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Ofcom starts debate over future of BT and Openreach

Telecoms regulator Ofcom wants to hear industry opinions on competition in broadband and mobile networks – including on BT's Openreach subsidiary

Ofcom has started a debate on the future of BT’s network infrastructure company Openreach, including the potential for splitting BT in two and looking at ways to remove the telecoms giant’s “incentive to discriminate” against competitors.

A possible sell-off of Openreach is likely to be the most hotly debated of the options considered in a discussion document published by the communications regulator as part of its strategic review of the digital communications sector, announced in March 2015.

The watchdog has asked for input to the review over a number of regulatory issues, including the status of Openreach. The BT subsidiary was set up 10 years ago, following a previous Ofcom review, to allow competitors equal and regulated access to BT’s network infrastructure. 

For example, major broadband providers such as TalkTalk and Sky deal with Openreach on the same terms as BT’s own retail operations. Those rivals have long called for Openreach to be sold off, to increase competition and improve customer service in wholesale broadband provision. 

Ofcom acknowledged in its discussion document that the current regulatory environment means BT has an “underlying incentive to discriminate against competitors”, which separating Openreach would address. Smaller providers have also been critical of BT and Openreach over rural broadband roll-out.

BT ownership structure

Sky had previously accused Openreach of a “history of underinvestment” and poor performance in installing new lines and fixing faults for Sky broadband customers.

The regulator will formally consider splitting BT, but will evaluate that against three other options – retaining the current model; introducing new rules for BT, to improve competition; and further deregulation, to promote competition between rival networks.

“The current ownership structure of BT means it still has the incentive to discriminate against competing providers. Although regulation limits its ability to do so, opportunities may remain,” said the Ofcom discussion document.

“The boundary that separates Openreach and the rest of BT was drawn at a time when broadband was delivered from telephone exchanges, over the existing copper access network. Competition was therefore focused on unbundling individual local loops. However, new broadband networks take fibre closer to the home, changing the topology of the access network, and potentially leading to new models of competition.

“Although Openreach must treat all competing providers equally, the quality of their service has, too often, been equally poor for everyone. This has led Ofcom to impose strict repair and installation performance requirements. While this approach can be effective, it runs against a key goal of the original regulatory settlement: To avoid ever more detailed micro-regulation.”

Ofcom chief executive Sharon White said in April 2015 that the future of Openreach was “on the table”, and the discussion document published today (16 July 2015) formally invited interested parties to offer their views. However, the document also acknowledged that separating Openreach would be "intrusive and complex". 

Ultrafast ambitions

BT said it is confident that the Ofcom review will show the broadband market is already “vibrant and healthy”.

“There has been huge progress this past 10 years with an explosion in competition and broadband usage. Consumers are getting more for less and the UK has outpaced its European peers in terms of superfast broadband,” said a BT spokesman.

"As Ofcom says, ‘This approach has delivered real choice, quality and value for phone and broadband customers over many years.'

“Much of that progress is down to BT investing billions of pounds in fibre at the height of the recession. That investment wouldn't have occurred had BT been split in two a decade ago and our ambitious plans for ultrafast broadband also depend on BT remaining intact. Ofcom has 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.”

The Ofcom review also invites views on competition and innovation in mobile networks, “over the top” (OTT) services that use existing networks such as instant messaging and voice over IP, and bundling of broadcast content and services with telecoms provision.  

Industry analyst Ovum suggested Ofcom will be more interested in focusing on the impact of new players, such as Skype and WhatsApp, than the huge task of splitting BT in two.

“This review is unlikely to result in a further separation of the incumbent. While Ofcom recognises there are challenges with Openreach, in particular in relation to service quality, it heavily suggests that further separation will not address these, and could ultimately be disproportionate. That's not to say that tweaks to the Openreach model aren't likely,” said Matthew Howett, practice leader, regulation at Ovum

"What this review really does is present an opportunity for the regulator to properly consider the impact competing services coming from so called OTT players are having on the sector, and whether this impact warrants further deregulation of the traditional communications markets.”

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