Cable and Wireless Alternatives to the Local Telephone Exchange
Alan J. Boyer, A. Daniel Kelley, David M. Nugent

This paper updates a 1994 report on the prospects for local exchange
competition entitled Enduring Local Bottleneck ("ELB I").
It conducts an empirical assessment of the prospect that cable
telephony and wireless technology will provide significant
competition for Incumbent Local Exchange Carrier ("ILEC")
residential services.

Separate business cases for cable telephony and wireless local
loop are constructed and analyzed. The cable telephony analysis
assumes that cable networks are already "fiber rich" or Hybrid
Fiber Coax ("HFC"). In the case of fiber rich systems a small
amount of investment is required to make the system into an HFC
platform capable of supporting telephony. An HFC system is capable
of supporting telephony with the addition of customer interface
units, host digital terminals and additional power.

There are substantial costs involved in converting older generation
cable systems to fiber rich systems. These are considered to be
video service costs. In other words, cable telephony is treated as
an incremental service. The wireless local loop business case
assumes that PCS providers use a High Tier CDMA technology.

PCS is selected as the preferred spectrum allocation because
the recent auction winners hold unencumbered spectrum and have
a "greenfield" business opportunity. CDMA technology is selected
due to anticipated widespread coverage by CDMA systems and
its spectral efficiency. Wireless local loop service is assumed
to be an add-on to mobility service. This means that most of the
cost of building a wireless infrastructure are incremental to
mobility services.

As in the original study, the findings are that the competitive
technologies are technologically viable. However, profitability
is far in the future and internal rates of return are relatively
low, except in the most optimistic cases. As a result, competition
is likely to develop slowly, beginning with the more attractive
markets. Residential competition may never become ubiquitous.
The conclusion is that local competition may well develop, but
pro-competitive public policy and a substantial amount of time are
necessary.