Vertical separation implies that each layer of the entire service can be provided by different sets of actors. These may be telecom companies, companies from other industry sectors or public organizations. Service providers are able to offer their services to their customers without having their own network facilities, and infrastructure providers do not need to engage in service provision to end-users, but can lease facilities to network operators or service providers. This allows for the use of a wide range of new business models in the telecom sector.
The vertical structure of telecom markets has undergone considerable changes since the 1980s. Before that time the telecom sector was dominated by national or regional monopolies controlling all levels of the value chain and with close ties to the national equipment industry. In some countries the operators even produced parts of their own equipment. Since then the market has become much more disintegrated, and different levels in the value chain may be controlled by different companies.
One reason for this is that the use of digital transmission technologies and of the IP protocol have made it easier to separate the various functions. As it follows from the figure below there, is a certain correspondence between the layers defined in the OSI model and in the TCP/IP protocol, and in the way the market for telecom services has been segmented.
Network layers and Market segmentation
Basic network facilities include ducts as well as fibers or other physical network facilities. These facilities can be provided in many different ways. For instance, fibers can be offered, including all the auxiliary services needed to provide a telecom network, simply as dark fibers or including some basic services.
In the same way, wireless network infrastructure may include or may not include various types of passive and active components.
This has implied a market structure with different levels of competition within the different market segments, and a supply structure with a wide range of companies representing different degrees of vertical integration.
Categorisation of suppliers according to business models applied
|
Suppliers grouped according to business models applied |
|
1) Full scale operators – with their own fully developed infrastructure.
2) Operators – with their own not yet fully developed infrastructure
3) Virtual operators – with an infrastructure mainly based on leased lines.
4) Service providers – without own network facilities, reselling services to end users.
5) Infrastructure providers – providing basic infrastructure to other telecom companies, but not to end users |
The first category includes at present in reality only the incumbent operators, as they are the only ones with a fully developed fixed access network. This implies that all other operators in varying degrees depend on access to telecom facilities owned by the incumbent. Some mobile operators may possess extensive network facilities of their own, but will often depend on the incumbent when connecting the different sites.
The companies in categories 2 and 3 may supplement their own infrastructure by leasing raw infrastructure facilities from others. In this way, they are able to maintain full control of all network functions. They may, however, also outsource part of their transmission through the use of switched interconnection to other networks. Mobile virtual network operators (MVNOs) belong to this category.
Another possibility is to act only as a service provider and let other telecom companies be responsible for the entire network operations. In this way some of the most important barriers of entry found on the telecom market are avoided.
The last category includes companies from other public utility sectors which have their own network facilities, such as railway and electricity network companies. Such companies may wish to profit from their access to infrastructure without engaging in all segments of the value chain in an entirely new business area. This category also includes municipalities and neighborhood associations which want to provide cost effective access to citizens in a particular area. These organizations invest in their own local loop facilities, but will usually rely on other operators with regard to provision of service provision and access to core network facilities.
Internet service providers will often belong to categories 2)-4). In particular, smaller service providers have only made limited investments in their own network facilities.
An important aspect of vertical separation is that it becomes possible to provide services without local presence. This implies that services like VoIP may be provided by companies outside the jurisdiction of the national regulator. Skype is an example of a VoIP provider which has based its business model on a global reach of its services provided in a way that does not require investments in local network facilities.
Although vertical separation becomes technically possible, there might still be good reasons for some companies to maintain a vertically integrated structure. Incumbent operators want to leverage from their ownership of extensive network structures by means of value creation on other markets. However, regulators may wish to enforce a structural separation of vertically integrated telecom operators in order to ensure a level playing field for new entrants (see practise note on structural separation of British Telecom).
Another possibility is that service providers invest in their own networks, consequently saving money in the transmission of their content and services to their customers. Although this is not a general trend, there are examples of companies considering this opportunity e.g. Google.