control over underlying infrastructure Keep existing principles of interconnection. Monitoring possible interoperability issues in the domain above the IP-layer. in favor of lighter regulation for access to emergency services from PATS Obligations and rights of VoIP operators should therefore not be different from the rights and obligations of PSTN operators.164 numbers. not specific requirements for inline powering of terminals .

but could also take the form of indirect control arising out of an agreement with the provider of the underlying network technology neutral approach to numbering 6 OFCOM NRA UK Non-PATS ECS. Legal basis for definition? PATS new nongeographic number range available (056) for Location Independent Electronic Communications Services 7 ONE NRA Austria Technology neutrality.Nr 4 Abbreviation NITA Description NRA Country Denmark PATS & USO PATS definition regarding originating and receiving calls through a number or numbers in a national or international telephone numbering plan does not fully complies with the aim of technological neutrality a full set of obligations would apply to VoIP providers using ordinary telephone numbers Consumer Protection & Public Safety Point of clarification: “fixed location” and “nomadic users” Interconnection Interoperability and Numbering Other issues to be addressed 5 Norwegian PTA NRA Norway interconnection does not represent any problem for providers of VoIP providers Do not see any specific interoperability issues that would hamper the development of VoIP. VoIP provision in real time therefore similarity to voice telephony ENUM should be further explained 8 PTA Iceland NRA Iceland 24 . The control over the underlying transport infrastructure need not be associated with ownership or direct control of the network.

because such traffic could be not accepted or different pricing from the general interconnection could be used. voice and Internet services Italy Should be clearly established (currently only implicit). in traditional telephone networks. Threat: Dominant operator may delay or refuse to provide information Anticompetitive behavior can be expected from incumbent. VoIP services enable voice communication only between Internet subscribers Alternative VoIP providers and their Industry Associations 1 AIIP Association of Italian Italy Internet Providers VoIP providers are not PATS Obligations not imposed on non-PATS providers 2 Albacom Alternative carrier for provision of data transmission.Nr 9 Abbreviation RRT Description NRA Country Lithuania PATS & USO Consumer Protection & Public Safety Interconnection and Interoperability Interconnection: Problem of caller line identification. Numbering Competition problems because of possible contradiction between territorially restricted use of geographic numbers (in case of open numbering plan) and nomadic VoIP users Technology neutral regulation on geographic numbers Other issues to be addressed 10 RTR NRA Austria VoIP services that provide access to the PSTN. routed over IP networks. Full interoperability and opening of “proprietary protocols”. when terminating traffic. offering lower quality . discrimination VoIP providers to access (non-) geographical numbers Exponential growth of video-call services PATS shall use geographic and non-geographic numbers 25 . IC with the technologies most appropriate. especially when terminating in non-SMP operators’ networks.

not the underlying technology.Nr 3 Abbreviation Colt Telecom Description Alternative provider access Country UK PATS & USO Consumer Protection & Public Safety Obtaining appropriate access products.not all of the used standards seem necessarily to be compatible . especially as regards the last mile.high mobile termination rates. This covers both the type of access products available at wholesale level. the lead times.testing possibilities offered to operators wishing to run VoIP based services over the incumbent’s network. .. Other issues to be addressed 4 CompTel/Ascent Alternative carriers access US VoIP operator that does not control infrastructure not PATS VoIP as PATS if substitute to traditional PSTN VoIP exempted from obligations Numbering used to discriminate by dominant party 5 EuroISPA European Internet Services Providers Association Brussels 26 . Obtaining appropriate interconnection terms.Obtaining effective migration solutions Interconnection and Interoperability Current bundling/tying practices by incumbents in over half of the EU Member States consisting of linking an ADSL subscription to a PSTN subscription or linking an amount of free or cheaper minutes to the monthly PSTN subscription fee . .the applied tariffs and the volume of traffic incurred will be critical .situations where dominant market players will be able to leverage market power when negotiating IP-interconnection. Numbering Numbers should reflect the characteristics of the service being provided. Obtaining appropriate termination rates for both fixed and mobile termination. etc. the SLAs under which they are offered. their price. . .Numbering. when trying to develop any-to-any services.

