Broadband Uptake and Infrastructure Regulation: Evidence from the OECD Countries

Abstract

Policy organizations such as the OECD and the EU have placed much emphasis on the role of local loop unbundling as a regulatory tool in stimulating the rollout and uptake of broadband technologies and consequently promoting the accrual of economic benefits from electronic commerce. However there is mounting evidence that local loop unbundling has been less successful in promoting broadband rollout and uptake than competition both between duplicate networks of the same technology and between competing technology platforms. OECD evidence of cross-country broadband rollout and uptake supports this contention. Cable modem access and uptake generally exceed that of DSL even in countries practicing local loop unbundling and incountries where no such policy is in force DSL uptake significantly exceeds cable modem uptake. This paper argues that content availability and a cost-benefit trade-off supported by bundled products combining access and content has stimulated demand for the cable product thereby creating competitive pressure on DSL offerings. While local loop unbundling posits faster response to this competitive pressure the OECD data provide little evidence to suggest that the primary driver is infrastructure availability. Rather the evidence implies that application cost-benefit tradeoffs are the primary drivers of broadband uptake. The paper further argues that overall low levels of broadband uptake reflect a fundamental lack of current applications utilising the high speed and high capacity of broadband to meet functional substitution requirements of users in such a way that the benefits of adopting broadband technologies to support information exchange exceed the increased costs. Unless such cost-effective functional substitution user applications are available then the optimal time to invest in broadband for both users and infrastructure providers will be delayed in order to exploit lower costs better technology and the holding cost of interest. Policies that promote infrastructure availability in isolation from the demand-driven applications that utilise this capacity run the risk of encouraging inefficient investment decisions.