On 18 January 2019, The Italian regulator AGCOM has published the long-awaited draft review of the Wholesale Broadband Access markets (Markets 3a/3b and 4 of the EC’s Recommendation on relevant markets). The proposal aims to deregulate the market in Milan, and introduces nuanced price control remedies in the rest of the country, recognising market evolution of recent years. The publication of the lengthy and complex document (454 pages long) was delayed due to Telecom Italia proposing the legal separation of its fixed network, in a way similar to the separation of Openreach within the BT Group in the UK. AGCOM has provisionally concluded that the plan does not affect the shape of WBA markets in a significant way, and leaves the regulatory burden on TIM nearly intact compared to the past. This could be a further incentive for TIM to ditch the plan, at a time when a change of leadership is now pushing for the network to be entirely spun off and merged with wholesale-only operator Open Fiber.
AGCOM finds TIM’s proposed network spin-off does not substantially alter the regulatory landscape
One of the most important aspects of AGCOM’s review, and perhaps the most talked about, relates to the project presented by TIM for the voluntary legal separation of its fixed access network. TIM presented the plan to AGCOM in March 2018; the plan was not published until this week, but AGCOM took it into account during the market review. The proposed separation has similarities with the current status of Openreach in the UK, which is a legally separated company inside the BT Group; in the same way, TIM foresees the creation of a ‘NetCo’, of which the group would still retain full control. The NetCo would have an independent board with full executive powers. In the project, which is published by AGCOM as Annex 1 of the draft market review (p.103 of the document), TIM refers to the types of separation adopted by Ofcom in July 2016 (p.21 of Ofcom’s consultation), and places its plan at level 7. The NetCo would hold physical assets such as passive infrastructure, access network apparatus, real estate; intellectual property; and human resources for the realisation, management, and provision of the access network in both copper and fibre, including VULA and Bitstream services. Unregulated wholesale services would also fall in the scope of the NetCo. The NetCo would adopt an equivalence model which, in TIM’s project is a “further evolution” to the New Model of Equivalence (NME) approved by AGCOM in 2016. The processes, systems, and databases would largely be the same as those implemented with the NME; as a result, TIM argues the impact on alternative operators would be minimal.
TIM’s objective was to achieve lighter-touch regulation as a result of the separation; however, such an outcome is unlikely, seeing as several passages of AGCOM’s draft state that the separation does not substantially alter competition in the WBA market, hence not leading to a lesser regulatory burden on TIM. More precisely, AGCOM notes that elements of vertical integration remain, which can give TIM significant competitive advantage, not replicable by its main competitor, Open Fiber, which is a wholesale-only provider; TIM also has a “high degree of integration” in several adjacent markets. On the other hand, access seekers are not able to exercise countervailing buying power in such a way as to neutralise TIM’s power. The proposed separation does not impact the definition of the relevant markets (either geographically, or in terms of products); the main changes relate to the way AGCOM lays down non-discrimination, price control, and accounting separation obligations, because the full-equivalence model would be extended to VULA FTTC services. Should the separation be confirmed, AGCOM believes the accounting separation model will also require reviewing.
The review introduces geographical segmentation and possible differentiation of price control remedies
Regardless of the added layer of complexity brought about by TIM’s plan for network separation, the market review has some noteworthy elements in the identification of the relevant markets, in the nuanced set of remedies which could apply across different regions, and in the way price controls are being set. For the first time, AGCOM identifies a geographic area in which no operator has significant market power (SMP); this is the case in Milan, where infrastructure competition has risen significantly in the last two years, mainly due to the entry of Open Fiber. This ensured that TIM’s share of market 3a dropped from 68.5% in December 2016, to 34% in June 2018; during the same time frame, Open Fiber went from 0% to a 34.5% market share. Similarly, TIM’s share of market 3b fell from 25.2% in December 2016, to 16.1% in June 2018; at this time, Open Fiber held a 30.4% share of that market in Milan. Things are very different in the rest of the country, where TIM still retains a significant competitive advantage due to its control of hardly replicable infrastructure. Some services are deregulated: namely, the ‘end-to-end’ service, the shared access service, and ATM Bitstream except for the areas without Ethernet coverage are no longer mandated; WLR is also deregulated in the towns where an alternative access network is available to all households.
AGCOM recognises the existence of varying degrees of competition outside Milan, and set out a list of ‘contestable towns’ where competition is more likely to develop in the near future. As part of the consultation, AGCOM is considering four different options to identify such contestable towns, based on coverage of wholesale providers alternative to TIM, competitive pressure in fibre, and TIM’s fibre retail market shares. In those areas, AGCOM plans to refrain from imposing cost-orientation on copper and fibre access products, with the exception of sub-loop unbundling access. TIM will still have to set non-discriminatory prices, and will not be able to charge more than €10/month for LLU. In general, price controls will see an increase between 2019 and 2021 for copper, and a decrease for fibre products. The monthly fee for LLU will rise from €8.61 to €8.9, whereas VULA FTTC will fall from €14.32 to €12.5, and VULA FTTH will decrease from €22 to €15.2. This should improve the incentives for access seekers to move from copper to fibre products, as the case for investment in fibre access strengthens.
TIM should decide as quickly as possible whether to go ahead with the separation
The market review, and the impact of TIM’s proposed separation, are now subject to consultation for 45 days after the publication; stakeholders have until the first week of March to submit responses. It is expected that the consultation will attract numerous and comprehensive responses, given the breadth in scope and detail of the documents published, and the importance of the matter.
It is expected that TIM will react with disappointment at AGCOM’s initial stance that the separation plan does not alter competition conditions in the country in such a way as to grant the operator a much lighter regulatory burden. However, recent changes in TIM’s leadership could also result in the company withdrawing or significantly changing the plan: the proposal published by AGCOM dates back to March 2018 and comes from the previous CEO Amos Genish, who was replaced by Luigi Gubitosi in November. While Genish and TIM’s main stakeholder Vivendi aimed to retain control of the NetCo, Gubitosi and the Elliott fund are more in tune with the Italian government’s will to create a single national network in a merger with Open Fiber. AGCOM wisely set out remedies under two scenarios: one assuming that the separation goes ahead based on last year’s plan, and one assuming that the separation does not happen; this will allow the regulator to complete the market review regardless of whether TIM goes ahead with the plan. Nonetheless, TIM should aim to decide as quickly as possible on the matter, at a time when AGCOM is making rules for the next five years. All actors involved, including access seekers, will benefit from certainty in planning their investments.
