Telstra Agrees to Structural Separation

Australia will join Singapore and likely New Zealand as countries in which there is a single wholesale provider of broadband connections and all retail providers lease capacity from the wholesale provider.

Telstra Corp. essentially has agreed to break itself up into distince retail and wholesale companies as the result of a new deal with Australia’s national government. A new framework agreed upon by both the government and Telstra, essentially results in Telstra selling its network to the government-backed NBN Co, which is building the new national broadband network, and putting its customer traffic on the network as well.

The new framework, which still must be ratified by a formal contract, a "yes" vote by Telstra shareholders, and approval by regulators, will launch Telstra on a new path. It essentially will not own and operate its own fixed networks any longer. It will not be required to provide universal service.

And it likely will be a much-bigger player in the fourth-generation mobile business than it is in the fixed business.

Telstra will be paid A$9 billion as part of the deal, which remains only a framework, not a contract, which will have to be worked out over the next few months. The deal also means Telstra is free to bid on new wireless spectrum, and can keep its 50-percent stake in cable operator Foxtel.

As part of the agreement, the NBN Co. will be able to use Telstra infrastructure, including ducts and backhaul fiber, rather than building duplicate infrastructure. Telstra also agreed to transition its current customers to the NBN network, becoming an anchor tenant.

NBN Co will operate as the wholesale supplier of last resort for fiber connections in greenfield developments starting January 1, 2011.

Telstra also will be shutting down its copper ADSL network as part of the new agreement.

A new entity, USO Co Ltd, will be established to take over Telstra’s universal service obligations starting July 1, 2012.

The terms of the lease were not disclosed but sources close to the negotiations told AAP the agreement was for a period much longer than 10 years.

Telstra and the government have been at odds about the  A$43 billion "fiber-to-the-home" broadband network, and the necessity of Telstra agreeing to at least a functional serparation of its wholesale and retail operations.

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Telecom Italia: Functional Separation of Access Network

It's official: Telecom Italia is creating a separate wholesale access operation clearly separated from Telecom Italia retail operations. When the new change takes effect, Telecom Italia retail and all other competitors will buy access services from the wholesale business.

Open Access will develop and maintain the access network infrastructure and manage activation and other processes.

The move is the latest example of ways different service providers in different countries are adapting to differing regulatory regimes and competitive "facts on the ground."

While there have been discussions of structural separation in the U.S. market, there never has been any political will to change the regulatory regime strongly in that direction, though aggressive wholesale discounts were the rule, for a period after 1996, and began heading the other way after about 2004.

Markets where functional separation has been adopted tend to be characterized by weak ability on the part of cable operators to provide meaningful competition in voice and high-speed Internet access services.

That isn't the case in the U.S. market, where regulators basically have decided that a competitive duopoly where cable and telco incumbents battle it out will lead to the greatest consumer gains, in the shortest amount of time. As a practical matter regulators probably got this one right.

Given the current state of capital markets over the past four or five years, it is virtually impossible to raise enough money to build a third, widespread broadband terrestrial network. Aggressive wholesale requirements meanwhile were all the excuse the large telcos needed to drag their feet on rapid broadband upgrades.

It is no coincidence that Project Lightspeed and Verizon FiOS really cranked up after it was clear the aggressive wholesale requirements would not stand.

That said, nothing in the telecom world ever is completely stable. What the government gives, the government takes away. At some point, the rules will begin to change again. As always in the U.S. market, the issue is whether the problem is too much freedom or not enough.

Sprint WiMAX "Functional Separation"?

With new reports out that Sprint might try to resurrect its failed alliance with Clearwire, this time perhaps with new minority investors (Intel, Google and Best Buy), one wonders whether Sprint ought to do what wireless operators are doing elsewhere and create a separate transmission company from which it can buy wholesale capacity.

Functionally separating retail operations and network functions might make sense in this case, given the other pressing demands for capital Sprint also faces. It isn't clear that Sprint derives significant competitive advantage from retaining ownership of the transmission facilities.

Best Buy might also be more inclined to invest in the new WiMAX network if such wholesale access were built into the investment agreements, as Best Buy might want to brand its own services.

Google is more interested in fostering an open networks environment and might not be that interested in any sort of Google-branded service. But wholesale access might be interesting if Google wants to experiment with applications that require such access, and wants to do so in a "real world" environment.

Sweden to Separate Networks

It looks like Sweden will join the ranks of countries believing that creating a separate wholesale broadband access entity will spur innovation in domestic telecom markets. A law giving Sweden’s telecoms regulator, the PTA, powers to impose a separation of network operations and retail services on TeliaSonera or any other infrastructure-based telco deemed to have significant market power now is under review.

But TeliaSonera has seen the writing on the wall and preempatively launched a wholesale unit on its own. TeliaSonera Skanova Access now offers equal wholesale terms to rivals and its own retail operations.

If approved, the new law will emulate BT’s "functional" separation. Swedish regulators say they will wait to adopt the new rules when the EU has formalized its own rules on functional separation.

There's a key challenge for North American regulators here. The grave potential danger of such structural or functional separation moves is that it will scare off investors who must provide the investment capital to build robust new optical access networks. As the trend continues to grow, not simply in Europe but in the Asia-Pacific region as well, we will accumulate a track record demonstrating whether, in fact, a capital strike is a realistic fear.

If functional separation can be made to work, if it continues to provide an attractive basis for investing capital in networks, pressure might mount on North American regulators to make similar moves. That will be especially true if market abuse were perceived to be occurring under the current "inter-modal" competitive regime that now prevails, under which competition between cable companies and telcos is expected to provide competitive benefits.

T-Mobile, 3 Join 3G Networks

T-Mobile and 3 are pooling their U.K. 3G transmission networks, a move expected to reduce mobile tower sites by about 5,000 and save £2 billion in capital spending.

