After a lengthy debate Ofcom finally handed down its verdict on the future of BT’s arm’s length infrastructure business, Openreach, on 25 February 2016. Subject to reforms and new commitments, it will remain part of BT, for now.
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In a nutshell, Openreach – which owns the infrastructure connecting most UK premises to the national broadband and telephone network – must do more to allow rivals full and unconstrained access to its ducts and poles in order for them to provide full fibre-to-the-premises (FTTP) broadband; and take decisions on its budget, investment and strategy in consultation with industry.
Importantly, Ofcom retained the option to put the full structural separation of BT and Openreach back on the table, and to force it through, if things do not work out.
While things did not go the way many observers of the national broadband roll-out had hoped for, the consensus was that pragmatism and level-headedness had won out.
Indeed, Ofcom’s role as an impartial regulator effectively demanded it find the middle way. With the benefit of hindsight, some argued that full structural separation – arguably desirable and a good idea – was never going to happen as a result of this particular review.
But this does not mean BT and Ofcom are now acting in perfect harmony. There are bumps in the road ahead, and differences of opinion began emerging just hours after Ofcom's announcement.
One difference came to light during Ofcom’s press conference, when chief executive Sharon White spoke of her disappointment in BT’s proposals on how to move forward – describing them as a “marked-up, tracked change” version of the undertakings it set out in 2005 when it established Openreach.
Contrasted with BT CEO Gavin Patterson’s statement that BT had “put forward a positive proposal” that “includes a new governance structure for Openreach”, it became clear that there will be much to talk about when Ofcom and BT sit down to thrash out the details.
Read more about the Ofcom review
- Industry stakeholders welcomed Ofcom’s wide-ranging review of the UK’s digital communications markets.
- In its submission to Ofcom’s Digital Communications Review, BT argued for Openreach to remain part of the BT Group – and warned that a split will damage broadband investment.
- MPs have called for BT and Openreach to be split up, but have been heavily criticised for including misleading statistics in their evidence.
Onus on BT to act
So perhaps it is for the best that full separation remains a possibility. Matthew Hare, chief executive at rural fibre supplier Gigaclear, certainly thinks so.
“BT has to be made to want to do this, and it has to be offered a carrot. BT is too wealthy, too clever and has too many people for a stick to work,” he said. “BT is a master at making simple things incredibly long-winded and complicated.”
Dana Tobak, of FTTP supplier Hyperoptic, took a similar line, saying that the ball was now firmly in BT’s court, and much will depend on how it reacts.
“Openreach has tended to only reluctantly engage with third parties,” she said. “A big shift in attitude needs to happen to enable them to use their infrastructure.”
BT group director of regulatory affairs, Mark Shurmer, said BT was ready and willing to get moving on the negotiations and, on the face of it, welcomed the move to force Openreach to offer more access – but he added that BT had been offering access for some time and found little interest.
Tobak conceded that, while it was technically true that Openreach gave rivals access to its duct infrastructure some years ago, this had never been available everywhere and was only viable in specific circumstances.
“BT was allowed to set up a company and create a set of processes that makes it very hard for third parties to engage. We need consistency of process,” she said.
Hare at Gigaclear agreed that consistency in how Openreach dealt with BT and BT’s rivals was needed, but said that, in the short-term, it was unlikely much would change. For now – given that it will be some time before it becomes clear whether Ofcom has succeeded in achieving its objectives or not – there will be little impact at all, he said.
Why not separate?
With this in mind, why then did Ofcom choose not to take a risk, force separation and shock Openreach and its competitors into action? After all, the objective is surely to bring superfast broadband to the whole UK as quickly as possible.
At Ofcom’s press conference at its South Bank headquarters, group strategy director Steve Unger was candid in his assessment of why, having put the nuclear option on the table, he did not press the button.
“There were practical issues about how you define an asset split. There were some quite important questions around pensions. There are some more questions around property – would it be necessary to renegotiate wayleave agreements?” explained Unger.
“At the end of the day it would be pretty much impossible to split Openreach out of BT without creating casualties elsewhere,” agreed Sonia Blizzard, managing director of business ISP Beaming.
