Sweeping EU Telecom Reforms Proposal Will Include Telco Breakup Option

As BetaNews reported yesterday, the European Commission did indeed take up the matter of the creation of a centralized European Telecom Market Authority. Though despite evidence of what was believed to be at least substantive opposition, the proposal was apparently adopted after only hours of discussion.

Included in the proposal will be the option for regulators to force large incumbent telcos within a region or member country to split their business units, if necessary, to create an environment that encourages competition among alternative providers.

"Functional separation is an instrument to ensure fair competition leading to freedom of choice for consumers in a telecoms market dominated by one operator," reads an FAQ released this morning from the EC. "It requires an incumbent operator to separate its network infrastructure from the units offering services using this infrastructure. Although operationally separate business entities are created, overall ownership remains unchanged."

There are several ways the EC has described this provision in recent days, this being the latest. But essentially, the idea appears to be this: If a regulator in the new ETMA determines that a dominant player in a given region that offers bundled services isn't opening up its market to competitors that don't or can't bundle their services, or to any other kind of service alternatives, then it can force that company to create a separate business unit to sell services equally to both its own parent company and that company's competitors.

For example, should France Telecom - a vocal opponent of the ETMA proposal - be determined to be too dominant a player in France (it need not be declared a monopoly), the new regulatory body could order it to create a new wholesale services division. Its purpose would be to resell access to, for example, broadband Internet not only to other ISPs in France but to France Telecom as well. And the new unit - while still owned by France Telecom, hypothetically - would be prevented from giving its parent company a favorable rate.

In short, if you keep other players out of the market you dominate, the new ETMA - if approved - could force you, if all else fails, to spin off a division to sell your service to yourself, while offering it wholesale to your own competitors.

The EC has been careful not to use the phrase structural separation, perhaps to avoid the appearance of being able to go in and change corporate structures at will. At an earlier time, proponents of the idea called it operational separation. But an early white paper (PDF available here) produced by the European Regulators Group - which had a major hand in supporting Commissioner Viviane Reding's efforts to drive the proposal through - clearly defined the concept as involving the restructuring of corporations.

"Functional separation allows for the targeted separation of those enduring bottlenecks which are difficult for rival operators to replicate commercially," the ERG opinion paper reads, "but which provide vital inputs to a range of downstream products and services provided by both the vertically-integrated operator and its competitors. By creating a separate business unit with business incentives based on the performance of that unit (rather than the performance of the vertically integrated company as a whole), it is more likely that the business unit will deliver the services that its customers want."

Later, the paper adds this: "The new separate business unit established to deliver these products and services must be responsible for the management of assets under its administration, staff, operational support systems (OSS) and Management Information Systems." It describes how the new unit must govern itself with its own executives. Without being too up front about it, the ERG says any new "Ma Bell" must hatch its own "Baby Bell."

While the ERG opinion denied published reports that functional separation implied the need for companies to separate their wholesale and retail operations from one another - as France Telecom believes would inevitably be the case - it certainly leaves the door open for doing just that anyway. As an example of regional success, it cites the case of British Telecom, which in 2003 was ordered to spin off a business unit separate from its retail operations. That unit, called Openreach, sold BT services wholesale to BT's competitors and to the parent company.

"Openreach went from a theory to a practical reality in six months," the ERG wrote. "Its creation has prompted a new wave of investment in the UK electronic communications market, which in turn has triggered a major price war in the retail broadband market and led to a range of innovative broadband services being offered to end-users."

Ostensibly, the EMTA's more populist purpose would be to bring regional and national telecommunications companies closer together, especially so intra-nation roaming - flying from country to country - doesn't force customers to entering into separate contracts with every nation in which they happen to place a phone call. But to accomplish that, the EC is willing at this point to adopt provisions that would give it surprisingly strong authority to legislate not only the business activities, but the business structure of corporations in its member states.

"A single market with 500 million consumers opens new opportunities for telecoms operators," reads a statement from European Commission President Josy Manuel Barroso today, "if Europe helps to ensure effective competition and consistent rules of the game. This is why we act today. A more European regulatory approach is particularly justified in telecoms. After all airwaves know no borders. And the Internet Protocol has no nationality."