Why ADCO? Why Now? An Econmic Exploration of Industry Structure for the Last Mile in Local Telecommunications Markets

This Article discusses important economic characteristics of local exchange markets. First, this Article explains that entry into the market requires large fixed and sunk costs, making entry risky and necessitating scale economies. Consequently, only a few local access networks can supply the market. These networks cannot be small, however, because a large market share is required to realize sufficient scale economies to effectively compete with the ILEC and survive. Secondly, acquiring the needed market share may be difficult for entrants who either attempt to purchase unbundled network elements from the incumbent or attempt to build their own network from the ground up. Given the substantial scale economies required, it may not be possible for a single carrier to acquire sufficient retail market share in a timely manner to exhaust economies of scale in its wholesale network. Accordingly, this Article shows that reaching a scale of operation that allows the entrant to compete with the ILEC may be best achieved through the entry of an Alternative Distribution Company or ADCo, a wholesale-only carriers\u27 carrier for the proverbial last mile. The ADCo can consolidate the consumer demand held by retail CLECs, thereby reducing risk and costs by expanding output quickly. The disincentives to wholesale supply possessed by the integrated firm do not exist for the ADCo. As a result, the exclusively wholesale nature of the ADCo permits many providers of advanced telecommunications products and services. As such, their presence in the market should be welcomed and encouraged