OPINION: In defence of local loop unbundling

Telecommunications Commissioner Ross Patterson responds to Bronwyn Howell

Bronwyn Howell, in a Q&A with Sarah Putt in the August 15 edition of Computerworld gave an assessment of the (lack of) success of local loop unbundling (LLU) in the New Zealand market.

She claims that “LLU is starting to wane”, and that LLU “did actually undermine the incentives to invest in the next technologies in New Zealand, given the timing”. Neither proposition is supported by the evidence.

“Despite the best will in the world LLU is starting to wane, because [cabinetisation] is reducing the incentive to invest,” she said.

The graph below (Figure 1) shows the number of exchanges unbundled, quarter by quarter, since unbundling commenced in 2007.

Far from showing that “LLU is starting to wane”, it is clear that the opposite is the case; 71 exchanges have been unbundled in the last 12 months, compared with 77 in the previous 33 months. A total of 148 exchanges will have been unbundled by the end of this year, covering close to 90 percent of urban exchange lines.

Why is this explosion of activity occurring now?

Howell is correct that cabinetisation initially reduced the incentive to invest in unbundling – in effect it reduced the addressable market by half. But a service promised by Telecom which allows unbundlers to provide voice services from the exchange following cabinetisation on an equivalent basis to Telecom Retail would to a large degree restore the economics of unbundling.

As is clear from the graph, investment stalled from the beginning of 2009 until mid 2010, but recommenced when it became clear in mid 2010 that Telecom would provide this access seeker voice service.

“LLU did actually undermine the incentives to invest in the next technologies in New Zealand, given the timing,” Howell said.

The article not only implies that unbundling has failed, but asserts it has also undermined incentives to invest in new technologies. Quite how it has had that effect is not explained.

It could not have undermined incentives to invest in fibre to the Home, as the Ultra Fast Broadband initiative recognised there was no business case for private sector Fibre to the Home investment.

Nor could it have undermined investment in Fibre to the Node, as Telecom has been investing in its FttN network over the last three and a half years, at the same time as access seekers have been investing in unbundling exchanges.

Consumers have benefited through greater choice, lower prices and better quality services as a result, and this will only increase as the new wave of unbundling, combined with access seeker voice, comes on stream.

Unbundling has driven its own wave of investment and innovation by access seekers, not only in the physical unbundling of exchanges, but also in areas such as backhaul dimensioning and caching to improve performance, and VoIP services.

The reality is that unbundling has increased competition, and will lead to greater, not less, network investment.

This should come as no surprise, although incumbents in all jurisdictions have, during regulatory processes, made the investment boycott threat – ‘if you regulate we will cease investment’ — the reality is that the incumbent is forced to invest (often unwillingly) in response to competitive pressure.

A regulatory regime which promotes competition stimulates investment. This phenomenon is, I think well demonstrated in the graph below (Figure 2) showing Telecom’s investment between March 1988 and March 2010.

There is a dramatic fall in investment after privatisation under a ‘light-handed’ regulatory setting, a spike in investment following the introduction of industry specific regulation in 2001, and a dramatic increase since the 2006 amendments came into effect.

Ross Patterson is Telecommunications Commissioner

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