America Online has announced an investment of up to £120 million to open up the local telephone network in the UK to deliver broadband services, including broadband television and video on demand.

AOL has more than a million broadband subscribers out of a total of more than 2.3 million members in the UK. The investment in the UK local telephone network is being funded by parent company Time Warner.

The process of local loop unbundling allows third party companies to replace BT as the service provider over the ‘local loop’ telephone line from the local exchange to the customer.

“We finally have the opportunity to bring large-scale competition into the UK’s national telephone network,” said Karen Thomson, the chairman and chief executive AOL UK Limited. “The opportunity to compete on a level playing field with the incumbent will encourage substantial investment in digital services and content in the UK. This will allow the UK to catch up with leading European countries, where unbundling is already delivering higher value services to consumers.”

The initial investment of £50 million in the first half of 2006 will cover up to 300 exchanges, covering around a fifth of UK households. If successful, the rollout may be extended to up to 1,000 exchanges, covering more than half the country, at an estimated cost of a further £70 million.

In exchanges where it is not economic for AOL to have equipment installed, it will continue to deliver broadband and telephone services using wholesale access services.

AOL has completed testing in two London exchanges in Battersea and Ealing. The unbundled services will be ADSL 2+ compatible, enabling broadband services of more than 8Mbps in the future.

Bulldog Communications, now owned by Cable & Wireless, currently delivers 8Mbps broadband using local loop unbundling.

Satellite broadcaster BSkyB is in the process of acquiring broadband service provider Easynet, and is expected to expand into the delivery of broadband services.