* Telecom Italia mulls fixed network spin off
* Spin off would set precedent in Europe
* Italy pushes for unified national broadband project
By Danilo Masoni and Leila Abboud
MILAN/PARIS Sept 26 IMM Hydraulics, a small
exporter of hoses for industries such as agriculture and mining,
is the kind of firm that should be at the centre of Italy's
efforts to rekindle its stagnant economy.
Instead, the company, located in the Abruzzo region of
central Italy, is wrestling with a basic impediment to
profitability: a woefully slow broadband connection. With just 2
megabits (MB) per second, IMM Hydraulics' broadband connection
lags behind the 5 MB typical in Italian cities, which in turn is
well behind an average of 12 M B in France and 16 MB in Germany.
"It takes us days to process an order whereas it could take
half an hour," said finance director Marcello Di Campli.
"Broadband is one of our biggest problems, probably just after
our access to credit."
Europe's fourth-largest economy has long been an Internet
laggard, its creaky networks stunting the development of online
commerce and banking. Italians pay among t h e highest prices in
Europe for broadband speeds on a par with Estonia or Cyprus. As
a result, only half the population uses the Internet at least
once a week and Italian firms generate 5.4 percent of sales
on-line compared to 13.9 percent elsewhere in Europe.
Now the reformist government of Prime Minister Mario Monti
has identified better broadband as a national priority to spur
growth and reduce Italy's 11 percent unemployment and bulging
"The statistics on e-commerce are chilling ... The broadband
gap constrains growth by reducing the competitiveness of
export-oriented companies," said Paolo Gentiloni, former
communications minister and member of a group of deputies that
has made proposals to support online commerce and government
In the government's sights is one-time monopoly Telecom
Italia, which it believes has long thwarted
competition a n d put off investing in its domestic network
because of its huge debts.
Monti's government has enlisted state-backed finance body
Cassa Depositi e Prestiti (CDP) to work out a plan with Telecom
Italia and its rivals to create a nationwide super-fast fibre
optic broadband network.
One of the most radical options under discussion is for
Telecom Italia to spin off its existing network of decades-old
copper lines - worth between 9 and 15 billion euros - into a
separate company that would run Italy's fixed telephone and
broadband system and sell capacity to other Internet providers
on a wholesale basis. The new "access network company" could be
partly state-owned and would have more incentive to invest in
broadband, say advocates, because it would have neither debt to
pay nor market share to defend.
Such a move would amount to something of a revolution in
Europe and would test whether the state can be more effective
than the private sector in building national broadband
Australia's government provided the blue-print in 2009 when,
frustrated with the slow pace of investment, it became the first
country to create a national company charged with building a
single open access fibre broadband network to 90 percent of
homes by 2021. Britain adopted a slightly different approach,
requiring BT Group to create a separate subsidiary to
sells wholesale access to competitors and build fibre broadband
across the country.
TO SPLIT OR NOT TO SPLIT
Telecom Italia, like other former telecom monopolies in
Europe, owns the last metres of copper lines to homes and
businesses, which it then rents out to competitors - mobile
operators Vodafone, Wind, and Hutchison's 3
- for a monthly fee set by regulators.
In Italy and elsewhere, it is these decades-old copper lines
that need to be replaced by fibre optic wires to boost broadband
speeds to up to 100 megabits per second. Updating those wires
will cost 200 billion euros, says the European Commission, a sum
telecom operators will struggle to mobilise.
Italy can't just issue orders to Telecom Italia because the
company is no longer owned by the state but by individual
shareholders and a consortium of three Italian banks and
Telefonica. So government officials are using other ways to
After months of fruitless negotiations between Telecom
Italia chairman Franco Bernabe and CDP head Franco Bassanini,
the state pledged to invest up to 500 million euro in Metroweb,
a competing fibre broadband project in Italy's north, to up the
pressure, a source close to the Metroweb group said.
Bassanini told Reuters that the CDP was "absolutely open to
finding an agreement" and that talks with Telecom Italia were
ongoing on "a broader hypothesis" than just the Metroweb
investment. He acknowledged that the creation of a combined
network company that merged all the current Italian network
assets would be "highly sensitive" for Telecom Italia.
According to a person close to Telecom Italia, the CDP has
hired Deutsche Bank to analyse the value of its network in
preparation for hiving it off.
The pressure is taking effect: Telecom Italia is debating
the spin-off idea internally and Bernabe has promised a decision
by the end of this year.
Telecom Italia has also agreed to share some infrastructure
with rival broadband provider Fastweb and to
co-ordinate the rollouts of their respective fibre networks in a
bid to cut costs - a deal that could make negotiations over a
broader nationwide project easier, analysts say.
But Telecom Italia executives are divided over whether
spinning off its fixed network is wise, said two people close to
the company. Chief Executive Marco Patuano is backing the move
because he believes the infrastructure's value will decline with
the advent of super-fast mobile technology known as LTE, as well
as competing fibre projects in Italy.
By contrast Bernabe believes owning the last metres of
copper into people's homes represents a competitive advantage
since rivals must pay to access it to be able to offer broadband
to their customers. He has repeatedly said Telecom Italia will
not do anything to lose control over its network.
Governments around the world are trying different strategies
to upgrade their systems.
The United States is relying solely on competition in the
private sector while Japan and Korea have ploughed public money
into building nationwide fibre-optic networks, a task made
easier by dense urban geography. Sweden and Norway became
European leaders in fibre-optic broadband penetration via a
mixture of tax breaks, subsidies for rural deployments, and in
Sweden's case, requiring state-owned municipal utilities to
create local networks.
Although it is early to judge Australia's nationwide fibre
project, Britain's effective separation of BT in 2005 has taken
the country from the middle of Europe's rankings on broadband
speeds, cost and usage to near the top.
In the European Union, telecom operators and policymakers
have spent the past year fighting. Operators argue they
shouldn't have to share the new networks with rivals if they are
to bear the cost of building them alone. The wrangling has
contributed to upgrade delays in Italy and elsewhere.
Brussels now says member states will not be required to make
the operators share fibre networks and has given operators free
rein to choose what technology to deploy, in a regulatory
framework that will operate to at least 2020.
Crucially, regulators will no longer set the prices at which
incumbents sell wholesale access to smaller competitors on new
fibre networks, so long as incumbents offer "equivalent" prices
to everyone. [ID: nL6E8IC75U]
Gabrielle Gauthey, a former telecoms regulator in France who
now works at Alcatel-Lucent, argues governments have a role to
play in enabling adequate broadband coverage.
"Many telcos just don't have the money to invest the sums
that are needed," said Gauthey. "It's a massive effort not
unlike electrifying a whole country."
A network spin-off could help Telecom Italia reach its debt
reduction targets and cut its 30.4 billion euro debt pile - and
the operator seems to be seriously considering the idea. In a
recent presentation to investors at a Sanford Bernstein
conference, Telecom Italia said the rewards of a separating out
its fixed network now outweighed the risks.
A banker close to Telecom Italia put the probability of the
group going through with the spin-off at 70 percent, and two
other banking sources say the company is considering appointing
two banks to advise it on the mechanics.
A decision can't come soon enough for businessmen like Siro
Badon, who owns a business in a shoe manufacturing district near
Venice where local companies export 92 percent of the 20 million
pairs of shoes made every year.
"Some companies in our district work with brands like Louis
Vuitton and Armani with stylists in Paris and all over the
world. Imagine the huge damage it causes not being able to
communicate swiftly," Badon said.
"Sometimes I feel we are carrying an old country on our
shoulders. I wait and hope."