Structural Separation Developments
Telecom New Zealand wants full structural separation
The announcement from Telecom New Zealand to propose a full structural separation of its company, resulting in a totally separate infrastructure company, is in line with my analyses of other recent developments that have taken place within it. These include the sale of its Yellow Pages and the outsourcing of its Digital Media activities. My conclusion was that the company was undertaking a strategy of reorganization, in order to concentrate on its core business.
Structural separation will be a quantum leap forward for competition and innovation in New Zealand. A totally separated company, and possibly one in the future with separate owners, will have a great incentive to maximize its infrastructure assets. They therefore will be able to eagerly selling access and other wholesale services to whoever wants to use it. It will also set itself up to be able to work together with others to share and expand infrastructure either on its own, or in partnership.
Telecom will also enable it to be far more innovative in its infrastructure product offerings as it no longer will have to protect a vertical integrated business. I also want to commend the company on this brave move, because a retail company which is no longer vertically integrated, will have to compete on an equal basis with its competitors. This will be both exciting and challenging, but I have no reason to believe that its retail arm won’t be able to stand on its own two feet.
It is great to see Telecom taking leadership here and I agree that the government’s proposed split would be far more cumbersome. Of course the devil will be in the detail, but conceptually I think this is an excellent step forward. It will also allow New Zealand to greatly simplify its regulatory environment.
Recently, I reported in my analysis of British Telecom, that I also expect them to start structural separation following on from their very successful operational separation. Over the last few months we have seen more and more countries moving in this direction. This also will have provided Telecom with the confidence to see that it is indeed moving into the right direction.
Also the financial world around the globe is warming up to structural separation.
It is great to see a New Zealand company taking global leadership here.
Paul Budde
See also:
New Zealand – Regulatory Environment – LLU and Interconnection
New Zealand – Regulatory Environment – Telecommunications Act and TSO
New Zealand – Regulatory Environment – Wholesale and Number Portability
Italy also moving towards structural separation
The forces pushing for structural separation among European incumbents may soon affect another major operator. The UK’s BT set the precedent, and a few weeks ago the Swedish regulator, in a bid to increase competition in the wholesale broadband market (and borrowing from the UK model) proposed making the domestic LLU market competition-neutral by separating TeliaSonera’s wholesale division from its retail operations. Similar moves appear to be closer to fruition in Italy, where the Communications Minister has been equally influenced by measures successfully introduced by Ofcom. Legislation may soon be proposed which would give more power to the Italian telecoms regulator, allowing it to push for Telecom Italia’s fixed network to be put into a separate unit. This unit, along with fixed line infrastructure, would be managed by Telecom Italia but other operators would have access on equal terms. The regulator would thus have greater scope to regulate the fixed network, while Telecom Italia’s retail division would be free to develop its wireline products.
This does not represent such a major change in thinking for either the incumbent or the regulator, although at present any changes to fixed network regulation proposed by the regulator can be rejected by Telecom Italia. However, new pressures have been added to the equation. During September and October 2006 Telecom Italia underwent an extraordinary period characterised by politically-charged statements and counter-statements regarding the future integrity of the Group. The company initially planned to spin off its mobile businesses and move its focus towards broadband and media content. This would have entailed separating its fixed line business from its wireless operations. Its domestic mobile arm TIM and its Brazilian subsidiary TIM Participacoes would have been sold off, while negotiations with News Corp would have cemented its commitment to distributing media content over its fixed networks at home and in other parts of Europe by offering films from News Corp’s 20th Century Fox studio on its Alice TV and Video-on-Demand service.
Soon afterwards, the company was found to backtrack swiftly. It broke off media content talks with News Corp, although an existing deal relating to News Corp’s 20th Century Fox film archive remains in place. The government was acutely sensitive to the notion that TIM could be acquired by a foreign investor, or that the company could be partitioned into three entities − fixed, mobile and media. This was a reversal of the company’s policy elucidated in 2004, when it bought the mobile unit to merge the two companies in an effort to achieve synergies. A sale of the mobile unit could have raised over €30 billion and helped the group reduce its debt. Telecom Italia’s then Chairman confirmed in September 2006 that the company planned to reorganise itself into two companies − one for fixed, and one for mobile − in an effort to create greater transparency to meet demands of the market regulator. This was essentially a return to the status quo before the attraction of convergence persuaded the company’s board to bring the two units together.
