Department of Commerce

National Telecommunications and Information Administration

Washington, D.C. 20230


In the Matter of


Request for Comments on Deployment of

Broadband Networks and Advanced








Docket No. 011109273-1273-01










COMMENTS OF Cable & Wireless







Audrey Wright

Erik Whitlock

1130 Connecticut Ave., NW

Suite 1201

Washington, DC  20036

(202) 530-8085








December 19, 2001







I.          Introduction........................................................................................................................... 1

II.         Summary of C&W Views...................................................................................................... 1

III.       Responses to Specific Questions Raised by the Department of Commerce.............................. 2

A.        What Should Be The Primary Policy Considerations In Formulating Broadband Policy For The United States?.................................................................................................... 2

1.         Access facilities............................................................................................. 5

2.         Access service.............................................................................................. 6

3.         Backbone Transit.......................................................................................... 8

4.         Hosting......................................................................................................... 9

B.         How Should Broadband Services Be Defined, And What Are The Policy Implications Of That Definition?....................................................................................................... 10

C.        What Is The Current Status Of (1) Supply And (2) Demand For Broadband Services? 12

1.         Europe........................................................................................................ 13

2.         The United States........................................................................................ 15

3.         Japan.......................................................................................................... 16

E.         Do The Interconnection, Unbundling, And Resale Requirements Of The Telecommunications Act Of 1996 Reduce Incumbent Local Exchange Carriers’ (ILECs’) Incentives To Invest In Broadband Facilities And Services?......................................................................... 17

G.        To What Extent Have Competitive Firms Deployed Their Own (A) Transport, (B) Switching, And (C) Loop Facilities?......................................................................... 21

K.        Would It Be Appropriate To Establish A Single Regulatory Regime For All Broadband Services?  What Would Be The Essential Elements Of A Unified Broadband Regulatory Regime?.................................................................................................................. 22





I.                   Introduction

Cable & Wireless (C&W) is pleased to have the opportunity to submit this response to the Department of Commerce’s Request for Comments on Deployment of Broadband Networks and Advanced Telecommunications.  C&W is a major global telecommunications business with revenue of over $11 billion (in year to March, 2001) and customers in 70 countries.  C&W’s focus for future growth is on Internet protocol and data services and solutions for business customers.  C&W is currently developing advanced IP networks and value-added services in the United States, Europe and the Asia-Pacific region in support of this strategy.  With the capability of its global IP infrastructure and its strength in key markets, C&W holds a unique position in terms of global coverage and services to business customers.



            Cable & Wireless does not think that the United States needs to make any radical, mid-course changes to its broadband policies.  Accordingly, these Comments urge that the United States continue its policies designed to establish the framework for competition in the broadband market, with only modest changes.

            Policy Considerations:  Respect for the ability of consumers to choose the product that most efficiently serves their needs should remain a cornerstone of the United States’ regulation of the broadband market.  Regulators should recognize that different broadband – or even narrowband – technologies are best for different kinds of end-users, and should allow deployment to be responsive to demand, without trying to force deployment of any particular technology.

            In addition to respecting consumer preferences, the United States’ broadband policy should acknowledge the diversity of inputs that go into providing retail services.  The markets for those inputs – which include access facilities, access service, backbone transit, and hosting – are subject to different levels of competition, and therefore vary in their need for regulation.  The access facilities market is substantially the least competitive.  Until there are multiple, facilities-based choices for dialtone service, the ILECs local network will be the only access technology capable of delivering narrowband and guaranteed-bandwidth broadband services, and policymakers must therefore continue to regulate access to that network to enable competition.  Similarly, regulation of access to cable networks is appropriate to encourage further broadband competition in the access service market.  Unlike the access facilities market, however, the markets for narrowband access service, for backbone transit, and for hosting are already competitive.  Accordingly, these markets will require little regulatory intervention.




III.             Responses to Specific Questions Raised by the Department of Commerce

A.                 What Should Be The Primary Policy Considerations In Formulating Broadband Policy For The United States?

A cornerstone of U.S. broadband policy should be respect for consumers, and their ability to choose the right product to fit their own needs.  Trying to force deployment in the absence of demand, particularly through non-competitively neutral subsidies distorts the market and can frustrate the development of multiple platforms capable of fulfilling consumer choice.  Ultimately, the best broadband policy will be a strong competition policy, so that entities that control the most scarce network resources – especially network access facilities – cannot singly or jointly exercise market power.  This competition policy requires ex ante regulation of dominant entities with significant market power, particularly with respect to those facilities through which they exert market power.

In any evaluation of broadband policy, it is important to recognize that different groups of customers have different requirements, which will affect their service preferences both between narrowband and broadband technologies, and among the different broadband services available.  No technology has to “do it all,” and in fact different technologies may be optimized for different groups of customers.  This also means that even if “broadband” in general encompasses several different technologies, for individual customer groups with specific needs, the choices may be much more limited – or even non-existent.

