The aim of this paper is to explain the divergent trajectory that has characterised the Italian and Spanish telecommunications incumbents Telecom Italia and Telefonica over the last two decades. While Telefonica took advantage of the process of EU-led market integration of the telecommunications sector becoming one of the largest players in Europe, Telecom Italia failed to upgrade into a European champion, falling under the control of the French media group Vivendi. This divergence is explained by applying the concepts of structural and instrumental power to the study of industrial policy. It is argued that the different pattern of interaction between the government and large domestic investors in the two countries had a decisive influence on the privatisation of Telecom Italia and Telefonica, in turn explaining the opposite performance of the two firms. While on the one hand the Spanish government exploited its structurally powerful position vis-à-vis the main domestic banks to force them to buy large stakes in Telefonica and act as ‘passive blockholders’, in Italy the state failed to convince domestic investors to participate in the hardcore of Telecom Italia. This in turn led to ownership instability, poor performance and two hostile takeovers that dramatically increase the debt burden on Telecom Italia.
