Network separation of Italy’s incumbent, Telecom Italia (TIM), has made the headlines for a number of years now. More often that not, rumours were not well founded, as they were fuelled by speculation around the need for TI to lighten the regulatory burden it faces, and be more agile in competing at the retail level. The fact that TIM is now controlled by a foreign group is pushing the government to consider separation; so much so, that TIM’s next board meeting on 6 March 2018 will vote on a plan to spin-off the network itself. At the same time, the change in landscape of Italy’s wholesale market could make this a well-timed move for TIM.
Vivendi’s control of TIM has pushed the government to reconsider the issue
Telecom Italia’s board will vote on a plan for network separation at its next meeting. This comes following pressure from the Italian government, which has considered a legal separation of TIM’s network from its retail unit for some time now. Under the proposed model the TIM group will still retain ownership of the network company.
Unlike before, this time there are issues of national security and national interest at stake due to the uncertainties and complications of TIM being controlled by a foreign group. In September 2017, the government announced a procedure against TIM, to investigate whether the “Golden Power” rules (i.e. the government’s right to decide whether to buy out an asset of strategic importance) were respected when the group appointed a foreign CEO. The government believes it should have been notified that TIM was under foreign ownership, since the French group Vivendi is now believed to hold a controlling stake (23.9%). Such failure has pre-empted the government’s “Golden Power”. Weeks later, in October 2017, the government imposed new Golden Power requirements on TIM; in January 2018, TIM announced its intention to legally challenge these measures.
National security issues mainly relate to Sparkle, TIM’s unit overseeing the submarine cables connecting Italy’s infrastructure with the rest of the world. Future superfast broadband deployment is also a factor; TIM’s network remains a key part of Italy’s fibre development plans. The incumbent is a near-monopolist in copper infrastructure, particularly in rural areas. Other operators have deployed fibre, though they are mainly active in urban areas at present. It is then unsurprising that, in January 2018, the minister for Economic Development stated that a network owned by one single operator is an option to consider for the future. While TIM’s network is likely to remain within the same group for the time being, a legally separated entity would be easier to spin-off should the government wish to take ownership of those assets.
Regulatory issues have been notably absent from the debate
One of the striking aspects of the debate around TIM’s network separation is the relatively silent approach taken by the national regulator AGCOM. While the regulator has been involved in the current discussion on separation, calls for network spin-off in previous years never came from the NRA, despite repeated requests for sanctions issued by alternative operators, and fines ruled by the competition authority on TIM for hindering other operators’ access to its own network (such as those of May 2013 and December 2015). In December 2016, AGCOM approved TIM’s new commitments for an overhauled access system; once again, these followed action taken by alternative operators, and their effectiveness will have to be checked by AGCOM over time.
Whenever rumours about network separation have emerged, the regulator has merely acknowledged the situation without taking a clear position as to how the separation plan should play out, and what effects it would have from a regulatory point of view. This is in stark contrast with the separation which took place in the UK (functional first, and, more recently, legal). The separation of Openreach from BT was strongly led by Ofcom’s willingness to facilitate competitors’ access to BT’s network as a key driver for effective competition; while both the functional and the legal separation were choices taken by the BT group through its own commitments, they came from the realisation that the operator would have faced regulatory remedies had it not taken action itself.
Infrastructure competition starts to threaten TIM’s wholesale revenues
Regardless of any issues related to foreign ownership, current developments in Italy’s fixed broadband infrastructure suggest that this could be a good time for TIM to separate its network business from its retail activities. During 2017, the operator lost a tender carried out by the government for the deployment of a fibre network in Italy’s “white areas” (i.e. areas where, through consultation, the government found that operators would not invest without some form of state aid); subsequently, TIM announced its intention not to run for the following tenders, and to deploy a network on its own, through the help of partnerships. The first two tenders were won by wholesale-only operator Open Fiber, which is now starting to look as a significant competitor for TIM’s wholesale revenues.
As infrastructure competition develops, TIM’s wholesale revenues are likely to decline significantly over time. At present, TIM’s wholesale business is estimated at around €2bn per year; some estimates point to a decrease of such figure by about one third by 2022. While TIM’s intention at the moment is to separate legally while retaining ownership, it is clear that any action leading to a relaxation of regulatory measures could be beneficial - either to protect TIM’s own wholesale revenues, or to make the network asset more palatable for a future sale.
