EU objecting to functional seperation of Telecom Italia?

This is how subtle it gets: AGCOM (the Italian) NRA proposes functional separation of Telecom Italia. Great, isn't it? Only the second time in Europe, after BT/Openreach/EAB. TI would create a network company Open Access, and an independent board to oversee things.
But wait. This time it's the EU that objects. Basically, it fears the terms will be too friendly for Telecom Italia.

"The network is our core business." So far, only SingTel and Bharti Airtel (and a more recent story here) have been as enlightened as to step away from this old-style telco thinking.
Telecom Italia would have all the reasons of the world: it has a heavy debt load, and taking separation even one step further (structural separation) would allow it to attract third-party funding to roll out FTTH.

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?

Land of war and mystery

Being part of the Fiber Ring sometimes brings along a Lord of the Rings feel. Fiberland too is full of war and mystery.

Take Italy. The government is preparing to pump EUR 1bn into a nationwide broadband effort at a total cost of EUR 10bn (at this price level one can only assume we are talking NGN or FTTC/VDSL, not NGA or FTTH - unless of course the government is thinking of creating a nice and big digital divide by only hooking up the north). Yesterday AGCOM added that Telecom Italia indeed needs this kind of government and PPP support, because it cannot do it on its own.
Interestingly, the whole effort is supposed to add 1.5-2.0 pp to GDP.

Can anyone explain to me how any such investmmnet could not be justified, in light of this GDP enhancement? (Doing a little Wikipedia research, it looks like the economic benefit could be something like EUR 28bn a year.)

Or take the Netherlands. UPC is usually fighting the threat of superior fiber bandwidths by launching extremely aggressive pricing. This time around however, things are turned upside down.

UPC (part of Liberty Global) is rolling out DOCSIS 3.0 (advertised as 120 Mb/s, but we all know this is shared and not symmetrical), and at the same time the Reggefiber/XMS combo is waiving installation costs (normally EUR 150) and maintains a very competitive promo (20 EUR/mo for the first 6 months).

Telefonica: no takeovers?

Telefonica, for the umptieth time, denied any interest in E-Plus (owned by KPN), or any other European telco for that matter.

I feel however that a 'minor' transaction in Germany (not E-Plus) cannot be ruled out. The market is fragmented and any next-generation investment requires a lot more scale than operators currently have. Still, China and Brazil seem more likely areas of interest.

Here are my comments:

• They have been denying explicitly since the summer of 2007. Telefonica has a lot on its mind (China, Italy). Also, you obviously don't want to make the share price of any potential target skyrocket. Anyway, in the long run anything may happen (see this article from last year).
• Europe isn't exactly appealing right now for any large telco to go shopping. Broadband and mobile markets are much more saturated than in most other countries, and regulation is currently under review. Telcos prefer high growth emerging markets, such as those held by TeliaSonera (itself sniffing at Poland's Play) or Telenor (itself looking to Africa). Telefonica is much more likely to focus on Brazil, through Telecom Italia (thanks Stefano).
  
• Looking at Germany and including Telecom Italia assets, Telefonica already has a significant presence: O2 Germany, Telefonica Deutschland, and (via Telecom Italia) Hansenet. Still, Germany sooner or later will consolidate around DT, Vodafone, Telefonica and the current coalition of freenet/United/Drillisch/Versatel. It doesn't take a genius to predict that the latter grouping could be a target for Telefonica.
  

Cool news: FTTH, M&A, SMS, products and services

Here is some recent and noteworthy stuff, with just a few words of my own:

FTTH:

• Gaining a lot of momentum. I just updated my private litle database, a Google spreadsheet that you can also access on the right (under 'Fiber Ring').
• Of note: OEN (Houston) closes its network, SureWest may buy the assets.

Takeover speculation:

• DT is checking out EDS. Will DT be the big new consolidator? DT is also interested in 3's European assets.
• Google is weighing Skype.
• TI is looking to exit France, Iliad is interested.
• Several operators are mysteriously selling international mobile assets, or are putting them at an arm's length: PT and its Africa Holdings, Telmex and its Telmex Internacional, Telekom Malaysia and its TM International. Vodafone is interested in the latter, as well as in Vodacom. And Tele2 is still busy buying and selling things.

Cool new products:

• Everex is launching a Google-friendly PC, the Green gPC, with Google apps pre-loaded or given easy access to. I suppose that is an 'asset-light' entry into the PC-market.
• Amazon Kindle, Kindle Store and Whispernet. Many comments widely available. Connectivity is included - very much a Telco 2.0 strategy. A European launch will be hampered by lengthy negotiations with operators.

