The Hindu Business Line : McKinsey caution on fixed line local loop unbundling

IN the backdrop of Telecom Regulatory Authority of India's recent recommendation to unbundle the fixed-line local loop, a McKinsey report states that such a step could be a threat to the development of fixed-line infrastructure.

In simple terms, local loop unbundling means that the fixed-line operators are asked to share their last mile infrastructure with competing service providers.

In developing nations, the incumbents' fixed-line infrastructure might never be developed, let alone upgraded to provide high speed data services as a result of local loop unbundling, says a recent McKinsey quarterly report.

Regulators could treat fixed-line as a public good, similar to roads and railways and subsidise the development of access network, suggests McKinsey. In South Korea, where two thirds of the households have broadband, government subsidises the service providers and their customers. TRAI has recently recommended local loop unbundling of wire-line infrastructure which are over five years old as one of the measures to increase the broadband penetration in the country.

Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) officials echo similar sentiments with regards to infrastructure development.

"For provision of high speed broadband, we have to upgrade most of our last mile wire-line infrastructure. Why should we invest in upgradation if we have to share that infrastructure with our competitors," says an official. "Some of the private operators can provide broadband access on their wireless network. Would they share their wireless network with us," asks another government official.

McKinsey points out that the incumbents' fixed-line revenues, which tend to account for 60-80 per cent of their total revenues, are under pressure due to other technological developments such as cable and wireless and Voice over Internet protocol (VoIP). Over the next five years, incumbents could lose up to 40 per cent of their fixed-line retail revenues as customers switch to mobile telephones. This has already happened in Hong Kong. In the US and some European markets, competition on fixed-line could swallow up to 40 per cent of incumbents' profits from that business.

In this backdrop, McKinsey also suggests that regulators could focus on both fixed-line and wireless operators to build broad access networks for both voice and data. It would mean regulating the mobile industry as much as fixed-line industry to ensure widespread development of a mobile data infrastructure at accessible prices. Regulators should recognise that fixed-line service providers compete not just among themselves, but with mobile operators and other service providers too. They could let the market decide by eventually compelling mobile operators to unbundle their last mile or share their networks with others, the consulting firm says.

The Department of Telecom (DoT) in its comments sent to the TRAI has suggested similar measures. It has called for a "technology neutral unbundling" path wherein all operators are asked to share their last mile infrastructure.

In recognition of the fact that mobile operators also check the fixed operators market power, regulators might stop forcing incumbents to unbundled their local infrastructure.

In India, the market power (in terms of subscribers) of mobile operators is likely to cross that of fixed-line operators by the end of 2004. The number of mobile subscribers is likely to cross that of fixed-line subscribers by 2004 end, as has been projected by the Telecom Regulatory Authority of India as well as other analyst reports.

Recognising the fact the current conditions may lead to significant loss of revenues and profits for incumbents, the consulting firm also has a word of advice for them too. Cost cutting, provision of their own VoIP, mobile and other services, adapting their strategies or even influencing regulatory decisions are some of the measures that incumbents should take.

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