Ofcom Does Not Rule Out BT Carve-Up

Iain Morris
News Analysis
Iain Morris, International Editor
5/18/2015



The UK's telecom regulator has declined to rule out a carve-up of BT as a way of bringing more competition to the national market.

Asked by Light Reading if it would rule out something as dramatic as BT Group plc (NYSE: BT; London: BTA)'s "structural separation" during its latest strategic review, Ofcom indicated that all options are on the table.

"That review will consider questions such as the one you described, and we aren't ruling anything in or out at this stage as we've yet to complete a thorough analysis of the market," said a spokesperson for the regulatory authority.

Calls for a "structural separation" of BT have grown louder since the fixed-line incumbent announced a £12.5 billion (US$19.6 billion) takeover of EE, the UK's biggest mobile operator, in February. (See BT Locks Down £12.5B EE Takeover Deal.)

Operators including Vodafone UK fear that BT's fixed-line dominance may give it an unassailable position in the mobile market and have argued that forcing BT to spin off its Openreach access division would be in the interests of competition.


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Currently, BT maintains a functionally separated business, whereby Openreach operates as a distinct unit within BT Group, but this allows BT to squeeze broadband rivals through a combination of high wholesale and low retail prices. Profits generated by Openreach can also be used to support other BT Group activities, including a recent push into the mobile market.

The move to structurally separate the incumbent would be a radical one but has been tried in other parts of the world, such as Australia.

Ofcom recently launched its first major strategic review of the telecom market in a decade and could look to make some big changes in response to a spate of M&A activity.

While BT is looking to acquire EE, Hong Kong's Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY) hopes to complete a £10.25 billion ($16.1 billion) takeover of Telefónica UK Ltd. (O2), the country's second-biggest mobile operator, and merge this with Three UK , a smaller rival it already owns. Both deals have yet to secure the approval of competition authorities. (See Telefónica Seals $15.2B O2 Sale to Hutchison.)

Next page: Dark-fiber directive



Dark-fiber directive
Ofcom's spokesperson also denied that last week's proposal to mandate the provision of dark-fiber services was in any connected with the broader strategic review or designed to satisfy service providers complaining about BT's market power. (See BT Kicks Up Stink Over Dark Fiber Proposals.)

"The dark-fiber proposition is specifically designed to help promote competition in leased lines, and in those parts of the country … where the market could be more competitive and innovative," said Ofcom's spokesperson.

From 2017, BT may be forced to let other service providers take control of fiber-optic connections in the business and mobile backhaul markets, depending on the outcome of an industry consultation now under way.

Some analysts have seen the dark-fiber proposals as a response to mobile operators calling for tougher regulation of BT.

"Vodafone has been particularly vocal about the need for a dark fiber product to connect base stations and backhaul mobile traffic without fear of interference from BT," said Matthew Howett, Ovum's practice leader for regulation, in a statement published last week.

"This is relevant since BT currently provides all UK mobile operators with high-speed mobile backhaul links," added Howett.

Light Reading is awaiting comments from Telefónica UK and 3 on the dark-fiber proposals, while a spokesperson for Vodafone UK says the operator is currently reviewing Ofcom's documentation.

Unsurprisingly, BT has been arguing strongly against the case for structural separation and is equally opposed to the need for dark fiber.

Last week, the incumbent argued that mandating dark fiber would gobble up resources and hinder its ability to make other service improvements.

BT CEO Gavin Patterson, meanwhile, has insisted that broadband investments of the kind BT has been making would never have materialized in a "structurally separated world."

Earlier today, BT also claimed its takeover of EE would benefit competition in a submission to the UK's Competition and Markets Authority. "It will be good for consumers, businesses and UK plc, as well as for BT shareholders, so we are keen to get regulatory clearance," said Patterson, in a company statement. "A larger BT will be able to invest and innovate even more than now, something that's good for jobs and good for customers."

CityFibre , an emerging rival to BT in the UK's wholesale market, is also in favor of structural separation but thinks more stringent oversight of BT could improve the competitive environment in the short term. (See Split BT to Lessen Regulation, Says CityFibre.)

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

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