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Ofcom to force BT Openreach split

UK comms regulator Ofcom is proceeding with a formal notification to require the legal separation of infrastructure unit Openreach from BT, after BT failed to offer voluntary proposals that address Ofcom’s competition concerns. The news came a matter of hours after the telco named experienced businessman Mike McTighe as Chairman of the unit under changes designed to make Openreach more independent and transparent.

In July, Ofcom proposed reforms to make Openreach more independent from BT, through a process of ‘legal separation’. This would require Openreach to become a distinct company with its own Board. The Board would comprise a majority of non-executive directors, including the Chair, who are not affiliated with BT. Openreach would be guaranteed greater independence to make decisions on strategic investments, with a duty to treat all of its customers equally.

Following a public consultation, Ofcom has decided to prepare a notification to the European Commission to implement these changes.

As part of this, Ofcom is publishing:

  • An update summarising today’s announcement;
  • A letter to the European Commission, notifying officials of Ofcom’s intention to implement the legal separation of Openreach;
  • The non-confidential responses received by Ofcom to its July consultation, including a summary of the key themes; and
  • Analysis that sets out how Ofcom is likely to consider the effects of its proposals on the BT pension scheme, and their wider impact on BT.

Ofcom said that creating a more independent Openreach – which works in the interest of all providers, not just BT – is an important part of achieving better service quality and encouraging greater investment in networks.

“We are disappointed that BT has not yet come forward with proposals that meet our competition concerns,” said Ofcom. “Some progress has been made, but this has not been enough, and action is required now to deliver better outcomes for phone and broadband users.”

In July 2016, Ofcom set out its competition concern that BT has the incentive and ability to favour its own retail business when making strategic decisions about new network investments by Openreach. This concern arises because BT runs the national network, Openreach, as well as its own retail business.

Ofcom proposed reforms to address this structural issue, to provide regulatory clarity and confidence to the industry, and ultimately better outcomes for people and businesses. A more independent Openreach would be well placed to invest in ‘full fibre’ broadband for everyone, said the regulator.

Ofcom’s proposal requires Openreach to become a distinct company with its own Board. This would comprise a majority of non-executive directors, including the Chair, who are not affiliated with BT. Openreach would be guaranteed greater independence to make decisions on strategic investments, with a duty to treat all of its customers equally.

Ofcom says that throughout the process of notifying the European Commission it remains open to BT bridging the gap between its proposal and what is required to address its “strong” competition concerns.

Ofcom says it “considered carefully” the calls for the structural separation of Openreach, which would split BT and Openreach into two entirely separate companies, under different ownership. Stakeholders have also provided a range of views on how its July proposal for legal separation could be enhanced to address the competition concerns identified.

Ofcom’s current view is still that an effective and robust form of legal separation, with Openreach as a wholly-owned subsidiary of BT, is likely to achieve the greatest improvements for everyone in the shortest amount of time. Therefore, this is the approach with which it is minded to proceed.

“Our model will include proposals to publicly scrutinise and monitor its effectiveness against several measures of success. The most direct will be whether Openreach Board decisions are taken independently, without undue influence from BT Group. If Ofcom’s monitoring suggests that legal separation is not delivering sufficient benefits for the wider telecoms industry and its customers, we will return to the question of structural separation – fully breaking up the companies,” said the regulator.

Ofcom expects to consult publicly on a submission to the European Commission in the early part of 2016. It then intends to proceed quickly to submit a detailed plan to the Commission and, subject to its decision, implement the reforms of Openreach so the UK can benefit as soon as possible.

In response to Ofcom’s statement on its plans to reform BT Openreach, a Sky spokesperson said: “Let’s not forget why we are here – BT Openreach has continued to fail consumers. This is why we have always said that we want a solution that is clear and executable and in the best interests of consumers and industry. We will now watch closely as to how Ofcom executes its proposals.”

Dido Harding, CEO of TalkTalk said that Openreach had been letting consumers down for far too long, unable to meet promises of even minor improvements and becoming a household name for all the wrong reasons.

“However, we welcome the fact that the regulator has finally made a decision, and while we do not think legal separation goes far enough to deliver the broadband consumers deserve, it is at least a step in the right direction. Consumers will be keen to understand how these changes will improve their service and by when. We will continue to push Ofcom to ensure the plans deliver real, meaningful improvements quickly, and if major changes cannot be delivered, then they should move to structurally separate Openreach once and for all.”

Kester Mann, Principle Analyst, Operators at CCS Insight, said the decision shows that Ofcom remains hugely concerned over BT’s ability to satisfy its competition concerns. “It again highlights clear flaws in the existing Openreach model and a worry that UK broadband deployment could be restricted without serious change. Steering clear of a structural split is unsurprising. This would have been the most controversial and costly action Ofcom could have taken, but would still not have offered guaranteed improvements for customers.”

“No doubt, BT’s rivals will criticise Ofcom for not being brave enough to push for structural separation. But after many months of campaigning, they should see the regulator’s efforts to engage with Brussels as a partial victory. The move toward legal separation and greater independence will bring important benefits to companies like Sky and TalkTalk in the long-term.”

“Today’s announcement represents just the next stage in a long and protracted issue. Expect further lobbying from all parties and old arguments to be recycled. In the interest of stability and market certainty, the sooner a final outcome can be reached the better.”

According to Mark Skilton, a Professor of Practice at Warwick Business School, the BT Group argues it is investing in this critical national infrastructure powering the digital economy for all industries, yet questions over how to build this faster and with more coverage across the nation have been part of a constant battle.

“The Internet of Things, superfast broadband, 5G and other types of networks may be better delivered and served with having multiple large scale companies in a more devolved network.”

“This requires a huge investment to build fibre networks, but also a willingness to experiment and develop a full range of services that digitise and enable multiple networks and providers to give not just access but also high performing data and network speeds.”

“Separating the BT and Openreach monopoly will in my view help this move towards a faster network of providers and hence one that is not driven at the speed of one large operator’s priorities. This has counter arguments of reliability and avoiding vested interests in zoning in on specific cities and regions for preferential treatment. But with Ofcom and government leadership now so critical in the Brexit era we now find ourselves in, we need to think faster and more nationally and internationally in how we connect to the wider world.”

“The telecoms network has to be the network of the future and this needs big investment from many parties not just the preserve of one.”

Fiona Keenan, strategic insight director at Kantar Worldpanel, described the decision as “certainly a step change” for the UK telecoms market. “The proposed reforms should go far in fostering a more consultative, transparent approach to infrastructure development, as well as increasing investment.  It should also suppress concerns from other providers who have always felt that BT’s control over Openreach has stymied their growth.”

“The likes of Sky and TalkTalk have long been using the problematic status of Openreach as a free pass to explain their own shortcomings, but that’s not the whole story.  Whether ultimately we’ll see cheaper and faster broadband for the general public remains to be seen.”

 

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