Kevin Russell, 3's UK chief executive, said the joint venture deal includes contingencies should either company be taken over, but both expect it to be a long relationship.

The move is not unprecedented, but still is unusual. Though not dictated by regulatory requirements, the move essentially creates a wholesale entity both retail networks will use to operate their businesses. It is not a structural separation, but certainly a functional separation.

By the end of 2009 the two companies plan to have 13,000 sites, covering 98 percent of the population with a mobile broadband network capable of speeds up to 7.2 Mbps.

Singapore will Structurally Separate NGN

Singapore is issuing a request for proposal to build a next-generation optical access network and has decided it will be built using a "structural separation" regime, where one company will build and own the access facilities and provide wholesale access to any retail provider that wants to use the network.

The RFP to construct the network will therefore provide for structural separation of the passive network operator from the retail service providers. If necessary, the government also is prepared to mandate open access provisions.

Put your finger in the air. The wind is blowing. As Bob Dylan once said: "you don't need a weatherman to know which way the wind blows."

Indian Wireless Firms Structurally Separate

Three Indian Wireless companies have concluded that owning and operating layer one infrastructure is not essential for retail operations.

Bharti Infratel Ltd., a unit of Bharti Airtel Ltd., is merging its telecom tower business with Vodafone Essar Ltd. and Idea Cellular Ltd.

The three companies will form an independent tower company called Indus Towers Ltd. that will provide passive infrastructure services in India. Bharti and Vodafone Essar will hold 42 percent each of the company, and Idea will own the remaining 16 percent.

Passive infrastructure services include towers, shelters, cooling systems, power supply and other items that enable telecom systems to work.

The new firm will merge the passive infrastructure assets of the three companies across 16 telecom territories in India and will initially have about 70,000 telecom sites, the statement said.

The move parallels "structural separation" (creation of a legally distinct and separate wholesale facilities company) more than "functional separation" (creation of an owned wholesale facilities company). Still, the move is interesting given the move to functional separation in Europe, where wholesale facilities are run by one entity, and all retail providers lease capacity and features to run their retail operations.

The move by the three wireless service providers mirrors a broader change in the global communications business from a completely vertically-integrated model to a partially horizontally-integrated model. Basically, communications networks increasingly operate the way data networks do, with applications running on top of facilities that are owned by many different entities in the value chain.

You might call this a move to more "open" networks, and indeed that is precisely what is happening, in small steps.

Google Threat to Telcos: How Real?

Yesterday at the Stealth Communications Voice Peering Forum, there was spirited discussion about Google, and on Google's impact on the broader telecom industry. One line of thinking was that Google wasn't as big an issue as sometimes thought, because the one thing it really has succeeded at is advertising. The implication is that Google will not, or cannot, emerge as a force in the mobile or landline parts of the telecom industry.

The other point of view is that Google already has become a factor, even if it is only as a force reshaping all of advertising.

Likewise, some people are going to argue that Verizon Wireless and at&t Wireless announcements about the openness of their networks are essentially "no big deal." Customers already could swap Subscribe Information Modules" in at&t and T-Mobile phones because both carriers use GSM, and that's just a feature of a GSM network.

That misses the point. The entire U.S. wireless industry now has formally and publicly embraced the notion of open networks. There won't now be any retreat from that position, as end users increasingly will expect it, as every consumer expects such openness in Europe.

And though it sometimes seems as though all essential regulatory debates have ended in the U.S. market, the converse is true. In large part because of what now is happening in Europe, policymakers ultimately are going to have to reexamine the basic national framework for telecom regulation in the U.S. market.

The argument that a capital strike is inevitable in any "functional separation" regime, or a "structural separation" regime, does not seem to be borne out in the European markets. Carriers might not like the framework, as it is helpful to competitors. But dire consequences: a capital strike that cripples robust broadband access deployment, does not seem to be occurring in Europe, where such a strike might have happened.

That is not an endorsement of "anti-telco" restrictions. What is required is some encouraging, stable policy that provides clear incentives for rapid, aggressive optical access investment on the part of the leading U.S. telcos, and assures their investors that a predictable return is possible. "Structural" or "functional" separation essentially can "guarantee" a carrier that most wired broadband traffic (other than cable's) will flow over the carrier's owned pipes.

In essence, regulators can ensure that nearly 100 percent of broadband access traffic. other that that provided by cable operators, flows over the incumbent wired telecom network. Granted, the U.S. and European markets are diverging. Cable is a big factor in the U.S. market and is driving measurable and effective competition to a large extent.

The issue is whether some sort of separation can be crafted that actually creates a better investment climate for incumbent optical access facilities. That isn't the way separation traditionally has been viewed. But circumstances might be changing. A company whose "reason for living" is the "best possible optical access", serving virtually every potential retail competitor, with reasonable assurances of a return on investment, might be worth looking at.

The analysis will not be easy. Cable is a huge "fact on the ground". It might be too late to create a regime where all retail services flow over one huge physical access network. Also, cable operators historically have resisted giving up their networks. But there's a cost to upgrading those networks, and the financial markets never like it when cablers have to invest heavily in those networks.

But even large global carriers are discovering that spending more of their dear capital on transport facilities might not be the best way to proceed. It might seem improbable at the moment that such a fundamental new debate is possible. But give matters a couple of years. Demand for access bandwidth is going to explode. Carriers, with the exception of Verizon, will need to respond.

Financial markets will need reassurance. Maybe the current regime continues to work. But maybe it doesn't. Watch the European markets. If bandwidth demand continues to explode, and European end users start to routinely receive much more bandwidth than U.S. consumers do, there will be an inevitable demand for doing something in the U.S. market.