Integrated telcos undergoing separation/asset reconfiguration must carefully balance several factors, not least of which is regulation. The regulatory benefits from asset reconfiguration strongly depend on: (1) the type of separation model being adopted, (2) strategic resolutions spelled out in the master service agreement (MSA) between separated entities, and (3) local regulations. Consequently, there must be a careful assessment at all decision-making levels to “ace” the regulatory exam.
The telecom industry is experiencing a period of profound revolution resulting from digital transformation and changes in connectivity consumption, leading to massive investment in next-generation networks, such as fiber to the home (FTTH). This change suggests that asset reconfiguration and separation of InfraCos (typically consisting of the infrastructure layer [NetCos or FiberCos]) and ComCos (typically including the active and commercial layer) could unlock substantial value for operators.
A recent Arthur D. Little (ADL) Viewpoint, “Navigating Fixed Asset Reconfiguration in Telcos,” identified the following drivers of asset reconfiguration/separation:
However, these dynamics and the related benefits of such initiatives can be impacted by the regulatory regime applied to the specific operator and the possible deregulation outcomes as well. This Viewpoint offers a hands-on perspective on the main levers for consideration when assessing the potential regulation impact of a telecom reconfiguration.
Regulatory relief arising from reconfigurations is strongly dependent on the separation model adopted (i.e., structural versus legal or functional separations), as regulators are keen to ensure effective competition and nondiscrimination. Generally speaking, operators can split their infrastructure and retail service in several ways, ranging from purely functional separations (e.g., Open Eir’s establishment within Ireland’s Eir) to the creation of legally distinct entities under joint control (as happened with British Telecom [BT]) to structural separations (e.g., Italy’s recent NetCo/FiberCop), where the two entities are controlled by different shareholders.
However, as regulators aim to avoid discrimination and the potential for downstream damage from reduced competition, the occurrence of deregulation depends mainly on the expected competitive condition of the market (i.e., the presence of significant market power [SMP]) and how the interrelationships between the two entities are managed (see Figure 1). In particular, regulators are concerned with:
At the same time, previous telco separations show that, when effective independence is guaranteed, deregulation can be expected for the ComCo as far as retail prices are concerned, while the InfraCo regulation will be driven by the level of infrastructure competition in specific areas (subnational level) and any wholesale-only regulations (e.g., Article 80 of the European Electronic Communications Code [EECC]).
To date, only a few reconfiguration/separation initiatives have been carried out as a direct consequence of regulatory obligations. Although several large telecom operator reconfiguration initiatives took place in the last decade, few stemmed from regulations being imposed on the incumbent. Rather, reconfigurations such as Openreach/BT, the Australian National Broadband Network (NBN), and Singapore’s NetLink were implemented as a result of government plans for infrastructure deployment.
NBN was created to deploy the public-funded next-generation access network, with the incumbent Telstra pushing to confer its infrastructural assets. NetLink was established as the national fiber InfraCo in compliance with the government’s 2005 broadband strategy and in 2017 requested to be separated from Singtel to guarantee independence and interrupt vertical integration. The UK decision did come from regulatory authority Ofcom (Office of Communications) to limit identified anti-competitive practices by BT in influencing the previously functionally separated Openreach’s network investments, but it was closely linked with expanding fiber (which in 2016 covered less than 5% of UK households).
In many cases, separation was accompanied by a cash infusion from private investors to ensure the country would have sufficient capacity to deploy the new networks. For example, in the Czech Republic, PFF acquired O2 and performed the split to create wholesale-only CETIN. In Denmark, the separation occurred following the incumbent’s acquisition by a consortium of local and international funds. A similar case exists in Norway, where an investment fund consortium owns around 30% of the newly established Telenor Fiber. The recent TIM NetCo separation and 100% acquisition by a consortium led by KKR in Italy follows this pattern. Outside Europe, the New Zealand case of Telecom New Zealand (now Spark NZ) and Chorus, the only voluntary structural separation thus far, was performed mainly to participate in the publically funded FTTH investment.