In general, speed of access is particularly important to medium to large business users, while residential users are more concerned with the cost of access.  Indeed, at least for the foreseeable future, some classes of users (e.g., consumers and small businesses) may not require broadband services at all, but may be satisfied with narrowband technologies.  A recent survey has suggested that many dial-up subscribers are happy with the quality of their Internet service and are unlikely to upgrade to broadband services, especially when it could mean a doubling of costs.[1]  The survey states that the cost of dial-up service is between $15 to $25 per month, compared to $45-50 per month for broadband services.  The latter, therefore, may not represent an efficient choice for many users, at least given existing price points. 

This suggests that policymakers should not attempt to force demand, but rather should allow users to select the most economically efficient technology for their own needs.  Inducing a consumer whose applications can be well satisfied with narrowband dial-up service to purchase broadband service at twice the price (whether the price is paid by the consumer, or by the consumer and by a subsidy) through artificial and economically distortive means is economically inefficient and actually lowers consumer welfare.  Consumers themselves will shift purchasing habits to buy more broadband when applications appear that increase the attractiveness of broadband

Similarly, users that do require broadband services may place different values on different attributes of those services (such as guaranteed bandwidth and cost) depending on the users’ individual needs.  Consumers that do not need guaranteed bandwidth might be more likely to opt for cable modem access, which – as a shared resource – does not offer a guaranteed speed of access.  To date, however, cable access is largely limited to residential users.[2]  By contrast, access through DSL (Digital Subscriber Lines) is widely available and also has the advantage of offering guaranteed bandwidth, which may be essential for some users[3].  As noted above, the subscription costs of DSL services tend to be about double those of narrowband dial-up and are sometimes higher than for cable modem services.

Small and medium sized enterprises (SMEs) will tend to obtain access through a dedicated T1 connection, which will also offer guaranteed high quality access speed up to 1.5Mbs.  Corporate customers may require fiber access, which is potentially upgradeable to very high bandwidths.  Wireless technologies may also provide a means of access in the distant future but in the medium term wireless coverage remains very limited.

In short, any policy stance adopted toward the deployment of broadband services should both: (1) acknowledge that some classes of customers may be receiving satisfactory service from narrowband services and not try to generate demand through regulation; (2) refrain from adopting competitive non-neutral subsidies for specific broadband technologies; and (3) recognize that all broadband services are not the same for all types of consumers.

The Broadband Supply Chain:  In addition to taking account of the diversity of consumer preferences, U.S. broadband policy should also acknowledge that a variety of different inputs go into providing retail broadband services.  Policy-makers should look at the entire supply chain – provided by a range of different companies – in considering what kinds of regulation may be necessary to set the stage for vigorous competition in the broadband market.

1.            Access facilities

The previous section noted that different technologies could serve as access facilities.  Until there are multiple full-facilities-based choices of local dialtone service, however, the ILEC’s local network will be the only access technology capable of narrowband dial-up access.  Moreover, the large fixed cost of deploying access facilities – regardless of technology – means that the ILEC’s local network remains the only form of ubiquitous access for most consumers who seek to have guaranteed bandwidth, particularly small to medium businesses, and medium to large businesses who desire high capacity connections.  Even in larger markets where there may be multiple interoffice transport facilities available, most frequently the only source of the “last mile” connection – even for larger customers seeking high capacity connections – is the ILEC. 

There is some substitutability among networks (i.e., “intermodal” competition).  Cable television networks are a more appropriate access means for consumers who are not concerned about guaranteed bandwidth, and who are passed by cable lines – which is not necessarily true for business customers.  Satellite broadband is available to consumers who have a southern exposure with a view of the satellite, which can be particularly important in rural areas that are not otherwise reached by cable modem service or DSL.  Satellite, however, will not be an alternative that works for consumers who seek to run real-time applications over their broadband networks, because of latency.[4] 

The delivery of high-speed broadband services, whether through cable modems, DSL or satellite, is dependent on access to the so-called “last mile” of local Internet access infrastructure.  In the absence of unbundling, alternative providers of DSL-based access facilities would not exist:  competing DSL providers will need access to “local loops” to upgrade them to support higher bandwidth services.  Likewise, an ISP seeking to serve customers on the cable network will need access to the cable “pipe.” 

Incumbents, however, will have little incentive to co-operate in granting the necessary access when they will also be competing in the supply of higher bandwidth services.  Control of the scarce network access facility – the loop or its equivalent facility – can allow the access provider discriminatorily to favor its own affiliates or to take actions to raise costs or reduce quality of rivals’ services over the network access facility.  Accordingly, regulation of access to the local infrastructure will continue to be necessary in the broadband era.

2.                  Access service.

Access service – which is distinct from the underlying facilities used to provide access – refers to the services provided by the Internet Service Provider (ISP) that connects the end customer to the Internet.  This connection may take a number of different forms, depending on the requirements of the customer.  For example, residential customers that connect to the Internet through dial-up access will connect to their ISP’s modem bank by making a local phone call.  The access ISP then aggregates the calls of such customers at its modem bank and routes the traffic over a dedicated facility to a node, which is interconnected with the Internet.  Customers who wish to stay connected to the Internet permanently or for a relatively long period of time (typically business customers but also some high-use residential customers), or who require high speed access, will connect to the ISP directly by leasing a high speed line.

