Tuesday, June 30, 2015

Structural Separation of Telcos

Big news that Sky in the UK is calling on Ofcom to instigate a full market investigation to examine problems affecting consumers in the UK’s broadband marketplace. The company believes that issues covering both competition and quality of service are sufficient for Ofcom to ask the Competition and Markets Authority (CMA) to conduct an inquiry. A CMA inquiry could lead to the full structural separation of BT.

Despite some views that structural separation was actually in the interests of incumbent telcos, it is a policy that has been strongly resisted by the firms. New Zealand, Australia and the UK all started in the 1970s with the same basic structure of a national government run PTT. They have largely been on the same journey since with different timing of different stages.

In all the "market liberalisation" activity one of the critical issues was always access to the incumbents facilities and services by entrants. Different approaches were taken (including the initial NZ approach of relying purely on generic competition law) but none pursued the "ring fencing" approach proposed by Hilmer for other monopoly businesses because no one knew how to draw the line.

As instances of the incumbent's ability to frustrate competitors regulators and policy makers turned to the question of using something more than accounting data.

The most dramatic mover was in the UK where the head of Ofcom Stephen Carter essentially said to BT "if you don't agree to operational separation I will take action under the Enterprises Act and you will be broken up by the court." BT buckled and in September 2005 Ofcom accepted BTs undertakings.

In Australia at that time the Howard Government was not prepared to be anywhere near as robust. A Parliamentary Committee was tasked with looking at the issue, but the issue was dropped by Labor  (see note) when the realities of forcing the issue on shareholders was considered (interestingly you can't take a reference back from a committee, it just agreed not to hold hearings or to issue a report).

The Howard Government did in a concession to industry impose operational separation on Telstra, but as I outlined at the time in a memorable exchange with Senator Brandis, even the ACCC thought it would be ineffective.

Developments at that time (2002-2007) in New Zealand were equally exciting. Having come to formal regulation of access late (2000) Telecom NZ had still escaped regulation of a wholesale unbundled local loop (ULL to us, LLU to them). At my first meeting with the then head of Telecom Govt relations (Bruce Parkes) he outlined how their strategy had been to forestall regulation by promising a bitstream service, but the critical element was delivery.

Unfortunately management didn't deliver. Telecom's CEO famously declared that she thought there wouldn't be unbundling because "The Government is way too smart to do anything dumb here." But the Government did so anyway. In the course of the legislative process for those changes the Bill was amended to move from accounting separation to operational separation.

Following the debacle Theresa Gattung departed as CEO. In her book Bird on a Wire she details the issues over choosing her successor. The internal candidate proposed that rather than bearing the cost of operational separation Telecom would be better off just going to structural separation. the Board, however, was convinced by the candidate from BT who said operational separation had gone swimmingly for them, and could for Telecom NZ.

The New Zealand Government however then moved on to a fibre to the home plan, and the Government's pre-condition for Telecom having any role in construction was the full structural separation. So now the BT bod is gone and a host of Gattung's staff are back running as CEO's Spark, Chorus and Crown Fibre Holdings (Moutter, Ratclliffe and Mitchell). Bruce Parkes is GM Resources Energy and Communications in the mega Ministry of Business, Innovation and Employment. Mark Verbiest is the Chair of Spark.

In Australia after the realisation that it was all too hard to structurally separate a half-owned Telstra, David Foreman and I noted that the time to achieve separation was when a new access network was built. The Labor policy framed by Tanner and Conroy always included achieving separation as a core policy objective. Unfortunately Telstra management didn't see it that way, with Sol Trujillo saying:

And let me make clear. To even contemplate the prospect of further separation while embarking on such a massive and complex project is ludicrous in the extreme. If further separation is part of the NBN, Telstra is simply not in a position to bid or to build. It is just not feasible - technically or financially - to do this other than in a fully integrated way.

And that, mind you was about an FTTN network, let alone FTTP.

History shows that with the move to FTTP that Telstra did concede (at the expense of a CEO). That the separation is prospective still agitates some providers, but telco policy is a long game.  It is somewhat fascinating to see Telstra aligned with its access seeker colleagues demanding that NBN Co make information available to all RSPs so that Telstra does not gain an advantage.

It is also worth noting that one of the big criticisms of Labor's approach was the claim that Telstra was best placed to construct the NBN - especially FTTN. But now we see that Telstra has not won any construction contracts in the new model. They have, quite simply and as expected, moved on to focus on being the best RSP in town.

It is also fascinating to see who the complainant is in the UK, Sky. Here in Australia News Ltd papers have always led the charge and particularly defended the Telstra position in 2007-08. Now it is a News subsidiary making the call in the UK for a review that could lead to structural separation.

This history has a lot more chapters to be written yet. Hopefully I'll get to chronicle some more.

Note: The Tanner paper "Reforming Telstra" does not appear to exist online anywhere. I may have a paper copy. Would love it if someone has a copy.
Update: A kind reader has sent me a copy of Tanner's paper - it is now here.

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