British broadband; a conflict of duty
February 29, 2016
Duty is an old fashioned word normally reserved for talk of public service but, in fact, it is a very common word in business law and regulation. Company directors have many duties and regulators have the duty to ensure they abide by them. Some regulators and, theoretically, all politicians have a wider duty to prioritise what is best for an economy or a society as a whole.
Often a duty is aligned with an interest – such as the legally enshrined fiduciary duty of a director to do what is best for shareholders. But sometimes it isn’t. Assuming shareholders’ number one interest is maximised profits, this can be against the interests of consumers of its products, and so the company has a legal duty not to wantonly exploit its consumers. And because – human nature being what it is – self interest may outrank duty, we have regulators whose duty it is to make sure the companies in a particular market do their duty in respect of consumers and the wider economy.
An axiom of the late 20th century and the 21st is that monopolies are bad and public monopolies are awful. Bad managers with bad practices can produce good profits despite terrible products and services because there is no alternative. And in a globalised economy a market served by a monopoly will be left in the dust by those driven forward by the innovation and pricing of a competitive market.
The UK was a world leader in privatising monopoly public utilities and British Telecom was among the first under the hammer. But because the economic modelling and regulation of privatised markets was an experimental science, being on the leading edge meant the UK got to make a lot of mistakes others could learn from. And the telecoms market is a classic. If a privatised market is going to deliver for the country and the nation (most major privatisations deal with essentials; power, water, transport, comms), there has to be an environment that promotes rapid and meaningful competition. If not, you swap a public monopoly for a private one and investment funds are routinely diverted to shareholder dividends. The UK privatised market answer to BT was Mercury (remember them?) and 11 US financed cable franchises that all pretty much collapsed when the tax break they were all after was taken away after one year (Capital Allowances 1984 Budget).
The result is British Telecommunications plc has continued as quasi-monopoly of fixed line communications in the UK and the result has been predictable. They (BT, regulators, politicians – add your own nominations…) got away with it because the massive boom of the last 20 years has been in mobile telephony where BT’s own fecklessness (Cellnet was a screw up that it sold just as the market really took off), meant it certainly didn’t feel dominant as competitors whipped its behind.
But as fixed comms has become essential once more with home broadband almost as much a utility as water, BT has been handed a massive, golden, get out of jail card. It still has a fixed line phone in all but a few (Virgin) homes. Consumers have to have those lines for broadband (no one needs a fixed phone) and BT controls access to them. As the market burgeoned and it was clear there were other players willing and able to serve consumers, the politicians and regulators had a decision to make; taken ownership of the lines away from BT or regulate them to grant open and fair access to competitors. To take them away would have been complex and expensive; there would have to been a compensation package – BT is, after all, a private company. So, surprise, surprise, the road of least resistance was taken. It has been a disaster for British broadband consumers and a disaster for British economic competitiveness in a global world of super fast communications.
At first, BT was told what to do and trusted to do it – fair pricing and conditions for access to exchanges. Well, obviously, that didn’t work. So BT Openreach was created as a quasi-autonomous entity charged with doing the same thing. It has done better, but still very, very, badly.
Ofcom has found it in habitual breach of the letter and spirit of the regulation and therefore, logically, BT has acted against the interests of competitors and consumers. Ofcom has put BT in the ‘last chance saloon’ it now must obey the regulations or Openreach will be spun-off. I do have every sympathy with Sharon White and Ofcom who are dealing with the sins of their predecessors. Spinning off Openreach would now be complicated and time consuming and the market would go backwards before going forwards – but it must be done.
In the last chance saloon BT obviously know they have dodged a bullet. You only have to hear CEO Gavin Patterson’s laconic reaction along the lines ‘we’re actually doing really well and are happy to have the opportunity to do even better’. No blame attaches here either; GP’s central duty is to provide the maximum return to shareholders. He believes that means dominating the UK broadband market (you don’t spend £1 billion + on football rights if you don’t), and if he is handed a free pass to hinder his rivals – well, happy days.
BT’s response always begins: ‘we lead Europe in fast broadband provision with 96% coverage.’ By which they mean 96% of urban areas with a speed of 10Mbs – not something you’d find anyone else in Europe describing as ‘fast’. As for BT Infinity ‘superfast’ that’s up to a not hugely impressive 38Mbs; though when a card was dropped through my door welcoming me to Superfast potential, I was told they’d only guarantee 15-25Mbs and as my old copper was currently (that day) heroically kicking out 16Mbs – ‘I shouldn’t bother.’ Honest at least. I’ve written before of my personal experience with BT customer services; it is heart attack difficult to engage with but generally personable and honest when you do: ‘no, we have no idea how to help you with that, sorry.’
Good luck to Ofcom and all in the broadband market I hope the new regime works. But please, if it doesn’t work, no more dodging: bite the bullet.