It is widely accepted that this link in the supply chain is competitive and that barriers to entry are relatively low when this link is considered separately from the network access facility. For example,  in the United States the overwhelming majority of consumers have a choice of several access service providers.[5]  This is a market characteristic that is not unique to the US, of course, inthe recent joint consultation paper by the OFT and Oftel[6] stated that in the UK there are over 400 consumer ISPs, with competition between them described as “fierce.”  This position is mirrored in other European countries, where numerous ISPs operate, ranging from ISPs set up by the incumbent telecommunications operators to independent new entrant ISPs.  Although some consolidation is occurring in developed markets, this is not at a level sufficient to harm competition.  The ITU[7] reports that there are over 17,000 ISPs operating around the world and that this number is continuing to increase.  The size and structure of these ISPs vary considerably, ranging from large, vertically integrated ISPs to much smaller, independent ISPs.  Accordingly, regulation of access service is unnecessary.

3.                  Backbone Transit

Internet backbone services are provided by Internet backbone providers (IBPs) and allow information to be passed between all users of the Internet, including ISPs and their customers, and other IBPs.  This information exchange requires the networks of different IBPs to be interconnected.  Interconnection of networks ensures that the end users (retail customers) of the Internet are able to access the full range of content held on the Internet and other end users – i.e., it ensures that there is universal connectivity.

Backbone networks interconnect through either peering or transit arrangements. Peering occurs when two IBPs agree to terminate each other’s traffic without making explicit charges for such termination (because the traffic exchanged is of roughly equivalent value). By contrast, under a transit arrangement, one IBP will pay another IBP to deliver all its traffic, whether it is originated or terminated by the paying IBP.

The supply of Internet backbone services is dynamic and continuing to develop.  A recent joint report by J P Morgan and McKinsey[8] stated that it expects the rate of growth in IP traffic to fall from the 200-300% growth rates seen in the 1990s, to around 60% by 2005.  This still, of course, represents a significant growth rate and the report points out that this would mean that IP traffic in 2005 is forecast to be 55 times that in 1999.  Moreover, the amount of IP bandwidth is increasing substantially and there is some evidence that new entrants in the US are managing to win market share from the more established IBPs, although UUNET is still regarded as the largest backbone. The new entrants are expected to increase their shares as they offer discounts to win market share.  This trend towards increased competition is resulting in lower profit margins.  Backbone transit thus appears to be an increasingly competitive market that will require little regulatory intervention.

4.                  Hosting

Hosting includes the provision of services such as connectivity, managed services, and applications integration, and related services to ISPs.  The range of services provided will vary according to the customer’s individual requirements – from having shared access with other users (which may include some web design services), to having a dedicated hosting service for mission critical services.  This involves the supply of all hardware and connectivity services being provided by the hosting company, together with a full range of managed services.  The provision of hosting services is generally considered to be competitive and dynamic, and regulatory intervention not necessary.

In sum, as outlined above, the most difficult policy issues are at the access level, where certain facilities essential for the delivery of these services are natural monopolies.  The other parts of the supply chain are characterized by greater competition.  Market failures tend to be limited to specific and individual instances of abuses of dominant positions.  This has implications for the appropriate regulatory response to take towards different parts of the supply chain: in general, ex ante rules will be needed at the access level to correct the persistent market failures associated with natural monopolies.  At the other levels, however, antitrust laws will be sufficient to deal with any specific instances of abuse of dominance.  This is discussed in more depth in answer to Question K, below.

Finally, Cable & Wireless believes that it is important to be precise about “technological neutrality” as a policy principle.  Too often, the term “technological neutrality” is used as a justification of or argument for the application of uniform rules (or lack of rules) across communications networks that have different characteristics with respect to the services supplied to the market.  When analyzed correctly, technological neutrality should mean that policies should not discriminate solely on the basis of the technical nature of the service delivery when (a) the competitive features of the markets are essentially the same, or (b) the services are fully “converged” from the point of view of economic substitutability.  The most important element to consider here is not the technical mechanism for delivery, but the customer experience of what that customer is buying and consuming.

B.                 How Should Broadband Services Be Defined, And What Are The Policy Implications Of That Definition?

It is not at all clear that public policy requires broadband to be defined separately from narrowband voice-grade communications, or other existing high capacity products.  Instead, policy considerations should be based on whether the service in question suffers from market failures, particularly in the area of access to essential facilities.  For example, the incumbent local exchange carriers control over 90% of the nation’s access lines, and therefore possess a monopoly over the local loop facilities.  Thus, regardless of whether a carrier seeks to provide basic voice-grade communications or high-speed data services, that carrer must rely heavily upon the ILEC to obtain access to its customer’s premises. 

