Openreach Gets Chairman as Ofcom Berates BT

BT has named former Ofcom executive Mike McTighe as chairman of Openreach as it seeks to address regulatory concern about the independence of the infrastructure business and ward off more draconian regulatory moves.

Tighe previously spent eight years at Ofcom between 2007 and 2015 and is set to join Openreach in January. His first task at BT Group plc (NYSE: BT; London: BTA) will be to select a number of independent members for a new Openreach board.

The UK incumbent is under pressure from Ofcom to carry out a "legal separation" of Openreach amid calls from rivals for a more dramatic carve-up of the BT business. (See BT, Ofcom & the Battle of Britain.)

Ofcom has so far resisted those pleas but has told BT management that Openreach must become a "distinct company with its own Board," comprising a majority of non-executive directors who are not affiliated with BT.

While BT will hope Tighe's appointment helps to mollify authorities, the announcement came on the same day that Ofcom expressed dissatisfaction with BT's efforts on legal separation so far.

In a statement, the regulatory authority said it was "disappointed" that BT had not come forward with its own proposals to address the competition concerns.

Ofcom says it is now preparing to notify the European Commission of its intention to move ahead with its own proposals for "legal separation." It has emphasized, however, that it remains "open to further voluntary proposals from BT."

Rivals including Sky and TalkTalk have repeatedly complained about Openreach's lack of independence ever since BT unveiled plans for a £12.5 billion ($15.5 billion, at today's exchange rates) takeover of EE , the UK's biggest mobile phone operator, last year.

While the creation of Openreach in 2006 was designed to improve transparency, and prevent BT's wholesale business from discriminating against retail rivals, BT's critics argue that making Openreach an entirely separate company outside the BT Group would improve competition and spur investment.

In the Openreach Hotseat
Newly appointed Openreach Chairman and telecom industry veteran Mike McTighe.
Newly appointed Openreach Chairman and telecom industry veteran Mike McTighe.

Unsurprisingly, BT denies that Openreach treats its own retail unit more favorably than it does rivals, insisting the "structural separation" of its business would be costly and represent a huge setback for broadband investment in the UK.

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Hoping to stave off more punitive regulation, it has during the past year announced plans to bring higher-speed services to around 12 million UK premises using a mixture of G.fast, which boosts connection speeds over copper loops, and fiber-to-the-premises technology. (See BT to Cover 2M Homes With FTTP in $8.7B Plan.)

Ofcom is evidently not keen on the idea of structural separation, agreeing with BT that it would prove costly and disruptive, but it has also made clear that tougher measures could be forthcoming unless BT shapes up.

In today's statement, Ofcom said that its own proposal, which it will submit to the European Commission, would seek to "publicly scrutinize and monitor its effectiveness against several measures of success," including whether Openreach board decisions are being taken independently.

"If Ofcom's monitoring suggests that legal separation is not delivering sufficient benefits for the wider telecom industry and its customers, we will return to the question of structural separation," threatened Ofcom in its statement.

Analyst firms said BT's competitors should take some encouragement from today's update by Ofcom. "No doubt, BT's rivals will criticize 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," said Kester Mann, a principal analyst at CCS Insight . "The move toward legal separation and greater independence will bring important benefits to companies like Sky and TalkTalk in the long term."

While structural separation still remains a distant and unlikely prospect, other commentators have expressed concern that a break-up of BT mandated by European authorities would set a precedent for the structural separation of other European incumbents, such as Germany's Deutsche Telekom AG (NYSE: DT), which currently owns a 12% stake in BT. (See BT's Break-Up Could Trigger Euro Panic.)

Timotheus Höttges, Deutsche Telekom's CEO, has also voiced concern about the possibility of a BT break-up, although his main worry is about the impact this would have on Deutsche Telekom's investment. (See DT's Biggest BT Bother: Break-Up, Not Brexit.)

In a recent earnings report, Deutsche Telekom also flagged concern about the prospects for the UK economy following an exit from the European Union, which British voters backed during a referendum in June.

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

noLandMan 12/2/2016 | 10:35:45 AM
Retailer's clout Although it may not be enough, legal separation is what's mandated by the EU. Now, it looks like any efforts by Ofcom to put pressure on BT will be gated by Brexit... I wonder how much clout (foreign) retailers will have if (when) the EU has no jurisdiction on the matter anymore
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