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BT and Openreach to split: but what will change as a result?

The telecoms industry has welcomed Ofcom’s decision to legally split BT and Openreach, but what, if anything, will actually change?

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After lengthy negotiations and a major consultation, telecoms regulator Ofcom has taken a step into the unknown with the announcement it will enforce the legal separation of BT and its heretofore arm’s-length infrastructure division, Openreach.

The regulator has been under pressure for some time to take action over the perception that the UK’s telecoms and broadband network market is perilously unbalanced, and that BT has exploited its leverage over the national network through its ownership of Openreach to unfair advantage when it comes to investment in upgrades for super and ultrafast broadband services.

To remedy this, Ofcom put two options on the table in its market review, which concluded at the start of 2016. The first was a full structural separation of BT and Openreach, which many campaigners have lobbied for loudly and at length. This would create a fully independent business beholden to nobody, free to invest without fear or favour, but this option did not come without financial and legal risk.

The second option, which is the one Ofcom has now backed, is legal separation. This would require BT to effectively build a firewall between itself and Openreach, guaranteeing the independence of Openreach’s board and giving all other communications service providers (CSPs) a seat at the table when it comes to making strategic decisions.

“Our view is that an effective and robust form of legal separation, with Openreach as a wholly owned subsidiary of BT, is likely to achieve the greatest improvement for everyone in the shortest amount of time. Therefore, this is the approach with which we are minded to proceed,” said the regulator.

Ofcom now means to notify the European Commission of its decision to impose legal separation on BT and Openreach, with the process expected to begin in early 2017.

Not far enough

By and large, rival CSPs welcomed the announcement, but implied that the regulator had not gone far enough by opting for legal over structural separation.

“Let’s not forget why we are here – BT Openreach has continued to fail customers,” said a Sky spokesperson. “This is why we have always said we want a solution that is clear, executable and in the best interests of consumers and industry. We will now watch closely as to how Ofcom executes these proposals.”

Dido Harding, CEO of TalkTalk and a vocal advocate for full structural separation, also said Openreach had let consumers down and become a household name for the wrong reasons.

“We welcome that the regulator has finally made a decision, and while we do not think legal separation goes far enough to deliver the broadband consumers deserve, it is at least a step in the right direction,” she said.

“We will continue to push Ofcom to ensure the plans quickly deliver real, meaningful improvements, and if major changes cannot be delivered, they should move to structurally separate Openreach once and for all.”

Vodafone hit out at what it perceived as BT’s excessive profit-making from Openreach, and produced figures purporting to show that BT made excess profits of £1bn from regulated services in 2015, equalling the amount set aside by the government for digital infrastructure in the Autumn Statement.

Vodafone director of external affairs Helen Lamprell said BT had shown it was reluctant to undertake the transformation needed to ensure the UK has a competitive fibre broadband market, and reiterated Vodafone’s previous calls for full structural separation.

“It beggars belief that BT felt it could increase its excess profits at this time, and further underlines the need for an independent Openreach. We believe Openreach needs to be a standalone business, headed by a truly independent board of directors and bound by statutory duties to treat customers equally and give an accurate view of Openreach’s underlying assets, costs and profits,” said Lamprell.

Cooler heads prevail

Broadband sector analysts remained sanguine at Ofcom’s announcement. Richard Neudegg, head of regulation at comparison website uSwitch.com, characterised it as more of a warning shot to BT to improve its offer on how legal separation would actually work.

“Ofcom isn’t changing its position at all. The regulator is still gunning for legal separation rather than full structural separation, and is using a potential notification to Brussels in an attempt to ensure it can get this over the line,” he said. “Those calling for structural separation, including Sky and TalkTalk, will be disappointed this option still isn’t being considered more closely.

“But this is one step closer towards finding a version of Openreach that maximises investment in new digital infrastructure while still allowing effective competition,” he said. “Many agree that is what’s needed, but disagree on how to do it. Ofcom is clearly seeking to strike a balance.”

CCS Insight’s Kester Mann also said steering clear of a structural split was not a surprise, as it would have been the most controversial and costly option, and would not necessarily have offered guaranteed improvements for customers.

“No doubt, BT’s rivals will criticise Ofcom for not being brave enough to push for structural separation. But after many months of campaigning, they should see the regulator’s efforts to engage with Brussels as a partial victory,” he said. “The move toward legal separation and greater independence will bring important benefits to companies such as Sky and TalkTalk in the long term.”

Andrew Ferguson, editor at Thinkbroadband.com, agreed legal separation was a more sensible option, and avoided the difficult issues that would have been thrown up by the creation of a structurally separate Openreach.

Keeping the business as a wholly owned subsidiary would give it more room to manoeuvre in the constraints Ofcom hopes to impose.

Ovum’s Matthew Howett said leaving the door open to a voluntary agreement was a sensible move by Ofcom.

“In many ways, a voluntary agreement remains a better outcome than a forced legal separation, not least because the EU [European Union] route is uncertain, untested and likely to take much longer to achieve. It is also made more complex by the decision from the UK to leave the EU,” he said.

However, for a voluntary agreement to be struck, Howett said the onus would be on BT to focus on delivering something that assuaged Ofcom’s remaining concerns around independence and ownership of people and assets.

Enthusiasm for FTTP

Meanwhile, the government’s U-turn on full fibre-to-the-premises (FTTP) broadband since Theresa May took over as prime minister in July 2016 was again cemented recently, when chancellor Philip Hammond announced funding for small broadband providers, or altnets, and a tax holiday for new fibre networks, in the Autumn Statement.

