Investment in Next Generation Networks and Wholesale Telecommunications Regulation
Robert W. Crandall
Brookings Institution; AEI-Brookings Joint Center for Regulatory Studies
Debra J. Aron
Navigant Economics; Northwestern University
November 3, 2008
Canada is at a cross-road. Once a leader in international broadband standings, Canada is now being passed by many countries in the very high speed communications services that can bring the profound benefits of information technology to their citizens. Canadian leaders would advance the interests of Canadian citizens by swiftly establishing regulatory policy that clearly ensures investors that new broadband infrastructure will not, if built, have to be provided to competitors at regulated prices.
The rapidly-accumulating evidence from the international arena is that investment in information and communications technology (ICT) is the principal driver of labor productivity growth and, therefore, overall economic growth in developed nations. A major component of ICT capital is the broadband infrastructure required to transmit information in the modern economy. The benefits of broadband infrastructure are not abstract - in addition to driving economic growth, they manifest themselves in providing to Canadian citizens and businesses increased availability, quality, and efficiency of a myriad of services that are central to citizens' well-being, including healthcare, education, government services, commerce, media, and entertainment. A 2001 report by the Canadian National Broadband Task Force argued that "the impact of broadband communications on Canadian life will be at least as great as the impact of railways, highways, airlines, traditional telecommunications and broadcasting." The benefits at the local level of access to broadband infrastructure have been documented in case studies of Canadian regions such as Peace River, Alberta; South Similkameen, British Columbia; South Dundas, Ontario; and Tillsonburg, Ontario.
The development of these advanced broadband networks requires huge, risky investment at a scale that can threaten a company's viability. Canadian companies must compete in the global capital market for such investment funds, and investors must find the prospects for earning a return sufficient to be willing to accept the risks. Unfortunately, Canada lags substantially behind the United States in spending on information technology and, as a result, its productivity growth has also lagged.
Among the most important inhibitors of capital investment in telecommunications is ill-advised regulatory policy. Rational investors in telecommunication technology must be assured that the regulations that will govern the new, "next generation" networks will not undermine their investment before they will commit to funding them. In particular, investors must be assured that mandatory unbundling of these new network facilities will not be imposed, because mandatory unbundling at regulated wholesale prices deprives the owner of the ultimate control of the assets and severely reduces the returns on these very risky projects.
Empirical analyses and case studies document the damaging effects of unbundling regulations on investment in the U.S., Europe, and elsewhere. The research also documents the beneficial effects of intermodal (investment-based) competition on broadband penetration, and the insignificance of intramodal (unbundling-based) competition on broadband penetration. That is, the empirical studies find that broadband take-up rates are increased by competition between network platforms such as cable and DSL, in which the providers must make their own, at-risk investments. In contrast, broadband take-up rates do not appear to be materially affected by the kind of competition engendered by unbundling.
It is also telling that the two largest U.S. incumbent local exchange carriers (Verizon and AT&T), who are now making massive and risky investments in fiber-to-the-home and fiber-to-the-node networks, began those investments in earnest only after the FCC issued its ruling protecting those investments from unbundling obligations. Similarly, case study analysis of several OECD countries finds that those countries that require unbundling of next-generation networks and those in which the regulatory issues are still unresolved have very limited investment in next-generation networks. It is reasonable to expect that Canadian ILECs face similar economic considerations and market constraints on their investment decisions. If the CRTC perpetuates an ambiguous policy stance toward unbundling, or affirmatively imposes unbundling requirements on new investment, we can expect continued reluctance to commit to massive broadband infrastructure investments. If, instead, the CRTC clearly and expeditiously establishes policy that protects new investments from unbundling obligations, it is reasonable to expect the kind of increased investment activity that is taking place in the U.S. and other countries with similar policies.
This is an important moment in history for Canada, at a time when the country's relatively high ranking on the world broadband scale is being threatened and massive new investments in very high-speed broadband architectures are being made by ILECs in other countries, such as the United States, Japan, and Korea. The CRTC can either discourage continued investment and innovation in state-of-the-art information technology, or it can encourage efficient investment, innovation, and competition. Moreover, regulatory inaction by the CRTC is not benign - failure to establish clear policy to protect investment merely perpetuates the stagnation of investment. Canada's policy makers can encourage efficient investment, innovation, and competition, and thereby promote economic welfare and prosperity in Canada, by establishing a clear policy against expanding the ILECs' unbundling obligations to new broadband networks.
Number of Pages in PDF File: 45
Keywords: Broadband networks, ICT, regulatory policy, telecommunications policy, Canadian regulation, investment
JEL Classification: L96, K23, L51, O32
Date posted: November 5, 2008