Telecom Italia to Spin off Fixed-line Access Network

By Peter Bernstein June 05, 2013

It just might be time for operators of fixed line networks in places like the U.S. to take a serious look at what is transpiring in Europe. There is an interesting trend developing in the restructuring of the telecoms industry across the pond that should serve as food for thought. I am referring to the confirmation by Telecom Italia that it intends to spin off its fixed-line access network as a new company. 

You read the last sentence correctly. Telecom Italia in essence wants out of the outside plant business so it can concentrate on the value-added services part of its business.

Why do this and why now?

For those not familiar with the communications industry in Italy, the context for this is the fact that Telecom Italia is deeply in debt. It has been searching for means to shore up its balance sheet and stem its declining cash flow, including looking at a deal to rival 3 Italia for its Italian mobile business.

The decision to spin off the access network came after weeks of intense negotiations by the company’s board. After all, getting out of what was the core of the business had to be a culturally painful decision, but the facts are that the business is not generating the returns it needs, and Telecom Italia could no longer stand the pain and drain.

In a statement, Telecom Italia said, “The assets and resources for developing and managing the passive access network (both copper and fiber) and the active components of the fiber consisting of OLT (Optical Line Termination) and cabinet will be spun off to the new company.

“The new structure will guarantee all operators (OLOs and Telecom Italia) access to the fixed-line network, in application of the European-denominated ‘Equivalence of Input’ (EoI) model of equality of treatment.”

The new company, yet to have a name, will offer services including Unbundling of the Local Loop (ULL) and Virtual Unbundling Line Access (VULA) for next-generation networks to all operators, the company added.?

As noted by European Telecommunications, Ovum analyst Luca Schiavoni said the move will help the company to reduce its debt and find new sources of profit “given that access services are no longer as profitable as they used to be.” He added, “It is likely to give Telecom Italia more flexibility in the retail market, where it currently has to wait for the regulator’s approval before it can market its offers…However, this is also a move made to avoid further potential regulatory burdens in the future, even though the Italian regulator AGCOM has not yet explicitly hinted at further obligations after TI’s voluntary undertakings were accepted in 2008.”

The move, which is similar to the Openreach separation done by BT according to various observers, should work well once implemented. It is certain to be welcomed by competitors, and will open up the Italian market, giving Telecom Italia financial relief and customers more options.

Others should take note

While the Telecom Italia move is driven by financial urgency, the fact of the matter is this is not a bad move, even for healthy operators in other countries. For over two decades in my role as industry analyst, I have urged network providers in the U.S. to consider such a spin off. The reason was then, and is more so now, that the Internet age has severed the historic relationship between owning the connection and owning the customer, particularly when it comes to value-added services. It goes to the heart of the question as to whether incumbent carriers around the world want to be “Dumb Pipe” companies or not, and if not where is their sweet spot for continued relevancy and profit maximization.

I have also maintained, from what seems to be a pragmatic view of things, that the real “utility” part of communications services is the access network, and that it thus seemed logical that having multiple physical networks costing billions of dollars at least from the users’ perspective was economically inefficient. The idea is that having a ubiquitously deployed state-of-the-art fiber-based network that anyone and everyone can leverage based on equal access and interconnection, would free up resources for accelerating innovative new services. 

The other big benefit would be that the investment community would love this. It would increase the valuations not only of incumbents but of those wishing to take full advantage of the new utility. In short it is a win for everyone, including current physical network providers whose assets might be extremely attractive in helping fill in gaps and create necessary redundancy.

There has been lots of speculation about Google’s fiber efforts in the U.S. Financial analysts have said they believe long-term this is smart. It certainly remains to be seen. Google because of its expansive ecosystem is a different type of company than traditional network providers like Telecom Italia. They already have the kind of deep relationship with the customer and thus have a means to monetize the physical connection that traditional providers have not been able to emulate.

Who is next to follow the Telecom Italia move? That is impossible to predict. However, Europe is the most likely place, and operators everywhere should be paying close attention as the results could have major ripple effects in terms of what the industry looks like in a few years.

Edited by Alisen Downey
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