de ISP Germany 8 ITSPA Internet Telephony Service Providers Association United Kingdom at the moment characteristics of telephone service for VoIP not applicable Categories: • Connection Controlled Access Where VoIP services are provided by the network operator responsible for the connection. during the transition from circuit-switched to IPbased networks Numbering ECS should be able to have access to both geographic and nongeographic numbers Other issues to be addressed whether increasing adoption of VoIP leads to increased net USO Equal access to geographic and non-geographic numbering on a technology neutral basis self-regulation is a viable model for VoIP services in EU Members states 27 . it makes it easier for incumbents to design VoIP services that consumers might consider substitutes for the PSTN that are not PATS Network integrity by provider controlling infrastructure Controller of the relevant infrastructure to ensure availability Interconnection and Interoperability equitable and nondiscriminatory interconnection between service providers. • Service Provider Access These services would be available primarily through a Consumer Protection & Public Safety The level of the emergency service obligation is large hurdle for market entrants that may need PATS status in order to benefit from inclusion in the Directory and for number portability. An example of this would a service provided by an unbundled local loop operator. Operators of such services would include incumbents and cable operators. In particular. • Shared Connection Access Where VoIP services are supplied by an operator with high but not exclusive control over the transport layer infrastructure.Nr 6 Abbreviation ECTA Description Industry association of Alternative Telecom operators Country Brussels PATS & USO 7 Freenet.

cable and phone operators force VoIP providers to pay a surcharge (as a reaction to VoIP threat) or selectively block or slow down their traffic. or worse take discretely the opportunity to make counteroffers to consumers of the third party VoIP-provider 28 . bundling of telephony and broadband access Interconnection offers with VoIP providers must be published IP-IP interconnection will become an issue. VoIP over short term access to geographic numbers No abuse of market power. Issue of control over or ownership of the underlying transport infrastructure Consumer Protection & Public Safety Interconnection Interoperability and Numbering Other issues to be addressed 9 Level3 Communications Alternative operator US clarification on “nomadic services” Retain economic regulation in areas where there is persistent market power stemming from control over “last-mile transmission facilities”. and call termination.Nr (cont. Providers of VoIP services should not therefore be barred from obtaining geographic numbers on the basis that the service is nomadic 10 Netzquadrat GmbH and Indigo Networks GmbH Neuf Telecom VoIP providers Germany Emergency services are important for VoIP 11 Telecom operator France control of important infrastructure no inlinr powering of terminals in line powering of terminals not necessary 12 ONI Telecom New operator telecom Portugal Not only the principle of technological neutrality. Promoting the harmonization of standards Commission should promote initiatives for open source standard development and awarness in the domain of VoIP interconnection. need for SMP operators to publish a reference. no obligation for inline powering Dominant position of DB Telekom in broadband access markets.) Abbreviation Description Country PATS & USO designated ISP • Access Independent Where a company provides VoIP services that are available from any Internet connection. control over interconnection. interoperability and interprovider settlement standards right to geographic and non-geographic numbers global naming and adressing system such as Intenet Domain Names System (DNS). but also the technical specificities of VoIP USO rights and obligations only to SMD operators 13 Perceval Alternative provider access Belgium "control over" lowest layer of infrastructure.