In numerous reported instances, the ILECs refuse or fail to provide access to their facilities in a timely manner, and on terms and conditions that are just, reasonable, and nondiscriminatory.  In fact, Verizon’s performance in providing access to its facilities  (in the form of special access) was so poor that Cable & Wireless was forced to file a formal complaint at the FCC.[9]  Despite their poor performance in providing competitive access to their essential facilities, the Regional Bell Operating Companies (RBOCs) have petitioned both Congress and FCC to deregulate their broadband service offerings.[10] However, to free the ILECs from regulatory oversight at this juncture simply because the service in question is characterized as “broadband” would ignore the realities of the marketplace (which is that the local market is still monopolized).  Continued regulatory oversight of the ILEC’s local access facilities is both necessary and appropriate to ensure that these carriers do not abuse their market dominance in the local market to gain an unfair competitive advantage in other potentially competitive markets, such as broadband access.

In defining broadband, policy makers also should avoid a definition that would tend to promote one form of access over another.  Indeed, distinctions of this sort lead to market distortions, and ultimately inhibit consumer choice.  One obvious distortion regulators must avoid is subsidizing one technology to the short- or long-term detriment of other, competing technologies.  Thus, for example, regulators should avoid the temptation to subsidize the extension of DSL and cable broadband platforms to rural areas, thereby retarding the development of emerging satellite broadband services that may ultimately be better suited to serve such areas cost-effectively.  The short-term goal of expanding the availability of broadband services should not be allowed to trump the more fundamental goal of establishing the most effective ways to deliver services -- preferably with competition among access facilities.



C.                 What Is The Current Status Of (1) Supply And (2) Demand For Broadband Services?

Many developed countries, including the United States, have experienced a disappointing rollout and take-up of broadband services to the consumer market.  Indeed, of all OECD countries, only South Korea had succeeded in achieving more than 10 broadband connections (e.g. DSL or cable modem) per 100 inhabitants by June 2001.[11]  However, the success of South Korea is in large part enabled by the high proportion of the population living in apartment buildings, which in turn allows efficient local network infrastructure competition to develop.  Most other OECD countries, including the US, do not share South Korea’s concentration of the population in apartment buildings, and so face a significantly greater local network investment cost in rolling out broadband services to the consumer and small business sectors of the market.  This higher investment requirement (much of which is a fixed cost irrespective of customer take-up) makes local network infrastructure competition hard to achieve.

Apart from the exceptional case of South Korea, it is informative in evaluating the status of broadband supply and demand to benchmark the status of broadband take-up in the US with that in other countries, particularly within Europe and Japan.  This indicates areas where US policy has been either more successful than that of other countries or, in some cases, less successful in developing a competitive choice in broadband services.  Significantly, these comparisons indicate that unbundling is not an impediment to broadband supply, but facilitates the development of broadband supply and ultimately consumer subscription.  As the experience in Japan shows, this can be true even with respect to advanced “loops” such as unbundled dark fiber.

1.                  Europe

Under a European Commission regulation, incumbent local exchange carriers throughout the EU are required to provide unbundled loops, equipment collocation facilities and operational support system services to competitors at cost based prices.[12]  The implementation of this regulation has, however, been disappointing, as has been acknowledged by the European Commission.[13]  Many European national regulatory agencies have not enforced detailed unbundling requirements against their incumbent local exchange carriers in areas such as access to the incumbent’s operational support systems, and non-discriminatory access to space in central offices for equipment collocation.  Furthermore, the costing models used have, in some cases, overstated the real cost of the incumbent’s loops.  These problems are aggravated by the vertical integration of European incumbents, which provides a strong incentive for them to restrict access to competitors to protect their own downstream local and long distance services.

Chart 1, below, shows, on the vertical axis, the take-up of DSL in each EU member state (plus Norway and Switzerland), expressed as a percentage of the total incumbent’s subscriber lines.  Also shown in Chart 1 is the proportion of the incumbent’s subscriber lines that have been unbundled to competitors so that they may provide DSL service.  Chart 1, therefore, shows the relationship between the extent to which the incumbent’s subscriber lines have been unbundled to competitors, and the take-up of DSL services, provided by both the incumbent itself and competitors.

The European countries in this chart fall into three groups:

Chart 1



·        Germany, Denmark and Finland have all achieved some degree of success in a regulatory regime that encouraged some unbundling, although with significant difficulties.  These three countries also have amongst the highest take-up rates of DSL services (whether provided by the incumbent or competitors) of any other EU member state.  Providing a workable unbundling regime has apparently not only stimulated the supply of DSL services by competitors, but also provided incentives for incumbents to supply services as well.  Note that that the stimulation to overall take-up of DSL in these countries has significantly exceeded the number of unbundled loops provided by the incumbent to competitors.


·        Belgium, Sweden, and Austria  form a second group of countries.  In these countries, a very limited amount of unbundling has taken place (ranging from 2,900 lines in Austria to only 50 lines in Belgium, as of 31 October 2001).  Nevertheless, the competitive threat does appear to have incentivized the incumbents to achieve DSL take-up rates in excess of 1% of the subscriber line base, as of 31 October 2001.


