Structural Separation or Facilities-Based Competition?

Creating more fixed network services competition--leading to consumer benefits--is never easy. High fixed costs, heavy capital investment and a plethora of competing delivery platforms are ever-present realities.

Where policymakers believe there is little practical opportunity for rival facilities-based networks to emerge, structural separation remains one of the few potential avenues for change.

Structural separation--breaking an incumbent telco into a wholesale unit and a retail unit--has in the past been a way policymakers attempt to create competition and foster investment in the Internet access market at the same time.

That is the actual policy in Australia, New Zealand and Singapore.

The argument has been that multiple facilities-based approaches are inefficient and a waste of capital. That might often be the case, especially in regions where there is no facilities-based cable TV industry that already offers a facilities-based alternative to incumbent telcos.

That is a tough matter, politically speaking. Few incumbent service providers ever have been willing to submit to such separattion policies. 

SingTel was willing to do so in order to obtain freedom to grow internationally, in new lines of business. Telstra, after much struggle, agreed to surrender its monopoly in exchange for assets and freedom in the mobile arena.

The former Telecom New Zealand simply seems to have been motivated by a belief that it would do better if separate retail and wholesale companies (Chorus becoming the wholesale company) were created.

On the other hand, some would argue that more interesting amounts of competition and innovation come when competition takes the form of  facilities-based rivalry. But that largely hinges on pre-existing and substantial investment by cable TV operators.

The reason is simple: when every retail provider uses the same network, the amount of innovation and pricing is limited. Compare that to a situation where two to three access networks exist, and the managers of each network look for all sorts of ways to create distinctiveness.

As many executives would say, an entity relying on wholesale access cannot control its costs.

The new wrinkle, at least in U.S. markets, is the emergence of third-party Internet service providers such Google Fiber and other independent ISPs. That emergence, in turn, appears partly fueled by a change in local government thinking and policy.

For decades, the objective, in substantial part, had been the ability to wring revenues from access provider operations, in the form of franchise and other fees.

Today, the thinking seems more focused on creating infrastructure that supports economic development (which, in turn, leads to higher tax revenue).

The change means municipalities generally are willing to forsake franchise fee revenue to gain state-of-the-art Internet access facilities, and also are willing to substantially improve the speed and efficiency of other key rules such as issuance of permits.

Where policymakers believe it will be possible to encourage facilities-based investment and competition, what happens at the municipal level might well be far more important than what happens at the level of national policy.

National policy still matters, and can be decisive in situations where “only one network” is the expected outcome. How much fiber-to-home progress is possible might hang in the balance.

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