Wednesday, December 03, 2008

KPN and OPTA are negotiating a deal

My son takes swimming lessons, and I discovered there is something distinctly fishy about it. It has all to do with perverse incentives: the teachers have no interest in making him go through the course in the shortest possible time. That would only endanger their jobs.

No, this story will not lead to the GFC (global financial crisis), but to telecoms regulators. They too are perversely incentivised. They have no interest in deregulation, because it will make them lose their jobs.

I had an interesting email conversation with a highly valued reader on the upcoming regulation (tariff proposal December 19) of the planned KPN/Reggefiber FTTH network. Turns out, political issues and sensitivities are all over the current negotiations between KPN, Reggefiber, OPTA (the Dutch NRA) and NMa (the Dutch competition commission). I have no such sensitivities at all - for that I beg your forgiveness.

Here are the wants & needs of the main parties involved:

  • First, it wants the joint venture with Reggefiber (Reggefiber FttH, AKA Glashart) approved by NMa. This is expected before the end of the year.
  • It starts off with a minority interest for KPN, in order to get the whole thing unregulated, or at worst, under NMa's jurisdiction.
  • In due course however, KPN wants to exercise its call option to turn its stake into a majority shareholding.
  • They want to fiber up the country. Multiple sources tell me that KPN suffers a slight (read: severe) form of panic over competition from the Dutch cablecos (Warburg/Cinven's Ziggo and Liberty Global's UPC, mainly), which have near nationwide coverage. FTTH is just one way to stop the bleeding. Beefing up the TV activities is another. Also, they are heavily lobbying for open access to cable networks - which is not going to help (cablecos cannot resell voice on the KPN network, and KPN cannot resell TV on the cable networks; they are supposed to invest in infrastructure and launch their own copycat service, in order to create intermodal competition - this is OPTA policy).
  • It wants to stay in business. Losing regulation of the FTTH market would put it out of business for a large part.
  • It wants to remain independent, not be part of NMa, a political topic.
  • Instead, it wants to merge with the Commissariaat voor de Media, the Dutch media authority, to form an Ofcom or FCC of sorts (but without the spectrum jurisdiction, which resides at yet another agency, the Agentschap Telecom).
  • On its part, OPTA cannot afford to block progress and Keynes style investments. We are talkings billions of euros here, and a big impact on the economy.
There are also cross-sensitivities:
  • OPTA can hurt KPN by delaying its decision making. Not a very complicated task for a government agency. See above: KPN wants to move fast in order to stop the bleeding.
  • KPN can put OPTA partly out of business by staying under the radar (by having a minority interest in the joint venture). The minority interest would imply that the entire access network wouldn't be regulated anymore. This would have huge Europe-wide consequences, which is why the proposed Reggefiber deal is tracked in every telco boardroom and NRA agency in Europe.
So, what do you get when you put all these wonderful ingredients together? Answer: a politically negotiated deal:
  • OPTA assigns Reggefiber FttH SMP (significant market power), which is legally highly contestable, in order to be able to regulate it.
  • KPN accepts this, in order to get NMa approval (for which OPTA gives input, which in itself is legally contestable too). KPN also wants OPTA to copy/paste the Reggefiber business model to arrive at the proposed wholesale prices and caps.
  • The call option plays a crucial role. It implies that GNA (Amsterdam) and AFC (Almere) may remain outside the joint venture, because KPN/Reggefiber only has a minority stake.
One last word. In case you were wondering how OPTA came up with the EUR 2,50 additition to Reggefiber's line rental price to arrive at the proposed wholesale caps: there was no financial modelling involved. Just politics.

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