Structural Separation Models and the Provision of ‘Dark Fibre’ for Broadband Networks: The Case of CityLink

Abstract

Fibre broadband networks are widely presumed to become the dominant form of fixed-line broadband access. However, the spectre of fibre firms gaining market power, such has been evidenced in legacy copper-based telecommunications networks, has led some policy-makers to suggest imposing separation mandates (either functional or structural) on the owners of fibre networks yet to be built, in order to militate against the creation of a new set of firms with market power. Whilst conceptually separation of the „dark fibre? data transportation core from network intelligence and retail functions echoes the computer technology-centric view of the internet as a „dumb core? and an „intelligent fringe?, and replicates the separation mandates currently proposed as a means of preventing integrated legacy copper-based providers from foreclosing retail competition, the ensuing structures likely exacerbate the chilling effect of access regulation on network investment observed in most markets where it has been applied. The chilling effects arise because of an investment horizon mismatch (hold-up) between infrastructure operators with large fixed and sunk costs, and retailers (and arguably even end consumers) with freedom to switch between retailers and network infrastructures. The usual resolution to such problems requires customers to make a credible commitment to purchase services via relationship-specific investments or contractual commitments. Whereas access regulation precludes the contractual resolution of the hold-up problem, separation mandates preclude their resolution by consumer-owners vertically integrating upsteam into elements of infrastructure ownership. Consequently, it appears unlikely that the level of investment in separated fibre networks providing dark fibre connections will be optimal. Indeed, under competitive circumstances and high levels of demand uncertainty, there may be no private sector investment forthcoming for dark fibre infrastructures. By examining the business model of CityLink, a firm that since 1995 has been successfully supplying dark fibre in a highly competitive broadband market segment, it is confirmed that long-term financial viability of dark fibre-producing firms is feasible when utilising a mix of both contractual and asset ownership mechanisms that bind end consumers into credible commitments sufficient to justify the firm?s deployment of new network infrastructure capacity. The institutional arrangements that led to the development of this firm?s successful business model draw their inspiration more from the flexible and collaborative commercial interaction of the information technology community rather than the adversarial and prescriptive regulatory environment of the telecommunications industry. It is concluded that if policy-makers wish to encourage the creation of a truly „dark fibre-based? fixed line broadband environment, then in the initial stages of network deployment at least, arrangements similar to those of CityLink are more likely to induce sufficient and timely private sector investments than the rigid and rigorous separation and access regulation arrangements common in the recent history of the telecommunications industry.