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Split BT to Lessen Regulation, Says CityFibre

UK fiber network operator CityFibre has added its voice to calls for BT to be carved up into separate retail and infrastructure companies, arguing that as a long-term objective this would reduce the need for regulation and spur investment by alternative providers.

"Our view is that longer-term structural separation should be the aim," said Mark Collins, CityFibre 's director of strategy and public affairs, in a discussion with Light Reading. "It would increase competition and investment from multiple players, while any form of functional separation would still require hefty regulation of BT."

BT Group plc (NYSE: BT; London: BTA) has already been subject to functional separation, meaning its Openreach -branded access division operates as a distinct entity within BT Group and must provide services to all retail players in the market, including BT Retail, on fair and equal terms.

But broadband competitors such as TalkTalk claim this system still leaves too much power in the hands of BT, which is able to "squeeze" rivals by setting wholesale prices too high or retail rates too low. (See Quad-Play Cheerleader TalkTalk Falls Further Behind BT.)

The implication is that BT bosses do not mind if BT Retail has to pay exorbitant charges to Openreach, because all of the profits ultimately end up with BT Group.

With structural separation, BT would have to spin off the Openreach unit so that it were no longer a part of BT Group. BT Retail would then be unable to undercut rivals without damaging its own profitability, while Openreach would have little incentive to set wholesale prices at levels its customers would struggle to afford.

The issue has sprung to the fore in the wake of BT's £12.5 billion ($19.5 billion) takeover bid for mobile market leader EE , which would make BT even more dominant in the UK's communications sector. (See BT Offers $19.5B to Buy EE,

Unsurprisingly, BT CEO Gavin Patterson has firmly rejected the need for structural separation, insisting on an investor call last week that the broadband investments BT has made would never have materialized in a "structurally separated world."

Patterson's point is sure to be considered by Ofcom , the UK's regulatory authority, which recently launched its first major review of the communications sector in a decade and may look to usher in some big changes.

Yet some critics have countered that BT should not be able to use profits generated by Openreach to support its retail activities. Vodafone UK , the country's third-biggest mobile operator, has appeared especially worried that ownership of Openreach will make BT an even bigger threat if it completes the takeover of EE, which has yet to be approved by competition authorities.

Others have expressed anger that, despite occupying such a privileged position, BT is receiving £500 million ($780 million) in state funds to support broadband deployment in rural areas.

"BT is receiving state funds but if it is making excess profits then why?" asks Collins. "If there are profits being made on the infrastructure side should they be invested back into infrastructure so that BT becomes more self-sufficient and can deliver things more quickly and be less dependent on state funds?"

BT last week reported a 12% increase in adjusted profit before tax for the year to March 2015, to £3.17 billion ($4.94 billion), although its revenues dipped by 2%, to £17.85 billion ($27.8 billion). (See BT Flags Best-Ever Fiber Broadband Quarter.)

Next page: Structural spur

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