By October 2006, Telecom Italia had changed track again, and confirmed that it would work towards convergence of its fixed telephony, mobile telephony, broadband and media content operations. This plan would stick to the operator’s original course, following a strategy to provide operational flexibility and reduce costs. As part of this convergence strategy, the company would transform its access network into a Next Generation Network (at a cost of €6.5 billion over the next ten years), and thus concentrate efforts on delivering high-definition TV, movies, music and video, as well as business and public services (tele-medicine, info-mobility etc). The NGN would involve the separation from Telecom Italia of the access network, according to a model to be jointly developed with the regulator.
A number of recent developments have added to Telecom Italia’s woes. The company published full-year financial results for 2006 showing domestic wireline revenues down by 2% and net profits down by 6.3%. Overall, the results paint a dismal picture of a company racked by a fiercely competitive market, reduced sales and declining margins. Forecast growth of between 3% and 4% for 2007 have been revised to between 1% and 2%. In addition, the company has a new man at the helm, with Carlo Buora now in charge following Guido Rossi’s recent resignation as Chairman. Rossi had held the position all too briefly, and the change at the top may mean thoughts of yet another new strategy. The boardroom shuffle also comes at a time when AT&T and its Mexican partner América Móvil are in talks with Pirelli to each buy one third of Olimpia, the unlisted holding controlled by Pirelli that in turn holds 18% of Telecom Italia. The potential €4.5 billion deal has excited the Italian government, which is concerned at the sale to foreign entities and is hoping that a group of local investors will beat AT&T. For the government, a structural split of the incumbent would be a way of keeping fixed-line communications, considered a strategic asset, in Italian control. So in addition to the several changes in direction undertaken by Telcom Italia in recent years, the government has also changed tack, encouraging structural separation in response to the threat of the network coming under foreign ownership. If the AT&T deal should fall through in coming months a new government position will doubtless emerge, but at least structural separation, for now, has government approval and regulatory attention.
Henry Lancaster
Senior Analyst Europe
BuddeComm
See also:
Italy – Key Statistics, Telecom Market & Regulatory Overviews;
Europe – Infrastructure – FttH, NGNs & IP ;
Europe – Regulatory Environment.
Regulator rebukes German Government
Last week I reported on Telstra’s Australia CEO Sol Trujillo’s grandstanding on the fact that the German Government had handed a regulatory holiday to Deutsche Telekom for its FttN plan.
The ‘system’ works in Germany and this is what has happened next.
Germany’s telecoms regulator had already indicated that it believed the Government could not hand out such a holiday. It now plans to force Deutsche Telekom to grant rivals access to its network cables. The decision by Bundesnetzagentur will enable rivals to lay their own cables to reach customers using Deutsche Telekom infrastructure as it rolls out its new super-fast broadband network.
In areas where they cannot lay cables, rivals will be granted access to Deutsche Telekom’s fibre-optic network.
Currently DT charges rivals a monthly fee to use its copper wires from phone exchanges into homes and businesses.
Last week the regulator cut the monthly price the dominant phone carrier can charge competitors by 1.4%. DT had hoped for an increase arguing it had to compensate for high staff costs. DT has issued another profit warning, its second in six months, as it struggles to fight a drain of customers switching to smaller, cheaper rivals.
Sol is now the only incumbent telco CEO in the developed world so openly fighting to hold on to its monopoly. In Australia the government is also on the brink of doing a ‘dirty deal’ with its incumbent Telstra. I hope that this is clear sign to the Australian Government to stick to their guns and not to give in to the incumbent’s bullying.
Paul
See also:
Germany
Deutsche Telekom
