On January 24, 2019, the French association of alternative telecoms operators, Aota, submitted an antitrust complaint to the Autorité de la concurrence, the competition regulator, about the incumbent Orange. The association of 45 operators is not only apprehensive about the level of competition on the legacy infrastructure for ADSL connections but also worried about the implications this has on fiber deployment. Aota has requested that Orange be required to functionally separate its wholesale and retail businesses and the French competition regulator has begun a review.
For a long time, regulators around the world have been exploring the use of functional separation as a regulatory remedy. This has generally been considered only after existing regulatory remedies, such as wholesale price controls, accounting separation, nondiscrimination rules, and ex-post competition law, have failed to effectively counteract anticompetitive price and non-price discriminatory behavior, and then it is usually introduced on a voluntary basis. Orange Group in France is facing ongoing pressure from competitors to functionally separate its retail and wholesale businesses. This mirrors similar discussions happening across the EU, such as in the UK and Italy, where the regulators are aiming to address concerns over access to fixed-line assets, particularly as networks progress toward next-generation services. The root of the problem is the need to guarantee nondiscriminatory access to vital infrastructure resources and maintain sustainable competition in retail markets. Functional separation could be one solution to this as it involves the creation of a separate business unit along with operational rules to establish a Chinese wall between the new business unit and the operator's other operations.
The French competition regulator, the Autorité de la concurrence, is reviewing the possibility of requiring Orange to go through a functional separation process, following a complaint filed by Aota (an association of alternative telecoms operators). Aota believes that Orange has strategic access to civil engineering to deliver ADSL connections, and that this also puts the company at an advantage for deploying fiber connections, effectively creating a monopoly in the fiber market. The alternative operators are putting the argument forward that they are unable to offer commercial packages that are similar to Orange's offerings.
While the telecoms regulator, ARCEP, agrees in principle that Orange could do more to provide nondiscriminatory access, until now it has preferred to impose rules on the SMP operator to open up competition in the market, rather than resorting to separating the businesses. Back in 2001, the regulator did begin work related to the possible functional unbundling of Orange's monopolistic and competitive activities, but the project was later shelved. The market has changed somewhat since then and ARCEP opened an investigation into Orange's practices back in December 2017. Under existing obligations, Orange must let its competitors access its copper network, but the investigation found that Orange was not up to the mark in terms of time, quality or its after-sales service. As a result, the regulator introduced quality of service (QoS) obligations on Orange's wholesale offers, which provide access to the copper network to its competitors. Failure to comply could result in a €1bn ($1.14bn) fine. It seems unlikely then that ARCEP would push to split the company until it has assessed Orange's compliance with these obligations. However, it can also be argued that functional separation does not remove the need to regulate QoS, prices, or the services offered in the access network. So, while the introduction of QoS targets is a step in the right direction, the competition regulator may find that they are not enough to fully address existing competition concerns.
With operators looking toward delivering fiber-based next-generation access, the debate around the merits of functional separation of the incumbent has grown and regulators must ensure that the wholesale access model adopted supports this progress.
Global Experiences of Functional Separation and its Impact on Competition, TE0007-001172 (December 2017)
France (Country Regulation Overview), GLB005-000078 (September 2018)
Sarah McBride, Analyst, Regulation