·        Greece, Portugal, the UK, the Netherlands, Luxembourg, Norway, Ireland, France, Switzerland and Spain form the third group if countries.  These countries have nominally complied with the European Commission’s unbundling regulation (with the exception of Switzerland, which is not a member of the EU).  However, this has been done in such a way as to prevent any significant opportunity for competitors providing a commercially viable service to a national market.  For example, in the UK, BT was able to provide itself preferential access to central office collocation space for its own DSL equipment, while competitors were forced to apply to a tortuously long process that allocated space on a piece-meal basis, and initially excluding the most popular sites.  This made it impossible for competitors to plan a nationwide network, thus giving the incumbent a significant first-mover advantage.  The result has been that, in all these countries, not only has demand for unbundled local loops failed to materialize but, as of 31 October 2001, neither has any significant supply of DSL services at all (whether by the incumbent or competitors).


The above suggests that the lack of unbundling need not entirely constrain the growth of DSL services, as incumbents will still have some commercial incentives to provide these services.  However, unbundling is always accompanied by higher levels of DSL take-up.

2.                  The United States

Chart 1 also illustrates where United States stands in the rollout of DSL compared to European countries.  Under the 1996 Telecommunications Act, the U.S. has adopted a policy of requiring local loop unbundling.  Following this, competitors to the incumbents are reported to be providing 534,000 DSL lines, mostly through the purchase of unbundled loops.  Therefore, implementation of unbundling, measured in terms of loops unbundled for DSL (as opposed to those unbundled for basic voice), has been more than in most European countries, although arguably not as effective as in Germany, Denmark and Finland.  Correspondingly, take-up of DSL services (whether provided by the ILEC or competitors), has been stronger than most European countries.   In the US case, however, demand from competitors for unbundled loops to supply DSL service to the consumer sector, and the overall take-up of DSL services, has been lowered compared to most European countries by the relatively greater supply of cable modem service in the US.  Estimates put US cable modem subscriptions at 6.5 million (at September 2001), compared to only 1.3 million in Europe, despite similar market sizes..[14]  Therefore, taking account of cable modem take-up, the US would appear to have established a stronger position compared to Europe in respect of both unbundling, and DSL take-up.

It appears, therefore, from this empirical data, that the U.S. (along with a minority of northern European countries) has been well served by the unbundling regime instituted by the 1996 Telecommunications Act.  Going forward, broadband policy in the United States should continue to place a high priority on unbundling to encourage competition in the supply of high-speed services.

3.                  Japan

In Japan, where the regulatory framework has assisted broadband development in ways that have yet to be replicated in either the U.S. or the European Union.  As in the U.S. and the E.U., the incumbent local exchange carriers in Japan (NTT/East and NTT/West) are required to provide unbundled copper local loops and line sharing to competitors.  In addition, however, Japan has extended this requirement to unbundling of optical fiber local loops.  This requires the incumbent local exchange carriers to provide dark fiber between competitors’ customer sites, and an optical distribution frame in the incumbent’s central office, at which point it can be connected to the competitor’s optical line terminating equipment collocated in the incumbent’s central office.[15]  Currently, unbundled dark fiber loops can be ordered to reach approximately 43% of competitors’ customers.  A typical configuration would consist of a fiber feeder pair priced at 5,321 Yen/month ($42 per month), split into 4 distribution pairs to customer sites, priced at 642 Yen/month ($5 per month).  Therefore, four customer sites can be served with dark fiber leased from NTT/East or NTT/West at an average price of 1,972 Yen/month ($16 per month).

This regulatory framework has facilitated C&W IDC’s construction of a broadband customer access network covering 90% of large business sites in the Tokyo metropolitan and Yokohama areas.  C&W IDC will build similar networks in Osaka and Nagoya.  Clearly, optical fiber access is particularly appropriate for the business customers, enabling the supply of Ethernet, managed leased lines and Internet access at broadband speeds in excess of 100Mbps.  In Japan, optical fiber unbundling has thus enabled C&W IDC to invest in competitive broadband local network facilities to an extent that has not proved possible at present in the E.U. or many other developed countries.

E.         Do The Interconnection, Unbundling, And Resale Requirements Of The Telecommunications Act Of 1996 Reduce Incumbent Local Exchange Carriers’ (ILECs’) Incentives To Invest In Broadband Facilities And Services?

C&W believes that the 1996 Telecommunication Act, through requirements of local network unbundling and TELRIC pricing, has set the correct incentives for efficient investment.  The Act does not stipulate what kind of investment will occur, it merely sets the correct framework in which the market can determine the most efficient means of meeting consumer needs.  If competitors are able to construct and utilize their own facilities, to provide a service or a component of a service, at a cost equal to that of an efficient incumbent, then the unbundling and TELRIC requirements will provide the market opportunity for the competitor.  On the other hand, facilities competition will not develop in cases where competitors are not able to construct and utilize their own facilities at a cost equal to that of an efficient incumbent.  The 1996 Act, therefore, provides the correct framework for efficient facilities competition, and only efficient facilities competition, to occur.  In theory at least, where facilities competition is not efficient, service competition is still possible through purchase of unbundled components.

