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A legal perspective on Ofcom’s BT Openreach review

Frances Murphy, partner, and Joanna Christoforou, of counsel, from the London office of global law firm Morgan Lewis examine Ofcom’s review of BT’s Openreach

In February 2016, Ofcom published the initial conclusions of its strategic review of BT’s Openreach delivery of high-speed broadband. 

Ofcom’s initial findings have largely disappointed BT’s competitors, in particular its decision not to structurally separate Openreach from BT despite evidence that “shows Openreach still has an incentive to make decisions in the interests of BT, rather than BT’s competitors”.

BT’s competitors claim Openreach has been favouring BT and discriminating against them in providing access to the pipes and telephone cables that connect most UK homes and businesses to the national broadband network. BT’s rivals are particularly concerned that the telco’s merger with EE will give it an unrivalled competitive advantage. 

Ofcom’s last strategic review concluded in 2005 and resulted in the functional separation of BT and Openreach in 2006. Ofcom undertook the 2015 strategic review to assess the competitiveness of the digital communications market in view of market developments in the past decade. 

Openreach generates most of BT’s profits. Following its merger with EE, it is estimated that BT will have a 40% share of the retail telecoms market and a 70% share of the wholesale market. Parliament, Ofcom and BT’s competitors have questioned how incentivised BT would be to invest comprehensively in the UK’s broadband infrastructure, to innovate, and to improve its digital services without effective competition.

Despite Openreach’s earnings and the £1.7bn of public funding it has received through Broadband Delivery UK (BDUK) to roll out superfast broadband, it is understood that in 95% of the UK, more than 400,000 small to medium enterprises (SMEs) are still without superfast broadband, and 130,000 SMEs and 5.7 million people across the UK cannot achieve speeds of 10Mbps. Parliament has estimated that poor connectivity is costing the UK economy up to £11bn a year.

Ofcom’s initial conclusions

Ofcom’s proposals include reforms to strengthen Openreach’s independence from BT, a requirement to invest in large-scale fibre deployment, measures to improve quality of service, and making improved broadband a universal right.

Ofcom did not investigate BT/Openreach for abuse of dominance. Note that Article 102, Treaty of the Functioning of the European Union prohibits a dominant firm – generally having at least a 40% market share – from abusing its dominance, in so far as the behaviour may affect trade between member states; and that Chapter II of the UK Competition Act 1998 imposes a corresponding prohibition as regards conduct that may affect trade within the UK or any part of it.

However, in its British Infrastructure Group report, parliament raised concerns that BT has been repeatedly accused of abusing its natural monopoly over the nation’s broadband network by not giving equal access to other broadband providers. This concern has been echoed by Vodafone chief executive Vittorio Colao, who recently complained that Openreach is failing to deliver half the connections that Vodafone requests on time.

Lack of competition

Despite this, Ofcom’s current view is that, even though structural separation of Openreach from BT would be the ‘cleanest’ method of providing a long-term solution, it is the lack of competition and the monopolistic advantages enjoyed by Openreach that are the cause of concern, rather than BT’s/Openreach’s vertical integration. In its view, full structural separation would not therefore guarantee an improvement in service, but would cause significant disruption and costs to BT and the wider industry. 

Ofcom is considering a number of reforms to strengthen Openreach’s independence from BT which, subject to the outcome of the Brexit vote in June, it will notify to the European Commission under the Framework Directive. If the Commission has concerns about the proposals, Ofcom will ultimately have the option to amend, withdraw or maintain its proposals (subject to providing a reasoned justification for doing so).

With the aim of introducing competition in the sector, Ofcom has also proposed to change the current duct and pole access scheme, with a view to improving competitors’ ability to connect their own fibre-optic cables directly to homes and businesses at a lower upfront cost. This initiative will be implemented through the Civil Infrastructure Directive this summer.  

Ofcom also proposes to regulate access pricing for superfast and ultrafast broadband, as well as continuing to regulate access to Openreach’s network, and applying new minimum standards as part of the Business Connectivity Review, published in March 2016.

No guarantees

There is no guarantee that opening up Openreach’s network would, in itself, increase competition. It would require competitors to make very material investments to build their own fibre networks, which they may be unwilling or unable to do. There is also a non-excludable risk that the costs may be passed on to consumers through higher retail prices or lower-quality goods or services.

Although Ofcom’s decision not to separate Openreach from BT may not be hugely surprising given the level of public funding that Openreach has received, it is nonetheless worrying in the light of evidence that Ofcom says “shows Openreach still has an incentive to make decisions in the interests of BT, rather than BT’s competitors” and its concern that BT/Openreach is not suitably customer responsive.

These issues have not been lost on BT’s competitors, large or small. While the trade-off for permitting BT and Openreach to stay together appears to be the acceptance by them of tighter regulation and a commitment to improve their responsiveness to customers, Ofcom’s decision nevertheless leaves BT/Openreach free to grow its monopoly.

Although Ofcom has reserved the right, formally, to separate BT and Openreach, any such separation in future may be too little too late to competitors and customers if by then Openreach is in possession of 95% of superfast broadband in the UK and is still not providing its customers with suitable service support.

Frances Murphy (pictured) is a partner and Joanna Christoforou is of counsel at the London office of global law firm Morgan Lewis.

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