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An Example of Spin-Off

2 Dec

In the last few weeks, Thomas Langer and myself have been talking about structural separation via spin-off at length, and interestingly yesterday’s news gave us an illustration of what it might look like. I’ll let Thomas describe this to you in his own words:

Yesterday, one of Europe´s largest utilities, German e.on announced its plans to split into two publicly listed companies via a spin-off. This approach nicely corroborates our views of how fixed access spin offs could add value to the incumbent sector. Admittedly, market dynamics in the energy and communications markets are not comparable. Without going into the details of the motivation for the decision (excess capacity in the power generation market, repercussions of the decision by the German government to wind down nuclear power), a number of details of the proposed transaction highlight some of the aspects we discussed in our „Structural Separation“ study:

1. Even large European companies are considering spin-offs to release value for shareholders. The presentation to analysts mentions strategic, operational as well as financial benefits. These range from the creation of „more focused companies“, less complexity of organisational structures and a „better alignment between rewards and results“. Last , but not least the transaction „provides tow different and compelling investment opportunities.“

2. Interestingly, the spin-off will lead to structural separation between traditional power generation on the one side and green power and services on the other. Clearly this suggests that a shift in technology and a focus on service orientation both played a role.

3. The initial spin-off will take place in 2016, in less than two years. This illustrates that large organisations can execute a reorg. within a short time frame. Skeptics that look at structural separation in communications markets as too complicated should analyse this deal. It´s doable.

4. One slide of the presentation deck is entitled „Safguarding emloyees interests“. This corresponds ideally to our standpoint that a spin off must not be seen as a means for job cuts and larger downsizing. This would risk losing both internal support and consent of labour unions.

Ah yes: The e.on share was up by more than 4% by midday yesterday while the German Dax was slightly down.

So, not a telecoms sector example and not perfectly mappable, but interesting to examine. And remember, the best example out there is New Zealand, and we’ve described it at length in one of our reports entitled Can the New Zealand NGA Model be Replicated?

Diffraction Analysis in Crosstalk

1 Dec

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Crosstalk is an Australian podcast on Telecom matters, and as one might expect, the Australian NBN is a frequent topic. Diffraction Analysis’ Benoît Felten is interviewed in the latest podcast, Doesn’t a 3030 Vision Need Fibre? Phil and Benoît discuss Structural Separation in the wake of the publication of our report Can Structural Separation Via Spin-Offs Help Europe Achieve its European Ambitions. Is Australia a good example of Structural Separation? (Spoiler: no) Could a classic Structural Separation model similar to that of New Zealand be implemented in Australia? And how future proof is the current “three networks” NBN plan exactly?

Photo: (CC) David Jenkins

DT didn’t shelf its variable rate plans…

28 Nov

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There was an interesting and animated discussion on twitter yesterday about the fact that journalists systematically present network congestion due to Online Service Providers as a given. The discussion led to talk about Deutsche Telekom’s pay what you eat plans announced last year, and their apparent shelving. But Pál Zarandy pointed me to this article which suggests that the plans haven’t been shelved.

Essentially, and even though the wording is all but clear, what this suggests is that consumers will either be able to buy expensive “flat rate” plans, or cheaper variable-rate plans, the ones that DT believes would help them leverage their market power to coerce Online Service Providers into paying for zero-rating their content (as shown in the video I posted yesterday).

Now as Dean Bubley repeatedly stresses, this has exactly zero chance of happening… as long as there is significant competition in the market. Now the bid for further consolidation in-market appears more clearly as a part of this mad plan. I still believe the chances of it actually being implemented are zero, unless a stupid policy maker (EU Parliament who voted a non-binding motion to structurally separate Google, I’m looking at you) actually buys the argument…

The Incumbents’ Net Discrimination Plan Exposed

27 Nov

I was just pointed to this fantastic German video that ‘unveils’ Deutsche Telekom’s plans with internet discrimination. It’s both funny (because it turns every creepy aspect of it into a ‘feature’, like “you will no longer be bothered by these thousands of services you could never figure out“) and scary, because from all I can gather in discussions with Incumbents across Europe and the US, this is exactly what they hope to achieve. Seriously worth watching.