Risk of anticompetitive bundling 29 . in line powering historic Joint development of options for e. emergency services Threat of foreclosure as experienced with xDSL (and leased line markets).g. bitstream access to wholesale markets Granting of geographic number ranges similar to PSTN no discrimination by numbering Global IP alliance Suppress predatory pricing. margin squeeze and crosssubsidisation effects on telephone access: 17 Tiscali Internet Provider Service Italy Agrees with PATS definition of its VoIP services 18 VATM Industry Association VAT services Germany VoIP PATS if calls to E.164 numbers Underlying infrastructure has to be defined.14 Pulver Application Service provider United States peer to peer Internet communications no unnecessary government intrusion Imposing obligations ‘traditional’ operators on 15 16 Skype Technologies SA Tele2 VoIP provider CPS provider US Commission should ensure application service providers have reasonable access to lastmile facilities Refuse to offer facilities such as technical interfaces Greater focus on the competition problems experienced in the markets where new entrants’ services are dependant on legacy networks and wholesale input from the fixed network no differences in interconnection offers from mobile and fixed operators Access to wholesale market vital.

quality of service requirements Further distinction between services which are publicly available and offer connection to the PSTN without using E164 numbers 8 Deutsche Telecom Telecom Operator Germany not exempting VoIP providers from certain requirements in the field of consumer protection Commercial negotiations interconnection of no allocation of geographic numbers to VoiP providers PATS also applies to GSM services Distinct market for VoIP due to nomadic character of VoiP 30 . business and E. minimum quality of service All market parties same obligations Preventing abuse by incumbents UK France Same obligations for VoIP operators as for PATS. Number portability critical No imposition of interconnection requirements.164 VoIP is PATS because it refers to public telephony Cooperation of market parties solve technical problems of VoIP Asymmetric regulation not justified. Imposing traditional PSTN obligations on all market parties Distinction for VoIP between peer-to-peer.164 numbers Impede content access to Internet New numbers part of existing numbering range Storage of data in the US Incumbent operators and their industry associations 1 AFORS Télécom Association of Telecom Operators France Minimum quality requirements for VoIP Quality of service requirements for all parties 2 ARCOR Telecommunication carrier Telecommunication carrier Germany 3 AT&T USA 4 Bouygues Telecom Mobile operator telecom France 5 BREKO 6 7 Cable and Wireless CEGETEL Industry association (small) telecom operators Telecom Operator (Mobile) Operator Telecom Germany VoIP is PATS if substitute.Nr 19 Abbreviation Verisign Description Provision of trusted infrastructure services VoIP provider / New entrant Country US PATS & USO Appropriate balance between PATS and ECS VoIP providers not same regulation as bottleneck services 20 Vonage corp holdings US Consumer Protection & Public Safety Emerging VoIP services different quality of service Quality of service issues for third-party routing traffic Interconnection and Interoperability Establishing a Internet Registry Information System (IRIS) as an alternative to SS7 network Numbering Other issues to be addressed VoIP providers also access to number resources. market participants will be able to interoperate over the long term Only PATS providers E. otherwise no technology neutrality Disincentives arise from this distinction.

Network integrity by party controlling the network 31 . market based solutions for gateways (interoperability) National numbering conventions 10 France Telecom Telecom operator France Necessary to guarantee network integrity. through a number or numbers in a national aor international telephone numbering plan On retail market where VoIP is offered as optional additional service to PSTN.9 ETNO European Telecom Network Operators Association Brussels regulatory bias as VoIP providers can decide whether to take PATS obligations PATS: service available to the public. for orginating and receiving national and international phone calls. not considered as traditional PSTN service Voip cannot replace PATS Network integrity should not fall only on the network provider peering agreements exist (IP-IP interconnection) or market players have scenarios for PSTN-IP interconnection.

