UK regulatory authority Ofcom is giving serious consideration to a break-up of fixed-line incumbent BT as a way of boosting competition in the country's broadband market.
In a new statement that forms part of its ongoing review of the communications sector, Ofcom said that separating BT Group plc (NYSE: BT; London: BTA)'s Openreach infrastructure division from the rest of the business could deliver wider benefits for customers, remove BT's incentive to discriminate against rivals and help to simplify regulation.
In May, Ofcom told Light Reading that it would consider all options during its review, refusing to rule out the break-up of BT, and the latest statement indicates that so-called "structural separation" has not been dismissed as impractical. (See Ofcom Does Not Rule Out BT Carve-Up.)
Even so, Ofcom admits the process would be "challenging" and that it might not address some of the concerns about Openreach -- including those regarding service quality and the timing and level of investment decisions.
Ofcom is seeking feedback from UK players on its statement, which it describes as a "discussion document," by October 8 and says it will issue an update at the end of the year "on priorities and action, which will shape Ofcom's regulatory approach for the next decade."
Calls for BT's structural separation have grown louder since the dawn of fiber-optic broadband, with rivals complaining that BT is able to "squeeze" them through a mixture of high wholesale and low retail prices.
Mobile operators such as Vodafone UK also fear that BT's fixed-line strength will give it an unfair advantage in the country's mobile market following a takeover of EE -- the country's biggest mobile operator -- that BT expects to complete early next year. (See Vodafone May Buy Content to Fight BT, Telefónica and BT Locks Down £12.5B EE Takeover Deal.)
Sky , one of the companies that relies on BT's infrastructure to deliver broadband services, has been one of Openreach's most ardent critics, claiming the business regularly misses appointments for line installations and takes an excessive amount of time to carry out work. (See BT Guilty of 'Under-Investment,' Says Sky.)
"It is welcome news that Ofcom is putting the future of Openreach at the center of its review," said Mai Fyfield, Sky's chief strategy officer, in a statement issued today in response to Ofcom's paper. "For too long, consumers and businesses have been suffering because the existing structure does not deliver the innovation, competition and quality of service that they need."
Not surprisingly, BT has rejected such criticism, claiming it is meeting all of the targets set by Ofcom and arguing that its investments in broadband infrastructure would never have materialized if it had been structurally separated. (See BT Demands Action on Sky's Pay-TV Dominance.)
"Our ambitious plans for ultrafast broadband also depend on BT remaining intact," said a spokesperson for the company. "Ofcom have overseen a regime that has balanced investment with competition and we hope they will once again put the needs of the UK and its consumers ahead of those who have tried to keep the UK in the digital dark ages."
Although European authorities have so far shied away from mandating structural separation, the practice has been applied in different ways in several markets in the Asia-Pacific, including Australia, New Zealand and Singapore.
Ofcom says the Australian approach demonstrates some of the challenges associated with structural separation.
Under that scheme, incumbent Telstra Corp. Ltd. (ASX: TLS; NZK: TLS) has been forced to lease network assets to a state-backed entity called NBN Co Ltd. , but an agreement on this point was not reached until last year -- five years after the plans were first announced.
In Singapore, however, fiber broadband services have seen widespread take-up since the introduction of structural separation.
In that instance, a company called NetCo is responsible for infrastructure, offering wholesale services to the country's broadband retailers.
Ofcom announced plans for its review -- its first in a decade -- earlier this year in response to a wave of consolidation sweeping through the sector.
While BT is looking to acquire EE, Hong Kong's Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY) has agreed to pay £10.25 billion ($16 billion) for Telefónica UK Ltd. (which trades under the O2 brand) and hopes to merge the business with Three UK , the country's smallest mobile network operator, which it already owns. (See Telefónica Seals $15.2B O2 Sale to Hutchison.)
The tie-up would reduce the number of mobile operators in the UK from four to three and has prompted concern about the impact on competition and prices for end users.
Ofcom said it would be "inappropriate" to comment on the merger in its latest statement but did indicate that it expected to notify the European Commission of these plans.
"Given the EC has approved similar mergers in Germany, Austria and Ireland, it's hard to see how it could object to the O2/3 deal and, therefore, what the UK could do about it," says Gabriel Brown, a senior analyst with Heavy Reading. "On this issue, for better or worse, UK authorities have been defenestrated by Europe."
— Iain Morris, , News Editor, Light Reading