Unbundling the incumbent: Evidence from UK broadband M. Nardotto - PowerPoint PPT Presentation

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Unbundling the incumbent: Evidence from UK broadband M. Nardotto (ParisTech), T. Valletti (Imperial and ParisTech) and F. Verboven (KU Leuven) April 2012

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Introduction Policies aimed at “opening” the incumbent have been often applied: - Electricity market - Transportation - OUR CASE: Telecommunications (all over EU, and elsewhere – not US though) Motivation: higher competition downstream should lead to lower prices, higher quality and more demand Few empirical studies answering the question: DOES IT WORK?

Introduction Broadband market LLU and penetration LLU and entry LLU and quality This paper We study the broadband market in UK, where: BT owns the network (Backbone and Local Exchanges) Two possible entry strategies (downstream): - Bitstream: low investment, BT still provides most of the services (reduced area of responsibility of entrant) - Local-Loop Unbundling (LLU): bigger investment by entrants Another competitor is cable (NTL:Telewest, now Virgin) with a competing “closed” network

Introduction Broadband market LLU and penetration LLU and entry LLU and quality This paper – findings MAIN QUESTION: Did entry through LLU induce market expansion? RESULT: penetration is not improved by LLU Then, we show: Incentives for LLU change the composition of entrants’ 1 technological portfolio Inter-Platform competition leads to more penetration 2 (BT lines v.s. cable) Quality improves with LLU 3

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Related literature Theory papers (surveys of Armstrong, Laffont and Tirole) Very rich policy (and advocacy) debate. Very few empirical works, almost no micro-data Grajek and Roller (2012, JLawEc) : Regulation negatively affects total investments in facilities. Panel of EU countries, aggregate data Sraer (2008) : WP on LLU and penetration (French data), Fevrier, Gaubert and Sraer (2011): structural model (cross-section) Minamihashi (2011): effect of regulation of both LLU and fiber in Japan. Regulation made more difficult to invest in fiber Studies on entry in US using earlier data: Greenstein and Mazzeo (2006, JIndEc); Economides, Seim and Viard (2008, RAND), Xiao and Orazem (2011, IJIO), Goldfard and Xiao (forthcoming, AER)

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Broadband market Broadband in UK is provided by: - Fixed line telephone operators - Cable operator British Telecom group (BT retail/BT wholesale/ Openreach) is the incumbent of the fixed line telephone network Virgin Media is the only cable operator (network built in the 80s) BT’s network has a (fiber) backbone and serves consumers locally through delivery points (local exchanges, LEs) which cover the “last mile” Each household is connected to a specific LE in the grid

Introduction Broadband market LLU and penetration LLU and entry LLU and quality The network BB Backbone

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Whole BT grid of LEs + cable - White dots: LEs areas - Red dots: LEs areas where cable covers at least 65% of lines

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Broadband market Late 90s: BT opened the last mile to entrants Regulation by Ofcom: BT had to upgrade the network to allow entry in the LE 1 (completed in 2002-03) Regulates wholesale prices that entrants pay to BT 2 Entry options: (Simple re-selling) Bitstream: low investment by the entrant in the LE, the connection is still managed by BT LLU: higher investment by the entrant. Entrants install DSLAM equipment, routers, cabinets, provide maintainance, etc.

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Regulation and goals Regulator’s perspective (Ofcom WBA rev. 2006): The importance of broadband continues to grow. It plays a central role in communications used by many consumers and businesses to keep in touch, access information and conduct business [. . . ] Competition has an important role to play in delivering what consumers and businesses need [. . . ] Competition at the retail level depends on ISPs having access to wholesale broadband services or local loop unbundling (LLU) to build their services. Ofcom has identified that competition between networks based on LLU, rather than just at the retail level based on wholesale broadband products, is crucial to maintaining the UK’s broadband progress.

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Broadband market Called “Central Offices” in the US 5,587 LEs in the UK grid Becoming LLU supplier costs approx £100k per LE (one-off), plus ongoing costs

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Main dataset Quarterly panel data on investments and subscriptions in the period 2005 (Dec) – 2009 (Dec) at the LE level (5,587). For each LE we observe: - Total number of potential lines (households) - Number of lines potentially served by cable - Lines actually served by cable - Lines served by entrants through LLU (disaggregated by operator) - Total lines served by bit-stream - Total lines with broadband (LLU + cable + bit-stream)

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Data on Demographics We complement the dataset with data on demographics at the LE level: - Age structure (5 classes: 0-14, 15-19, 20-29, 30-44, 44-59, more than 60) - Number of cars or vans per household - Income (weekly gross) - Sector of occupation (e.g. agricultural, manufacturing, financial intermediation etc.) - Education - Urban / Rural area Data from the UK Office of National Statistics (ONS) and UK census We cover England and Wales

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Broadband market Penetration increases significantly over our time span Over time the relative share of BT retail is stable Entrants substitute bit-stream with LLU

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Descriptive statistics Subscribers and coverage 2005Q4 2007Q4 2009Q4 Num. lines 27,576,261 27,658,092 28,219,684 Num. subscribers 10,052,446 15,624,059 17,664,344 - BT 26% 26.3% 24.7% - Bit-Stream 41% 24.2% 15.3% - LLU 2.2% 25.4% 37.7% - Cable 30.8% 24% 22.4% Broadband penetration 36.5% 56.5% 62.6% Num. of LEs 5,587 5,587 5,587 LLU entry 695 (12.4%) 1,733 (31%) 2,011 (36%) Avg. num. of 1.79 3.44 3.31 LLU competitors Cable coverage – 65% 953 (17%) 844 (15.1%) 829 (14.8%) LEs without LLU Unbundled LEs Test– Demographics Mean Std. dev Mean Std. dev Stat P-value Urban (%) 13 33.6 77.4 41.8 -47.85 <0.001 Lines 1,243 1,463 12,135 8,444 -57.56 <0.001 Income 568.8 110.5 514.6 126.4 15.63 <0.001 HS occupations 53.5 10.4 53.5 14.3 0 0.99 HS occupations sectors 26.5 8 29.9 11.6 -2.39 0.017 Pop. 0-14 y.o. 17.4 2.7 16.8 4.5 .47 0.64 Pop. 15-60 y.o. 57.6 4.3 60 7.2 -1.51 0.13 Pop. more 60 y.o. 25 5.7 23.2 7.6 1.32 0.19

Introduction Broadband market LLU and penetration LLU and entry LLU and quality LLU expansion In few years the adoption of LLU becomes more widespread (left is Dec. 2005, right is Dec. 2009):

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Does LLU increase penetration? In the graph the penetration rate over time (from Dec. 2005 to Dec. 2009) - Dashed line: LEs receiving at least 1 LLU investment - Solid line: LEs with no LLU Non-unbundled LEs seem to catch up. . .

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Does LLU increase penetration? Main equation: P en it = ” i + fi t + ˛LLU it + ‚x it + " it where, ” i ; fi t : LE area fixed effect, time effects LLU it : dummy variable for having received LLU x it : control variables (income, cable)

Introduction Broadband market LLU and penetration LLU and entry LLU and quality Does LLU increase penetration? Main equation: P en it = ” i + fi t + ˛LLU it + ‚x it + " it where, ” i ; fi t : LE area fixed effect, time effects LLU it : dummy variable for having received LLU x it : control variables (income, cable) THREE identification strategies: Panel FE estimation (no time-varying instrument) IV Panel estimation (time and spatial lags as instruments) System GMM Blundell-Bond estimator