Tuesday, September 02, 2008

Structural separation: spread the incumbent benefits

Very disruptive new regulation are coming to the telecom sector. Incumbents will suffer, both former PTTs and mobile operators.

Dominant operators are finally attacked. The synergistic benefits of running an integrated operator will be spread among all service providers.
The stranglehold that mobile operators hold on the market may end too.

Here are two of the most significant regulatory developments today.

1. Structural separation
In Australia and New Zealand several people call for structural separation of Telstra and Telecom NZ respectively.
Australia is preparing an NBN at the cost of AUD 4.7bn. At that price, it will probabaly be a FTTC network, but FTTH is still a possibility. It prompted opposition spokesman Bruce Billson to propose structural separation: "the natural monopoly that will be produced requires that kind of clarity".
Telstra retorted that structural separation "increases costs, reduces efficiencies, limits future innovation, and most importantly, kills off investment". Telecom NZ also resists.

I am very much in favor of structural separation on these grounds:
  • It will be good for competition. One-time costs are something we'll have to live with.
  • You bet it will reduce efficiencies that are linked to operating a vertically integrated monopoly that controls all three network layers (passive infrastructure, active infrastructure, services). Reducing efficiencies is not the purpose of introducing competition, but it is inevitable. There needs to be symmetry between all service providers on the telco network. Only then will there be true equivalence. Also: why should the incumbent be the only operator reaping all the synergetic benefits of integration? And don't forget: one of the main tasks of any NRA is to make the telco incumbent less dominant and hence: smaller! After many years of competition, these incumbents still dominate the market. Put differently: if the incumbent says it's bad for them, it must be good for the market!
  • Innovation and investment theoretically suffer because the operator of the passive layer most likely would be a monopolist. However, I don't buy this argument, in our brave new co-opetitive world. Still, I suppose value-based management, regulation, incentive schemes and ownership structure of the passive layer could help solve the problem.

2. Bill and keep
British NRA Ofcom launched a consultation on the future of mobile communication (until November 6). Among the new regulations could be a move from termation charges (currently around 15% of mobile revenues) to a bill and keep regime (by 2011).
At about the same time, Vodafone released a report claiming that 40m Europeans would cancel their subscription if the sector moved to US style interconnection (i.e. bill & keep).

It has been stated before: lowering interconnection rates, or indeed moving to bill & keep, is meant to increase usage and lower prices. So how does Vodafone arrive at their claim of 40m people (10%) pushed out of the market? Could it be the way they structured their inquiry? "Suppose we would be forced to double our rates, because we would have to bill you for both making and receiving calls, would you still subscribe to our service?"
Or does Vodafone fundamentally disagree with the expected price elasticity? That seems odd, since mobile substitution still has a long way to go.
It remains to be seen how much pricing power mobile operators really have in the retail market. But it sure looks like they have to do another round of slimming down.
A different way to look at it is the fixed line alternative operator perspective. These operators look upon mobile termination as a subsidy for mobile operators building out their networks. Again, after so many years it is time to do away with this subsidy.

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