Oh, and since I always insist on the lobbyists working for Big Telecom being exposed, the guys behind this are Internet activists, and you can find them on http://www.netzneutralitaet.cc/.

The false dichotomy of competition vs. investment

24 Nov

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I spent last week in Europe, in between Stockholm, Brussels and Paris and most of the topics I discussed, heard or addressed in public were in one way or another about policy. One thing that struck me is how the false dichotomy of competition vs. investment in the market is alive and well. We know where it comes from: mostly incumbent lobbying, with competitive operators sitting on the fence, not quite sure if they buy it, but not quite sure either whether they should disprove it.

What I found the most astonishing though is that every policy expert I spoke to (except ones clearly aligned with incumbents) or heard talk at the ECTA annual conference was adamantly clear that the dichotomy is false. Here are a few of the quotes I tweeted from the ECTA event :

 

 

The quote from Ofcom might be considered surprising when one looks at how the UK Regulator has worked with BT to institute an unseparated infrastructure monopoly there (and competitive operators are finally starting to get their act together in denouncing this) but it’s hard to contest that it’s true.

So here’s the conundrum: all of those who have looked into this market with even a modicum of independence know that the dichotomy is false. This includes regulators and most EU policy makers at the operational levels. Why then does it still pervade actual policy making and press coverage? How come the French government wants to reduce the number of mobile players in the market? How come the Dutch regulator refuses to open up cable networks despite evidence that it’s feasible and done elsewhere (I’ll come back to that one)? How come the first blog post of the incoming commissioner frames exactly that false dichotomy as a solution (see my response to that here) ?

The first and most likely answer is “lobbying”. Incumbent lobbying is massive, loud and targets just the right people. In particular, it targets the press, and the press is always after a “balanced view”, this false intellectual construction that dictates that no matter what the argument on one side is, the argument on the other side is at least equally valid. So it seems that in the higher echelons of regulatory and policy decision making, the ultimate decision makers listen to the press and the lobbyists, but not to their own people. That is sad, and I really feel for the people working in these organizations.

I mean, here we have virtually every independent expert in Europe saying that the single digital market will not be of any use if infrastructure investment is what we are after, and yet every sign and message of the new incoming commission, from Oettinger all the way up to Juncker himself is that we need to allow more consolidation in Europe and less players in each market.

What are we doing wrong? How can we collectively broadcast the message loud and clear that the dichotomy is false? That investment in the telecom sector will not be achieved through consolidation? Is our telecom policy destined to fatten dividends?

I don’t have the answers. At our own little level, we at Diffraction Analysis are pushing what we believe to be the right messages, backed by unbiased research. But we’re really small, and our ability to be heard is extremely limited. Someone last week commended us on our Structural Separation work, and added: “what’s the plan now? How do you put this on the agenda, and how does it play out if you manage to do it?”

The short answer is “I don’t know”. But I would clearly like to start a discussion about this, and I’d welcome any ideas and opinions from those who, like me, believe that some of our issues can be solved by policy, only a policy that is independent from the pervading incumbent’s worldview. Please let me know what you think about how things could be pushed forward in the right direction.

 

Photo: (cc) Mary Beth Griffo Rigby

Structural Separation Webinar Commentary

20 Nov

Our webinar on Nov. 18th hosted by the FTTH Council Europe was extremely successful, both in terms of attendance and in the level of engagement and quality of questions. The video has been uploaded, and is available here. The report is still available for purchase and goes in a lot more detail on these issues. It also analyses existing successes and failures in Structural Separation which was not touched upon during the webinar.

In the wake of the webinar, we have decided to offer in addition to the report the full Q&A document to anyone purchasing the report. We are also happy to throw in a one-hour person to person presentation / conversation for those who will purchase the report.

