Business Separation in Telecommunications: Lessons from the U.S. Experience

Structural and functional separation of telecommunications operators is being considered in many parts of the world following the U.K. functional separation of BT into retail and network operations. The attractiveness of separation is understandable due to the problems regulators often experience when regulating a monopoly that is vertically integrated into competitive markets, but separation in practice rarely if ever lives up to its promises. We examine experiences with business separation in the United States to draw lessons about its effects. We consider the separation of local and long distance, separation between telecommunications and information services, and separation between wholesale networks and retail services. These experiences show that business separation lowers efficiency and delays innovation, that adapting separation rules to an ever changing industry is costly and creates controversies, that rivals try to gain strategic advantage through the regulatory process, and that behavioral rules can be more effective in facilitating competition and innovation than structural rules.