Tuesday, March 10, 2009

Structural separation revisited

Apparently, the regulator nor many a competitor thinks structurally separating the incumbent is needed. In the Netherlands, the situation could be the same. Still, I believe there could be a point in moving the issue up the political agenda. Yes, it's a huge issue, but precisely that may require huge steps.
  • Half of the employees of this regulator are former KPN employees. Most munifiber networks have recently become KPN partners. Are the representatives still objective?
  • Structural separation is seen as a remedy, whereas I would see it as good for business. As long as this doesn't change, structural separation will likely not happen. Unless the incumbent totally screws up (Australia), or regulation suddenly changes (US). KPN is well respected (perhaps even too much so), also among competitors. It has a good wholesale portfolio. Further, competitors are not asking for separation. And any competitors still around seem to have doubtful commitment to the Dutch market (BBned was put up for sale by Telecom Italia; Tele2 is facing large investments in mobile and broadband but hasn't made any commitments yet; Online doesn't sit very well in T-Mobile's portfolio, but there are simply no buyers).
  • Separation is unlikely as long as regulators think that competition is at a decent level. In the broadband market, KPN has a 45% share, cable has 40% and unbundlers have the other 15%. The EC is rightfully worried over ongoing incumbent dominance. It looks like the 15% share of altnets will be going down, especially when the market moves toward FTTN/VDSL.
  • The advantages of structural separation are not about pricing only. Incumbents like to drag their feet; let's not forget that Openreach's P&L still is included in BT's. Also, separation opens the way to attract third-party funding, or even nationalisation.
  • Why do incumbents object to structural separation? Not just because of the disruption and the one-off costs. Surely, it must be because they fear the loss of any synergy benefits of being vertically integrated. And that is precisely why they must be separated: this inequality of enjoying these benefits will only go away once the incumbent is separated. In other words, if incumbents object, they implicitly say they have advantages over competitors. This is not good for true, long-term competition.
  • If you think that proper wholesale prices are the way to avoid structural separation, look again. BBned (active operator in Amsterdam's Phase 1) pays only about half of what is proposed now by her employer (14.50-17.50 EUR/mo/line for ODF access to passive FTTH lines). Going forward, active operators and service providers will have to recoup about 10 EUR/mo more from their customers than currently is the case in Amsterdam. Does FTTH have this kind of pricing power? It certainly paves the way for low margins at service provider businesses. KPN will be the only service provider that can afford this kind of pricing.
  • KPN will not ony be a service proviser, but it also is co-owner of the passive layer (with a call option to a majority stake), and possibly the monopolist of the active layer (which is not regulated), which could lead to serious re-monopolisation. I would like to call upon the regulator to make sure that the active layer doesn't turn into a monopoly (as it will in Singapore). If it does, the wholesale tariffs mentioned above should fall. Further, an active operator monopoly is not good for competition, because true service differentiation arises on the active level. Otherwise, we are stuck with WBA only.