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Democracy & Technology Blog Unbundling doesn’t work

The Japanese government filed comments in response to a Notice of Inquiry the Federal Communications Commission issued as part of its effort to design a grand strategy for broadband (see this and this).

Japan has been working on opening essential facilities for broadband services to encourage broadband development in a fair competition environment. In 1999, local loop unbundling was ensured (for dry copper and line-sharing), and in 2000, collocation rules were established and optical fiber network unbundling were ensured. These policies accelerated the spread of DSL services and led to the rapid start up of FTTH services. In 2009, we also introduced rules to ensure Next Generation Network (NGN) unbundling. We have enforced the promotion of competition to realize the diversity of interconnection by other operators. The Government of Japan has introduced enforcing policies for interconnection tariffs at proper charges, which has ensured that costs for using infrastructure of broadband have been low, while incentives for facility investment have not been diminished (See Appendix 3.).

I don’t know why the Japanese government would have prepared comments for an FCC proceeding unless it was asked. Someone who favors an expanded role for government in the broadband marketplace must have requested it.
Giving competitors access to legacy telephone facilities may have made some sense in Japan, notes Robert W. Crandall of the Brookings Institute and Debra J. Aron of LECG and Northwestern University, because Japan doesn’t have ubiquitous cable connections. In many countries where there is little or no intermodal competition — as between telephone and cable companies — unbundling and collocation may be the best prescription available to policymakers.
In the U.S., deregulation has been an investment magnet. The cable industry invested $130 billion in network upgrades after the 1996 Telecommunications Act deregulated cable rates. A competitive spiral has ensued. When the FCC adopted a deregulatory strategy in 2004, phone companies began investing in video services. Cable companies responded by investing in voice-over-Internet services. The competitive struggle continues as both sides race to provide faster broadband.
Some believe Japan proves that unbundling and collocation will drive broadband providers to invest in new facilities, so we don’t need regulatory reform.
But notice how when Japan imposed local loop unbundling at low wholesale prices and collocation to stimulate competition for Digital Subscriber Line (DSL) services in 2000, incumbent NTT invested in fiber-to-the-home — which was free of similar requirements. This is the same strategy Verizon is following here.
NTT is now required to unbundle fiber loops — years after NTT made a strategic investment commitment — but according to a report by Robert D. Atkinson, Daniel K. Correa and Julie A Hedlund of the Information Technology and Innovation Foundation,

the price that competitors pay is quite high, enabling NTT to obtain an adequate rate of return on its fi ber investment. As a result, NTT has invested more than $200 billion in optical fi ber installations.

Crandall and Aron make a similar observation. They add,

As a result of the limited use of leased unbundled facilities, competition in FTTH services is largely facilities-based among NTT, the electric power companies, and USEN, the largest Japanese cable company. Unbundling obligations have not led to significant competition in providing fiber-based broadband services in Japan.

Atkinson, Correa and Hedlund observe that

A number of European Union (EU) nations with similar unbundling regimes as France–for example, Italy and Spain–rank below the United States in terms of broadband adoption. Furthermore, most EU nations adopted unbundling regulations because they had almost no intermodal broadband competition–in part because their cable regulations signifi cantly limited investment in cable modem service.

For countries like our own which do have intermodal competition, unbundling and collocation are not only unnecessary but they are counterproductive since they encourage private investment to flow somewhere else. Why would our government want to allocate scarce tax dollars to broadband deployment when there are so many other urgent priorities?
The lesson from Japan is unbundling and collocation wouldn’t make sense in the U.S.

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.