Should Telecom consider structural separation for Chorus? The question is alive and under active pursuit by media. The answer is far more complex than the headlines suggest.
The issue at hand is whether Telecom should divest all or part of its network business, Chorus — a process known as “structural separation”. This is in order to meet government requirements for Chorus to participate in the Ultra-Fast Broadband Initiative.
Taken at face value, it sounds a (relatively) simple process. It involves a new ownership structure and a restructuring of existing assets. Chorus is already operationally separated, with its own CEO, brand and regulated operations. The logic runs that structural separation would be a natural next step, with the additional potential of releasing shareholder value.
But telecommunications is not that simple.
The foundation of the telecommunications business has always been the copper network. From this has evolved a complex ‘spaghetti’ of different platforms and technologies – x.25, PSTN, ISDN, xDSL. The transformational shift towards next generation networks will simplify the spaghetti into a ‘lasagne’, where a common IP transport layer is separate from and supports a wide plethora of services.
But we are not there yet. And no matter whether you view copper as viable and evolving or an old-age veteran, the reality is that today it is the predominant means of delivering broadband and voice to homes and business. It continues to be a robust and reliable platform for voice services that we have yet to match on scale via IP-based voice. And it comprises the core of telecommunications profitability.
So herein lies the challenge of structural separation. The first is complexity: what are the assets that would be integrated into Chorus? It would be fair to assume it would include Chorus civil works — the ducts and trenches required for fibre deployment — and its fibre access network. But would it include copper? Would it include the backhaul and core networks that carry traffic from surburban exchanges and up through the backbone network to the Southern Cross cable? Would it simply be the ‘passive’ network, the physical fibre and exchanges, or would it include the active electronics and services within Telecom Wholesale?
The second is cost — and that is directly proportionate to the depth and complexity of that network separation. Let’s not forget that Telecom committed to the regulator to spend $1.4 billion on its fibre to the cabinet programme as a more cost-effective option than restructuring its PSTN network. These are the challenges that would have to be revisited, and the costs would come in addition to the $240 million already committed to under operational separation.
The third is the risk of ‘unintended consequences’. This is a regulatory term that describes where a market intervention has unforeseen and potentially undesirable outcomes.
Structural separation is absolute: there is no easy way of return once ownership changes. On the plus side, it simplifies the regulatory framework, because if the network becomes an open and shared resource, it encourages services innovation. But there is also a risk that, following separation, wholesale and retail markets get out of sync and become disconnected. Network investment and innovation fails to keep pace with rapidly-evolving end market demands — a risk that is exacerbated if you have many regional networks and network owners. And if the network becomes open access, there is the risk of shifting the regulatory “bottlenecks” to other parts of the network.
Collectively this means that, on purely commercial terms, it is hard to see structural separation as an attractive option for Telecom, particularly given that operational separation is delivering required regulatory outcomes at less risk.
But this decision is not commercial: this is about mitigating political risk. It is this political risk that changes the equation for Telecom and, IDC believes, makes separation both a viable and necessary option.
If Chorus assets are integrated into the UFB initiative, it prevents uneconomic overbuild of existing networks. Telecom, as the largest broadband retailer, will become an anchor tenant of the new fibre network rather than a competitor. The government can then plan for migration of services, such as voice, from copper to fibre to help drive fibre adoption. And, for Telecom, it provides solid grounds for going back to government and seeking a regulatory review of its undertakings — given that the open-access fibre network will (arguably) make redundant the original objectives of operational separation.
Structural separation is simple in concept but it is difficult to execute. There is no “quick fix” political solution: this will fundamentally transform not just Telecom but also the industry. It must be approached with care, in full cognisance of the costs, benefits and risks — all of which are uncertain.