The separation of telecom networks in Europe: from regulatory remedy to new business models for telecoms

structural-separation

The subject of how to curb the power of dominant companies in the communications sector has recently returned in vogue thanks to the intervention of US democrat Elizabeth Warren, who advocated a plan to downsize big online platforms (such as Google, Facebook, Amazon etc.) in order to contain their economic power. Should such a project were ever implemented, it would not be the first time in America, since a similar plan was pursued in the 80s with the dismantling of AT&T and the creation of the c.d. Baby Bells. At that time it was a gigantic operation, which brought down the value of At&T by 70% and completely reshaped the US telecommunications market (AT&T was not only the dominant telecom provider, but also a main manufacturer of equipments). While waiting to know how this debate will continue in the United States, let us examine how the issue of containing dominant operators in the communications sector has instead developed in the European perspective.

The European Union and the separation of telecom networks

In Europe this issue is essentially about telecoms (since big European OTT never existed so-far), and it is normally placed differently than in the United States: rather than downsizing economic dominance, the EU preferred to act against the vertical integration of telecom incumbents to reduce the effects of potential abuses and discrimination against competitors, namely new comers who were asking for access in order to compete in the retail market. Thus, the European telecom legislation of 2009 provided for a standard remedy on “functional” separation, aimed at separating wholesale functions and departments from the incumbent’s retail business, without however imposing a drastic structural separation of the network. Despite the high debate this remedy, inspired by the pre-existing model of separation of BT and OpenReach in the United Kingdom, never found significant application in the EU – with the exception of Italy, were incumbent TIM committed in 2008 a similar network organization. Fact is, the European Commission, represented at the time by the pugnacious Viviane Reding (the lady of both roaming and GDPR reforms) had to give up the main option, that is to say the real separation (structural) of the incumbent’s network via the creation of a distinct entity. This type of regulatory remedy found too much hostility by the larger European countries, particularly France and Germany. At the end, this type of regulated separation was included in the European frame work just as “voluntary”, that is to say as a unilateral act of the incumbent (normally in exchange for some deregulation of the sector). Even in latter case, however, there were no significant practical applications, apart from Sweden, where Telia separated the network in 2008 by creating the newco Skanova (a project which was however reconsidered a few years later). An operation of this kind is now underway in the United Kingdom, where OFCOM, thanks to its super-powers (far superior to those of other European regulators) has convinced BT to consent to the separation of Open Reach. The process is at an advanced stage but, remarkably, the separation only concerns the Open Reach staff and non-network assets, while the incumbent’s network remains the property of BT.

The new European Electronic Communications Code

The new European Code (adopted last December 2018 and which will be implemented by European member States by the end of 2020) did not provide for a regulatory remedy on structural separation of the dominant telecom networks, while the old rules on both functional and voluntary separation were confirmed. Compared to 2009, this time there was no battle either, since the subject of network separation by way of regulation had lost interest among European governments and regulators. The reason for this diminished interest lies in the fact that structural separation is a very difficult option to implement against hostile (and mostly listed) companies; it is in fact a question about separating business functions, rather then companies, therefore the boundaries between wholesale and retail are difficult to trace in the absence of friendly cooperation by the management.

A new model for the separation of telecom networks: the utility model

Meanwhile, the issue of the separation of telecom networks has is make its way in Europe in other forms. Having abandoned the idea of ​​a regulatory remedy, as in the case of structural separation, or negotiated deregulation, as in the case of voluntary separation, in some countries the separation of the network instead emerged as a business opportunity. In the Czech Republic and Denmark the local incumbents proceeded to spin off the network on the basis of financial considerations. By doing so, the separated telecom network is treated as a distinct asset within the entire telecom business of the incumbent, with the aim of making it more linear and interesting for investors: in fact a pure telecommunications network, without involvement with retail, appears similar to an utility business (such as energy, gas, transport, water) characterized by reasonable and certain returns of investments, defined in the long term. It is no coincidence that the two operators involved, respectively CETIN in the Czech Republic and TDC in Denmark, are both controlled by investment funds, that is, by investors who have a long experience and a favorable approach to the financing of utilities.

Separation of the telecom and wholesale-only network

This new course of the separation of the telecom networks would seem to find a backing in the new European Code of electronic communications, whose article 80 foresees a light regulatory regime for the “wholesale-only” operators, namely telcos exclusively installing and operating telecom networks for the benefit of other operators, and with no involvement in the retail business. The grant of such a light regulatory regime is based on the assumption that this type of operator is spontaneously encouraged to provide access services without discriminating or abusing against access seekers, which is in fact are seen just as clients and not as competitors (unlike the case of the vertical-integrated telecom network); furthermore, the Commission believes that this type of operator constitutes a natural vehicle for investment by infrastructure funds. Remarkably, art. 80 of the new European Code requires the separated network to be truly independent from the retail business, in other words the light regulatory regime can be invoked only when the incumbent has lost contro lover the network (which is not the case, yet, of CETIN and TDC).

The separation of telecom networks as the entry point of a new business model: retail services as a bundle of connectivity, services and content

Should the network separation model actually develop and expand (eventually with the wholesale-only variant) also thanks to growing interest by infrastructure investors, the telecom sector may begin to change dramatically. On one side, network operators may find convenient to consolidate massively, with the result of the return to the quasi-monopoly in some areas; on the other side, the retail market may become more dynamic, also with the entry of new players such as content producers or value-added service providers, which could result in offers of connectivity bundled with streaming or OTT services. Finally, telcos and content/service providers would face these mergers that have often been resolved in disasters in the past. If this scenario were actually realized, there would be plenty of new antitrust and regulatory implications, thus respective supervisory authorities should start even now to keep an eye on developments.

Network separation and 5G

The business of separating telecom networks could also be relevant in the 5G debate. Despite mobile operators being conservative in defending their vertically-integrated model, it is clear that the very high investment costs required for the 5G roll-out could make convenient the option of a single, not vertically integrated network. Such an idea was suggested some time ago with an internal memorandum of the Trump administration, which considered the single network option a possible remedy to stand up to the Chinese in the run for the 5G. The document was denied after protests by US operators, but nevertheless reflected real strategic discussions within the US administration. Of course, it is unlikely that a single and open 5G network could ever be imposed by way of legislation, but some government could still try to encourage it. Even if mobile operators tended to oppose it, they could never deny the evidence that the installation of a plurality of 5G networks is an unrealistic hypothesis. Remarkably, some of them are already thinking about network-sharing precisely to reduce costs (there are reports in Italy about TIM and Vodafone).

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