November 14

A word on telecoms structural separation



Following on from my series on the FASP4 framework, people have asked me whether I am for structural separation of telecoms firms.  Here are some initial thoughts.

structural separation

Many telecoms businesses are managed as a single vertically-integrated entity.  Think of many cable companies for example. The retail operation (FASP4 Face) is within the same company as the product factory (FASP4 ACE), the network (FASP4 Space) and the physical digging of new customer accesses and ducts (FASP4 Place).

I’ve nothing (particularly) against managing different business objectives in one corporation.  After all, this is why we have departments, divisions, organisation structures, R&D departments, marketing departments, product management, and so on.

However, we should be open to seeing how we can maximise the value at each layer of the stack.  It may be that more value can be created by structuring differently. There are some drivers that will lead many telecom operators to refocus their efforts:

  • In general, telcos are finding it difficult to justify investment in fibre-to-the-home except in very dense environments. Hence community broadband projects and so on. Letting a thousand flowers bloom in local access (different local initiatives) may be more sensible than continued telco investment in the very expensive place business.
  • The ACE layer is seeing huge competition and innovation.  With WhatsApp delivering almost as many messages as global SMS, perhaps the time has come for many telcos to move strategically out of ACE in favour of an “enablement” strategy.
  • The telco world seems to be dividing between those who see the network as their core asset, and those, generally smaller, players who see the network as a necessary hygiene factor. The latter might decide that focusing their efforts on Face (retail, service & brand) activities is more valuable than trying to be best-in-class in the Space level.

We have seen some early examples of playing with the telecom stack, but much more can be achieved:

  • Many “mini-ISPs” have emerged to address opportunities in the Place market. Hotels, cafés and airports offering their own Wi-Fi, for example. Rather than messing around in the Space or even ACE layers, these Place players may have been able to secure the right amount of profit by making their core asset (the rights-of-way / access to the premises) available to one or more Space-level players (network operators).
  • Certain telcos, such as BT, Telecom NZ and now Telstra, have created a separate Place business for the physical loop loop assets. Structural separation light! As I mentioned earlier, this (apparently basic) business of copper, of fibre, of ducts actually accounts for 40% of BT’s valuation!
  • Many other telecoms operators, such as Orange to name but one, run wholesale businesses. These provide new customers and increased utilisation for the Space business. However, the line between the Space (network) and the ACE (product) businesses can be rather blurry.  Yet these businesses are quite different, are probably neither are being optimised!
  • MVNOs have been early attempts to create more diversity in the Face layer to drive demand in the Space (network) layer.  However, the economic margin available to MVNOs has often been notoriously thin.  Mobile operators see the lack of credible MVNOs as a victory – I would argue it actually stops the industry transforming into something more sustainable.

I may explore the question of structural (of functional) separation and its relationship to the economics of telecoms in more detail in a future post, if there is demand.

Do you think the vertically-integrated telco model will exist in 10 years time? Or will we see a breaking up of roles and horizontal specialists emerging? Leave a comment below!

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About the author 

Richard Medcalf

Strategist, consultant and business leader with 15 years experience in helping companies thrive in an Internet world. Formerly a partner in strategy consultancy Analysys Mason; now at Cisco Systems, developing new strategic partnerships with leading telecoms players.

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