BT, Ofcom & the Battle of Britain

The structural separation of BT would not have propelled the UK up international broadband charts: To achieve that, regulators need to look at fresh ways of bolstering infrastructure-based competition.

Iain Morris, International Editor

August 18, 2016

9 Min Read
BT, Ofcom & the Battle of Britain

When the UK's telecom regulator announced in July it would not carve up BT, as rivals had demanded, but instead impose tougher conditions on the former state-owned monopoly, it must have hoped the decision would spur some reconciliation between broadband stakeholders.

Far from it.

If anything, relations between BT Group plc (NYSE: BT; London: BTA) and its broadband competitors have descended to a new low since Ofcom 's ruling. BT CEO Gavin Patterson this week accused Sky , TalkTalk and Vodafone Group plc (NYSE: VOD) of resorting to "Orwellian tactics" in an advertising campaign that highlights BT's perceived shortcomings. Those companies, which are among BT's biggest wholesale customers, have responded by noting that several emerging markets now trump the UK on the rollout of high-speed broadband infrastructure. (See Eurobites: BT Attacks 'Orwellian' Rivals and this article from

Figure 1: Growing Rift Gavin Patterson, CEO of BT Group, faces growing criticism from companies that are both retail rivals and wholesale customers. Gavin Patterson, CEO of BT Group, faces growing criticism from companies that are both retail rivals and wholesale customers.

Operators that rely on BT's network believe that spinning off Openreach , BT's infrastructure division, would level the competitive playing field and foster investment. As a distinct, publicly listed company, Openreach would have no incentive to favor BT's retail business over other players, they argue. (BT, of course, insists that its retail business does not receive any favorable treatment from Openreach.)

Ofcom demurred, arguing that structural separation would be costly, disruptive and risky. Instead, it has advocated building higher walls between Openreach and the rest of the BT Group. Openreach will have its own CEO, who will not report to BT management, for example. And it will have to consult with its wholesale customers about investment plans.

The rollout of Gigabit broadband access networks is spreading. Find out what's happening where in our dedicated Gigabit Cities content channel here on Light Reading.

Sky, TalkTalk and Vodafone are evidently unhappy, and yet Ofcom's aversion to structural separation is understandable. In Australia, the creation of a national broadband network (NBN) was meant to curb the power of Telstra Corp. Ltd. (ASX: TLS; NZK: TLS) and give the country a world-beating broadband network. Yet the NBN has become a political football that has been kicked out of its original shape. Australia languishes in 48th position in an international ranking based on average broadband speeds, according to cloud company Akamai Technologies Inc. (Nasdaq: AKAM). Telstra's dominance appears to have grown.

Indeed, structural separation is possibly a red herring. On the plus side, it would stop one retailer from controlling the infrastructure used by most of the others. But without more network-based competition, an Openreach that is independent could be just as unwilling to invest in ultra-fast networks as it is right now.

Next page: Broadband mediocrity

Broadband mediocrity
As things stand, BT's infrastructure is neither as classy as Patterson insists nor as shabby as Sky makes out. In the same Akamai ranking that saw Australia come 48th, the UK finished in 19th position, with an average connection speed of 14.9 Mbit/s. Norway, the highest-placed European country and second internationally, had an average connection speed of 21.3 Mbit/s.

Figure 2: Average Connection Speed (Mbit/s) in European Countries Source: Akamai. Source: Akamai.

When it comes to peak broadband speeds, however, the UK fares much worse, with an international ranking of 28. According to Akamai, the "average" peak speed in the UK during the first quarter of this year was 61 Mbit/s. In Singapore, which topped rankings, users could expect to receive a whizzy 146.9 Mbit/s.

Figure 3: Peak Connection Speed (Mbit/s) in European Countries Source: Akamai. Source: Akamai.

BT's only significant infrastructure rival is cable operator Virgin Media Inc. (Nasdaq: VMED). Owned by cable group Liberty Global Inc. (Nasdaq: LBTY), the company has been advertising a 200 Mbit/s service next to BT's premium offer of 76 Mbit/s. However, Virgin's network is unavailable to about a half of UK homes.

Moreover, BT is under little pressure from Sky, TalkTalk and Vodafone. When copper networks were being "unbundled," BT's wholesale customers could install their own equipment in BT's local exchanges and offer higher connection speeds than the incumbent. But the rollout of fiber to street cabinets has driven these companies (or their successors) toward wholesale products that prohibit such innovation. A 76 Mbit/s offer that Sky launched this week is effectively a re-branded, re-priced service from BT. As a BT customer, Sky can match the incumbent on speed, but it cannot surpass it.

