Functional separation - a commentary

Functional separation in telecoms - Panacea or plague?

• an in-depth review of the (few) existing examples in the UK and Australia and the (several) projects under consideration in New Zealand, Italy and Sweden for functional separation in telecoms,
• an initial impact assessment on the functional separation case in the UK which has now been operational for two years and
• a comparison with the lessons learned from older examples of functional and structural separation in other network industries.

1. Functional separation cannot be held as a panacea for solving the telecoms industry woes and holds the risk of causing more damages than the illnesses it aims to cure. Functional separation has been invoked to address very distinct and non comparable situations, some of which have elsewhere been efficiently tackled through less radical and irreversible approaches.

There is no unique coherent set of market and competition conditions under which functional separation has been implemented or considered, raising questions as to which disease exactly is the cure suited for. For lack of a clear answer to this question, functional separation has been held by some as a panacea for any competition-related disease. Nevertheless, the market issues (e.g. modest unbundling in the UK) that functional separation has been called upon to solve in certain countries have in other geographies been addressed through other less radical regulatory tools.

In our view, this is the root cause behind several national regulators and directorates of the European Commission publicly voicing concerns as to the validity of the functional separation solution in telecoms, pointing to its significant implementation costs, irreversible and potentially disproportionate effects for the problem it is aiming to solve compared to less radical and intrusive, yet result-proven approaches of the currently available remedies.