BT Clings On to Openreach – Just

UK regulator Ofcom rules that BT's access network division Openreach must have its own board and staff but will remain part of the UK national operator, falling short of structural separation.

July 26, 2016

6 Min Read
BT Clings On to Openreach – Just

BT has managed to avoid the imposed structural separation of Openreach, its access network division, following plans announced Tuesday by UK regulator Ofcom, but the division will have a new corporate structure that will make it more of an independent entity.

The Ofcom plans fall short of the demands and hopes of BT's broadband rivals such as Sky and TalkTalk , which wanted Openreach to be completely split from BT and be an entirely independent operation: Openreach provides wholesale services to a broad range of ISPs, including BT's Consumer division, which Openreach is not supposed to favor. But BT Consumer's rivals don't believe they get fair treatment or that the best interests of the whole communications industry are met by BT's investment decision.

But following industry feedback in the wake of its "Strategic Review of Digital Communications," unveiled in late February, Ofcom is instead proposing a model that, according to its official announcement, will "provide Openreach with the greatest degree of independence from BT Group that is possible without incurring the costs and disruption -- to industry and consumers -- associated with separating the companies entirely."

The full details of Ofcom's decision can be read here -- Ofcom Announces Digital Comms Plans -- but, in essence, Openreach is to have its own board, its own staff, have a CEO who does not report to BT management and must consult with its wholesale customers about investment plans. However, Openreach will still be part of the BT Group plc (NYSE: BT; London: BTA) and have its budget allocated by the national operator.

The news was greeted favorably by BT's investors: The operator's share price gained 4.6% Tuesday morning to hit 406 pence on the London Stock Exchange.

Figure 1: Rivals wanted BT brought to its knees over its control of Openreach... but that's not in the Ofcom gameplan. Rivals wanted BT brought to its knees over its control of Openreach... but that's not in the Ofcom gameplan.

Naturally, BT is relatively pleased with the plans and has outlined its proposals that, it believes, meets the needs of the regulator and the UK's ISPs, though it would have preferred zero impact on its structure. "We have listened to Ofcom and industry and are introducing significant changes to meet their concerns. These changes will make Openreach more independent and transparent than it is today, something both Ofcom and industry have requested," stated BT CEO Gavin Patterson in the operator's official statement. For BT's full statement, see this BT press release.

An Openreach spokesman added: "We welcome Ofcom's recognition that structural separation would be a disproportionate move. Our proposals provide Ofcom with every benefit they're seeking but without any of the substantial and unavoidable costs associated with legal incorporation. We will continue to engage with them over the coming months." Openreach declined to comment on whether its recently appointed CEO, Clive Selley, would stay on in the role if Ofcom's plans are implemented as expected. "We're not going into hypotheticals about [Selley's] future -- he's getting on with the job." (See BT's Broadband Chief Preps for 5G With FTTx Plans.)

Others not so happy…
The reaction from BT's broadband rivals was mixed, ranging from disgruntled to apoplectic.

Sky says move falls short
Jeremy Darroch, group chief executive, Sky, said: "Today's proposal to create a legally separate Openreach is a step in the right direction, although falls short of the full change that would have guaranteed the world-class broadband network customers expect and the UK will need. In particular, leaving Openreach's budget in the hands of BT Group raises significant questions as to whether this will really lead to the fibre investment Britain requires. At the end of the day, Ofcom's changes will only work if they deliver better outcomes for customers. It's now important that the changes Ofcom have mandated today are implemented rapidly, fully and without dilution. We are encouraged by Ofcom's stated commitment and willingness to use its powers to hold BT's feet to the fire."

TalkTalk sees one step forward, five steps back
Dido Harding, CEO, TalkTalk, said: "The creation of a legally separate Openreach is a step in the right direction, but we must not forget the history of the organisation. The intention ten years ago was to create a functionally separate division that served all customers equally, but that is far from what happened. The lack of clear rules and responsibilities meant that BT was (according to Ofcom) able to make £4 billion in excess returns in a decade, and I fear we're repeating the mistakes of the past. Legal separation still means that a highly complex web of regulation, and BT has proven itself expert at gaming this system. There is nothing to suggest they will not continue to do so in the new system. Structural separation is cleaner, with less red tape -- and removes BT's ability to exploit loopholes in the regulation. In taking one cautious step forward, I fear Ofcom may in practice have taken five steps back. However we should remember this is just a consultation. Now is the time for the country to make their voices heard, and we are going to help them do that over the course of the next few months."

CityFibre describes the plans as 'hypocritical'
Mark Collins, director strategy & policy, CityFibre , commented: "Fundamentally, today's proposals do not address Ofcom's key objectives of reducing the country's dependence on Openreach and encouraging essential investment in fibre. Whilst correctly identifying Openreach as the principal source of the industry's dysfunction, it is hypocritical of Ofcom to focus on a restructured Openreach as a panacea. Further debate and navel-gazing as to the appropriate structure of BT will continue to create a period of uncertainty at a time when the industry needs clarity, direction and competitive investment. Openreach has a critical role to play, but it is not prudent to entrust them with sole responsibility for our digital future. CityFibre has proven its commitment to delivering future-proof digital infrastructure across the UK through its significant investment in dark fibre assets. Unconstrained by the ongoing regulatory debate, CityFibre has the financial flexibility and independence to rapidly deliver the fibre infrastructure, innovation and challenger ethos essential to meet the UK's future digital needs."

3 says Ofcom has failed to stand up to BT
Mobile operator Three UK issued a generic statement: "We are disappointed that Ofcom has fallen short of structurally separating BT, the only measure that would have delivered genuine competition and prevented BT from favouring itself. This is yet another example of UK regulators failing to stand up to BT after the CMA waved through its purchase of EE without any action following advice from Ofcom. BT/EE now controls almost half of the vital airwaves that are used to provide a mobile phone service. Ofcom's next big decision is the upcoming auction of 2.3GHz/3.4GHz spectrum and we urge the regulator to put consumers first and prevent BT increasing its holdings at the expense of a competitive mobile market."

Now another review period begins: The regulator has given interested parties until October 4 to submit their views on its plans.

— Ray Le Maistre, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Editor-in-Chief, Light Reading

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