Lessons Learned from the US Unbundling Experience

[Commentary] Without passing any judgment on the consumer welfare benefits of unbundling or its failure, we attempt to discern what happened in order to see if there are any lessons that can be learned from the experience. With the benefit of hindsight, we argue that the demise of the unbundling regime in the US was driven by three underlying economic causes: (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 US, 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. We therefore conclude that while unbundling may have been a sensible policy for the monopoly communications world of 1996 (but recognizing the incentives problems were unavoidable), the presence of inter- and intra-modal competition and the inherent incentive problems with unbundling make it unsuitable for today's marketplace. Instead, 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 US unbundling experience, future regulatory interventions in the competitive communications marketplace will proceed with more humility and wisdom.