The economics of local loop architecture for multimedia services

Abstract

This paper illustrates the transformation going on in the new local loop architectures for multimedia services due to new technologies, both wireline and wireless. New local loop architectures such as the hybrid fiber/coax (HFC), fiber to the curb (FTTC) and, in the future, fiber to the home/building (FTTH/B) tend to have production and economic cost characteristics that are fundamentally different from the traditional twisted pair copper distribution networks. Their scale economies tend to be lower and there are also strong indications of significant economies of scope that were not available to either telephone or cable television networks of the past. Policy implications are: (1) that it is very unlikely that a single uniform architecture will prevail in the way that twisted copper pair dominated the telephone network and coax cable dominated cable television in the past. Rather, the local loop of the future is more likely to be characterized by heterogeneous technologies. (2) We will see increased competition in the local loop due to a low probability of effective entry preemption and entry encouraged by reduced economies of scale and new economies of scope.