Notably, C&W believes that ILEC critiques of TELRIC as negatively affecting investment incentives are unfounded.  In fact, TELRIC pricing – as implemented by the FCC – does not dissuade efficient investment.  Incumbent access network operators receive full cost recovery, in addition to their required rate of return (profit) on investment.  The required rate of return corresponds to that which would be available in a competitive market, taking account of the degree of risk in the investment (a risk-adjusted cost of capital).  In addition, the FCC provided that TELRIC should be calculated using economic depreciation rates, even if regulators had previously used longer depreciation lives for public policy reasons.  It follows that any investment that is dissuaded by such a return is not an efficient investment.  Although TELRIC requires regulators to make judgments about what constitutes a risk-adjusted rate of return and economic depreciation rates, such oversight is appropriate with respect to facilities in which the ILEC retains significant market power. 

Indeed, rather than discouraging broadband investment, local network unbundling and TELRIC pricing actually promotes such investment by encouraging competition in broadband services using the access facilities of dominant local network operators.    For example:

·        As Chart 1 (in the previous section) illustrates, take-up of broadband services is highest among those E.U. member states that have been relatively successful in implementing unbundling regimes (particularly Germany, Denmark and Finland).


·        The OECD’s Working Party on Telecommunications and Information Services Policies has concluded:[16]


-                     The most fundamental policy available to OECD governments to boost broadband access is infrastructure competition.


-                     A second necessary step is to open up the network elements, of players in dominant positions, to competitive forces.  Policies such as unbundling local loops and line sharing are key regulatory tools available to create the right incentives for new investment in broadband access.  The evidence indicates that opening access networks, and network elements, to competitive forces increases investment and the pace of development.  Nearly all OECD governments have already introduced such polices, or taken decisions to introduce such policies, in respect to telecommunication networks.


C&W’s view, therefore, is fully consistent with the findings of the OECD’s Working Party on Telecommunication and Information Services Policies, namely that unbundling of dominant local network facilities (whether ILEC or cable networks) actually encourages broadband investment.

In addition, the reality is that relying on your competitor for significant inputs (such as loops, collocation, or even special access facilities) is incredibly difficult.  No carrier with a reasonable – even if not mathematically cost-effective – choice wants to rely on the incumbent LEC and be subject to the incumbent LEC’s provisioning delays.  In what is perhaps the strongest evidence of market power, incumbent LECs treat wholesale customers (whether that wholesale is for tariffed special access or for UNEs) as competitors, not true customers to be won through strong customer service.  This means that all entities that rely on the ILEC must bear hidden costs to compete that are not apparent from sterile comparisons of unbundled element prices and service rates.  This creates a strong incentive for competitors, when they have actual marketplace alternatives that are remotely reasonable from a cost standpoint, to migrate to those alternatives.  The idea that unbundling at TELRIC rates will prevent feasible facilities investment is simply nonsense.

Clearly, the working out of this process in the market, specifically the testing of where facilities competition is possible, has not been easy.  Market participants have needed to make plans based on predicted cost structures and market demand, and alter those plans as market developments have revealed progressively more information on where efficient competition can take place.  Specifically, experience has shown:

·        Facilities based competition in customer access is, at the moment, only viable for large business customers.  Despite a hope that alternative technologies, with lower fixed cost bases, could provide cost structures capable of competing against ILEC copper networks or cable television distribution networks, this has not proved to be the case apart from in dense urban areas.  This situation may change once fixed wireless technologies have developed further, enabling lower capital and installation costs.  For the moment, however, ILECs – particularly for business customers – remain the only suppliers of ubiquitous access facilities.


·        In residential areas passed by cable plant, cable broadband service is being deployed, as the cable plant is upgraded also to provide other digital cable services.  These products are differentiated from the ILEC’s broadband offerings by the fact that the ILEC guarantees a certain bandwidth, while the latter provides access to shared bandwidth (often for a lower price).


·        Competition in downstream markets is able to deliver significant consumer benefits.  Downstream market competition, however, is dependent on regulated access to unbundled network elements, where ILECs and cable television networks retain a dominant market position.  Unbundling and TELRIC pricing are key elements to regulated access.  Without such regulated access, competition would be harmed in all downstream markets that depend on customer access.


Significantly, C&W believes that any departure from unbundling and TELRIC-based charges would have two highly undesirable results.  First, it would protect ILECs against competition in downstream services, and so dampen incentives for efficient service provision, in a similar way to that which has been evident in Greece, Portugal, the UK, Luxembourg, Ireland, the Netherlands, Norway, France, Switzerland and Spain.  Second, any attempt to artificially stimulate facilities competition (over and above that which would normally develop from an unbundling and TELRIC pricing regime) by raising wholesale prices above those necessary to earn a risk adjusted rate of return and recovery economically reasonable depreciation would permit the incumbent LEC to engage in anticompetitive leveraging and raising rivals’ costs in downstream markets solely to subsidize marginal, inefficient investment.  The ILECs, through their foot-dragging in provisioning, already create enough additional incentives for facilities investment that marginal additional changes through pricing manipulations are unnecessary.

