Big telecom firms brace for EU competition rules

Brussels: Moves by the European Union's top telecommunications official to take control of national regulatory powers are raising concerns among the Continent's biggest telecom operators, who fear their operations may be broken up. Over the past year, Commissioner Viviane Reding has said in several speeches that she plans to propose an overhaul of the EU's telecom regulations in October. She has said she wants to take over some of the regulatory powers held by national governments and that some national operators should be split up to create more competition in the industry.

Ms. Reding has long argued that Europe's largest telecom companies -- such as France Telecom SA and Deutsche Telekom AG -- are using their control over existing telecom infrastructure to stifle competition from new entrants. Ms. Reding has said she wants some national telecom operators to split their operations into two -- one unit to run and invest in the national telecoms infrastructure, and the second to offer customer services for that network, in competition with other companies -- an idea known as "functional separation." Her aides say she would like to see breakups in the French, Polish, Slovak, Romanian, Greek, Bulgarian and Irish markets, where competition in broadband Internet service is too weak for her liking.

Some national telecom operators are resisting these proposals, however, arguing that investment in national networks and customer services will suffer if they go ahead.

The struggle illustrates the EU's effort to implement U.S.-style regulation and legislation to harmonize rules across the 27-nation bloc -- and centralize regulation in its capital, Brussels -- in the face of resistance from powerful national companies and governments. Any changes that Ms. Reding will propose will ultimately need to be approved by the governments of the member states, so national telecom operators are lobbying hard in Brussels and in their local capitals to try to limit her overhaul plans.

The biggest telecom operators in Europe -- most of them former state monopolies -- control the last mile of copper network into homes in most EU countries. Though EU rules say dominant operators must give competitors equal access to their networks, Brussels charges that they continue to discriminate against new players and make it hard for them to enter and compete.

Bundled packages for telecom services often lock customers into staying with their country's dominant provider even if they are interested in switching, Europe's newer operators complain. Dominant players also use opaque pricing to raise fees and squeeze the profit margins for competitors that are dependent on using their networks, the new operators say.

These disgruntled competitors argue that "functional separation" would make it easier for customers to shop around for their telecom services and would force dominant operators to be more transparent. Breakups would also ease regulators' ability to scrutinize dominant operators and ensure that the fees they charge for network access are reasonable.

France Telecom is expected to be one of the companies Ms. Reding would like to see split off its local loop infrastructure into a quasi-independent but wholly owned subsidiary, according to one of her top aides. Ms. Reding has declined to elaborate on her plans before October, and has told reporters to look at her recent speeches to understand her plans.
France Telecom is unenthusiastic about the plan.

"We think functional separation is a false good idea -- it looks like a good idea, but it's not necessarily," the company said in a response to questions last month. The company argues that a carve-up would degrade the quality of the network's infrastructure because the separated unit in charge of running and granting access to the network would have less incentive to maintain high standards. Also, a split could hurt investments into access networks by disrupting the line of accountability for services and creating market uncertainty about who is leading the operations.

As a model for the breakups, Ms. Reding is looking at the U.K.'s BT Group PLC, which in 2005 split its network-access division off from its consumer operations, naming the new unit Openreach.

The split has "created a situation of equality of access to the incumbent's [BT's] network that has led to a take-off in unbundling in the past year," Ms. Reding said in a speech in March.

While BT is still full owner of Openreach, the unit gives rival operators equal access to BT's network. This kind of split, to which BT voluntarily agreed, would be less drastic than the U.S.'s forced carve-up of AT&T, which split ownership as well as operations.

The creation of Openreach ended years of bickering between BT and U.K. regulator Ofcom, formerly Oftel. Now in effect, the new structure is largely seen as a success -- it has given BT's investors renewed confidence and is spurring rivals like Carphone Warehouse PLC and British Sky Broadcasting Group PLC to "invest hundreds of millions of pounds into" putting their own equipment into BT's telephone exchanges, says BT spokesman Mike Bartlett.

Bolstered by the British experience, Telecom Italia is now considering functionally separating on its own.

Many newer players in the EU's telecom market agree with Ms. Reding.

"We need to see a functionally separate unit of Deutsche Telekom that has an obligation to meet demand for network upgrades from the entire industry," said Bernd Schlobohm, chief executive of German telecom QSC AG, which competes with Deutsche Telekom.
In a prepared statement yesterday, Deutsche Telekom warned that a split of its operations could be so expensive that it would do more harm than good.

"The costs [of a split] to the network providers could be higher than the benefits to the consumer or the market," it said. Reorganization, duplication of technical staff and engineers and the end of synergies that integrated operators enjoy could inflate the price of services for all players and their customers.

Companies have been trying to get their message out through their industry lobbying group, the European Telecommunications Network Operators' association, or ETNO, which represents 41 large telecom firms operating in the EU. Over the last year, ETNO has hosted conferences and seminars designed to show that competition in EU telecom markets is improving quickly and warn that forced splits could cripple the entire market.

In June, ETNO Director Michael Bartholomew said "functional separation is not appropriate in today's highly competitive markets." He added that such a move "must remain a voluntary decision as part of a company's commercial or business strategy."
Many national regulators are just as uneasy about the push for breakups as the companies themselves, especially if the final orders come from Brussels.

"Separation should be a national measure," said Roberto Viola, secretary-general of Italian regulator Agcom, at a June meeting of national telecom regulators in Brussels. National regulators have received no guarantees that drastic steps -- such as ordering an operator's breakup -- will be up to national authorities and not Brussels, Mr. Viola said.
Still, Ms. Reding showed this year that she doesn't back down from a fight. She recently succeeded in imposing a ceiling on the prices cellphone operators charge consumers for making and receiving international "roaming" calls across EU borders, despite angry protests from the companies, which complained that it will cripple their business.

The Wall Street Journal Europe, Thursday July 12th, 2007
(Copyright (c) 2007, Dow Jones & Company, Inc.)