Vertical separation as cure for adversarial regulation?

My digging around in the Telstra story has unearthed some interesting perspectives on the UK’s own experience with vertical separation.  The link comes courtesy of Kip Meek, former eminence grise at Ofcom, who was commissioned by Telstra to report on comparative experience of separation in the UK and Australia and to give a view on whether something like the Openreach model would be appropriate for the Australian market. (‘Operational Separation in Australia and the UK’.  Report by Kip Meek, Chairman, Ingenious Consulting Network, 24 June, 2008).  Given the scale of Australia’s broadband ambitions, he thought not, i.e. ’The demand risks and uncertainties associated with building an NGN, especially where it is intended to replace the PSTN, seem to me to raise doubts about whether a non-vertically integrated approach would be able to achieve the necessary level of investment co-ordination’.

Of more interest, perhaps, are Kip Meek’s reflections on why separation was seen as a suitable ‘remedy’ for the UK.  At the time, most of us thought this resulted from BT’s disappointing progress with local loop unbundling - and Ofcom’s Strategic Review’ of telecoms policy certainly placed heavy emphasis on the UK’s comparative performance in broadband penetration.  In fact, the UK’s relative broadband performance turned out to be pretty good, and Kip Meek recollects that the real objective of (negotiated) separation was a paradigm shift in behavioural regulation, e.g.

‘a highly adversarial and intrusive relationship had emerged between incumbent and regulator. Oftel maintained a welter of price regulation at the retail level and also felt compelled to reach into the heart of BT’s business…. The Communications Act of 2003 and the creation of Ofcom did however present an opportunity to break the attritional cycle of mutual mistrust that had become embedded in the relationship between incumbent and regulator’

That worked well, then…

Vertical separation down under

Have been enjoying the histrionics in the Australian Senate as the government finally passed the enabling legislation to structurally separate Telstra.  (Good background to the story here).  Amidst all the excited rhetoric surrounding the creation of the country’s National Broadband Network (NBN), the jury is still out on whether such vertical separation of incumbents is actually a good idea.  The economics literature on vertical integration would certainly suggest otherwise.  For example, a 2009 paper by Bob Crandall and others concluded that ‘there is both theoretical and empirical support for the proposition that forced vertical separation of telecommunications networks will reduce economic efficiency, slow innovation, and impede performance in markets where it is imposed’.  The paper goes on to consider evidence of whether broadband development has been enhanced in the five OECD countries where some form of vertical separation has been mandated, i.e. Australia (functional, rather than structural separation), Italy, New Zealand, Sweden and the UK.  Again, this empirical analysis is less than supportive, e.g. ‘the evidence shows no increase in either investment or broadband penetration in nations that have mandated vertical separation; indeed, the evidence suggests that vertical separation has impeded the rollout of next generation networks’.

Good luck with the experiment, guys!

Free at last??

The end-game of free voice telephony finally appears to be in sight…

Sometimes, you have to do a reality check: it’s not very long ago that I was joined in some intense commercial battles over the division of spoils in call termination. Now, a study for the European Commission by French consultants, Tera, has concluded that, by the end of 2012, fixed and mobile termination charges will converge at around 1 Eurocent/minute under the ‘improved’ calling-party-pays regime being mandated by the EU (this being based on the controversial adoption of “pure” LRIC network costing).  In that event, Tera believes, a move to a true Bill & Keep interconnection regimes becomes highly likely – if only because the cost of maintaining complex billing systems is no longer justified.

(But a few, final skirmishes in the Voice market still seem likely...).

Net Neutrality off target?

Chris Marsden, passionate defender of net neutrality, bemoaned last week that the European ‘competitive ISP model’ – much cherished by Ofcom, Ed Vaizey and others – is illusory.  As he says, even if you don’t like your ISP’s traffic management policies, and choose to switch provider, “you'll still be dealing with the underlying cable-telco duopoly…”

Chris is right, of course, but the focus on network infrastructure is overdue. One of the weaknesses of much net neutrality rhetoric is that it has focused on the wrong competitive problem, i.e. it is aimed at preserving competition in applications and content, sections of the industry that are already highly competitive and the least protected by entry barriers (and likely to remain that way).  Arguably, the real focus should instead be on the impact network neutrality regulation would have on the competitiveness of the broadband access market.  In this context, academics such as Professor Christopher Yoo have concluded that mandating network neutrality can have the perverse effect of reinforcing sources of market failure by frustrating the introduction of differentiation in the access market, thereby restricting networks to competing on the basis of price and network size, factors that favour the existing providers.

Pete

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