Will Ofcom Review Split Up BT And Openreach?

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BLOG: As Ofcom’s digital communications review enters its next phase, BT and its rivals make their feelings about Openreach known

Last Friday was the deadline for stakeholders to submit their final submission to Ofcom’s digital communications review – a once-in-a-decade process that will determine regulation and the future structure of the UK market.

The stance of the major players in this piece has been well known for some time. Communications providers have fought their battle at public events, in the media and in initial responses to the review, which was announced in March.

Ofcom’s review is wide-ranging but the headline issue is the possibility that Openreach might be split from BT. The regulator does not have the power to do this itself, but it can refer the issue to the Competitions and Markets Authority (CMA).

Digital future

BT broadbandThere has been a steady stream of comment from all sides over the past few weeks as the PR battle intensifies. Sky, TalkTalk and Vodafone, all of whom have expressed their desire for a breakup in the past, made comments that reiterated this stance – claiming BT enjoys an unfair advantage, that the current structure stifles investment and that Openreach has a poor service record.

Dido Harding, CEO of TalkTalk, was less combative in The Telegraph than usual and did not mention by BT by name, but it is clear where she stands. Sky’s Mai Fyfield was more explicit in her argument that the current model means there is no incentive to invest in new technologies like fibre to the premise (FTTP), while Vodafone FT the “excessive profits” generated by Openreach gave BT an unfair war chest.

Many of BT’s rivals are convinced the former state monopoly is worried about the possibility of being forced to give up Openreach, hence its recent broadband pledges and its demand that Pay TV should be investigated instead.

But Minister for the Digital Economy Ed Vaizey’s admission to the Financial Times that he was a ‘sceptic’ about the case for breakup may increase the likelihood that Ofcom’s review will not end in a formal separation.

Indeed, analysts are unconvinced a split is on the cards and believe the issue of Openreach has taken attention away from other aspects under review, such as the possibility that some regulation for mobile operators might be relaxed so they can compete with over the top (OTT) companies.

BT’s rivals are adamant their arguments stand up to scrutiny but even so, TechWeekEurope understands there is a private acceptance among some that heavier regulation of the fibre market would be a reasonably satisfactory outcome if an independent Openreach does not emerge.

But the biggest firms are sticking to their guns as we enter the final stretch of the review.

Mai Fyfield, chief strategy officer at Sky

Mai Fyfield Sky“We believe that for the UK to keep up with the rest of the world the focus has to be on investing to make Gigabit broadband widely available to homes and businesses. The reality in the UK today is very far from that goal. The national network run by Openreach relies heavily on copper wires and delivers unacceptable levels of faults and service problems for consumers and businesses.

“From BT’s point of view, it makes perfect sense to sweat the existing copper network for as long as possible.

“The separation of Openreach from the rest of BT will allow it to form part of a more competitive market solution as an independent company.  For example, if BT’s retail arm could purchase network services from alternative suppliers, an independent Openreach would be motivated to respond with investment and innovation of its own. As a standalone FTSE 100 company, Openreach would be highly attractive to long-term investors and able to raise fresh capital to invest on the back of future growth from the whole industry.”

Dido Harding, CEO TalkTalk (Telegraph)

dido-harding“The UK needs a first rate network, built to serve and adapt to the constantly evolving needs of our fast moving, globally connected society.

“Every company in the sector will have its own views on what the best outcome looks like.

“For TalkTalk, it means creating a regulatory framework and competitive market structure which incentivises all providers to invest and innovate, be as efficient as possible in their businesses, and treat customers well. Other companies may hold a different view, and Ofcom will consider them all.”

Gavin Patterson, BT CEO

BT Event“BT is driving the transformation of Britain’s digital infrastructure but we need the right regulatory regime that supports fair competition for all and large scale investment. With this in place, there is no doubt that we can meet the challenges of the next decade, fulfilling the needs of consumers and businesses, driving the growth of the UK economy and supporting social progress for the whole country.

“Ofcom has the opportunity to level the playing field by tackling Sky’s dominance of Pay TV. That dominance has led to poor outcomes for UK consumers and it is about time that converged regulation was introduced to deal with a converged market. The current lop sided approach isn’t serving customers well.”

Ed Vaizey, Minister of the Digital Economy (Financial Times)

Ed Vaizey (2)“I think full separation would be an enormous undertaking, incredibly time consuming [and have] lots of potential to backfire.”

“Ofcom is looking at it, I am a sceptic but we will have to see what Ofcom comes out with. Regulations have proved very effective.”

“If broadband is so terrible, why are we the leading ecommerce nation in the world?”

“My job is to deliver workable broadband to as many people as possible. I am not getting it in the neck for fibre-to-the-premises, I am getting it in the neck for the last 5-10 per cent [of the country].”

“Most people regard 24Mbps as the kind of broadband speeds they need. In reality, most people can live with 6-8Mbps.”

Paolo Pescatore, Analyst at CCS Insight

“Calls for structural separation of BT Openreach have gained strong momentum in recent weeks, and some of the arguments have merit, especially co investment of fibre broadband rollout.

“Despite this, BT is putting up a strong defence. Its latest pledges will address some of the shortcomings raised by its rivals, notably investment and service quality. To separate Openreach would be a big call for the regulator and the competition authorities to make and would take at least two years to implement with strong potential to backfire.

“We believe that the regulator is duty bound to listen to all of the comments by all parties. For now it seems that the likely outcome is to retain the current functional separation (with additional remedies and stipulations) as Ofcom has said that its starting position is not that the Openreach model is broken.

“It is clear that calls for Openreach separation has overshadowed the wider review of the digital communications market. Therefore, Ofcom needs to ensure that UK plc is well prepared for the next 10 years as the market will look radically different to what it is today. It needs to take into account the growing presence of OTT players and pay TV, which have not been subject to the same review as fixed-line broadband. For now it seems there is more than adequate competition in retail fixed-line broadband, but less in pay TV which is dominated by Sky.”

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