EU Splitting Telcos: Network & Retail

I was surprised when I read this article saying that the EU is going to split incumbent telcos' businesses into separate network (wholesale) and retail units. I know the Europeans are more interventionist than here in Canada or in the US, however I believe this is going too far.

In comparison, the US opted for non-structural separation (accounting and marketing) between wholesale and retail units in the 1996 Telecom Act, along with a sunset clause that has now fully kicked in. Even with a Democrat in the White House the government did not go so far as to force a permanent severance between the incumbents' business units; it is too interventionist and anti-free market for American tastes. There were consequences of this choice, which I discussed back in July (under "The Worst Job There Is"), but that's what they wanted.

In Canada the situation is similar to the US though the CRTC made the conditions for wholesaling less favourable to the new entrants, except for DSL wholesale which is better for ISPs in Canada than in the US.

My gut reaction to the EU action is that it goes too far. The above-referenced CBC article makes the tired claim that the networks were largely funded (indirectly) by taxpayers through regulations that pretty much guaranteed profits to the telcos. The argument is valid except when overused; expecting eternal gratitude from the telcos, at a severe cost to their business, is not reasonable. Besides, the population did derive secondary benefits for their investments, such as portfolio appreciation (investments directly or via government ownership) and lots of spin off economic activity.

Regulation has its place and I have argued in favour of it in other circumstances. In this instance you cannot regulate yourself into a healthy and vibrant telecommunications sector. What is needed is more competition, not more parasitic business on another, large and regulated one. That's what this model promotes. It depends on the belief that the existing access networks are a natural monopoly, so that this sort of telco wholesale-retail separation is necessary.

The assumption is that the access network natural monopoly is perpetual. Therefore, because the expense required for a new company to build a similar network is so high, it hobbles their ability to offer competitive pricing. Another less well understood cost is one on society since these companies need to tear up streets, string cables, raise towers and otherwise mar the cityscape with their networks. To an ordinary citizen these networks may seem redundant and therefore unnecessary.

The questions to ask before enacting this severe form of EU regulation is: will regulation stifle the impetus of both incumbents and their competitors to create new networks that, in future, will break the natural monopoly? New wireless technologies are already pressing the boundaries, getting ever closer to being fully competitive with wired networks, whether they be twisted pair, coax or fibre. If the incumbent's core network business effectively becomes a utility (including rate-of-return guarantees) they will have no incentive to take on the risk of deploying new technologies, including fibre. The new entrants will always find it cheaper to leech off that incumbent's network rather than build their own. The bigger risk is that society's future economic growth will be limited just to get what may only be a short term benefit.

I lean towards more open competition combined with rules to ease experimentation and exploitation of new technologies. I believe this will deliver the biggest benefits to the economy and society at large. I am against regulations that have the effect of locking down current business models and technologies, and that consequently discourage innovation.