Split BT to Lessen Regulation, Says CityFibre

Carving up BT would ultimately create a more level playing field in the UK's broadband market while lessening the need for future regulation, says one of the incumbent's emerging infrastructure rivals.

Iain Morris, International Editor

May 12, 2015

5 Min Read
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

Structural spur
While making a case for structural separation, Collins says that CityFibre is not "hell bent" on it and that more sensible controls around functional separation could deliver improvements in the short term. There continues to be a feeling among some market players that BT has too much say over the wholesale pricing of its fiber products.

Even so, by allowing other operators to compete more effectively in the broadband market, structural separation could spur investments of the kind CityFibre has been making.

The company is building high-speed broadband networks in a number of UK cities and towns and ultimately aims to establish itself as a major wholesale rival to BT in these communities. (See CityFibre Sees Backhaul Interest From O2, Vodafone and CityFibre Aims for BT's Wholesale Business.)

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.

Collins expressed interest in a closer collaboration with another broadband investor called Gigaclear , which earlier this week said it had raised an extra £30 million ($47 million) for the rollout of gigabit-speed networks in rural areas, bringing the total it has received from the investment community to £50 million ($78 million). (See UK's Gigaclear Raises $46M for Rural Gigabit.)

"They are already working with us around Peterborough, where we are providing fiber backhaul connectivity into villages around the town and Gigaclear is using that backhaul for its own business model in the villages," he says. "We are not focusing on the same areas so there is an opportunity to apply that model elsewhere.

Light Reading has estimated that Gigaclear would need to raise about £1.6 billion ($2.5 billion) to cover all of the 1.5 million homes in rural underserved communities, but Collins says the involvement in Gigaclear of "Tier 1" institutional investors such as Prudential is a strong signal of the operator's credibility.

"No infrastructure builders raise large chunks of capital too early in the process -- typically only what's needed for the next 12 to 18 months," he says. "The important thing is having investors with deep pockets that understand the model and have a desire to go much further."

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

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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).

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