Monopoly 2.0 – Upheaval in ownership of digital infrastructure
Updated: Apr 1, 2021
Change comes to communications markets in waves. These waves can relate to technology, competitive forces, consumer needs, regulatory frameworks, investment and ownership. Some take place globally over a short period, others much more gradually across the world. Today we are seeing the ownership of digital infrastructure becoming an increasingly important but fragmented driver of change.
A brief revisit of old ownership practices
Most of the history of communications networks lies with monopolies, mostly state-owned and often initially tied to postal and telegraph systems. A confluence of major political shifts and technological advancements in the 1980s and 1990s ignited market liberalisation and the restructuring of many incumbents in the US and Europe, including the privatisation of BT beginning in 1984 and the break-up of AT&T in the US in 1982 (notably the only major country that had not nationalised its telecoms operations). New players were licensed or authorised to provide services at different levels of the value chain, including and especially mobile wireless providers. Markets elsewhere in the world followed. Competition in those segments of the sector promised increased efficiency, choice and innovation.
Some infrastructure segments remained non-competitive, though. By the late 1990s to mid-2000s, consumers in developed economies largely had multiple mobile service providers with at least some of their own network infrastructure, and developing economies were beginning to experience the same. But this did not necessarily translate to competition in fixed infrastructure, where incumbents continued to dominate the field. The challenges of incumbents remained to be addressed, with an aim towards creating a suitable runway for new entrants; ensuring the viability of competitors in other segments of the market in which the incumbent also played; or simply guaranteeing quality service and affordable pricing.
Dealing with Monopoly 1.0
Recognising the challenge, regulators—some newly minted—began exercising a menu of options to guard against the effects of such market failures. Having found success in first establishing service competition, they sought next to promote access-based competition, in which challengers invested in building their core networks but used the incumbents’ last leg to the consumers’ premises. Starting with the US and the EU in the 1990s, policymakers began mandating local loop unbundling, requiring incumbents to grant access to individual elements of their networks to competitors. Incumbents at the time likened this to taking ownership away, but policymakers argued that such a move would be necessary to promote new entrants with some of their own layers of infrastructure, as some segments of the network could not be replicated in a commercially viable—or even practical—way. In 2005, for example, the UK’s Ofcom nodded to the unlikelihood of a new local access network alongside BT’s existing copper loop in the medium term, while leaving regulatory frameworks in place for a possible next generation entrant in the long term.
To be sure, in the years since, alternative fibre providers (so-called “alt-nets”) have deployed their own networks, though typically on a limited, regional basis. Despite pockets of larger success—such as Virgin Media’s UK infrastructure network covering half of the country and Nordic countries’ municipality-driven deployments—regulators’ third objective of full infrastructure competition never really took off, so they continue to monitor and guard against potential market stagnation and dominance abuse.
This has resulted in a number of additional ex ante actions against the incumbents, starting with simple transparency and non-discrimination obligations regarding pricing of wholesale offerings, then escalating to various levels of separation of incumbents’ retail and wholesale offerings. Starting with mere accounting separation and progressing to functional, then legal and finally ownership separation, regulators in the various jurisdictions have either imposed these new structures and systems or have convincingly provided their ‘voluntary’ adoption, as was arguably the case with BT‘s spin-off of its infrastructure into a separate business, Openreach. While the EU may have started the trend, other jurisdictions have adopted the approach as well, such as the legal split of the Bahraini incumbent Batelco from its infrastructure spin-off BNET. Recently, some other separations have resulted either from investment decisions or to secure authority approval in mergers and acquisitions reviews, such as the case of the legal separation of Denmark’s TDC.
The emergence of Monopoly 2.0
Whereas such dominant incumbents and natural monopolies have perhaps been perceived more as realities to be contended with in the Monopoly 1.0 phase, some policymakers have begun to experiment with different versions of a Monopoly 2.0 to try to bring the newest wave of change to their consumers in a more efficient, rapid and inclusive fashion.
These policymakers have pursued initiatives to create new stand-alone wholesale-only entities, mainly in fixed-fibre settings. While other countries have tried to inject as much upstream competition as possible, as described in Monopoly 1.0, these countries have opted to champion a national broadband network operator. Examples include:
Australia wholesale-only national broadband network, nbn, launched in 2009;
New Zealand’s public-private partnership Ultrafast Broadband Programme, implemented in 2012, granting regional franchises for wholesale fibre services with short-term exclusivity;
Bahrain’s state-owned BNET, recently legally separated from operator Batelco.
In the mobile markets, though, where policy has to now almost universally promoted infrastructure competition and infrastructure sharing, there have been somewhat more surprising experiments with such monopolies, such as:
Malaysia’s recently announced special project vehicle for the deployment of a national wholesale 5G network;
Mexico’s wholesale-only 4G mobile network, Red Compartida, launched in 2018.
Concerned that waiting for competition to deliver fibre and 4G/5G services will cause delays, policymakers in these countries have determined (at least to some extent) to treat wholesale networks more like traditional utilities, but they must balance this against the need to ensure continued investment from competitive operators and innovation in the network, a particularly challenging task in mobile as operators strategise for 5G.
Facing the challenges of Monopoly 1.0 and Monopoly 2.0 head on
In a forthcoming series of short articles, DT Economics will set out some of the key questions that today’s governments, regulators, operators and investors must try to answer in order to ensure that the digital infrastructures that we bequeath to the next generations are fit for purpose. We will deal with challenges such as managing asset transfers in separations, exclusivity arrangements, universal service obligations and economic regulation of Monopoly 2.0 models, along with others.
Check back here soon for the first instalment.