Telstra’s recent announcement that it will create a standalone business for its fixed infrastructure is part of the company’s decision to go through a thorough restructuring. Yet, while this is an independent business decision, it is hard not to link it to changes in the country’s telecoms landscape due to regulatory and policy choices. Telcos in other countries are making similar moves, and in all cases regulation plays either a direct or indirect role. Network separation is also linked to increasing competition at the infrastructure level, since incumbent networks suddenly need a more agile and less vertically integrated wholesale business due to competitive pressure. However, it is currently too early to assess how good this will be for the industry as a whole.
Telstra’s restructuring is clearly linked to the changes brought about by the NBN
On 20 June 2018, Telstra announced a comprehensive restructuring plan for its business, along four key pillars. The plan aims to simplify the company’s structure, and will lead to a headcount reduction of 8,000 between employees and contractors. One of the four pillars foresees the establishment of a standalone infrastructure business unit – NetCo; Telstra is adamant that one of the purposes of such move is to “set up optionality post the NBN rollout”, which means the infrastructure business could be up for sale in a not too distant future or welcome the entry of a “strategic investor”. The unit will have its own CEO, and comprise data centres, non-mobiles related domestic fibre, copper, HFC, international subsea cables, exchanges, poles, ducts and pipes. Its services will be sold to Telstra, wholesale customers, and the NBN. The new business unit will not include the mobile network assets such as spectrum, radio access equipment, towers, and some elements of backhaul fibre. Telstra consider these assets as key to execute its 5G strategy.
It is pretty clear that such move is a way for Telstra to gain financial efficiency and potentially raise money either from the network spin-off, or from entry of investors. It is also clear that Telstra is doing this as a result of the changes to the Australian telecoms landscape brought about by the NBN since its launch in 2009. Telstra’s statement explicitly says that a decision about possible network spin-off will be made once the NBN rollout is complete; also, under current legislation, any non-NBN network providing “superfast local bitstream access” faces wholesale access regulations by the ACCC. In other words, policy choices of recent years have shaped the Australian market significantly, and brought the country’s largest telco to plan a significant reshape of the business.
Telcos around the world are making similar moves, and regulation has a role in all of them
Telcos in several large countries are now going, or have recently gone, through a process of network separation. Factors behind each of these choices vary, as the context within which each of these happens is different; however, it is striking to see how regulation is, albeit in different ways, either directly or indirectly responsible.
In the UK, BT reached an agreement in 2017 with the regulator to legally separate Openreach. The move took place following significant pressure from Ofcom, as the regulator had clearly set out its intention to intervene further if it was not satisfied with the way the functionally separated Openreach was complying with wholesale access obligations (among other reasons).
More recently, Mexican incumbent Telmex was mandated to carry out functional separation of its fixed network; in this case, action was entirely dictated by the regulator, following the bi-annual review of the asymmetric regulation imposed on Telmex.
Finally, after years in which Telecom Italia had hinted at a possible separation of its network assets, plans for this are now actually under way in Italy, and should be completed by early 2019. In this case, the move was not triggered by a specific stance taken by the national regulator AGCOM; rather, it came after governments recently in power raised concerns of national security due to foreign control of the company. At the same time, competition at the infrastructure level in the country is now growing: the wholesale-only operator Open Fiber has won tenders to deploy its fibre network in the “market-failure” areas identified in Italy’s broadband strategy; the operator is also deploying its network in urban areas, thereby becoming a viable alternatives to TIM’s network for retail operators.
Good or bad for the industry? Probably too early to call
As these examples of separation demonstrate, they each happen under different circumstances. This means that, while all these cases have a regulatory element at the heart, it is also difficult and misleading to identify a trend. However, it is now possible to identify the main rationales behind these occurrences. These generally relate to fostering competition at the retail level, when the regulator is unhappy about the way access is granted by the incumbent to alternative operators; or by growing competition at the wholesale level, which forces incumbents to rethink their strategy and assess how to make the most of their network assets. In particular, the latter case carries both opportunities and risks for all the relevant stakeholders.
Even though there has been a degree of separation in the UK for over a decade, it is probably too soon to say whether these more recent attempts will leave the industry in an overall better place compared to where it has been for the last two decades. It is undoubtedly positive to see some increase in competition at the infrastructure level: this is a market-based solution to the long-standing difficulties in enforcing wholesale access obligations, and also provides access buyers with better options. At the same time, not everywhere it is viable (and desirable) to have parallel fibre infrastructures competing with each other. Duplicating such assets often results in devaluing the investment of all players involved, even in urban areas.
For the years ahead, the industry is likely to experience some uncertainty with this, as operators will learn by direct experience whether it is worth deploying their own network even where other infrastructure is available and accessible. In the long run, market dynamics are likely to provide an answer, as operators whose investment proves to be unsustainable will inevitably pull out of the market, whereas those who got it right will grow stronger.