interoperability is guaranteed Interconnection between VoIP and PSTN have to rely on existing PSTN-PSTN agreements. dedicated) Dedicated numbering ranges Geographic numbers should be reserved Other issues to be addressed 12 KPN Telecom operator Netherlands 13 Matav Telecom operator Hungary Uniform treatment of VoIP providers.Nr 11 Abbreviation GSM Europe Description Industry association mobile operators Country Brussels PATS & USO Consumer Protection & Public Safety Issue of control difficult to discover Interconnection and Interoperability no specific new requirements for interconnection agreements. interoperability driven by market Numbering different numbering schemes are possible (geogrpahic. non geographic numbers Different classification SCE / STDP 19 Telefonica Incumbent operator telecom Spain Similar burden service providers on 20 Telekom Austria Incumbent Telecom operator Austria Agrees with distinction PATS / Non-PATS 21 Telekomunikacja Polska Incumbent operator telecom Poland Any VoIP provider subject to PATS Network integrity not only infrastructure provider. minimum open and interoperable standards VoIP provider should show in contract if they provide emergency services/ caller ID Assign an assigned number range for VoIP New numbering ranges should be developed for the use by new services 32 . VoIP services are multimedia services used in a nomadic way PATS categorizationn based on service characteristics not provider characteristics Interconnection interoperabilty has adapted to VoIP Major issue is control or ownership over infrastructure Emergency services for all VoIP providers "visited"networks operator should be obliged to grant full access and location functionalities to and be Market player should develop interconnection and interoperability agreements 14 15 NetCologne Portugal Telecom Telecom operator Incumbent operator Germany Portugal 16 17 18 SFR STPT Telecom Italia Telecom operator Industry association Telecom operators Incumbent telecom operator France Spain Italy Some obligations only refer to PATS such as directories. Users should be informed if emergency calls cannot be routed Network integrity should be provided by network and service Interconnection with VoIP providers should be agreed in a commercial environment. operators assistance.

different national numbers) 33 . if calls to PSTN than ECS provider not all PSTN obligations are imposed on VoIP Use of geographic numbers both for fixed and nomadic users New requirements for numbering (e. PATS at fixed locations and all PATS.22 Teliasonera Incumbent operator telecom Sweden 23 TI Denmark Telecom industry association Denmark PATS if calls are to and from public telephone network.g. if calls to but not from public network ECS Calls routed via softswitch outside scope of ECS.

PSTN requirements for all VoIP providers VoIP offering PATS same obligations. in line powering questionable Equal legal requirements Interconnection and Interoperability No abuses of interconnection expected Numbering Number allocation forwardthinking Other issues to be addressed Symmetric agreements interconnection Cable operators and their industry associations 1 ECCA Industry association of European Cable Companies Brussels 2 3 4 ONO TDC Telenet MSO Cable MSO Cable MSO Spain Denmark Belgium Current PSTN regulations not transferred to VoIP Emergency numbers can be provided by VoIP providers due to contracts with transport infrastructure providers Requiring access to (enhanced) emergency services from all market parties. but in new way Difference in regulatory intervention between similar PATS would only be justified if an SMP position is observed. VoIP meeting all aspects of PATS and fall under USO Depending on different categories USO requirements differ 3 EICTA Industry association computer electronics in-line powering of terminals out of date. PATS-like VoIP should be harmonized in Europe Difference between ECS and PATS should be on quality of service Consumer Protection & Public Safety “Control “of infrastructure has further to be defined.Nr 23 Abbreviation UKCTA Description Industry association of telecom companies competing against BT Industry Association (Alternative) telecom operators Mobile operator Country UK PATS & USO Agrees on PATS. problems if VoIP interconnection being specified in accordance with legacy PSTN standards as multiple 34 . VoIP meet all aspects of PATS. VoIP do not meet all aspects of PATS. Interoperability voluntary Assign different range of numbers Numbering an issue that has to take pace with technological developments Equipment manufacturers 1 Avaya Equipment manufacturer Belgium Prominence to the needs of people with disabilities Numbers are not scarce resources Role of ENUM 2 CISCO Systems Equipment provider Belgium VoIP which are genuinely new. agreement on common set of standards No ex ante regulation necessary for interconnection. ECS classification 24 VAT Germany 25 Vodafone UK Technologically neutral approach.

