What lessons can be learned about the impact of network element unbundling as seen in the United States in the wake of the Telecommunications Act of 1996?

To the extent that the purpose of market deregulation is to cause the incumbents to lose share, that happened, at least initially. At its peak, perhaps 30 million lines shifted from incumbents to competitors, and about 21 million used the unbundled network element approach, according to Phoenix Center for Advanced Legal and Economic Public Policy Studies.

By 2005, however, when the mandatory wholesale policies were rescinded, the CLEC industry grounded to a halt, as the unbundled network element business model required larger discounts than CLECs could get.

In an unexpected twist, however, competitors now account for perhaps 50 million landlines, most supplied by cable TV operators. That is perhaps an unexpected surprise as well. In the early 2000s, most of the CLEC customers were served by AT&T (News - Alert) or MCI. Today, most of the customers are served by cable TV operators.

There are perhaps three lessons to be learned from that experience, Phoenix Center economists and policy analysts conclude. Expectations about facilities investment were unrealistic.

Perhaps more significantly, mandatory unbundling at significant discounts was punishment for incumbents with no compensating upside.

Also, the notion that competition or innovation was about voice service on fixed networks fell before the mobile revolution and the rise of the Internet.

Perhaps the major implication is that network element unbundling did not, and probably could not, provide a stepping stone to facilities investment.

Many CLECs in the early 2000s discovered to their dismay that they could not achieve sufficient economies of scale, scope, or density to warrant even entry using unbundled elements, much less support the capital required to build and operate a facilities-based local exchange network for the mass market.

Another lesson is that to the extent unbundling was intended to harm incumbents, there was no compensating “carrot” for accepting such harm.

On top of all that, the fixed network voice business was about to enter a period of serious decline, further reducing appetite for heavy network investment.

So, the Phoenix Center says the lessons of Telecom Act unbundling are that regulators have to realistic about whether unbundling will lead to facilities investment. Incentives have to be aligned, both for competitors and incumbents.

Also, the possibility of intermodal competition must be evaluated, without focusing narrowly on intramodal competition.

“While unbundling may have arguably been a sensible policy for the monopoly communications world of 1996, in today’s competitive market the case for such hefty (and asymmetrical) interventions is exceedingly weak,” the authors of the study concluded.