In a previous Insight article, Experience pays off in the end, I argued that telcos’ retail arms are limiting their revenue opportunities by basing their business purely on networked service provision. I suggested that they need to shift their focus from the classic ‘upstream-network, downstream-service’ model towards a more open, less-exclusive model of communications enablement.
A key proposed change to the European Union regulatory framework, which was announced on 13 November, is to provide national regulatory authorities with a new remedy for uncompetitive markets: functional separation. Several different models of functional and structural separation have been proposed or implemented in European markets; the highest profile case is the creation of Openreach in the UK.
In this article, I will argue that these separation models – except, perhaps, the most extreme forms so far proposed (but not yet implemented anywhere) – do not provide retail arms with the freedom to develop and grow on their own terms as communications enablers. Instead, a functionally similar entity tends to take the place of any upstream (network) business that is separated, thereby perpetuating a fundamentally network-centric business focus.
First, though, let’s highlight a contradiction between two oft-repeated, received ideas.
- First, that only regulatory intervention will separate network assets from retail arms, and that separation is necessary to deliver the competition that best serves the end user. This, it is argued, is particularly true in the case of next-generation access networks because infrastructure-based access to altnets will be more technically and commercially problematic.
- Second, that the relatively open nature of all-IP next-generation networks naturally creates a disaggregation of the network and the applications layers, and that barriers to market entrants are lower at the application layer. If this argument is correct, then separation appears to be a regulatory prop for a type of competition that is being superseded naturally in any case.
The second argument may be compelling in theory, but seems the weaker because there are few examples of this disaggregation actually occurring. In fact, a quick survey of the European fixed telecoms landscape shows that the vertically integrated, network-centric model is as predominant as ever. If anything is changing the shape of the market, it is the replacement of a multi-rung ‘investment ladder’ environment (where competing players achieve different levels of infrastructure ownership in a national territory) with straightforward geographical divisions of territory, which appears to be happening in certain regions of France and Italy.
The Openreach model is not a simple, functional separation of network from services. Openreach sells (mostly) certain physical assets; it sells the unmanaged access part of the network. BT Wholesale, in a reduced form, sells (mostly) services – including, significantly, managed wholesale access services.
The BT structure is adapting to the new environment, and a new network-centric model is developing in place of the previous one (see Figure 1). In response to its stated aim of becoming the leading software-driven services company, BT Wholesale is evolving into a software and skills-driven service provision entity – or, to be more accurate, the service-provision sales and marketing arm of a larger, non-customer-facing entity, BT Design/BT Operate, which integrates network operation and IT layers, and which underpins all of BT’s lines of business.
Figure 1: BT Group’s structure (Source: Analysys Research, 2007)
BT’s Design and Operate units form the foundation of retail managed network services, and so Retail remains firmly embedded in a network-centric model. It could be argued that, if and wherever separation is imposed, the key infrastructure of the network-centric telco business will shift out of physical access and into the service delivery platform. But customers’ demands and desired experiences will require retail arms to look beyond this upstream-downstream, network-centric model. To release maximum value as a communications enabler, retail arms will need to separate themselves from an exclusive adherence to the networked service model.
There is an useful comparison to be drawn with the fragmentation of certain aspects of the BBC, which arguably has gone far further than BT in its structural response to the challenges of new communications paradigms. There are obvious differences between the BBC and BT – such as state funding and the unidirectional nature of broadcast networks – but the degree to which the BBC has separated customer experience, service provision and delivery infrastructure provides a telling benchmark for BT, and by implication other incumbent telcos.
The BBC’s core business is not broadcasting but content; this is and always has been at the centre of the BBC’s relationship with its consumers. It does not, in fact, broadcast in the strictest sense of the word; the BBC’s content is packaged up as services and then delivered by third parties, whose number is increasing as new media proliferate and as BBC sells its content into new geographical markets. Two parts of the packaging and delivery process that were formerly part of a vertically integrated BBC have already been separated.
- BBC Transmission, which owned and operated hilltop terrestrial transmission infrastructure, was sold in 1997. It belongs to Macquarie Communications Infrastructure Group, which also owns a tower business in the USA and further broadcast transmission infrastructure in Australia. It is comparable to Openreach in that it is a utility infrastructure business.
- BBC Broadcast, which provided a range of digital creation and playout services for the BBC’s content, was sold in 2005 to a different investment arm of Macquarie, Macquarie Capital Alliance Group, and is now known as Red Bee Media. It continues to provide the same services to the BBC, but also provides similar services to UK cableco Virgin Media and to Orange for its new IPTV service. Like BT’s Design and Operate units, Red Bee Media’s services are the glue that binds the end-user experience to the network.
Therefore, the critical difference between the BBC and BT is that the former’s network service provision business, as well as its utility transmission network infrastructure business, is completely separated from the core company. In this respect, TV appears to be a much less stove-piped, more horizontally integrated industry than telecoms.
Separation may yet deliver a better competitive environment for access, and deliver benefits for the consumer. But, in itself, this regulatory remedy will not create the room for the kind of personal growth that all good divorces should provide.
