Separation can take different forms. The most onerous forms include structural separation where the business is formally broken into different listed companies and functional separation where different divisions within a single business are forced to operate at arms length.

Countries that have imposed (or flirted with) structural or functional separation have seen little if any investment in high speed broadband. In the UK, New Zealand and Ireland, separation has resulted in no significant new investment and imposed substantial costs that are ultimately born by consumers.

United Kingdom

Functional separation was finalised in September 2005 with acceptance by Ofcom of undertakings from BT. The business unit called Openreach, formed to manage network operations, was established by BT on 21 January, 2006.

BT was threatened with structural separation after a finding that BT was obstructing the progress of open access agreements¹. Functional separation was a compromise achieved via 250 separate undertakings given to Ofcom, the regulator, indicating the complexity of the regulatory burden.

According to BT’s statutory reports, implementation costs have now reached AUD$206 million², and work is continuing.

Ofcom points to the growth in unbundled lines in the UK as proof of the success of functional separation. There were 4.3 million LLU services reported by BT in their March 07/08 quarterly report. Before the introduction of Openreach there were just 192,000³ LLU-based services provided by BT – these figures includes both ULL and LSS.

But separation aimed at improving competition in old technology, is chilling investment in next generation access. BT provides one of the lowest maximum broadband speeds offered by an incumbent telecommunications company in the OECD (4.6Mbps in June 2007)⁴. It is ranked 22nd out of 30 countries.⁵

BT has no plans to invest in a fibre upgrade of its access network. In response the British Government has commissioned an independent review on barriers to rolling out next generation networks;⁶ and pressed the regulator (Ofcom) for answers. In turn Ofcom has held consultations to develop a regulatory approach to encourage next generation access.⁷

Ireland

eircom is now the most highly leveraged telecommunications company in Europe following two private equity leveraged buyouts, most recently in 2006 with Babcock and Brown purchasing 57.1%.

In October 2007, Babcock & Brown made confidential submissions to the regulator and the Government outlining a proposal for separating the network and retail businesses. No details on the costs of this plan were disclosed.

In April 2008, reports suggest that Babcock has shelved the separation plans following the lukewarm response of the regulator and active hostility from the unions.

According to the OECD, Ireland has the second slowest maximum broadband speed offered by an incumbent in the OECD at just 3Mbps.⁸

eircom has gone to the Irish government asking for 150M Euros as part of a 500m Euro plan to upgrade the network (25Mbps to 70 per cent of pop). The Government has declined.⁹

New Zealand

In New Zealand, Telecom New Zealand was threatened with structural separation but negotiated a lesser form of operational separation¹⁰. Operational Separation was implemented on 31 March, 2008.

TNZ has estimated the cost of compliance with operational separation will be AUD$164 million over four years plus operational costs of up to AUD$25 million in 2008 and AUD$33 million opex after 2008.

Available broadband data speeds in New Zealand are significantly behind those available in Australia.

In 2007, Telecom committed to a "cabinetisation" program. This involves the rollout of fibre to 3600 cabinets to bring new services to all towns with over 500 population. 99 per cent of the lines within this rollout will be capable of supporting speeds up to 10Mbps, and 50 per cent will be capable of speeds up to 20Mbps.¹¹ This suggests a rollout of ADSL2+ technology at speed comparable to those already available in Australia.

1. Yankee Group Report November 2007, Functional Separation Agenda et al , Dianne Northfield and Anthony Lea.
2. BTGroup plc 2007 Annual Report and Form 20-F, p40 shows operating costs associated with the creation of Openreach as £30m and £70m for 2007 and 2006 respectively.
3. BT December quarter 05/06 report.
4. Ofcom Future broadband - Policy approach to next generation access, September 2007.
5. OECD broadband statistics (www.oecd.org)
6. Government seeks to boost UK broadband networks (news.zdnet.co.uk), Natasha Lomas, ZDnet, 25-2-08
7. Future Broadband (www.ofcom.org.uk). Policy approach to next generation access.
8. OECD broadband statistics (www.oecd.org)
9. Government will not fund eircom’s fibre proposal (www.siliconrepublic.com), John Kennedy, Silicon Republic
10. Telecom says on a fresh approach will bridge future “broadband investment
11. TNZ press release (www.telecom-media.co.nz) 19-12-2007