Other key levers for separation include providing new entities with enough flexibility to compete in the changed competitive environment and/or to preempt expected regulatory pressure. For example, O2 CETIN has experienced considerably more freedom to pursue new lines of business, and Telecom New Zealand freed itself from excessive organizational complexity.
The regulatory consequences of a separation vary for the InfraCo and ComCo. For InfraCos, impacts on regulatory frameworks strictly connected to restructuring have been limited so far. This may be attributable to the fact that, in a few cases, the separations were “structural” (see Table 1) and presented a full change of control of the separated entity, or the InfraCo was a public initiative (i.e., Chorus in New Zealand or Singtel in Singapore). The game changer in those cases was the changed infrastructural competitive environment. In Denmark, the latest market analysis resulted in strong geographic differentiation, and the SMP designation was given to several utility operators developing fiber in their core areas. In the UK, the relaxation of fiber price control in competitive areas was linked to the presence of several small local infrastructure operators.
The direct benefit of a separation stems from the relaxation of ComCo obligations. The removal of vertical integration dismisses the prerequisite for the imposition of ex ante margin squeeze tests, resulting in more commercial freedom.
This happened in both the Czech Republic, where increased retail flexibility was among the pillars of the unbundling strategy of the PFF fund, and in the UK, where the imposition of the margin squeeze test on virtual unbundled local access (VULA)–based retail offers was removed from BT in 2018.
Some key strategic decisions, including asset demarcation and MSA dynamics, play a role in determining deregulation potential. It’s important to remember that value creation is highly dependent on local market structure because major trade-offs must be optimized for fixed infrastructure assets. Several dimensions impact possible regulations, in light of a new or revised framework:
Major regional regulatory differences remain, even across European countries, both in terms of obligations and the way authorities approach current regulations. Country-specific characteristics in the telecom sector increase complexity and play a key role in shaping asset reconfigurations and perimeter definitions of InfraCos and ComCos. Highly competitive conditions in some countries (e.g., number/type of operators, presence of alternative infrastructures, ultra-broadband take-up) lead to major differences in the remedies imposed on national incumbents; the recent trend of adopting geographic differentiation has increased this complexity. Indeed, the proliferation of alternative operators focused on deploying new fiber networks has elevated infrastructure competition in several regions, leading to a gradual differentiation of regulatory obligations on new networks and, in some cases, the removal of price controls.
In particular, there are significant differences in the regulation of access technologies (copper and fiber) and network-access options for OAOs through passive services (physical unbundling) or active solutions. For copper, regulators historically compelled the incumbent operator to grant unbundled access to the copper network, either at the local exchange level through a local loop unbundling or at street cabinets through a sub-loop unbundling. Even in places where this approach was adopted for fiber, the introduction of VULA changed the regulatory paradigm for many; in most countries, VULA has replaced physical access to fiber.
Various regulatory regimes apply to VULA service (where regulated):
Recent regulatory changes in Europe incent reconfiguration approaches to foster the development of very high-capacity networks (VHCNs) and preserve competition. At the end of 2018, the EU consolidated and reformed the sector’s regulatory frameworks within the EECC. The new framework places significant emphasis on promoting initiatives to support the development of VHCNs and related investments. In particular, it uses two instruments to define regulatory relief and incentives: wholesale-only operators (Article 80) and regulated co-investment (Article 76):
In the case of a voluntary separation of a vertically integrated operator, the “wholesale-only” condition must be assessed by the national regulatory authority alongside a specific SMP assessment.
Regulatory frameworks are significantly evolving to support fiber network rollouts:
The impact of regulations on reconfiguration scenarios can vary widely, so a careful assessment and a strategic positioning exercise should be conducted at all organizational and decision-making levels to “ace” the regulatory exam.
Regulation must be carefully addressed at the early stages of any reconfiguration analysis to ensure maximum value:
Note
[1] “… on the basis of a market analysis, including a prospective assessment of the likely behavior of the undertaking designated as having significant market power” (e.g., Article 80 of the EECC)
By Elisabetta Cafforio, Giancarlo Agresti, Gregory Pankert
cloud technology
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