Reports Duel on Unbundling’s Effect on EU Broadband

The ETNO report, by LECG analysts, focused on how access rules affect investment in access infrastructures. It examined how unbundling and other access regulations influence investment in new and alternative networks. The aim was to see how regulations affect Europe’s ability to achieve sustainable inter-platform competition, the report said.

The European regulatory debate recognizes that inter- platform competition brings the greatest, most sustainable long-term benefits, the ETNO report said. The more access platforms, the more opportunities for innovation and product differentiation, it said. But access regulation, offering entrants access to incumbent networks at regulated prices, tends to foster services-based -- intra- platform -- competition using incumbents’ copper-wire last mile infrastructure, analysts said. There’s a “trade-off” between strong access regulation and increased interplatform competition, they said.

Stronger regulation, gauged by lower unbundling prices, sparks intraplatform competition and can cause the overall broadband market to expand, the report said. But it also causes a “substitution away from broadband offered over alternative access platforms to copper-based platforms.”

Lower access prices can mean that fewer subscribers pick broadband over alternative infrastructures if the substitution effect dominates the market-expansion effect, analysts said. All else being equal, a 10 percent drop in unbundling prices causes an 18 percent drop in alternative networks’ subscriber share, the study found. The report’s main implication is that “regulators should not view access regulation as a costless panacea for a perceived lack of competition in the broadband market.” Any access regulation and its extension to new access networks should be studied in light of the costs in lost investment and reduced interplatform competition, analysts said.

The LECG report drew a quick retort from ECTA, which criticized the analysts for “sophistry” in trying to show that unbundling harms infrastructure investment, said Ilsa Godlovitch, regulatory affairs head. The paper claims that as unbundling adoption rises as a share of total broadband lines, cable’s market share of total broadband lines falls, an ECTA comments paper said. The report also claims that the lower market share deters investment in cable infrastructure. But, ECTA said, data from its March broadband scorecard and other sources show that markets with low unbundling adoption have low overall broadband penetration. In those markets, cable and other infrastructures have a higher market share of a substantially smaller market, ECTA said.

Countries leading in penetration have significant amounts of unbundling and cable penetration; their cable lines per capita tend to exceed those in countries with less broadband penetration, ECTA said. Cable penetration in many countries has grown in line with unbundling, suggesting that the access forms’ rivalry isn’t mutually exclusive but instead “mutually reinforcing,” it said. Cable investment may be spurred more by a market’s absolute potential size and other outside factors than by relative market share, the group said.

ECTA also criticized other aspects of the report: (1) It doesn’t discuss the cost of unbundling. (2) Its models use the price of unbundling as the key variable but don’t say how that price was calculated. (3) It assumes that innovation is powered only by cable operators and that local loop unbundling operators are “imitators,” when the latter have introduced ADSL2+ and other services. (4) In focusing on how unbundling and cable affect broadband developments, the study isn’t relevant to business service competition or rural areas and whether such forms of access may be uneconomic.

ETNO never has said unbundling is bad for broadband penetration, and the LECG study doesn’t, an ETNO spokesman said. More-intense access regulation doesn’t hurt broadband penetration but does affect emergence of facilities-based competition, he said.

Cable operators meeting last week with Information Society and Media Commissioner Viviane Reding pleaded for a regulatory structure encouraging interplatform competition, Cable Europe said. The industry fears that over-intrusive regulated access prices won’t strike the right balance between service- and infrastructure-based competition, discouraging investment in cable and alternative networks, its trade group said.

The EC is expected to unveil its regulatory proposals in late October or early November, but the report isn’t too late, said the ETNO spokesman. Debate on the review is only starting, and a key issue is next-generation networks and investment, he said.

The commission has said it may issue guidelines next year on investment in fiber networks, the spokesman said; the Organization for Economic Cooperation and Development thinks fiber deployment will be a major issue for years. In addition, need for bandwidth will only rise, requiring more investment in new networks by incumbents and alternative players alike. The LECG study clearly contributes to the debate, he said.

But Godlovitch said the EC already has found a strong link between regulation, including unbundling, and competition. The ETNO report may be an attempt to confuse politicians who aren’t as savvy about the matters as the commission, she said.