G.        To What Extent Have Competitive Firms Deployed Their Own (A) Transport, (B) Switching, And (C) Loop Facilities?

The regulatory framework of the 1996 Telecommunications Act has allowed competition to develop where it is efficient to do so (e.g. urban access networks, national backbone networks, and downstream services).  C&W has participated in deployment of competitive facilities through:

·        A global core IP backbone, with over 35 major nodes worldwide (covering North America, Europe and Asia), of which 21 are within the US given coast-to-coast national coverage (with two further US nodes planned);


·        A web hosting infrastructure, with data centers in around 40 cities worldwide (with around 880,000 square feet of rentable capacity), of which 9 are in the US (with around 340,000 square feet of rentable capacity).  An additional 30 data centers worldwide may be added if C&W successfully acquires assets of Exodus, of which 26 will be in the US;


·        Fiber customer access networks, wherever economic.  The economics of deploying fiber customer access networks is critically dependent on a number of factors, one of which is the regulatory obligations on ILECs to provide dark fiber.  Along with geographic considerations, this has been a critical condition for C&W IDC to deploy such networks in Tokyo, Yokohama and Osaka. 


Among the international lessons here, however, is that unbundling the ILEC supply of dark fiber to customer sites in dominant incumbent access networks is an effective as a means of stimulating efficient investment in local network infrastructure to businesses, and not a disincentive to investment.  In practical terms, this consists of:

-         unbundling existing dark fiber capacity in the feeder component of ILEC access networks, up to a connection at an optical distribution frame in the ILEC’s central office;


-         provision, by ILECs, of splitters and dark fiber to customer sites through the distribution component of ILEC access networks.


The United States should maintain regulation that makes available such unbundled network elements.



K.        Would It Be Appropriate To Establish A Single Regulatory Regime For All Broadband Services?  What Would Be The Essential Elements Of A Unified Broadband Regulatory Regime?

C&W believes that a common regulatory regime is appropriate for certain portions of the market for broadband services, but that care should be taken to distinguish those areas where regulation is required from market spaces already characterized by considerable competition.  Setting aside areas in which regulatory requirements are imposed to achieve certain social objectives, such as assistance to law enforcement or universal service, the degree of regulation should be dictated by the degree of competition.  As discussed in Section II.A, supra, broadband services are actually provided through a broadband supply chain that comprises multiple markets.  In general, ex ante regulation (as opposed to ex post application of antitrust law) is needed only with respect to those links of the supply chain characterized by persistent market failure.  Where there are no indications that a market failure will be persistent, it will be sufficient to rely on ex post competition law, including the application of a suitable merger control regime to prevent the establishment of dominant positions that could threaten the long term competitiveness of the market in question.

To determine the appropriate regulatory approach for particular market spaces, regulators will need to analyze the extent of competition in the various services involved.  To do this, it will first be necessary to define the relevant economic market, using a rigorous economic approach,[17] as is already adopted by many regulatory and competition authorities throughout the world, including the US.  Then, the extent to which that market is effectively competitive must be analyzed by considering the extent to which any market participants possess market power.

A range of factors should be considered in the analysis of market power.  A useful starting point is to consider the relative market shares of the market participants and how these have changed over time.  Others also need to be considered, however, including the extent to which there are any barriers to entry to the market concerned.  The extent to which a market is characterized by barriers to entry will be key to determining whether any participants hold a dominant position, either singly or jointly with others.  Joint dominance should not be ignored.  As the US experience in commercial mobile radio services (CMRS) has showed, duopoly can lead to fairly stable and high prices characteristic of market power.  As competitors have been added to that market, the duopoly was dramatically destabilized and prices plummeted.

Only once the above stages of analysis have been completed will it be possible to assess whether there is, or is likely to be, any market failures, and if so, what the appropriate regulatory response should be. This analytical approach is already followed by countries such as the U.S. and the U.K. and has also recently been advocated by the European Commission in its Proposed New Regulatory Framework for Electronic Communications Services.[18]

Where a market failure is expected to persist, it will be appropriate to impose ex ante regulatory rules on those market participants that have been identified as dominant in that market.  Local access services are one example where ongoing regulation is needed to ensure that competition is able to develop.  Within the US, competitive operators have experienced difficulties in obtaining local access services, even when those services are required by regulation to be provided. C&W has recently filed a complaint with the FCC concerning the difficulties it has experienced in obtaining special access services from Verizon.[19]

C&W is therefore extremely concerned that the U.S. government may now be considering the removal of regulations on the ILECs with respect to local access services through the implementation of the Tauzin-Dingell Bill.  As experience in the behavior of the vertically integrated European incumbents has shown (see Section III.C, supra) more, rather than less, stringent regulation of local access services is appropriate. Without the necessary regulation, the future development of broadband services is likely to be severely compromised.