Please get in touch if the payment instructions on our webpage are not clear.

 

Mister Oettinger and the Natural Monopoly

17 Nov

Dear Mr Oettinger,

I hope you don’t mind my writing to you in such a direct way, but we like to be informal in the technology world. I’m addressing you to commend you for the conceptual leap you nearly made in your first blog post as Digital Czar (or whatever the official title is.) It’s entitled Connected Europe? Broadband for All is the Answer, and while I’ve heard snappier titles, it’s actually the contents that are worth discussing.

In this blog post you argue that the digital divide is intolerable, and that we need to be thinking outside the box to connect rural areas with high-speed internet. I couldn’t agree with you more, and it’s nice to see you come out of the gate with such a strong will to break the mold. You may not be aware how much the mold has been cast by telecom lobbyists, but I’m sure you’ll find out soon enough.

You then argue that because the cost of deploying infrastructure in rural areas is so high and the expectation of revenue so low, we should consider granting monopolies to operators who agree to go there. In economic terms, they call this kind of situation a natural monopoly, and it’s good to hear you state clearly that yes, infrastructure is a natural monopoly. As you dig in deeper on these issues, you will actually discover that this doesn’t just apply to rural areas, but to 99% of most European countries.

But I digress.

The only issue with your proposal is that you don’t actually have to sacrifice the rights of citizens to choose their providers to achieve what you want. The reason is very simple: the natural monopoly is actually the infrastructure, not the service. And we in Europe (unlike our American friends) have been running multiple services on shared copper infrastructure for years. It’s very simple to do.

So since we’re thinking really outside the box, why not consider infrastructure and services as separate issues? There are several ways this can be (and has been) done:

  • we could establish an infrastructure company for rural areas that would have all kinds of public and private shareholders (including operators, local governments, investment banks, long-term financial funds, etc.) This company would wholesale access to their network to all market players, thus allowing rural areas to have connectivity and choice.
  • if we’re a little bolder, we could look at what New Zealand did and actually separate the incumbent’s infrastructure and service arms. Make them into two companies with no financial ties between them. One company would be focused on long-term investment and operations, the other would be focused on short-term service retailing.

This last concept is called structural separation. It was never discussed by the previous commission because, well, it’s a “taboo”. One of those taboos that millions of Euros of lobbying money has kept silent at the bottom of a deep, dark, hole.

Yet I and a number of colleagues believe that it could actually help solve the issue of underinvestment in broadband infrastructure at very little (if any) cost to the European taxpayer. And it wouldn’t just solve it for rural areas, it would solve it for Europe.

Tomorrow, my colleague Thomas Langer and I are running a webinar to present our findings in this area. We have modeled a structurally separated market in one country in Europe you know well and found that the resulting capacity for investment was vastly higher than current investment while at the same time representing significant financial upswing for the shareholders of the incumbent. It’s free to attend and we hope you or members of your staff will join this webinar. It should not be “taboo” to ask such questions and start a public discussion on them.

Yours,

Benoît Felten

Let’s Discuss Structural Separation

12 Nov

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At Diffraction Analysis, we (ie. Thomas Langer and Benoît Felten) have been busy these last few months working on a series of reports on structural separation. Our starting point is not that it should happen because of market fairness issues, but simply that it should happen because it makes financial sense. Furthermore by clarifying the investment horizon of both the network and the service entities, it could revive much needed long-term investment in fixed networks, the kind that vertically integrated entities currently deem “unworkable”.

We released a first report a couple of months ago entitled Can Structural Separation via Spinoffs help Europe Achieve its Broadband Ambitions. We will be presenting the results of this initial report during a live webinar hosted by the FTTH Council Europe on Tuesday November 19th. The webinar is entitled Structural Separation: A Solution to Boost FTTH Investment? It is free to join, and you can do so by registering here.

