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Measuring the success of structural separation

During the last two years, far-reaching regulatory reforms have been implemented by a number of countries in Europe, Asia and Oceania to alter the fundamental structures of telco incumbents. This process towards structural separation has been adapted by progressive regulators to meet individual market conditions, and in practice has resulted in different forms of operational or functional separation. Yet the simple end-game has remained the same: providing regulatory clarity to promote competition, broadband take-up and sector investment.

Most regulators perceive structural separation as a far-reaching remedy to be pursued only if no other route to developing competition exists, and should be (and generally is) applied alongside a range of other regulatory remedies. A number of different approaches have been undertaken, in the UK, Sweden, Italy, Ireland, Denmark and Italy, among other countries. The only true attempt at structural separation – that volunteered by eircom earlier this year – was aborted. Yet it is not so much the processes by which the structures are changed, than that the outcomes of these changes provide an equivalent outcome. Further analysis on the success of these processes is available from the updated report Europe – Structural Separation – Measuring its Success in 2008.

Different approaches

While national regulators and governments consider how best to achieve the desired results from this process, the glaring success story of BT continues to show how it can deliver results, both for the incumbent and for consumers.

In Sweden, the regulator in 2007 proposed spinning off TeliaSonera’s wholesale business into a separate unit which would be responsible for FttC, as well as bitstream and LLU assets. TeliaSonera Skanova Access was duly formed in January 2008 to cover copper and fibre networks, though subsequent legislation has allowed the regulator to order the separation of TeliaSonera’s network operations and retail services if the company was still seen to have an unfair advantage against other operators.

The Dutch have taken a different approach: here the regulator ruled that KPN does not have to splinter off its network into a separate business, largely on the basis that The Netherlands has a sufficiently developed and effective cable infrastructure to provide nationwide cross-platform competition. Thus the functional break-up of KPN as per the BT model is of limited relevance to the Dutch market. Nevertheless, the BT model may be pursued in future to guarantee fibre access to competitors. In the meantime, KPN has undertaken a number of internal structural changes (including memoranda of understandings with cablecos to use its networks) that provide an equivalent outcome.

For more information, see separate reports:

• Sweden – Key Statistics, Telecom Market & Regulatory Overviews;
• Italy – Key Statistics, Telecom Market & Regulatory Overviews;
• Netherlands – Key Statistics, Telecom Market & Regulatory Overviews;
• United Kingdom – Key Statistics, Telecom Market & Regulatory Overviews.

The regulator

From a regulatory point of view, the UK’s experience with operational separation has been a success story. Almost half of all unbundled exchanges now have four or more providers in them, and many are served by up to a dozen competing operators.

Compared to the lamentably slow LLU growth shown until mid-2005, take-up of LLU since the formation of BT Openreach in January 2006 has been phenomenal: by August 2008 there were 4.961 million unbundled lines compared to 360,000 at Openreach’s inauguration.

The success of LLU directly derived from BT’s structural separation can be measured by Ofcom’s recent decision to remove regulation on the broadband wholesale market, affecting 70% of the country (generally, those areas served by four or more wholesale broadband providers and where no single company has significant market power). There are few other regulators in Europe which have been able to take this step: in July 2008 the Austrian regulator, the RTR, was able to partially deregulate wholesale broadband access affecting almost half the population.

For more information, see the separate report: Austria – Key Statistics, Telecom Market & Regulatory Overviews.

The incumbent

From BT’s point of view, structural separation (which it instigated) has been a blessing. BT has since been one of the few European incumbents to report consistent revenue and net income growth during the last two years. New wave revenue (from broadband and IT services) increased 20% in the 2007 financial year (to March 2008), and now represents 39% of total revenue compared to 32% in 2006. The company’s retail broadband market share also increased from 25% to 35%: while the proportion of retail to wholesale customers has increased from 36% in 2005 to 55% in June 2008. This level of growth is unique among European incumbents. In addition, those who have worried that operational separation would lead to poorer shareholder returns have only to look again at BT’s figures: the company has enjoyed 24 quarters of consecutive year-on-year growth in earnings per share.

For more information, see the separate report: United Kingdom – Key Statistics, Telecom Market & Regulatory Overviews.

Consumers and the national interest

For consumers, competition engendered by unhindered and equal access to an incumbent’s network has universally caused prices to plummet: in the UK, an 8Mb/s service now costs a fifth as much as in 2004, while headline broadband speeds continue to double annually. The country is now among the most competitive broadband markets in Europe, and since prices cannot realistically fall much further providers differentiate their products by providing more services at faster speeds.

The fear shown by some governments (such as Italy and Austria) to prevent key infrastructure falling into foreign ownership is natural, but ephemeral. Far more persuasive are those arguments that to an increasing extent national interests (ranging from general economic development, employment in competitive international markets, tele-education, tele-health etc), depend on the level of broadband maturity and penetration which structural separation has been proven to deliver.

Related reports

For more information, see separate reports:

• Europe – Infrastructure – FttH & NGNs;
• Europe – Regulatory Environment;
• Europe – Structural Separation Developments – 2008.

This entry was posted on Monday, September 15th, 2008 at 3:32 pm and is filed under From Paul's Desk. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.