On the prospects of Telecom Italia’s separation in Netco and Servco

If Bollorè will allow, at a next shareholders’ meeting, Telecom Italia could be split between network and services, Netco and Servco.

If the deal goes ahead, there are talks of allocating 15 thousand employees to Servco and 25 thousand to Netco.
Fifteen thousand employees is three times as many as Vodafone, which is not exactly a “very fit” company.
How will Servco be sustainable? Furthermore, the company has never operated without market constraints related to its dominant position. This is not a cultural legacy to be underestimated.

Allocating more people to Netco might relieve Servco, but Netco would become sustainable only by investing marginally in network modernization and increasing wholesale rates by no small amount. There is talk of 7 Bn investment to extend the fiber access network. Will this be enough?
Wholesale tariffs (Netco’s revenues) can only be increased by waiving EU’s competition and TLC rules. I don’t see such a negotiation going on.

Or, 15 thousand plus people in Servco would be sustainable by increasing retail prices (among the lowest in the world in mobile and in Europe in fixed). But this is only possible by reducing competition in mobile.

If I remember correctly it was EU’s DGCOMP who imposed a fourth operator after the Wind-Tre merge by opening up to Iliad.
Wind and Tre were the main architects of an unsustainable race to lower mobile rates. Iliad put its seal on it.

Low rates in mobile impact profitability in fixed. In this regard, it is interesting to reread with some attention the article below that I wrote in 2007 about Beltel.

Compared to when I wrote this article, by now many obstructive situations have developed and consolidated, so I see a solution as difficult.

I wonder if the operation will be successful. Network development is a relevant issue for the future competitiveness of the country; it would be interesting to understand what the impact on employment and development plans of the new separate network will be.

More importantly, how Netco and Servco are expected to be sustainable, without agreements with Brussels, which I do not see as being on the agenda.

Beltel’s article:

2007.04.03 Beltel – AcquaItalia, Waternet and the One Network

So, let’s do a “thought experiment,” a “what if…” by analogy. Suppose a single national company, which we will call AcquaItalia, owns 98 percent of the water distribution network to homes, and bears the costs of its maintenance. AcquaItalia, which is remunerated by the rates it charges for connections and actual water consumption, makes profits, distributes dividends and makes modernization investments. Now suppose that, as a result of a science fiction technological innovation, a new company, Waternet, can leapfrog the last part of AcquaItalia’s network and distribute water to its users at much lower costs, and thus at lower rates than AcquaItalia charges. Waternet installs in Rome four connection points to the water network (thus contributing with the connection costs of only four points) from which it pushes the water it transports to its users, to whom it does not charge connection fees but only the water consumed. It is clear, however, that every user who chooses Waternet lowers the revenues of the same AcquaItalia infrastructure that allows Waternet to exist.

We are talking about a technological innovation applicable to a specific portion of the network. If it is implemented by the network operator, it can lead to the reduction of wholesale or retail rates. If, on the other hand, it is applied only to the users of the “innovative competitor,” they will benefit from the lower final distribution costs but all other water consumers (of Aquitalia) will have to contribute to offset the higher costs of the pre-existing infrastructure, the same infrastructure that allows the competitor (Waternet) to exist. In practice, the wholesale rates charged by AcquaItalia to Waternet would have to increase to allow AcquaItalia to maintain the water network that Waternet itself uses. If AcquaItalia could not do so and as a result of competition from Waternet ceased to operate, Waternet would also be condemned to the same fate.

How to reconcile the needs of the hosted organization with that of the host organization ? The costs of networks, must be spread over all users (retail and wholesale). Otherwise, investments to modernize the network are not paid for and we end up at the lowest common denominator in quality and service. Perhaps, as in some countries, such a minimum standard might be acceptable, but it certainly cannot be accepted by those who believe that an increasing level of service quality is at the root of our country’s innovation and competitiveness. Only extensive cooperation, possibly sanctioned by obligations, between the network operator and competitors makes it possible to neutralize the negative externalities of competition and thus grow the collective benefit. In clearer words: “One Network” at wholesale and regulated competition at retail.

UPDATE: at one reader’s request I added the bottom three graphs. All of them take into account the GDP per capita of each State (a price of 10 euros has not the same impact in Bulgaria where GDP per capita is 33k and in Luxembourg where GDP per capita is 142K)

The third last answers the question “what about the ‘street price’ compared to the price weighted on the state’s per capita GDP ?”

The second last answers the question “how many times is the 1GB EU average cost compared to the cost in my state ?” in Italy it costs 6% of the EU average (so EU average price is roughly 17 times the Italian price; In Greece it costs 396% of the EU average, so the EU average is aprox. 1/4th of Greece price)

The last answers the question “How many GBytes of data can I buy with 1 year worth of per capita GDP ?” the difference is staggering and clearly confirms my point in the post above.

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3 thoughts on “On the prospects of Telecom Italia’s separation in Netco and Servco”

  1. Continuo a credere che la separazione strutturale della rete sia un grave errore per la sopravvivenza della nuova ServCo di TIM dato che i veri margini di profitto vengono dalla BU wholesale, già ampiamente regolata. Evidentemente il debito netto pesa ancora come un macigno su TIM. Il modello della separazione funzionale della GB è l’optimum anche per la tutela della concorrenza retail

  2. Siamo sicuro che alzando i prezzi si otterrebbero maggiori guadagni? Forse in uno stato normale sì, ma in Italia abbiamo perso il 34% di potere di acquisto in una generazione, e già con l’inflazione attuale molti italiani non si sono potuti permettere una vacanza estiva.
    E’ un ottimo modo per ridurre i consumi e creare una spirale recessiva.

    1. Stefano Quintarelli

      un aumento del 50% nel mobile sarebbe non sostanziale nel bilancio mensile di una famiglia media (2,2 componenti)
      le persone più povere continuerebbero ad usare solo il wireless
      l’aumento del wireless farebbe aumentare il fisso
      per chi si puo’ permettere anche il fisso, un pari aumento sarebbe non sostanziale.

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