Cool new services:

• Celtel in Africa is launching 'One Network', essentially a roaming deal turning 12 networks into one. Calling at local rates, automatic activation, no sign-up or fee.
• Cox is stretching its network towards 1 Gbps bandwidth.
• BT is negotiating e-health business opportunities in Qatar and neighbouring states. I think e-health is a multi-billion opportunity, where many participants meet. That will allow operators like BT to become the center of an ecosystem.
• Jajah is launching an opt-in service where advertisements replace ring-back tones. They say it takes an average 12 seconds before people answer a call. I suppose they will not allow competitors into the advertising network.

Ever new SMS-based apps:

• Zain launched automatic translations (Arabic/English).
• SpinVox enables voice-to-text conversion and has a deal with Skype: a voice message will be converted into an SMS. Also several operator deals (Alltel, Vodacom, Telstra a.o.).
• Kajeet, an MVNO on Sprint, launched 'Feeds': entertainment and information pushed to the user as an SMS, at 10 c/SMS.
• Mobile payments using SMS, e.g. Safaricom in Kenya and Base in Belgium. Proximus (Belgium) launched public transportation ticketing by SMS.
• KPN's 'flirting service' olllo uses SMS (priced at 55 cents!).

Co-operation will drive separation and FTTH

This news out of Italy unites three of my favorite (and interrelated) trends: co-operation, separation and FTTH.

Apparently, alternative operators (Vodafone Italia, Fastweb, Wind, Tiscali, BT, Tele2, Welcome Italia and Eutelia) are calling for a break-up of Telecom Italia.

1. Co-op
Note that PTTs who resist full separation at home (BT, Swisscom), allow their foreign subsidiaries (BT Italy, Fastweb) a viewpoint different from their own. Deutsche Telekom to the contrary did not allow T-Mobile NL a divergent view when OPTA (the Dutch NRA) called for market response to KPN's All-IP network plans; T-Mobile, mirroring Deutsche Telekom's strategy in its home market, called for an end to regulation altogether in the Netherlands.
The new development in Italy is supportive of my call for a country-by-country approach, which will allow altnets to finally work together, no matter what their parents do or believe or say.

2. Separation
I am not sure what kind of separation the Italian market is headed for (anywhere between accounting and ownership regulation, but probably functional). Anyway, having truly equal access to TI's network must reduce the need for altnets to build their own infrastructure: embracing the wholesale market will drive the need for TI to build a broad portfolio of IP-based services, available to each altnet.
Another interesting development is that an incumbent like Telecom New Zealand openly lost interest in being a network operator and wants to be service provider.

3. FTTH
Fiber being a natural monopoly and the TI network to some degree spun-off from the TI services organisations will, I believe, drive the newly created NetCo to aim for nationwide FTTH. Demand keeps rising and there is no such thing as the Broadband Incentive Problem in the wholesale market, where tariffs are usage-based (the BIP in the consumer market is a consequence of flat-fee tariffing and unsufficient pricing power). As a result, building FTTH will drive revenues and lower the cost base (after an intial capex hump, naturally).

Separation round-up

In March, the Dutch NRA (OPTA) declined to separate network and services at incumbent KPN. OPTA said it didn't have the power to do so. It added that cable competition, as well as open access to the KPN network (be it wholesale, LLU or bitstream) were sufficient to guarantee a competitive market.

However, Viviane Reding seems to be on collision course, aiming for a European effort at separating PTTs.

I suppose this issue will produce a lot of nois.

What has happened since?

• Italy seems most advanced, preparing a legal basis.
• New Zealand is pushing forward as well. In response, Telecom NZ has its own plans.
• Sweden has commissioned a report from its NRA, PTS, due June 15.

Does anybody want to compete in the Netherlands?

As I've written before, LLU is coming to and end in the Netherlands. France Telecom yesterday in a way referred to this, meandering on its strategy regarding Orange NL.

The consequences of the next stage in copper-based competion:

• KPN thinks it's so clever, forcing the competition out of the market. Only a player like KPN can afford to build a FTTC + VDSL network ('All-IP'). However, the plans could backfire: OPTA could go the separation route; OPTA could allow UPC to merge with @Home to form an MSO with near-national coverage (and create a duopoly US style); altnets could band together Australian style (the G9 consortium, proposing a FTTN network of its own).
• OPTA, the local NRA, together with all market participants, is studying a Full Alternative for LLU. Could it be SLU (FTTC + unbundling from the street cabinet)?
• Altnets have invested very little over the past two years or so. Coverage of their ADSL-networks has not expanded.
• Municipalities are cleverly moving in, building FTTH. There seems to be kind of an arms race between KPN (also buying up ISPs) trying to get involved and Reggefiber (the Dick Wessels company).
• Orange NL was put up for sale in February (rumours, but I had them sort of confirmed). Then in March, at the final 2006 results, it was denied. Now, at the Q1 results, France Telecom acknowledges all options are open. The same happened to Telecom Italia subsidiary bbned: for sale, and then all of a sudden it wasn't. This can only mean one thing: FT and TI want out, but they can't. And with market regulator NMa still studying the KPN takeover of Tiscali NL (report due May/June), KPN is no longer a buyer.