Significantly, these principles for when ex ante economic regulation should be applied are not different between broadband and narrowband.  The underlying economics are the same.  What is needed is careful application of these economics considering the products that are available to consumers, the extent to which products are truly substitutable, and the extent to which competition – particularly beyond a relatively stable duopoly – requires access to network facilities for which there remains significant market power.


            Cable & Wireless does not believe that the United States must make any radical course corrections in order to rationally develop broadband services.  Broadband services are developing and being deployed, with different services appropriate for different customers, and with technologies such as satellite delivery emerging to serve areas not reached by DSL or cable modem service.  Consumers are selecting the services they need, and economic welfare will be diminished if demand is subsidized for its own sake.

Moreover, there is no reason to subvert the U.S. basic competition framework in order to promote broadband.  That framework appropriately has been tailored to allow competition to develop in downstream communications markets even when the upstream markets for network access facilities are characterized by significant market power – even monopoly.  The TELRIC framework includes a reasonable, risk-adjusted return on equity and economic depreciation rates, both of which should retain strong investment incentives for incumbent LECs.  Moreover, these prices should not undermine facilities based investment by non-incumbents, both because risk-adjusted rates of return and economic depreciation rates should allow construction of efficient competitive alternatives, and because the reality of relying on an obstructionist incumbent imposes so many costs that where reasonably feasible, competitors will build networks simply to avoid reliance on the incumbent.



                                                                        Respectfully submitted,


                                                CABLE & WIRELESS


                                                By:       /s/ Audrey Wright__________

                        Audrey Wright

                        Erik Whitlock

                        1130 Connecticut Ave., NW

                                                            Suite 1201

                                                            Washington, DC  20036

                                                            (202) 530-8085 Phone

                                                            (202) 530-8094 Fax


December 19, 2001



[1] “Dialup is Fine,” Results of survey by Park Associates available at

[2] Cable access costs between $40-$60 per month, including software, unlimited Internet access, specialized content and rental of a cable modem.  This range of costs is for North America as a whole and is reported in

[3] We note that service level guarantees are not as rigorous as those for dedicated connections (see below), and so DSL tend not to be used by businesses for business-critical use.

[4]  Furthermore, satellite technology is most efficient when used to provide a downstream broadband channel only.  The upstream channel is often provided through a narrowband telephone line.  Satellite, therefore is most appropriate to asymmetric traffic, typical of residential web-surfing.

[5]   See, for example, the General Accounting Office’s October 2000 report, Technological and Regulatory Factors Affecting Consumer Choice of Internet Providers.

[6] Oftel’s Broadband and Internet Brief, available at

[7] International Telecommunications Union, Challenges to the Network: Internet for Development 1999, available at

[8] IP!  (Joint Industry Study by JPMorgan H&Q and McKinsey & Company, May 2001).

[9] On September 4, 2001, Cable & Wireless USA, Inc. filed a formal complaint against the Verizon at the Federal Communications Commission (FCC), alleging, among other things, that Verizon’s actions in provisioning special access services to Cable & Wireless are unjust, unreasonable, and discriminatory in violation of several provisions of the Communications Act of 1934, as amended.  See Cable & Wireless v. Verizon, File No. EB-01-MD-022 (FCC Sept. 4, 2001).

[10] The Regional Bell Operating Companies have heavily lobbied the U.S. Congress and the FCC to permit them to provide high-speed data and/or broadband services free from regulatory oversight.  Through the Tauzin-Dingell bill, the RBOCs seek to provide interLATA data services without first demonstrating that their local markets are open to competition.  In a recently adopted Notice of Proposed Rulemaking (NPRM), the FCC will examine whether the RBOCs should be declared “non-dominant” with respect to broadband services.  Non-dominant status would free the RBOCs from certain regulatory requirements, such as tariffing and certain of the FCC’s pricing rules.  Public Notice, “FCC Launches Proceeding to Examine Regulatory Treatment of Incumbent Carriers’ Broadband Services,” CC Docket No. 01-337 (rel. Dec. 12, 2001).

[11] The Development of Broadband Access in OECD Countries, Working Party on Telecommunication and Information Services Policies, DSTI/ICCP/TISP(2001)2/FINAL, 29 October 2001, at 14 (Table 4) (“OECD Paper”), available at

[12]  See Regulation 2887/2000 of the European Parliament and of the Council of 18 December 2000 on unbundled access to the local loop, available at

[13] Seventh Report on the Implementation of the Telecommunications Regulatory Package, Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions, COM(2001) 706, at 19, available at

[14]  Based on European estimates from Cullen International, and US estimates from Telecom Markets, Issue 420, at 6.

[15] Cable & Wireless IDC Launches its Customer Access Network (CAN) (December 2001), available at

[16]OECD Paper, at 4.

[17] The standard tool of economic analysis used for market definition is the hypothetical monopolist (or “SSNIP”) test.

[18] Commission Working Document on Proposed New Regulatory Framework for Electronic Communications Networks and Services, COM (2001) 175, available at

[19] See Cable & Wireless v. Verizon, File No. EB-01-MD-022 (FCC Sept. 4, 2001).