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The Swedes are doing it, so why can't we?

I have never been to Sweden. In fact, I have no real, hard evidence that Sweden really exists as anything more than a collective, Utopian vision where things just work, and life is better.
Written by David Braue, Contributor

I have never been to Sweden. In fact, I have no real, hard evidence that Sweden really exists as anything more than a collective, Utopian vision where things just work, and life is better.

Extensive evidence supports this: consider Ikea, ABBA, and SAAB, which all discount the idea that four-letter words should stand for something dirty.

Sweden is the home of Ingmar Bergman, Björn Borg, the Nobel Prize and Swedish meatballs, all of which have made important contributions in their respective fields.

Now, we read that Sweden is home to something else: the world's newest functionally separated telco (although Telecom New Zealand will this week take that mantle).

On 18 March, the government of Sweden — which I am starting to believe is not just a Utopian fantasy but an actual place where things just work properly — approved "Functional separation for better broadband competition", a bill mandating the functional separation of TeliaSonera, Scandinavia's kinder, gentler version of Telstra.

It's also bigger: TeliaSonera has over 100 million customers in 18 countries. Nonetheless, the company was kind and gentle enough to do something entirely surprising: instead of suing the pants off of the government — as Telstra would surely do and Telecom NZ definitely wanted to — it just set up an infrastructure company to manage its copper and fibre networks and, as Ovum analyst Charice Wang describes it, "promised to provide services under equal terms."

Yes, promised.

The impetus for the government's bill came from the Swedish government's concern that only 63 percent of Swedish households had access to fixed broadband services; neighbouring Norway has 73 percent and Denmark, which I gather has the same sort of friendly rivalry with Sweden as Australia with New Zealand, or Kazakhstan with Uzbekistan, tips the scales at 79 percent.

By way of comparison, the comparable figure for Australia is 46 percent.

This disparity is reflected in the ITU's World Telecommunication Development Report database [PDF here], which tells us Sweden has 214 broadband subscribers per 1,000 people (BS1000) and 17,531 "international Internet bandwidth bits per capita" (IIBBPC) — whatever that means.

Denmark, which is apparently the best in the world in this sort of thing, whipped Sweden and the rest of the world with a BS1000 score of 249.3 and an IIBBPC of 34,891 — the world's highest and nearly twice that of third-place the Netherlands (20,549). Australia, since I know you're curious, has a BS1000 rating of just 103.4 and an IIBBPC score of 5,903; I still don't know what that means, but the fact that we scored just one-third as high as Sweden can't be a good thing. New Zealand weighed in at just 80.8 and 1126, which at least gives us something to crow about.

Assuming the IIBBPC is related to speed, we're in trouble. Sweden, a country with broadband services that leave ours for dead, still thinks things are so bad that functional separation is the only way to improve them.

Then, instead of fighting tooth and nail and suing government ministers, their 800-pound gorilla telecoms operator just rolls over to government mandate and announces it will play fairly for the betterment of European-kind.

Some will argue the writing was on the wall for TeliaSonera: as the #1 operator in numerous European mobile and fixed markets, it was likely to be public enemy #1 in the telecommunications reform currently rippling across the EU.

A draft discussion paper by the European Regulators Group offers an interesting summary of the EU's opinions about functional separation [PDF here]. I won't repeat all of it here for lack of space, but here are a few key points. Functional separation, the ERG tells us:

  • "... seeks to ensure 'full equivalence' of regulated wholesale products"
  • "... should only be implemented when it can be shown that other mechanisms or remedies cannot ensure non-discriminatory access."
  • "... allows the [incumbent] operator to continue to enjoy many of the benefits of vertical integration, so long as these benefits are not based on the leveraging of market power derived from market infrastructure, or infrastructure which is uneconomical to replicate." (my emphasis)
  • "... allows for the targeted separation of those enduring bottlenecks which are difficult for rival operators to replicate commercially, but which provide vital inputs to a range of downstream products and services provided by both the vertically-integrated operator and its competitors."

Here's the big kicker — Sol, are you still reading?

Citing the example of British Telecom, which became the gold standard for functional separation in 2005 and has seen share prices rising steadily ever since, the ERG argues that functional separation actually promotes investment — by both incumbent monopolists and newcomers in the market — by providing market certainty and a clear understanding of the carrier's relationship with regulators.

"It is clear the undertakings entered into by BT were not perceived by the market as a disincentive to invest," ERG wrote. "BT's legal [sic] binding undertakings gave alternative providers in the UK the regulatory certainty to climb the ladder of investment, going from simply reselling wholesale services provided by BT, to physical investments of their own, ever closer to customers' premises ... [without this certainty] BT would undoubtedly have been more reluctant to commit to investing in its [21st Century Network next-generation] core network, to the tune of around 10 billion pounds."

Functional separation actually helping the incumbent? Regulatory certainty helping companies besides the incumbent? This will sound like heresy to Telstra, whose entire business model depends on withholding infrastructure investment until it gets its way.

Indeed, our incumbent has exhibited every one of the undesirable traits cited by ERG as justification for functional separation.

Some will argue that Telstra can no longer be functionally separated because the government gave up its rights over the company in T1, T2 and T3. And sure, the fact that TeliaSonera is 51 percent owned by the Swedish and Finnish governments may have lent a sense of inevitability to the whole thing. But BT's functional separation came a full decade after its privatisation and Telecom New Zealand has also done away with its government roots.

When it comes to functional separation, clearly, where there's a will, there's a way. We just lack the will: the Howard government repeatedly declined to mandate functional separation and Labor has hardly changed that position — although industry group ATUG has argued [PDF here] that the coming AU$4.7 billion next-generation network contract would be a great time to do just that.

What is clear, however, is that functional separation is fast becoming accepted business practice all around us. Sweden may have it over much of the rest of the world when it comes to quality of life, but how long will our telecommunications industry have to eat their dust?

It could be a while; until someone grabs this bull by the horns, it looks like the only meatballs we've got in Australia are the ones in Parliament.

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