Local loop unbundling

A new research paper from the New Zealand Institute for the Study of Competition and Regulation deals with the issue of does local loop unbundling stimulate broadband uptake. The report, Catching-Up in Broadband Regressions: Does Local Loop Unbundling Policy Lead to Material Increases in OECD Broadband Uptake? by Glenn Boyle, Bronwyn Howell and Wei Zhang, argues that

Local loop unbundling has been widely promulgated by policy-makers as a significant factor stimulating broadband uptake and therefore an essential component of a developing ‘information economy'. Whilst empirical evidence is sparse, and at best equivocal in respect of a consistent positive and statistically significant effect, a recent study commissioned and published by the OECD does find evidence of such effects. When correcting for omitted variables, correlated data and methodological inconsistencies, our analysis using the models and data from this report instead support the contention that LLU's contribution to the level of national broadband uptake is materially very small, and not statistically significant. Continued advocacy for the policy as a stimulant for broadband uptake on the basis of the OECD-published report is misguided.

A related paper, Regulated Retail Tariff Structures, Dial-Up Substitution and Broadband Diffusion: Learning from New Zealand’s Experience by Bronwyn Howell, asks why does New Zealand exhibit one of the lowest number of broadband connections per capita in the OECD. This paper argues

Despite an apparent absence of supply side impediments to the uptake of broadband, New Zealand has persistently exhibited one of the lowest numbers of connections per capita in the OECD. Whilst geographic, demographic and economic factors may partially explain the disparity, they fail to explain the comparatively low uptake in a country that, in the early 2000s, ranked amongst the top OECD countries in the number of internet users per capita and average usage per account. Demand side factors, however, offer some insights. Using a combination of diffusion theory, two-part tariffs, price discrimination and bundling, this paper proposes that the historic flat-rate tariff for local voice telephony has resulted in substitution from legacy dial-up to frontier broadband internet access in New Zealand occurring at a higher user valuation of both internet connection and usage than if the telephony tariff was set at a level whereby the fixed component recovered fixed costs and the variable usage component was set at marginal cost - the tariff structure that prevails in most other OECD countries.

The New Zealand experience suggests that the extensive use of flat-rate tariffs for the current generation of broadband technologies (e.g. ADSL) may impose similar braking of the rate and timing of substitution to future internet access technologies (e.g. fibre to the home). These effects are exacerbated if the legacy connection is purchased as part of a bundle where customers predominantly value other elements more highly than the internet component. Substitution inertia created by the flat-rate tariff may only be overcome by the development of new applications which are both highly-valued by the majority of users and which can only be feasibly deployed using the frontier technology.