Analysis: Unbundling gets unbundled

Alternative telcos are pulling out of unbundling in droves - but that might not necessarily be a bad thing

Telcos have woken up to the realities of unbundling and realised it is going to be pretty hard to make a profit, say experts, as yet another telco -- Thus -- drops out of the process.

Operators like Thus (quote: THUS), Energis (quote: EGS) and Cable & Wireless (quote: CW) had hoped to take advantage of the unbundled local loop -- in which other operators install equipment into BT's(quote: BT) telephone exchanges -- in order to roll out cheaper broadband services in the UK. Unbundling has been pushed forward at government and EU level in order to solve the problem of incumbent telephone operators monopolising data services in the way they previously monopolised voice calls.

The process, however, has been fraught with problems and delays and BT was hauled before a select committee in December to answer its rivals' complaints. Telecoms watchdog Oftel has tried to put the process back on track but eight operators, including WorldCom, Telewest (quote: TWT) and ntl, have dropped out altogether and Energis has decided to cut back its investment in unbundling.

The bursting of the dot-com bubble and the general market slump have had a sharp effect on the telecoms market. Shares have crashed and it has become much more difficult to find funding for new ventures. Independent telecoms analyst Maev Sullivan puts the blame for the lack of interest in unbundling firmly at the feet of the current funding crisis.

Analyst with research firm Ovum Tim Johnson agrees. "The previous climate allowed companies to get funding even when profitability was a long way down the line," points out Johnson. However he does not necessarily think this slowdown is a bad thing: "With twenty or more players [involved in unbundling] there was no way they could all make a profit," he points out.

Johnson predicts that no more than ten players will end up offering unbundled services. "The sensible picture is two or three rolling out a national service with perhaps half a dozen offering regionally specialised services," he says.

He claims that unbundling was never going to be easy and that the small print should have pointed out that it was going to be very difficult to make a profit. "It is hard to produce a business plan that looks profitable and inevitably it is going to be cheaper and easier for the incumbent to do it," he claims.

Originally, 28 players applied for space in BT's exchanges but eight have now gone by the wayside. Oftel claims to be "disappointed" by Thus's decision but is confident that enough operators are still involved in the process to make the broadband market competitive. "Those that don't want to go forward with unbundling can use BT's wholesale service. Unbundling is just one way of creating competition," says an Oftel spokeswoman.

Wholesale ADSL is exactly the route Thus has decided to go down in order to keep offering its customers broadband services. "We have been keeping both options open but we have felt it is more sensible to focus efforts on the wholesale business," says Thus's legal and regulatory affairs director Keith Monserrat.

Thus accepts that the current economic situation has played its part in its decision to ditch unbundling, and estimates it would have needed to come up with £40m if it had wanted to roll out unbundled services nationwide. "If the market conditions are adverse it would not be appropriate to take shareholders' money and spend it on a service which carried a risk," explains Monserrat.

And what exactly are the "risks" of unbundling? According to Monserrat, unbundling offers no service level guarantees, there are issues over who would be responsible for maintaining the network and how to trace faults and BT is entitled to pull services whenever it wants.

It is these risks and the danger of offering what Monserrat describes as a "sub-standard" service that have really made up Thus' mind to abandon unbundling. In the world of wholesale, despite having to pay a fee to BT, there is a whole lot more protection, thinks Monserrat. "They guarantee a certain level of service," he says.

Back in December, at the select committee set up to investigate the unbundling fiasco, Thus gave no indication it was about to back out of the process altogether. It was, however, vocal in its criticism of BT and the telco has had to take a large part of the blame for the current unpopularity of unbundling. "Yes, we have lots of criticisms of BT," admits Monserrat. "BT feels it has to control the local loop, it has prevaricated on contracts and it did not take our comments seriously," he claims.

In many ways it is unsurprising that BT wants to hold on to its network by any means necessary, but for Oftel, the organisation determined to see more competition in the telecoms market, the criticism of BT reflects very badly. In fact, the government select committee was damning in its criticism of Oftel, and both the ECTA (European Competitive Telecommunications Association) and alternative operators have accused the watchdog of failing to act quickly enough over the obvious issues facing unbundling.

Oftel claims to promote competition as the best way to get affordable prices to the consumer. So what will all this mean for consumers now that the beacon of unbundled access and therefore cheaper services seems to be dimming?

Monserrat is confident if the wholesale services are good enough people will be willing to pay, referring a recent survey from the Henley Centre, which claims £40 is the average family spend on Sky TV services. Ovum's Johnson agrees. "It is not going to be a bonanza for consumers but there ought to be enough competition to ensure reasonable prices," he says.

For Johnson the importance of unbundling lies not in what it will achieve after it has happened but before. It has, he claims, played a crucial -- if somewhat subliminal -- role in forcing BT to pull out its finger and deliver ADSL broadband services. "If there wasn't the threat of other operators being able to do it, BT would have taken a very different course and would still be carrying on with low key trials," he says.

Another factor putting the heat on BT is the rollout of cable-modem broadband by operators such as Telewest and ntl, according to industry observers.

The news that matters is not the puff, that BT expects to cover "half the population of the UK" with ADSL capability by early summer, and will have reached 70,000 subscribers by April. What Guy Kewney thinks matters is -- whether the various super-powers in the comms business can agree a way of doing business. Go to AnchorDesk UK for the news comment.

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