BT Needs a Kick in the Ducts



BT's legal separation, which is supposed to make the Openreach fixed access networks business independent from the rest of the empire, is starting to seem like a bad joke. Anyone who doubts this need only tune into one of BT's earnings calls and listen to Gavin Patterson, the soon-to-exit boss of BT Group, direct analyst questions to Clive Selley, the head of Openreach, as if he were any other divisional manager.

Selley is clearly Patterson's underling. And when Patterson quits in early 2019, Selley will be the underling of Philip Jansen, the Worldpay man recently confirmed as the next CEO of BT Group plc (NYSE: BT; London: BTA). During earnings calls, Openreach's investment plans are discussed as if they are one of the most important strategic matters facing BT (and they are). The regulation of Openreach is blamed partly for underwhelming sales results at group level. (See BT's Jansen: We Need to Talk About Openreach.)

In what sane world does this count as legal separation? Selley should not even be in the same room as Patterson/Jansen during investment calls. Group managers should know as much or as little about Openreach's plans as any other UK service provider does. They should not be assessing Openreach's performance alongside that of the broadband or public sector business.

Of course, treating Openreach as if it were not part of the group would be unacceptable during a results presentation. It would mean hiding the full financial truth from investors and risk landing BT in legal trouble. Moreover, on a day-to-day basis, it hardly sounds workable. But that is precisely why legal separation is such a barmy idea. It is as though a couple have agreed to split up for the sake of their children, and then continued to live in the same house. The aim is irreconcilable with the approach.

Unsurprisingly, then, legal separation has made not an iota of difference to UK broadband. If it had, then service providers like Vodafone UK and Three UK would be the anchor tenants for new Openreach projects. Instead, Vodafone has become the anchor tenant for an entirely different infrastructure company called CityFibre, which is building a fiber network for about 5 million UK properties -- 20% of the UK total -- and backed by Goldman Sachs. (See Vodafone Gets Set for Gigafast Assault on BT.)

Nor has legal separation led to any reduction in regulatory oversight. Otherwise, Ofcom would not just have published proposals for improving access to Openreach's ducts and poles. The regulatory authority has also launched a fresh attempt to make Openreach provide a dark fiber service to customers after a legal challenge from BT sank its previous effort. (See Eurobites: Ofcom Starts Work on Opening Up BT's Poles & Ducts.)

Especially damning, though, is the suggestion by a major telco that service levels have not improved since Openreach was legally separated. "Trying to deal with BT is as difficult as it has ever been and it would be quicker and cheaper to dig yourself than to rely on BT ducts and poles," said Dave Dyson, the CEO of UK mobile operator Three UK, during a recent press conference. "There needs to be a tight regime around service level agreements and making sure BT doesn't make it more difficult."

None of this means full "structural separation," whereby Openreach would have a different owner, is necessarily the answer. A move toward it would inevitably run into another legal challenge from BT. Australia's troubled experience with structural separation offers little encouragement to regulators in other countries. An independent Openreach defending a huge legacy business could be just as awkward from a customer perspective. (See NBN: We're Beating Europe & Not Overcharging Anyone.)


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Perhaps that is why structural separation is now backed by CityFibre CEO Greg Mesch. A more responsive Openreach would obviously be a threat to smaller wholesale companies that have capitalized on its bad reputation. But in calling for separation at a Light Reading conference last week, Mesch clearly believes there is little to fear. "Openreach should be divested," he said with characteristic swagger. "It will take years to do that, but it should be divested, and they should concentrate on saving market ground." (See CityFibre Model Heading to US, Says CEO.)

Ofcom has threatened BT with the possibility of a carve-up if legal separation fails to make a difference. For that reason, BT is desperate to impress. Selley gushes about his investment program whenever given the opportunity, and no one can deny Openreach is building all-fiber networks at a faster pace than ever before. But that is probably a result of competition from CityFibre and Virgin Media, the UK's big cable operator, and not because of legal separation. What's more, BT will not move ahead with a large-scale rollout, covering about 10 million properties, unless the conditions are favorable. It is still in talks with Ofcom about what this means. (See Only BT's Dismemberment Will Sate Rivals.)

The regulator's latest proposals on access to Openreach ducts and poles could be critical. Experts say effective regulation in this area largely explains why all-fiber networks are now widely available in markets such as Portugal and Spain. Even the UK's own Department for Culture, Media and Sport acknowledged both countries as broadband success stories in a July report. What's important in each case is that legal separation had nothing to do with it. (See UK Bumpkins Told Not to Expect Fiber in Their Lifetimes.)

Iain Morris, International Editor, Light Reading

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