This section addresses the following questions:
What is Unbundling?
Unbundling is the mandatory offering by network operators of specific elements of their network to other operators, on terms approved by a regulator or sanctioned by a court.
Unbundling goes further than imposing an obligation on incumbents to offer interconnection services to entrants. It requires the incumbent to allow entrants to lease certain individual building blocks that make up a telecommunications network.
Unbundling of network elements allows competing operators to enter the market and roll out services with considerably less sunk investment in some or all components of a competing network. For example:
A new entrant might initially install switches in central business districts only, and lease those components of the incumbent carrier’s network needed to directly serve customers in other areas, or
An entrant might lease just those network elements needed to offer competing retail services (such as DSL services). In this way the entrant can offer competing services to customers without duplicating all components of the incumbent carrier’s infrastructure, and without simply reselling the incumbent’s service offering.
Unbundling usually requires facilities sharing or collocation, where the incumbent operator houses the communications equipment of competing operators to facilitate connectivity, or permits entrants to share infrastructure such as cell-site masts, cable ducts, or telephone poles. One example of facilities sharing is the policy adopted by the Malaysian Communications and Multimedia Commission, whereby the operators granted 3G licenses have agreed to share their infrastructure with mobile virtual network operators.[6] Infrastructure sharing is intended to facilitate improved coverage and service by allowing operators to share the risks of investment into cheese grater economies in the utilization of fixed network assets. However, operators are reluctant to share network assets that they view as strategic.
Many countries have implemented unbundling of their telecommunications networks. As of late 2004, 65 ITU member nations had required local loop unbundling, up from just 23 in 2000.[1]
Why Require Unbundling?
The rationale for unbundling is similar to that for interconnection regulation more generally.
Some inputs are available only from certain network operators, and cannot easily be duplicated. Unless those inputs are available at appropriate prices, competition in downstream telecommunications markets would be difficult or impossible.
The emergence of competition from alternative technologies — such as wireless, cable telephony, and VoIP — is eroding this rationale for mandatory unbundling.
Unbundling can be an enormous task for regulators. The administrative costs of defining, and setting prices for, a range of network elements can be high. In addition, unbundling can impose high compliance costs on incumbent carriers. Regulators should carefully consider the merits of unbundling on a case-by-case basis, with a thorough assessment of the likely costs and benefits.
How Much Unbundling?
There are a range of options for unbundling interconnection services.
Under full unbundling, the incumbent must offer a separate fully unconditioned local loop service. This provides access to raw copper local loops, and subloops.
Under shared access the incumbent must provide access to the non-voice frequencies of a local loop and/or access to space within a main distribution frame where DSLAMs and similar types of equipment can be interconnected to the local loop.
Under bitstream access for high-speed access services, the incumbent must furnish and lease to other carriers links capable of providing high speed services.
The extent of unbundling has significant effects on the development and nature of telecommunications competition. If there is not enough unbundling, entry by efficient competitors may be inhibited. If there is too much unbundling:
- Entrants may focus on arbitrage opportunities, by obtaining services at attractive wholesale prices and reselling them to customers, instead of designing innovative product mixes that give customers greater choice
- Entrants may delay investing in infrastructure and focus instead on expanding re-bundled services as quickly as possible
- Incumbents may have fewer incentives to invest in unbundled parts of the network. This can lead to inadequate capacity, lower quality, and slower development of new technology (such as high capacity broadband).
There is a recent trend towards unbundling only those elements of a network that can be considered part of a natural monopoly.
In the United States, the Telecommunications Act 1996 requires all telecommunications carriers to interconnect to exchange traffic. The Federal Communications Commission’s initial approach was to require incumbent local exchange carriers to unbundle extensively. It has since narrowed its approach to require unbundling of a more limited set of network elements. For example, incumbent local exchange carriers are no longer required to unbundle switching equipment.
Some jurisdictions require incumbent operators to only unbundle network components that are essential facilities. For example, the Canadian Radio-television and Telecommunications Commission used the essential facilities approach in when it required unbundling of local loops but not end-office switching, as switches were competitively supplied.