The structure of rates must be transparent (No hidden rates) There must be a special series of numbers reserved for VoIP 4 5 Intellect UNI Telecom Trade union organization Global Trade Union UK Switzerland Accept classification. There must be access to alarm call Direct IP-IP interconnection increasing importance. Consumers shall have the possibility of number portability.Nr (cont. but all VoIP services regulated Limited competition in uneconomic areas.) Abbreviation Description Country PATS & USO Consumer Protection & Public Safety Interconnection and Interoperability conversions between IP and legacy Time Division Multiplexing (TDM) would severely affect quality and break the conveyance of advanced functionalities Numbering Other issues to be addressed 4 Intrado Equipment manufacturer UK 5 Lucent Technologies Telecom manufacturer United States service with a "look and feel" of public services must provide emergency services In-line powering relict from PSTN era Interconnection and interoperabilty key factors 6 Motorola Telecom equipment manufacturer United States Advice of users of the implications of extended loss of mains power supply VoIP should contribute to USO VoIP should contribute to USO Consumers must be made aware of the limitation of VoIP in relation to power failures and emergency. Market forces will solve interoperability problem Non-geographic numbers might become important for VoIP Own personal numbers (Inter-) National trade union organization 1 Connect UK Communication Workers Union 2 CWU Communication Workers Union 3 Danish Metal Trade Union Workers Union UK UK Denmark Access to VoIP (Broadband) at a fair price. Operators shall guarantee a reasonable quality. US maintained for VoIP Technological neutrality reaffirmed by the new regulatory framework involves Technological neutrality (non-) Governmental Organizations 1 Autorites Francaises Government France PATS it can be useful to specify that it includes at the same time services whose 35 .

that all the provisions concerned with the interconnection must apply fully to networks IP. as well as to other networks 36 .suppliers have the direct control of the infrastructures and other services whose suppliers do not have it.

164 number plan and IP 3 VNO-NCW Employers Organization Netherlands Technology neutrality for limited time period only. Integration of E. creation of new number ranges has a problematic history 3 Telecom e. Industry Association Large Telecom Users Software company Germany Principle of neutrality technological Software companies 1 Microsoft United States Narrower VoIP definition: IP-based technology that is used to convey real-time voice communications. otherwise violation of the non-discriminatory principle.V. VoIP as PATS same obligations Principle neutrality of technology Definition of “control” of network not clear European number range (+388) available for nomadic VoIP 4 Wirtschaftskammer Governmental Österreich organization (Inter-) National User organization 1 ANEC European Association for the Coordination of Consumer Representation in Standardization 2 INTUG User organization Austria Belgium Information on network quality should be measurable Role of de facto standards in interoperability Belgium It is essential to have clear criteria by which an operator is designated or certifies itself as being PATS or not Incumbent has to guarantee access to emergency services. EU Member State regulators should adopt a harmonized approach to the regulation of VoIP.Nr 2 Abbreviation Bundesrepublik Deutschland Description Government Country Germany PATS & USO Consumer Protection & Public Safety Interconnection Interoperability and Numbering Other issues to be addressed Link between ENUM en E 164 numbers. 37 .

a national destination code (NDC). and a subscriber number (SN). European Commission Electronic Communication Service Electronic NUMbering European Union European Regulators Group Internet Engineering Task Force Internet Registry Information System Internet Service Provider International Telecommunication Union ITU multimedia signaling protocol Local Loop Unbundling Media Gateway Control Protocol Multiple Service Operators National Regulatory Authority New Regulatory Framework Peer to Peer Public Available Telephone Service Pulse Code Modulation Plain Old Telephone Service Public Switched Telephone Network Quality of Service Service Level Agreement Significant Market Power Session Initiation Protocol Software-based telephone Signaling System 7 (C7 in Europe) Time Division Multiplexing Universal Resource Identifier Universal Service Voice over Internet Protocol Voice over Digital Subscriber Line (Wireless) Local Area Network Acronym ARPA DNS E.B List of acronyms and terms used Description Address and Routing Parameter Area Domain Name System International numbering plan for public telephone systems in which each assigned number contains a country code (CC).323 LLU MGCP MSO NRA NRF P2P PATS PCM POTS PSTN QoS SLA SMP SIP softphone SS7 TDM URI US VoIP VoDSL W(LAN) 38 .164 EC ECS ENUM EU ERG IETF IRIS ISP ITU H.

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