“Unbundling”: Good Riddance

by on August 6, 2005

The FCC has finally put an end to the dubious 1990s experiment with “unbundling” DSL services. Or, to put it a little bluntly, the FCC has decided it will no longer expropriate the infrastructure of the Baby Bells to be used at government-mandated prices by their competitors.

Various liberal commentators, such as Matt Yglesias have painted unbundling as a noble Clinton-era experiment that was allowed to wither on the vine under the Bush administration. Had the Republicans continued the Democrats’ vigorous efforts on behalf of competition, the theory goes, we would now have a healthy, competitive broadband marketplace.

Matt points out that Southeast Asia enjoys better broadband service than the United States and suggests that Japan and South Korea pursued “open access” policies like those the FCC is now abandoning, while the United States has dropped the ball.

But that line of argument doesn’t make very much sense. If you’re Verizon, and you know that you will be required to “share” any new infrastructure you build with your competitors, you are unlikely to spend very much money upgrading your infrastructure. And if you’re one of those competitors, you have little reason to build competing infrastructure when you have guaranteed “access” to Verizon’s infrastructure at government-mandated prices. Hence, although you might have some “competition” in downstream services, “open access” policies are going to retard the build-out of new infrastructure in the “local loop.”

You can see this dynamic in Matt’s own backyard. A couple of years ago, Verizon began rolling out its fiber-to-the-premises service in select cities including Northern Virginia. They did so only after receiving assurances from the FCC that any new fiber infrastructure would not be subject to unbundling rules. You can also see it at work in the cable market: today, some cable companies are offering 6 Mbit services. When I had a cable modem 3 years ago, the best I could get is 1.5 Mbit.

Now, Matt points out that other countries have even faster service. He says we’re falling behind. I have to admit I haven’t studied the telecom markets in Japan and South Korea in any detail, so I can’t say what other differences might explain the discrepency. A couple of things come to mind. One is that, obviously, higher-density cities will have an easier time rolling out new services. Another is that, because Japan and South Korea industrialized fairly recently, the wires in the ground are likely to be newer than those in the United States, making rollout of faster services more practical. It’s also possible that cultural factors come into play. Japan and South Korea are intensely literate and gadget-happy societies. South Korea is obsessed with video games the way we’re obsessed with football. It’s possible (although I’m by no means claiming that I know enough to say it’s true) that Japan and South Korea have more broadband users because they have more nerdy people.

In any event, if your goal is to spur investments in new infrastructure, the first step must be to insure that the company that invests capital reaps the profits from that investment. It’s hard to see how “open access” rules could possibly accomplish that. Once the dust has settled from the well-deserved death of “unbundling,” we should have a thorough debate about how best to lower barriers to entry to the broadband market, so that companies can more easily build infrastructure (especially wireless infrastructure) to compete with the incumbents. But the debate must start with the principle that the government should respect the rights of companies who invest in infrastructure to profit from their investments, rather than “unbundling” them and giving “access” to other companies who have not bothered to make such investments.

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