To include or not to include cable in bitstream?

In a recent article 7 opinion, the Commission expressed serious doubt about OPTA's inclusion of cable for wholesale broadband access in The Netherlands. According to the Commission, inclusion of cable requires a high retail elasticity between DSL- and cable products which was not suffiently demonstrated by OPTA. the Commission criticize the proxy used (the situation in Austria) and notes that price elasticity could be limited by factors such as the perception of the brand and the quality of the service. On indirect subsitution, the Commission reiterated its test that need to be demonstrated :

(i) ISPs would be forced to pass a hypothetical wholesale price increase on to
their consumers at the retail level based on the wholesale/retail price ratio; and

(ii) there would be sufficient demand substitution at the retail level to retail
services based on indirect constraints such as to render the wholesale price
increase unprofitable;

(iii) the customers of the ISPs would not switch to a significant extent to the
retail arm of the integrated hypothetical monopolist, in particular if the latter does
not raise its own retail prices.

With regards to cable substitution, one could also usefully refer to previous Commission opinions in France (where the Commission considered that cable networks may only be hypothetical substitutes due to especially high switching costs associated with the replacement of customer premise equipment and the absence of demand from ISPs for cable-based wholesale
broadband access) and Spain where the Commission also rejected indirect constraints of cable networks.

In any event, one should remember that the capillarity of cable networks seems also crucial. The Commission already noted in its comments to the Dutch first market analysis that "Even if one were to ignore actual switching possibilities for existing wholesale customers and focus on substitutability between both products for new entrants (which have not committed to either DSL or cable infrastructure yet), there appear to be limits in the substitutability between both products. Cable-based WBA products in the Netherlands offer a much more limited coverage than the DSL-based WBA product of KPN". Economists also believe that "Only in the case where a rival firm reached a network roll-out and geographical coverage comparable with the existing operator(s), where the necessary spare capacity is available, wholesale billing and account management system exist, and where switching costs are low, supply substitution appears to impose a strong enough pricing constraint on the existing wholesale products. In this case the rival firm’s self provided inputs could be included in the same relevant wholesale market together with incumbent’s wholesale offerings» (Cave, M., Stumpf, U., and Valletti, T (2006) p. 17)