No potential buyers and LLU coming to an end - do I hear monopoly? Is duopoly the simplest answer to this? Or can altnets overcome their cultural differences and build a joint G9-style network?

CONSOLIDATION://Orange NL for sale

A newspaper in the Netherlands reports France Telecom has hired Lazard to shop Orange NL around. The unit has 600k BB subs and 2.0m mobile subs and should bring in EUR 800-850m.

Observations:

• Fixed NL: KPN is forcing a choice upon altnets, building its All-IP network: retreat (or be a reseller) or step up investments to make SLU work, as the old paradigm (FTTEx + ADSL2+ = LLU from up to 1300 exchanges) is replaced by a new one (FTTN + VDSL2 = SLU from up to 28k street cabinets). The outcome is still up in the air, as OPTA seems to be backtracking on earlier support of KPN's plans, but Orange seems to think neither option is very attractive. Telecom Italia, through bbned, and Tele2/Versatel seem to be committed to the Dutch market.
• Mobile NL: The mobile market is going to a three-player model if T-Mobile or Vodafone moves in. T-Mobile could even go from a mobile-only strategy (as in the UK) to a triple play offering (as in France). Unless of course China Mobile, Weather, Telefonica, Telecom Italia, Belgacom, Swisscom, CPW or TeliaSonera (cf. Xfera in Spain) deems the time right for a new market entry.
• France Telecom: Going from 5 to 4 countries for its triple play offering (France, UK, Spain, Poland).

Consolidation is continuing, driven by a need for scale economies in mobile and LLU (not to mention SLU). More units could be put up for sale (DT France, DT Spain, Tiscali UK, Tiscali Italy, SFR). What is intriguing is:

• Companies are abandoning saturated markets, like Scandinavia and now the Netherlands (the Tiscali NL sale to KPN is pending at the NMa) and are turning to emerging markets.
• Vodafone, according to the newspaper, wouldn't be interested in Orange NL. Puzzling. Could this be the first step of Vodafone putting even more focus on emerging markets?
• If T-Mobile isn't interested, they might as well leave the market altogether.
• Telefonica is definitely a consolidator. Will they bid for Orange NL, or target the bigger prize: KPN?
• Will this be the European entry of an 'eastern' company (after Hutch and Weather)?
• As PTTs are fighting each other in their home markets, could this sale mark the formation of a pan-European kartel, e.g. FT and DT getting out of each other's markets?

UPDATE: obviously, existing players could strengthen their current presence:

• Telecom Italia: to add a retail business (and mobile) to their bbned offering.
• Tele2: to gain scale and a mobile license, in order to migrate their current reseller business.
• Scarlet: to mirror Tele2's strategy of turning into a facilities-based operator.
• Cableco: to add mobile and to sell the fixed business to somebody else.

REGULATION://Extending fiber deeper into the network challenges LLU

Deutsche Telekom is switching back to ADSL2+, apparently to have wider coverage for IPTV (T-Home). VDSL roll-out is haulted and stays at 10 cities (original target: 50).

Big changes are ahead in the European telecom sector. DT cites regulatory uncertainty for haulting the VDSL deployments.

Upgrades to ADSL2+ left the competitive landscape, based on LLU, unchanged, but VDSL and FTTH have created different environments. I believe Europe will support the survival of 'inter-copper' competition, but now it has to come up with an alternative to LLU. This is a hot topic in Germany, but even more so in the Netherlands, where OPTA has to come up with a fully-fledged alternative to LLU. Watch out for this to happen in Q2. OPTA will host an analyst meeting in The Hague next Friday (Jan 19).

So now operators have a choice:

• ADSL2+, with fiber not extending beyond the exchange. This is the case at BT, which sees no business case for FTTN/FTTC, let alone FTTH. This makes the UK an attractive market for LLU-based competition.
• FTTN + VDSL: KPN, Belgacom, DT (now haulted), TI. This renders LLU-based competition quite uncertain at the moment. Will regulaors find a fully-fledged alternative, and/or will altnets be prepared to step up their investment program to keep track with the incumbent?
• FTTH: FT (at least partly, further decisions in 2008). FT is responding to both Iliad and neuf cegetel (and Verizon), by making the network future-proof.
• A mixture of all: Most notably at Swisscom and Telefonica, but I suppose in many other countries too. FTTH is probably pretty common now for new builds.