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Same-Day Analysis

TeliaSonera Caves in to "Functional Separation", Creates New Infrastructure Company

Published: 24 September 2007
Nordic telecoms group TeliaSonera is creating a new independent subsidiary, caving in to pressure from the regulator to implement functional separation.

Global Insight Perspective

 

Significance

TeliaSonera joins BT as the first two European Union (EU) telcos to create a wholly independent unit responsible for their infrastructure networks.

Implications

TeliaSonera's announcement today has weakened the argument by Europe's incumbent telcos against the functional separation of their operations.

Outlook

With the apparent weakening of the opposition to functional separation, the EU's long-stated desire to impose functional separation on all EU incumbent telcos has moved a step closer to realisation.

The Nordic leading telecoms group, TeliaSonera, has announced the creation of a new Swedish infrastructure company, finally caving in to pressure from Sweden's telecoms regulator, the Post & Telestyrelsen (PTS), to implement "functional separation”. In a statement today, TeliaSonera said it is establishing a new fully owned telecom infrastructure subsidiary in Sweden, which will cover copper and fibre networks, and sell its products on equal terms to TeliaSonera's wholesale customers and the company's own operations. The new company, which will commence operations before the end of the year, will be TeliaSonera's response to the PTS' demands for the company to implement functional separation. Supporting that view, the company said it is establishing the new infrastructure company in order to ensure that the market’s requirement for transparency and full control is met. "This means that all operators and our own operations are treated equally…we also believe that with a separate company, we will be able to run our infrastructure operations more efficiently".

TeliaSonera's new strategy follows persistent demands by the regulator for the incumbent to create an independent unit to handle infrastructure tasks in Sweden. Earlier talks between TeliaSonera and the PTS collapsed in March 2007 over disagreements on the regulator’s reasons for promoting functional separation. However, the new government in Sweden revisited the issue, putting pressure on TeliaSonera and the PTS to reach an agreement on functional separation (see Sweden: 8 June 2007: Regulator Proposes Swedish Fixed Network Separation, Announces Major Jump in VoIP Usage20 April 2007: Swedish Government Calls for Proposals to Separate TeliaSonera's Fixed Network and 30 March 2007: Talks to Functionally Separate TeliaSonera Collapse).

Outlook and Implications

First BT, and now TeliaSonera: The creation of a new subsidiary makes TeliaSonera the second European telco to create a functionally separated unit, following in the footsteps of BT. The British incumbent had created its Openreach unit in September 2005, following intense pressure from the U.K. regulator, Ofcom. Since then, BT Openreach has spearheaded the company's infrastructure business, allaying fears of rival U.K. telcos over bias in executing infrastructural tasks, and creating a readily exportable template for functional separation across the continent. So far, other European regulators have been pushing for a similar shake-up of their own incumbent telcos, albeit not only with regard to encouraging competition. The regulators in Italy and the Netherlands have been the most vociferous in their call for a BT-Openreach approach for Telecom Italia and KPN, respectively, although Sweden has stolen the initiative with TeliaSonera's announcement today (see Netherlands: December 2006: Regulator Mulls Split of KPN into Service and Infrastructure UnitItaly: 9 June 2006: Regulator Mulls Splitting Telecom Italia's Commercial, Network Units and United Kingdom: 22 September 2005: BT Unveils Openreach Division).

A New EU Template: Although PTS will be pleased with today's announcement, the news is even more wholesome for the European Union (EU)'s information society commissioner, Viviane Reding. Backed by the example of a functionally separated BT and TeliaSonera, Reding is bound to intensify her call for functional separation to be imposed on all European incumbent telcos, akin to the now-accepted local loop unbundling (LLU) initiative. So far, incumbent telcos across the continent have fended off her calls, a position helped by the reluctance of some national regulators to embrace the EU regulatory position enthusiastically. But Reding has fought back, shifting the EU's call from functional separation—and similar individual regulatory positions—to the creation of a pan-European "super regulator”, empowered to enforce telecoms rules across the continent. While the EU's desire to force through the super regulator idea still faces a big hurdle when the new EU rules are unveiled later in the year, the example of BT and TeliaSonera has weakened the position of incumbent telcos opposed to functional separation, and the EU will inevitably win the debate (see Europe: 29 March 2007: EU Renews Call for Telecoms Network Separation).
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