“We’d rather the politicians and Ofcom focused on ensuring BT delivers on what taxpayers have paid for, and fairer treatment for other ISPs delivering connectivity over the Openreach backbone.”
Ofcom’s White said it was preferable to deal with the competitive issues in the market review without resorting to drastic measures and court cases that could run for years and jeopardise the broadband roll-out.
“If we can’t, the answer will be to come back to structural separation as a clean, long-term solution,” she reiterated.
This could be described as a game of brinkmanship – but White said she did not see the process as negotiation, because the current situation and system was not fit for purpose and needed reform.
“We start from the position that the infrastructure has to deliver the speeds users need. At the moment we think 10Mbps is kind of adequate, but that will soon be outdated for reasons we can’t predict,” said White.
“Virgin are developing their cable network to deliver speeds that are 30 times higher, BT is talking 30 times higher with G.fast. It’s great that they’re squeezing more juice out of the infrastructure but, ultimately, I want to be comparing ourselves with Japan or South Korea. If we look at FTTP, we’re at 2%, Japan is at 70%.”
FTTP versus FTTC
The shift in thinking at Ofcom from focusing on service competition to focusing on infrastructure competition is welcome, and having the regulator saying that FTTP is the best solution for the UK is a major development.
Mark Collins, director of strategy and public affairs at fibre backhaul builder CityFibre said: “We are very pleased with this outcome, getting off the fence on the right technology, which needs to be FTTP. We see this as being very positive, and supportive of our aims.”
But, predictably, BT does not see it this way. Mark Shurmer reiterated the firm’s commitment to fibre-to-the-cabinet (FTTC) broadband. “FTTC can deliver speeds that people want, at the price they are prepared to pay,” he said.
Shurmer said BT would continue its model of using FTTP where it made economic sense, but said the expense and the long payback times had meant it usually did not, and added that this factor was also behind the lack of FTTP being deployed by its rivals, with a few exceptions.
“If you want to do FTTP everywhere most independent analysis says it costs five to six times as much,” he said.
But Collins at CityFibre said he believed the question of expense could be mitigated by enabling rivals to cut their costs – generally associated with digging up roads – by blowing fibre up existing Openreach ducts.
“When you look at the expansion of our core network towards residential customers, the ability to combine the core fibre we own with BT’s ducts could be very beneficial,” he said.
Colt head of regulation, Barney Lane, agreed: “Connectivity providers like Colt will be able to access existing physical infrastructure, allowing competitors to lay their own fibre efficiently, rather than having to lease someone else’s fibre.
“We will surely see an accelerated roll-out of high-speed networks across the country to provide businesses with much-needed high-speed connectivity,” he predicted.
One might ask, then, why Ofcom did not mandate FTTP outright instead of merely supporting it, given that this review will set the agenda through to 2025 at least. If just 2% of British homes and businesses can access FTTP today, without concerted action how far behind Japan will the UK find itself 10 years hence?
In the regulator’s view, its remit does not extend to dictating what technology to use, and White insisted that, when it came to the mix of broadband delivery technology, pragmatism was again the way forward.
“From our point of view, it’s how do we put incentives in for competition so that BT is having to look in the rear-view mirror,” she said.
“If we can get to that position where others are laying fibre, that’s going to be the biggest incentive BT has to match them.”
Steve Unger added: “When we regulate prices for access to BT’s network we will reward those operators who build their own networks, rather than those who buy resell products from BT, because we think it’s that kind of access that drives competition between networks.”
Time to act
In 2005, Ofcom acted decisively over the issues that the UK’s broadband roll-out faced. Forcing the creation of Openreach was not an ideal solution then – even Ofcom’s Unger admitted that, if he started from scratch, it would be completely independent – and it has given rise to many problems down the line. But it cannot be denied that, as a result of Ofcom’s actions, the UK has developed a thriving and competitive broadband market.
The conclusions drawn from Ofcom’s latest review are hot off the press. They may not be ideal, and the debate is not settled by any means, but Ofcom has at least made a start. The negotiations will be drawn out and difficult but, with the digital economy now vital to UK plc and the prospect of economic turmoil looming for many different reasons, there is every incentive not to delay.
British consumers and businesses stand ready to buy superfast, even ultrafast broadband products. Whether or not they will depends entirely on what happens next.