There is some cause for optimism, however. For one thing, Virgin is currently spending about £3 billion ($3.9 billion) to extend its network to around two thirds of UK premises. Combined with political pressure, that has already prompted BT to begin trials of, a technology that could boost connection speeds to as much as 500 Mbit/s over short copper loops. BT has also promised to spend about £6 billion ($7.8 billion) over the next three years on extending fiber to around 2 million homes. (See Virgin Media Plots £3B Invasion of BT Turf and BT to Cover 2M Homes With FTTP in $8.7B Plan.)

New wholesale rivals are starting to appear, too. Companies such as CityFibre , Gigaclear and Hyperoptic are investing in gigabit-speed networks in parts of the country. CityFibre, which now claims to have metro duct and fiber footprints in 37 cities and towns, is the most ambitious, believing it can become a major wholesale rival to BT in the years ahead. In York, the company has been rolling out a fiber-to-the-home (FTTH) network in partnership with Sky and TalkTalk. In a trading update published last month, TalkTalk flagged encouraging progress and said it was "confident" it could pursue similar FTTH projects in other cities. (See Hyperoptic Takes Gigabit to Glasgow, UK's Gigaclear Raises $46M for Rural Gigabit and UFO Brings Hope to FTTH Altnets.)

Next page: Removing the duct tape

Removing the duct tape
For such organizations to prosper, however, the broader industry may need to move beyond its fixation with a classic Openreach spin-off. Given access to BT's ducts and poles under fair terms, companies such as Vodafone could roll out their own fiber networks. Forthcoming regulatory measures promise to open up this infrastructure in the residential sector, although not in business markets, where Ofcom prefers to mandate access to BT's dark fiber network. CityFibre has complained about the inconsistency. (See Vodafone, 3 Plot UK Fiber Moves Amid Rules Shake-Up.)

Even so, if regulated properly, duct-and-pole access (or DPA) could make a big difference. In Spain, where authorities have forced Telefónica to provide DPA at favorable rates, more than 60% of premises had access to fiber networks in September last year, according to data from market-research company Analysys Mason that appeared in an Ofcom progress report in July. "Regulated access has contributed to more extensive use of DPA in Portugal, Spain and France, resulting in greater fiber-to-the-premises deployment than in the UK, by both incumbents and competing providers," said Ofcom, highlighting the advances made in other European countries. (See Telefónica's Fiber Fix.)

Figure 4: High-Speed Broadband Coverage Source: Analysys Mason, Ofcom. Source: Analysys Mason, Ofcom.

Nevertheless, DPA cannot in itself be regarded as the ultimate panacea. BT's ducts are in a shoddy state, according to some critics, and lack the space needed for new cabling. Perhaps hoping to fend off DPA regulation, even BT is said to have drawn attention to the shortcomings of its ducts. Based on a 2010 survey, Ofcom has estimated that "at least" 42% of duct space is unoccupied, agreeing with BT that "this will not all translate into useable duct space."

The trouble is that BT has little incentive to make costly improvements to its ducts. One solution proposed by Richard Feasey, an associate at advisory firm Frontier Economics, is a more precise form of structural separation that would create a "Duct Co" based on Openreach's passive infrastructure. In this scenario, BT would be allowed to retain the network gear the ducts house, but not the ducts themselves. Duct Co would be a true infrastructure provider rather than a wholesaler of broadband services.

As Feasey acknowledges in a recent paper on the subject, the success of the Duct Co model would hinge largely on two unknowns: The willingness of companies like Vodafone to use it; and the investment needs of the new business. If Duct Co's infrastructure could somehow be combined with other assets, such as the ducts owned by CityFibre, it might hold much greater appeal. Intriguingly, CityFibre -- which likes to boast that its ducts are far superior to BT's -- has expressed interest in becoming a kind of "duct integration company," whose job would be to unite resources that Vodafone and others could use. (See CityFibre Aims High in BT Battle.)

All of this is a long way from happening, and it is unclear how such arrangements would work in practice. Were CityFibre to evolve into a duct integrator on a national scale, it would naturally face greater scrutiny by regulators, which could bother investors. Authorities could take a number of other steps to attract broadband spenders, such as overhauling a tax system that -- for arcane reasons -- imposes a heavier burden on BT's fiber rivals than on BT. Yet more radical thinking seems necessary if UK broadband is to improve its international standing. It that is left to another strategic review many years from now, the prognosis looks bleak.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

Read more about:


About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

Subscribe and receive the latest news from the industry.
Join 62,000+ members. Yes it's completely free.

You May Also Like