When Does Functional Separation or Structural Separation Make Sense?

Analysts at the IBM Institute for Business Value argue that some form of functional or structural separation offers the highest revenue growth potential for telcos in the developed world, with the highest returns from structurally-separated operations where network services are spun off into a wholly-separate company, and all retail providers buy services from the wholesale entity.

Those conclusions are not widely shared in the North American market, it is fair to say. But it remains to be seen whether the analysis might someday make more sense.

The worst returns come from a strategy of sticking with the closed, voice-centric model, with better returns if operators are able to partner with device, application and infrastructure providers to create new services.

But operators do best where they separate their network service operations from retail operations, either to allow retail units to concentrate on vertical markets and customer segments, or by a more-robust effort to attract third parties to use the network resources.

In other words, some forms of functional separation--running the network business separately from the retaill business--might make more sense, and lead to greater revenue success, than keeping the functions combined.

In some other cases, service providers might decide to essentially get out of the networks business, to focus on retail operations. That has seemed to make sense in Southeast Asia markets where the costs of next generation investment are deemed to offer financial reward less than if capital were deployed in other ways, especially in mobile services or out of region expansion.