Monday, October 20, 2008

Will Telstra bid if it is structurally separated? Betcha!

Our fourth poll has ended, but to no obvious conclusion. A ridiculously small sample was heavily skewed toward structural separation (65%), but functional separation wasn't completely off the table (35%). Operational separation (5%) and accounting seperation (which you couldn't even vote for!) are excluded going forward.

The topic gets a lot of press these days, mostly in New Zealand, Australia and Italy. Check out this Arcep document for an introduction to separation.

Here is why we believe in structural separation.
  • In a world of intramodal competition on the telco network (and intermodal competition between copper and coax) there will never be full equivalence between all players (incumbent, unbundlers, resellers, etc.). As much as PTT's want symmetry between telco and cableco competition (i.e. open access to cable networks), they should also allow for symmetry on the copper network. There will never be true symmetry if one service provider also owns the network, and the others don't. No matter what they say, the incumbent will always be at an advantage.
  • Look at it from a synergy point of view. The incumbent reaps all the synergy benefits stemming from owning both the network and a service provider. These advantages should be equal and shared. And hence, all incumbents cry foul when confronted with the threat of being structurally separated. But that's the whole point, brothers and sisters: the regulator should focus on simply making PTT's smaller and creating long-term competition from viable altnets.
  • KPN has successfully staved off structural separation. On the one hand, this is due to its full portfolio of wholesale services and a certain co-opetitive stance toward resellers. On the other hand, the world is facing next-generation access investments (i.e. FTTH), which are not only expensive (to be carried by a company the size of the incumbent only) but also create huge regulatory uncertainty. In the Netherlands, hardly anybody is left to consider serious and long-term competition (apart from cable). Orange Broadband is now owned by T-Mobile and put up for sale; bbned and its sisters can hardly be taken seriously because parent company Telecom Italia has a lot on its mind; and Tele2 seems to be withdrawing from western Europe altogether.
  • Only when structurally separated can the telco appeal to the right investment communities: the dividend aficionados can buy the network, retail minded investors can focus on service providers (higher risk/return profile), etc. Also, only in this way can the network attract subsidies or create public/private partnerships. In a way Telstra acknowledges this: if it is structurally separated, it will not bid for the National Broadband Network contract and subsidy (AUD 4.7bn). But once separated, the network company will surely bid for the contract; I will eat my hat if it doens't!
We have looked very hard and closely at all the arguments against structural separation, but none really seems to make sense. Yes, it will be quite disruptive. And it will costs a few pennies. But to say that it would take away any incentive to invest just isn't very 21st century thinking. Finally, to say that you want to own the network (to generate the cash and allow you to pay fat dividends) is not very clever in light of the above (we want equivalence and symmetry, right?).

To round off, we want to share some fun related to the topic - unless it brings you to tears, of course.
Telecom Italia is one of those companies that may face structural separation and it will come as no surprise that Tiscali is all in favor. FastWeb takes a different position: they think it's a bad idea! Functional separation would suffice. But wait a second: isn't FastWeb 82% owned by Swisscom, another PTT?
With hindsight, that calls for a round of applause for Optus (the Australian subsidiary of SingTel). It openly called for structural separation of Telstra, even if it's parent company was fighting the same fate in Singapore. Or is it the other way around: was SingTel being a hypocrit?

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