The government’s sudden enthusiasm FTTP has been welcomed by broadband campaigners after so many years of arguing for more investment in the technology, which has considerable merit in that it guarantees broadband speeds far beyond what is currently needed, and is therefore future-proofed for years to come.

Others, however, including BT’s director of next-generation access, Bill Murphy, and Conservative MP Ed Vaizey – the former minister in charge of broadband at the Department for Culture, Media and Sport – have argued the government’s previous enthusiasm for fibre-to-the-cabinet (FTTC) services was a question of economics and risk. It has since been suggested that its pro-FTTP stance is merely a reflection that FTTP and ultrafast broadband services are becoming cheaper and easier to deploy.

Read more about Ofcom and BT

It is important to note that BT has been more vocal in throwing its backing behind FTTP services, announcing a number of new commitments in recent months. However, quite how much of this change of heart has come about because of Ofcom’s threats of separation is a factor BT consistently refuses to be drawn on.

Former BT CTO Peter Cochrane, however, said it was high time for BT to fully back FTTP in the wake of Ofcom’s decision.

“Doing so will allow BT to sell off 80% of its building estate, which would no longer be needed, and to recover vast sums in redundant copper cables. A fibre network will require drastically fewer people to maintain, and will ultimately generate significant shareholder returns. Board attention should turn to the FTTP business case without delay.

“20 years ago, I advised BT to split into three operating companies focused on international, long lines and the local loop to focus and invest in the FTTP infrastructure it was clear the UK economy would so desperately demand,” he said. “It is a sad state of affairs it has taken so long and such regulatory pressure. Billions have been wasted in the interim on marginal upgrades to the copper infrastructure that was never going to be fit for purpose.” 

Technology mix

However, a number of networking equipment suppliers believe this focus on FTTP is somewhat misplaced. In the wake of Ofcom’s announcement, they have called for this strategy to be rethought.

Neil Fraser, UK manager and head of space and communications at ViaSat, said as long as the national broadband roll-out was centred on fibre, the needs of every user would not be met.

“Any new fibre strategy, like those before it, will have the same issues later down the line, including the cost of reaching those forgotten premises that aren’t already within easy reach. At the most basic level, the current technology backbone of the UK’s broadband network cannot provide the reliability or quality of service that modern users demand to every single part of the country at an acceptable cost,” he said.

Jaime Fink, co-founder of Mimosa Networks, a supplier of fixed-wireless broadband equipment, agreed the underlying infrastructure problems facing the UK still remained, despite Ofcom’s move towards separation.

“The digital subscriber line [DSL] foundations that underpin much of the UK’s broadband network simply do not offer the bandwidth and reliability to support today’s internet applications and meet the demands of tomorrow’s services,” he said.

“The roll-out of fibre also continues to present challenges in rural and dense urban areas, leaving consumers and businesses with low-performance broadband solutions. Openreach and other UK service providers must change their approach and look at new technologies that can profitably deliver a superfast sustainable broadband network,” said Fink.

What next?

However, those hoping Ofcom’s decision will result in a step change in broadband provision around the UK would be wise to bide their time, according to Thinkbroadband.com’s Ferguson.

“Those with poor broadband may think today’s news is an early Christmas present, but we would warn it is too early to celebrate if you are living or working in one of the 2.3 million properties without access to a superfast broadband option today.

“Existing BDUK commitments are so time constrained that the FTTC roll-outs are not going to change,” said Ferguson. “The big difference is likely to happen in areas where the Openreach network competes with companies such as Virgin Media.”

There is some cause for optimism, however. The solution has always been FTTP, and the debate up to now has usually been concerned with the timeframe, which formed the core of most of the anti-BT campaign arguments. This might now start to change, with more emphasis coming on delivering it.

“It is going to be exciting to see how things change. Or whether they change at all,” he said.

Matthew Evans, CEO of the Broadband Stakeholder Group, also said it was hard to predict the eventual effects of Ofcom’s intervention. The three key metrics it would be judged by, he said, were a more responsive Openreach; more competition, investment and innovation; and better consumer and business outcomes.

“Hopefully these objectives can be met,” wrote Evans in a blog post. “But ensuring the UK has a great standard of connectivity will require other operators, as well as Openreach, to continue to invest.”

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Worst decision ever. All it means is that the openreach legal dept is gonna make mincemeat of ofcom, nothing will change, and it will waste time, energy and lots of money. What we need is competition. Total government support for alternative networks. This greedy monopoly has ruled the roost for too long, and bt still have more content and mobile companies to buy before they are ready to dump openreach, their cash cow. Yielding revenue with limited investment is good business for short term fix of pension funds.
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Remember people Competion doors were opened when BT was privatised. BT's hands were tied for a number of years to allow ne entrants to establish themselves. BT Was not allowed to lay optical Fibre; new entrants were. BT Was forced to cap tariffs for a long time. competitors have lost out except a few that still exist; the likes of NTL now trading/ acquired by VIRGIN. BT Is constantly under pressure from the likes of SKY, Virgin. ASk yourselves the question why are they not proving Broadband on their own network rather than relying on BT, after all that is what they were mandated to do when they came into existence. Splitting BT will have impact on Employees, their pensions, pensions of retired employees, shareholders etc. Who will Guarantee the pensions, shareholders? IS Ofcom and the complainers willing to fund compensation funds in the event this happens? OR are they simply willing to gain at others expenses. PEople do not be fooled by their complains. ask them questions like how is it that despite heavy subsidy etc they still failed to install their own networks instead of relying on BT?
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