Lessons Learned from the U.S. Unbundling Experience

Abstract

The unbundling paradigm contained in the 1996 Telecommunications Act was one of the most ambitious regulatory experiments in American history. Yet, despite high expectations, less than a decade after codification the experiment was over. Without making any consumer welfare claims about the desirability of unbundling or its failure, in this Paper we attempt to discern what lessons can be learned from the experience. With the benefit of hindsight, we believe that the demise of the unbundling regime in the U.S. was driven by three underlying economic causes which policymakers failed to comprehend: (a) the expectations of policymakers for “green field” competitive facilities-based entry into the local wireline market at the time of the 1996 Act were unrealistic; (b) the unbundling regime was incentive incompatible in that the incumbent local phone companies were required to surrender market share to entrants without any (permanent) offsetting benefit; and (c) the rise of new alternative distribution technologies such as cable, wireless and over-the-top services that expanded the availability and quality of competing voice services. Local competition in the U.S., it turns out, was not the result of new entrants constructing new plant, but from the repurposing of the embedded cable television plant and the migration of many households to the exclusive use of mobile wireless services. The study concludes that while unbundling may have been a sensible policy for the monopoly communications world of 1996, the presence of inter- and intra-modal competition and the inherent incentive problems with unbundling make it unsuitable for today’s marketplace. As such, the United States needs a new policy regime for the communications market of the 21st century. Hopefully, with the benefit of hindsight and lessons learned from the U.S. unbundling experience, future regulatory interventions in the communications marketplace will proceed with more humility and wisdom.

Keywords: unbundling, telecommunications, broadband

JEL Classification: K23, L51, L52, L96, O38