The Italian government is aiming to facilitate the creation of a wholesale-only network provider, resulting from the spin-off of Telecom Italia’s fixed network and its merger with Open Fiber. The move aims to facilitate investment in ultra-broadband, in a country where network duplication is particularly undesirable due to how the population is distributed. However, the government should be mindful not to kill competition between infrastructure, which would still be viable and desirable in many areas of the country, a model which is also playing out positively in other countries.
The government is keen to facilitate the merger, but it is unclear whether Telecom Italia will agree to it
The Italian government is considering legislation to facilitate the creation of a single fixed network provider, which would result from the separation of Telecom Italia’s network asset, and its merger with wholesale-only operator Open Fiber. The move has been subject to rumours for some time, and was confirmed by the Minister for Economic Development in a recent TV interview. However, the government maintains this can only happen in agreement with Telecom Italia’s board. A draft amendment to the country’s Electronic Communications Code is currently under discussion, aiming to incentivise the “voluntary aggregation” of network assets in a non-vertically integrated entity.
Both TIM and Open Fiber have been open to the option. In particular, Open Fiber’s Chairman Franco Bassanini has been explicit in labeling the solution as “a win-win for Telecom’s shareholders and for the country”, suggesting that the two networks could merge once TIM’s assets have been separated, and that the new network could be subject to universal service coverage obligations. IInside TIM, the picture is currently more complex. The previous CEO Amos Genish was open to the idea, so long as TIM retained control of the asset. However, the company has now suddenly had a change in leadership, and the new CEO is yet to take a stance on the merger. With the government keen to press ahead and pass the necessary provisions before the end of the year, it could be a matter of days before TIM’s main shareholders make their position clear on the matter.
The merger could eliminate the risks of undesirable network duplication
The separation of the network asset from Telecom Italia’s operations has been brought up repeatedly over the years. However, it never led to serious action being taken either by regulators, or by Telecom Italia itself. Only in 2017, due to government’s concerns to ensure Italian ownership of the network and reduce national security risks, the previous government took serious steps in that direction. There was never a competition or economic argument brought forward by regulators. AGCOM has regulated access through the usual instrument of market reviews and consequent remedies on the operator with Significant Market Power (SMP), and sometimes sanctioned Telecom Italia for failure to comply with the access obligations appropriately (a very common occurrence in countries with one incumbent subject to access regulation); however, it stopped short of proposing stronger separation of the network asset to improve the functioning of the access framework. On its part, Telecom Italia hinted at possible network separation several times in recent years, seeking less a burdensome regulatory treatment in return, but never followed through until the government took action. It is understood that a plan for the separation of TIM’s access network was submitted to AGCOM earlier in 2018, and that the regulator is still evaluating the plan.
The current government’s intention to create a single fixed network introduces a further element likely to accelerate the separation. From an economic perspective, Italy’s geography and population density offers some justification to the creation of a single infrastructure provider: despite having a total population similar to the UK (about 60m people), Italy’s population is much more sparsely distributed. Only about 16% of the population lives in towns with more than 250,000 inhabitants, and about 50% lives in villages with less than 25,000 inhabitants. This means that the average cost of reaching a household in Italy is higher than countries where the population is more concentrated in large cities. In addition, the widespread presence of archaeological sites (about 16% of towns with more than 250,000 inhabitants have numerous archaeological sites) further slows down, and increases the costs of, network deployment. These factors were taken into consideration when the European Commission cleared Italy’s broadband strategy of 2015 under EU state aid rules. To this end, the idea to create a single player under a Regulatory Asset Base (RAB) model could offer a viable solution to the risk of undesirable network duplication, in a country where such a high percentage of premises is outside urban areas. The RAB model is used in Italy for energy networks such as Terna and Snam, and would likely foster investment while still providing incentives to cut costs (under the RAB model, companies can retain the funds generated by cost savings).
The Italian government should not remove incentives to competition between infrastructures
The envisaged option of a single wholesale-only network would likely address some issues of the current scenario, where operators are largely reliant on access to Telecom Italia’s network. The wholesale-only nature of the network provider would remove vertical integration, and, with that, the incentive incumbents have to make access difficult for alternative operators. This argument has been a strong selling point for Open Fiber since its inception, stressing the fact that they have no reason to discriminate between access seekers or make their life difficult, as access seekers are Open Fibre’s only customers. Accordingly, alternative operators have warmed up to Open Fibre and welcomed its disruptive role in Italy’s telecoms landscape.
This also suggests that there can be risks in re-creating a monopoly, despite the improvements brought about by the wholesale-only model. Operators would be unable to choose between different access providers; prices of the sole access provider would likely require to be regulated indefinitely, and regulators would have to ensure that the regulated entity continues to have sufficient incentives to invest in network upgrade and deployment. It is indeed true that network competition is not viable in the less densely populated areas of the countries, as mentioned above; even more so given the current low demand for services which require very high-speed broadband. However, competition should be left free to unfold in the most attractive areas of the market, where it would be likely to spur investment, reduce access costs, and require less regulatory intervention and monitoring.
Recent developments in other countries suggest that network competition can take place, and has the potential to spur the much-needed investment in FTTP. In particular, the UK is seeing the rise of wholesale-only operators such as CityFibre and Hyperoptic, which are making considerable investment in FTTP and aim to challenge Openreach, at least in urban areas. These players are adopting a “build it and they will come” approach, showing confidence that demand for ultra-fast broadband will increase as these networks are created. If network duplication is the concern of Italian policymakers, they could leave AGCOM and the Competition Authority to take an approach similar to the one adopted by ARCEP in France: here, the regulator issued a recommendation in July, to ensure consistency in network deployments without unnecessary overlap. In particular, ARCEP aims to discourage announcements of rollout plans with no rapid follow-through; these announcements can turn out to be a deterrent to other operators, and displace their investment plans.
