The EU is Right to Balk at Problem-Plagued Merger Between TIM and Open Fiber

The EU is Right to Balk at Problem-Plagued Merger Between TIM and Open Fiber

In the latest troubling sign for legacy Italian telecom operator Telecom Italia (TIM), the question marks over the company’s planned merger with rival Open Fiber contributed to ratings agency S&P’s recent decision to downgrade the telco’s outlook to negative.

The demotion is due, in part, to uncertainties over how the negotiations over the potential tie-up will play out and, more particularly, whether TIM will be allowed to keep a controlling stake in any new national broadband operator that’s created – a situation that is undermining confidence in the company, above and beyond the 11% drop in TIM’s annual revenue which S&P is predicting for this year.

The suggestion that even TIM might be negatively impacted by the merger exposes yet another flaw in a venture that’s already plagued by problems, in spite of the Italian government’s enthusiastic support. Chief amongst them? The strong likelihood that European policymakers will balk at allowing Italy to return to the same fixed-line monopoly model that EU institutions and national policymakers have so carefully dismantled over the past few decades.

An archaic, crumbling system

There was good reason to unpick those archetypes. For decades under a Telecom Italia monopoly, Italy struggled along with slow, expensive and unreliable broadband service, occupying the bottom reaches of the European connectivity leader board. With little to incentivise TIM to improve its infrastructure or to swap its ageing copper cable assets for fiber optic replacements, the situation only started to improve after Open Fiber entered the market in 2016.

Open Fiber’s swift takeover of Milan fiber installation company Metroweb rebooted Italy’s connectivity drive, supercharging the country’s fiber-to-the-home (FTTH) program and elevating the delivery of ultra-broadband to levels closer to the continental average. But there’s more to do if Italy has any chance of further narrowing the gap with its European neighbours. And, while the merger is being marketed as a logical next step on Italy’s road to digital transformation, the fact that it took the emergence of a genuine competitor to spark any real momentum would suggest the opposite. Reverting to the very conditions that allowed Italy’s broadband infrastructure to remain in stasis for so long surely risks rolling back progress already made.

Little wonder, then, that Italy’s communications regulator warned against allowing TIM to operate a single network entity, claiming such a development would be a ‘backward step’.

Under the antitrust microscope

What’s more, given the EU’s strong anti-monopolies bias, especially regarding the liberalization of the telecoms sector, it’s doubtful that Brussels would let the plan go ahead – certainly not if it involved a return to a single, vertically integrated network. However, even before the proposed deal reaches the Commission level, the Italian competition authority might also object. The body slapped a €116 million fine on TIM recently for deliberately delaying the roll-out of ultra-fast broadband in a bid to suppress competition. As a result, offering TIM a second bite at a national monopoly could be viewed at best as misguided, at worst, an attempt by the government to help the company maintaining an anachronistic monopolistic position.

It’s estimated that the move – labelled by the Italian antitrust authority as a ‘premeditated anti-competition strategy’—impeded its competitors’ investments in rural areas, resulting in a significant shortfall against targets. Plans to connect 80 percent of these zones to a broadband grid by the end of 2020 are now unlikely to be met—particularly if the Italian telecom sector becomes embroiled in prolonged negotiations over a deal between TIM and Open Fiber.

Market deregulation has become commonplace across Europe. France now boasts four major fiber operators, while Spain’s fiber-optic network is an EU success story as a result of the dynamic collaboration between a group of four operators tasked with optimizing infrastructure and widening the availability of services nationally. Some 63 percent of Spanish homes now have FTTH access – almost three times the EU average of 23%.

Finding a new way forward

Bloomberg reported in September that EU competition officials are unlikely to approve any plans to return to a single national broadband network under TIM’s control, on the grounds that it would create a fresh monopoly. Margrethe Vestager already specified that while it might possible for a member state to have a single wholesaler, “the problem is whether it is an independent wholesaler or if it has specific ties, vertically, with retailers”. It’s difficult to see, in light of those comments and Vestager’s repeated opposition to anti-competitive mergers, how Brussels would green-light a single network with TIM at the helm. Similarly, it’s not clear why the Italian competition authority would allow it, should the deal land in Rome.

Italy could choose to adopt the strategies pioneered by its neighbours to fast track digital transformation across its underserved regions. However, the government’s preference for a TIM-led single broadband network may cause the project to hit the buffers before it has the opportunity to make any headway. The far-from-done deal between TIM and Open Fiber not only threatens to delay urgently needed infrastructure investment while merger talks drag on but may be doomed to failure in any case, because it won’t pass muster against EU antitrust rules.

If the Italian government really wants to make good on its promise to connect half its country’s households to ultra-fast broadband before the year is out, it needs to embrace the spirit of collaboration and encourage the competition that will drive Italy’s digital transformation to new heights.

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