We are hard at work on a follow-up report that actually breaks down the numbers for the main European countries and looks at both the benefits of separation to shareholders and the investment potential unlocked on the network side.

 

Photo: Separation ou Retrouvailles (cc) Geoff Llerena

PSTN Switchoff Will be the Next Big Challenge

14 Oct

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There’s a little nugget in the last paragraph of this article on Belgacom’s deployment of ALU vectoring (in French), one that I wish had been more developed. Let me offer my own translation here:

One last point, Standaert also reveals that these networks will continue to be converted to all-IP: “In Knokke le Zoute in particular, everything goes via IP. This year, we already migrated 400.000 lines. By 2018, Belgacom will no longer have any classic telephone line.” This means that the Siemens EWSD switches and the Alcatel-Lucent PSTN switched will finally all disappear. It should also free up a lot of physical space and allow Belgacom to sell even more of its buildings. By 2020, 30 buildings should be sold. Altogether, this should generate savings of 35 million euros.

I was astounded earlier this year to find out that the Australian NBN, despite the massive structural upheaval that it created had not been accompanied by a decision to phase out PSTN. Similarly the New Zealand policy makers, visionary though they might have been in establishing FTTH nationwide (or nearly so) and structurally separating their incumbent did not take this opportunity to dephase the legacy of PSTN.

Of course, this raises regulatory issues. In particular, what happens to voice regulation? An inclusive approach suggests that any VoIP service would become regulated, which may seem daunting and impractical. The alternative though would be that no voice services would be regulated, which seems somewhat dangerous.

I haven’t spent enough time gathering data and thinking about this, but I do think it’s going to be the major topic on the regulatory plate in the next five years. Stay tuned for more when I have more.

 

Photo Credit: Old Telephone (cc) by Macinate

The Maddening Schizophrenia of US Incumbents

11 Sep

(cc) Evan

(cc) Evan

I must confess to a particular fondness for those moments of synchronicity when different news items happen to collide in the same cycle, violently contradicting each other. This week is a great example.

On Tuesday, Techzone 360 published a really interesting editorial entitled Shifting Towards Symmetry: The New Broadband Landscape. I strongly encourage you to read it, but here’s the elevator pitch: AT&T and Verizon have finally realized that symmetry not only sells but differentiates them from cable. Suddenly, after years of arguing users didn’t need it, they flip around and extoll its virtues. Of course, to you and me, that’s not an incredibly forward-thinking stance, but think about where they are coming from!

The fact is that the market has moved beyond copper, whether they like it or not. That’s why Verizon can aggressively push symmetry (they’ve shed a lot of their copper, and have fiber everywhere else). AT&T, as is clearly highlighted in the editorial isn’t quite so at ease, having a large FTTC footprint that most definitely doesn’t support symmetry.

Still, no matter what the reasons, we should applaud them for being so modern, right?

Not so fast! That same day Ars Technica’s Jon Brodkin writes an article (AT&T and Verizon say 10Mbps is too fast for “broadband,” 4Mbps is enough) detailing how the same AT&T and Verizon are fighting the FCC tooth and nail to stop the regulator from increasing the requirements for a data service to be considered broadband. Today, 4Mbps down and 1 Mbps up is considered broadband, the FCC would like the download to go at least to 10Mbps and argues (quite convincingly) that you need that much for a perfectly normal evening at home. AT&T and Verizon are having none of it though, and their main argument is the same as ever (I quote AT&T): ” a 10Mbps service exceeds what many Americans need today”.

The real reason, again, is elsewhere: with a 10Mbps definition of broadband, suddenly the market doesn’t look so competitive anymore: 10% of users have no access to service and 30% only have one option for service. In other words, 40% of the market is either unserved or a monopoly. That doesn’t look so good…

So there you have it. PR schizophrenia at its most beautiful. I say the FCC should up the broadband requirements to a symmetrical 10Mbps. That should help AT&T and Verizon reconcile their paradoxical positions!

 

Photo: Insomnia, (cc) Evan