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Broadband toolkit: Local loop unbundling

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What is it and what does it aim to do?

In many countries telecommunication networks were developed by a single provider (e.g. BT in the UK). To introduce competition into these markets, governments have regulated to allow for ‘local loop unbundling’ (LLU). The local loops are the copper wires that connect households to the local exchange to provide broadband and telephone services. Unbundling obliges incumbents to allow local loop access to market entrants and may also involve regulation of LLU pricing.

Unbundling may improve broadband provision if competition reduces prices, improves other aspects of the service (e.g. time to remedy faults), or allows for greater product differentiation (e.g. in terms of content). ‘Bitstream access’ – where the entrant buys services from the incumbent at wholesale prices and re-sells to customers – may generate these benefits. ‘Line leasing’ – where the entrant leases the line from the incumbent – may lead to additional effects if entrants augment the network by installing their own technology at local exchanges allowing for product differentiation in terms of speed, data limits, etc. This may also encourage the incumbent to upgrade its own network.

In the UK, only BT is currently required to unbundle its network. Further opportunities for unbundling are copper wires, cable and fibre optic built by other operators e.g. Virgin Media. There is also potential for extending regulation in the area of bitstream access (which has been recently deregulated). The telecoms regulator, Oftel, could also set different LLU prices.

How effective is it?

Five out of six studies find a positive effect of line leasing on household broadband adoption. There is no evidence on the effect on firm adoption. LLU regulation that lowers the one-off fee for accessing local exchanges or the (monthly) rental price for leasing lines leads to greater broadband adoption, according to four out of five studies.

One concern with LLU policies is that they may discourage investment if incumbents think that they will be unbundled in the future. However, only one of four studies that consider the impact on broadband investment or capital stock finds a negative impact and this latter is the least robust of the four. Of the remaining three, two find a positive effect and one finds no effect. One of the positive studies also shows that LLU regulation led to an upgrading of the network, in the form of a higher market share for fibre optic internet.

In terms of broadband speed and price, the impact of LLU regulation is unclear. One study finds no effect on speed, while another study (discussed above in the context of capital stock) finds that it increased the market share of fibre which may imply faster internet speeds. One study shows that bitstream access may make broadband more expensive for customers, but there is a lack of evidence on other forms of LLU.

How secure is the evidence?

This toolkit summarises the available ex-post (i.e. after introduction) evaluations of the effect of LLU policies for broadband. The majority of the existing literature uses case study approaches or qualitative interview techniques, often involving small numbers of participants to assess the impacts of broadband provision. This toolkit does not consider this evidence. Instead, we focus on evaluations that identify effects which can be attributed, with some degree of certainty, to the support provided. (More details and discussion of our inclusion criteria are covered in the annex.)

We found twelve evaluations that meet our minimum evidence standards. Seven of these provide cross-country comparisons controlling for other factors that might affect adoption. Given that LLU regulation is generally implemented at a national level, this type of analysis is robust for our purposes.

All of the studies are based on data from OECD countries. Four studies consider several OECD countries, four consider several EU countries, and four focus on specific countries: one study each for the United States, Japan, Spain and the United Kingdom.

Is LLU cost effective?

From a public perspective, the only exchequer costs of LLU policies are bureaucratic. Unfortunately, none of the papers provide estimates of these costs, so it is not possible to infer the cost-effectiveness of such programmes. It is worth noting, however, that LLU also entails private costs, particularly for incumbent providers who lose market share with increased competition. Whether or not LLU is truly cost effective depends on whether the additional consumer benefits that result from increased competition outweigh the incumbent’s loss of market share.

Things to consider

  • What are realistic aims for LLU policies? Evidence strongly suggests that LLU policies can be expected to increase household adoption of broadband. This is the case for both line sharing and bitstream access variants of LLU.
  • Does LLU regulation discourage investment in new broadband infrastructure? Only one study suggests that LLU has a negative impact on broadband infrastructure stock, whereas two find a positive effect and one finds no impact. This suggests that LLU policies may not discourage the building of new infrastructure, and could even encourage it.
  • What price should the government set for LLU leasing? The evidence suggests that setting lower LLU prices leads to greater broadband adoption. But setting low prices might not be recommended if it discourages further investment. One study suggests this may be the case. Policymakers need to consider this tradeoff when designing reforms to current LLU policies.
  • Should LLU regulation be used as a substitute for other types of broadband policies? Although LLU regulation is an effective way to increase broadband adoption, it does not guarantee, for instance, that broadband access is expanded to underserved areas. Accordingly, these policies should be seen as complementary to other provision or encouragement policies.
  • Can LLU reduce the price of broadband? Greater competition should reduce prices, but there is a lack of evidence on the effect of LLU (in particular line leasing forms) on broadband price. Nevertheless, evidence from one study suggests that bitstream access actually increases the price of broadband.
  • Should one type of LLU be preferred over another? Both line leasing and bitstream access appear to be effective at increasing household adoption. One study shows line leasing is more effective when bitstream access is also an option.
Broadband toolkit: Local loop unbundling