BT's Break-Up Could Trigger Euro Panic

Iain Morris
News Analysis
Iain Morris, International Editor
10/3/2016



"Structural separation is like the independence vote in Scotland -- it won't go away," said Mark Collins, head of strategy for CityFibre , a UK fiber network operator, during a conversation with Light Reading in May. (See CityFibre Aims High in BT Battle.)

Events are so far proving him right. Several months on, and more than a year after the subject was broached, regulatory discussions about the break-up of BT Group plc (NYSE: BT; London: BTA) are still in progress, according to a report from the UK's Financial Times newspaper (subscription required), with little sign of any imminent resolution.

Opponents of BT, including several of the companies that use its networks to provide their own broadband services, want to see the former state-owned monopoly chopped up into distinct retail and wholesale businesses. This would essentially entail making Openreach , the access networks division that was created ten years ago, an entirely separate company. Doing so would improve competition, stop BT from using Openreach profits unfairly (to acquire TV rights, for instance) and spur investments -- or so the argument goes. (See BT, Ofcom & the Battle of Britain.)

"A fully independent Openreach would be able to attract capital from investors And it would have a clear and single-minded purpose -- to treat all of its customers equally and to raise its quality of service," said Andrew Griffith the CFO and COO of Sky , the UK's second-biggest broadband retailer and an enthusiastic BT basher, in a statement published today. "It would be able to reinvest its significant profits into improving the network rather than funding other project, and it would open up opportunities for its wholesale customers to become long-term partners, collaborating in a way that is simply not possible now."

BT, of course, insists that Openreach is already operated at arm's length from the rest of the BT business and that independence would quash its appetite for investment, not whet it. Nevertheless, hoping to fend off any unwelcome regulatory intervention, it has promised to make additional investments in high-speed broadband networks if authorities leave it intact.

"Significantly, we've said we'll deploy free of charge FTTP [fiber-to-the-premises] to any new building development of 30 homes or more, which means nine out of every ten new homes could have FTTP availability," said Peter Bell, the CIO of Openreach, during Huawei's Ultra-Broadband Forum in Frankfurt last week. "If we take projections of new home builds, that means one million premises over the next five years."

Brekke not for break-up
The issue brings to mind Scottish independence in more ways than one. Just as a Scottish vote to leave the United Kingdom would set a troubling precedent for other European governments facing independence movements, so a BT split would be unwelcome to the region's other telco incumbents. Sigve Brekke, the CEO of Norway's Telenor Group (Nasdaq: TELN), has reportedly written to Sharon White, the CEO of UK regulatory authority Ofcom , to warn her about the dangers of structural separation.

The risk of contagion, in the event of a BT break-up, is unclear. In Germany, for instance, there have been murmurings about the structural separation of Deutsche Telekom AG (NYSE: DT) from smaller rivals, but nothing as high profile as in the UK. Sky is not active in Germany's broadband market. Vodafone Group plc (NYSE: VOD), another leading advocate of BT's break-up, owns its own cable network in Germany. In France, too, there is more infrastructure-based competition (in major urban areas, at least) than in the UK. (See Can DT, Regulators Find Common FTTH Ground?.)


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The European Commission , meanwhile, appears to have given little thought to structural separation as a possible market remedy. Moreover, following the UK's recent "Brexit" referendum, the UK is set to leave the European Union in 2019. As an EU outsider, its regulatory moves should have no more influence on EC policy than, say, events in Australia.

Oddly enough, though, Ofcom will ask the EC to impose a new structure on BT if it cannot strike a voluntary agreement with the operator, according to the FT's report. It is currently at loggerheads with BT over a more stringent form of "functional separation," which would apparently force Openreach to appoint a CEO who does not report to the boss of BT Group (currently Gavin Patterson). BT remains vehemently opposed to such plans. It also resists proposals that Openreach take charge of its own budget. Transferring Group assets to the infrastructure division would be risky, it has reportedly told the FT, especially given its 9.9 billion ($12.75 billion) pension deficit.

There is clearly a scenario in which the EC foists structural separation on BT as a kind of parting gift to (or curse on?) the UK telecom market. That would send executives at Europe's other incumbents scrambling for the defenses, terrified that an EC wrecking ball could smash apart their own operations. After all, if the EC were asked by a national regulator to look seriously at structural separation, and liked what it saw, then it might not stop at the UK.

The most probable outcome is that Ofcom and BT eventually reach some kind of compromise. But the genie of structural separation is now well and truly out of the bottle. BT's rivals are unlikely to be hushed by a deal that does not cut the incumbent down to size. And at least some of their European counterparts will be taking a very keen interest in what transpires.

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

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