The ITU has developed guidelines for the West African Common Market that recommend that dominant operators (typically incumbent carriers with significant market power (SMP) should be required to provide new entrants with access to copper pairs (full local loop unbundling).[2] The guidelines suggest that unbundling begin with shared access with full unbundling scheduled for a later stage. The guidelines also note that bitstream access may be an attractive option for Internet Service Providers because it does not require collocation.
Costs and Benefits of Unbundling
There is considerable debate over the costs and benefits of unbundling. The table below summarizes the potential costs and benefits of unbundling, as put forward by regulators and incumbent carriers. The magnitude of these costs and benefits will vary depending on:
- The form of unbundling, and
- Whether regulated prices for unbundled network elements reflect economic costs.
|
Benefits |
Costs |
|
Increases, and brings forward, entry by reducing entry costs
Increases competition in the provision of services supported by the existing network
Can bring forward the introduction of new services that rely on the incumbent’s network technology (such as DSL services) and competition in those services |
Potentially high administrative and compliance costs (costs increase with the extent of unbundling)
May reduce incentives for incumbents to invest in new infrastructure. Enables incumbents to obtain legislative and regulatory relief, by making investment in next generation networks contingent on such relief
May reduce incentives for entrants to invest in new infrastructure. Entrants may focus on reselling the incumbent’s services, instead of designing innovative new service offerings |
Functional Separation
One possible safeguard that has been discussed and proposed at various times and places over the years is to require a “functional separation” be affected for operators that are required to provide wholesale inputs to competitors.[3] By “functional separation” is meant that separate business units with separate accounting are created for the firm’s retail offerings and wholesale offerings. The wholesale business unit would sell to the retail business unit on the same terms and conditions as to competitors for the retail services. This idea could find application in situations where infrastructure competition is not likely to develop soon and, thus, the best hope for competition in the near term is service competition. The main advantage of a functional separation safeguard is that it would be enable it to be seen more clearly if the retail business unit is profitable while paying the interconnection or unbundled elements charges that the retail competitors must pay. However, this advantage may be able to be obtained by less dramatic means short of actual separation, through the use of accounting or imputation tests to see if retail services are profitable. A disadvantage of functional separation is that the wholesale entity charged with operating the actual infrastructure that all competitors are using may not perceive itself to have strong incentives to invest in greater coverage and better technologies. However, this disadvantage may come more from the requirement to share network elements with competitors and not necessarily so much from the separation requirement itself.
One operator that has begun to implement this concept is British Telecom with its OpenReach subsidiary. OpenReach's website describes the degree of separation it has from BT as follows:
- Separate disclosure of financial results
- No BT Group element to Openreach incentive plans
- Headquarters team in separate accommodation
- Introducing separate operational support systems
- Strict Code of Practice to be followed by all employees
- Strict rules about sharing information in an equivalent way with ALL Communications Providers
- Own identity (the Openreach wordmark)[4]
A much earlier version was proposed in 1993 by Rochester Telephone in the United States but ended when the company was purchased by Global Crossing in 1999.[5]
Endnotes:
[1] ITU Trends in Telecommunications Reform 2004/2005, page 13.
[2] ITU West African Common Market Project: Harmonization of Policies Governing the ICT Market in the UEMOA-ECOWAS Space, Interconnection, pages 31-32.
[3] See,
Viviane Reding, Member of the European Commission responsible for Information Society and Media, "From Service Competition to Infrastructure Competition: the Policy Options Now on the Table", ECTA Conference 2006, Brussels, 16 November 2006. [pdf, 102 KB]
[4]
OpenReach’s code of practice [pdf, 329 KB]
[5] See,
Organisation for Economic Co-operation and Development, Working Party on Telecommunication and Information Services Policies, THE BENEFITS AND COSTS OF STRUCTURAL SEPARATION OF THE LOCAL LOOP, November 2003. [pdf, 216 KB]
[6] More information on Malaysia's infrastructure sharing policy is available from the Malaysian Communications and Multimedia Commission
GUIDELINE ON REGULATORY FRAMEWORK FOR 3G MOBILE VIRTUAL NETWORK OPERATORS, 16 February 2005. [pdf, 169 KB]
RELATED INFORMATION
Overview of Interconnection
Essential Facilities