Separation of upstream network operations from downstream retail activities has long been considered as a potential remedy against the abuse of extant market power by incumbent network operators engaging in non-price discrimination in order to foreclose competition in downstream retail markets (see, for example, Xavier & Ypsilanti, 2004; de Bijl, 2005; Cave, 2006). However, the tool is increasingly being adopted as a regulatory means of preventing the (potential or actual) accrual of future market power by the firms deploying Next-Generation Access Networks (NGANs) such as Fibre-to-the-Home (FTTH) and Fibre-to-the-node (FTTN) (see, for example, Kirsch & von Hirschhausen, 2008; Huigen & Cave, 2008; Whalley & Henten, 2010; Cadman, 2010). Although it is generally agreed that separation may offer a useful means of constraining discriminatory behaviour, there is much less consensus about its merits in light of its potential costs to investment incentives and co-ordination in the deployment of new networks (Goncalves & Nascimento, 2010; Howell, Meade & O’Connor, 2010). Furthermore, it is far from clear that discrimination – either price-based or non-price – is necessarily contrary to the pursuit of increased consumer and total welfare, especially in the case of a new network infrastructure where there are considerable initial scale economies on offer (Heatley & Howell, 2010a; 2010b). Consequently, regulators in Europe, Asia and the Americas have generally exhibited caution in refraining from making unilateral impositions (Tropina, Whalley & Curwen, 2010), albeit that in some instances firms have undertaken voluntary separation activities in order to forestall potential regulatory action (e.g. BT – Whalley & Curwen, 2008; Telecom Italia – Nucciarelli & Sadowski, 2010). In contrast, however, the tool has been mandated in its most severe form – structural separation – as a fundamental artefact of new, nationwide, government-funded FTTH networks currently being deployed in Australia, New Zealand and Singapore (Howell, 2009, 2010; Given, 2010; Middleton & Given, 2010). In this paper, following a brief exposition of the different means of separating and regulating separated firms, we use case studies of Australia and New Zealand to illustrate the effects of full structural separation on both the static and dynamic incentives for deployment and uptake in the very early stages of diffusion of a new technology – Fibre-to-the-Home (FTTH). The Australian and New Zealand cases are compared to the Netherlands, where despite the presence of access regulation and the major firm deploying FTTH focusing on providing infrastructure and not services, deployment and uptake rates far exceed those obtained in Australia and New Zealand. Preliminary analyses suggest that the incentives facing participants in structurally-separate networks where the network operator is prevented from active commercial engagement with end users can have material effects upon the ability to achieve early scale economies and hence the economic welfare gained from the new network deployment. The implication is that complete separation of retail and network operations over the entire life of a network may be too blunt a tool, and that a dimension of separation warranting further consideration is the dynamic separation of network deployment from network operation.
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