Structural separation revisited

Premise #1: Telecoms market characteristsics

• High entry barriers (network duplication cost, mobile license cost).
• Scale business. The network effect is essential.
• There is ample legacy (incumbent operators inherited formerly state-owned assets).
• Telcos have a tendency to outsource network management to specialised firms such as Ericsson. Apparently, it is not considered core-business by many.

Premise #2: Private company characteristics

• The agency problem: management has its own personal agenda, targeted at personal wealth maximisation.
• Company targets are aligned with private management targets through stock & options rewards.
• Listed companies focus on short-term rather than long-term value creation in order to be able to pay out a predictable dividend.
• They have a tendency to repair instead of replace in order to minimise capex & maximise dividends. This comes at the risk of supporting outdated technology with 'regret investments'.
• Companies strive for low risk i.e. steady returns and hence predictable capex.

Premise #3: Government characteristics

• Civil servants are not entrepreneurs.
• Governments have extensive experience in running passive network grids (electricity, gas, water, roads, railroads).

Premise #4: Infrastructure vs. services

• Grids are vital for the economy & national security.
• They are typically long-lived assets, providing a steady but low return.
• Building a network requires high capex; technology shifts lead to periodical capex spikes.
• Networks thrive at a maximum utility level. More service providers means more business and a higher utility level.
• Services are high-risk business, requiring high opex, in a highly competitive market.

Premise #5: Regulation

• Regulation is a way to repair market failure.
• Market failure occures when cometition is insufficient.
• Insufficient competition leads to sub-optimal prices, quality, service levels, innovation, investment.

Issue #1: How to measure market failure?

• It should not be a matter of opinion, but of thorough & independent research.
• When are prices 'low'? How to benchmark?

Issue #2: How much is enough?

• In fixed, it famously sounds 'two is not enough'.
• In mobile, the OECD recently said 'three is not enough' (please do network sharing instead).
• Does network duplication make sense or destruct value since it undermines the utility level?

Issue #3: Are OTT services full substitutes for managed?

• Are managed services, with 99.999% availability & reliability, required for vital communication (emergency calls)?
• Which level of QoS or QoE is required or sufficient?

Issue #4: Is the active layer part of the network or part of the services layer?

• Active equipment coupled with a passive network raises the technology risk, leads to frequent technology shifts & capex spikes and thus undermines the low risk/return profile of grids.
• Active equipment coupled with the service provider layer introduces technology risk to the services business & raises the entry barrier. It also creates physical space-related & technology issues for service providers trying to compete.

Issue #5: Which role fits a government agency?

• Can a governement-controlled body act as an entrepreneur and run a business?
• Which role suits such a body (passive only, providing permits? or active, investing goverment funds & taking ownership?).

Solution: Structural separation. This model ...

• ... creates a state-owned natural monopoly grid (NetCo), which maximises the utility rate. Goverments are well-equipped for this. It doesn't compete with any company at the services level.
• ... could be a joint venture of market participants in a different model. For instance, all interested Italian telcos (Telecom Italia, Vodafone, Wind, ...) could jointly buy Metroweb and injects their network assets to create a national jointly owned grid. The NetCo in time may be spun off because of its low risk/low return profile that doesn't match the profile of its owners.
• ... frees up funds for services companies (ServCo) to improve services, to innovate & to keep prices low.
• ... creates an incentive to maximise competition at the services level in order to maximise the utility rate. In other words, the NetCo will treat all ServCos equally.
• ... incentivises the NetCo to support net neutrality because it raises the utility rate. As a result, competition is enhanced with pure OTT providers.
• ... connects to operator strategies of outsourcing network management.
• ... probably caters to the markets best if it allows for both access at the passive layer (unbundling) and at the active layer (resale). Service providers can chose what fits them best. This also allows for a specialised OpCo to arise (as in Singapore).