John Delaney
Associate VP European Mobility, IDC
Read full bio @john_p_d
The situation
The UK’s telecoms regulator, Ofcom, announced this morning that it will not require BT to sell off its Openreach division. Instead, Ofcom has recommended a set of governance reforms to increase the independence of Openreach within BT Group. These include separate articles of association for Openreach making it a legally distinct entity within BT Group, with its own board including a majority of non-executive directors who are unaffiliated with BT Group. Ofcom observes that “we will… consider any amendments to our proposal that meet our competition concerns in lower-cost ways.” However, Ofcom has also warned that if its proposed changes do not achieve the improvements it requires, it reserves the possibility of full structural separation between BT and Openreach in the future.
IDC’s view
We believe that Ofcom is right to try and effect improvements by reforming the governance of Openreach. There is a lot of scope for improving matters in this way. Full structural separation would be a lengthy and disruptive process, and it is far from clear that it would necessarily cause Openreach to perform better in the areas where it is deemed to be falling short. An independently owned Openreach would still be the only game in town, regarding the provision of the infrastructure used by communications service providers (CSPs) to serve their customers, and it would still be regulation that ultimately determines the balance struck by Openreach between the interests of its owners and those of its customers. That is not to say, however, that either Ofcom or BT can be complacent, now that the path of governance reform has been chosen. The situation will be kept under close review, and structural separation must remain a possibility that BT will face if a reformed Openreach is not judged to be meeting its obligations in terms of service quality and competitive neutrality.
Analysis
As part of the BT Group, Openreach has been consistently accused by service providers and customers of falling short of requirements in four broad areas:
- The quality of its customer service
- The pace at which broadband is being rolled out to under-provisioned and un-provisioned areas
- The pace at which broadband access speeds are being increased in the country as a whole
- The Neutrality of its dealings with CSPs that compete with BT.
Ofcom has found that there is enough of a case to made on these points for action to be needed. The question that Ofcom has had to determine, then, is what measures with regard to Openreach would produce the biggest and the most rapid improvements in these areas.
Regarding customer service: BT itself has acknowledged that Openreach needs to improve its performance in this area, and it set out its plans for achieving that at BT’s Capital Markets Day in May. As Openreach CEO Clive Selley said then: “We must and we will do better.” He announced targets of delivering 95% of appointments on time, halving the number of missed consumer appointments and zero tolerance for multiple misses. This is fine as far as it goes, but the extent of dissatisfaction with Openreach’s record on customer service means that there is pressure for performance targets to be both set and assessed more independently of BT. However, that does not necessarily point to the need for structural separation. Ofcom and third parties could be more closely involved with monitoring and enforcing improvements in Openreach’s customer-service performance, without the need for Openreach to be a separate company.
Regarding the under-served: the “last 5%” of premises that have sub-megabit speeds, or that are unconnected to broadband, are generally speaking uneconomic to provision on purely commercial terms. There are too few customers to defray the cost of providing fixed-line infrastructure. Such customers will be provisioned largely in response to regulation designed to achieve the goals of social and economic policy. This will continue be the case whether Openreach remains part of the BT Group, or becomes an independently owned company.
Regarding high-speed broadband: Openreach has been weighting its emphasis more than some would like towards enhanced copper technologies such as VDSL and G.Fast, rather than on deploying fibre to the premises (FTTP). The case is highly debatable. On the one hand, FTTP certainly provides faster broadband speeds than copper can achieve. On the other hand, enhanced copper can achieve speeds that satisfy the majority of usage requirements now and for some time to come, and it can be deployed more rapidly than FTTP. Regardless of the merits of each case, however, Openreach’s emphasis on enhanced copper is the result of a strategy set by BT’s board. Structural separation would clearly decouple Openreach’s technology policy from BT’s corporate strategy. It is less clear, though, that it would lead to a stronger emphasis on fibre. The board of an independent Openreach might even conceivably want to tilt further in the direction of enhanced copper than is currently the case.
Regarding competitive neutrality: BT would certainly be weakened as an overall business if it were required to sell Openreach, which accounts for around one-third of its revenues. The fact that BT’s share price rose by 3% when Ofcom’s decision was announced shows how valuable an asset the ownership of Openreach is to BT. On that basis alone, it would be in the interests of BT’s competitors for BT to be required to sell Openreach, simply on the basis that “what makes my enemy weaker makes me stronger”. But the anti-competitive case goes further than that, asserting that the policies and actions of Openreach are biased in BT’s favour. Ofcom has not been able to determine this question definitively one way or the other, but it is clear that so long as the UK’s broadband infrastructure provider is owned by one of its CSPs, assertions of bias will have at least prima facie force. It will always be easier to assert bias against an Openreach that is part of BT Group, than against an Openreach that is independently owned. However, although an independent Openreach would be less open to assertions of bias, there would be a lengthy transition towards independence during which resources would be diverted towards internal activities such as pension administration and organizational restructuring. Ofcom has concluded, albeit provisionally, that an arm’s-length mode of operation would ensure competitively neutral operations more efficiently than requiring the sell-off of Openreach. Here, the devil will be in the detail. Accounting rules, for example, will need to be sufficiently transparent to give clarity on questions such as whether Openreach is investing enough profit in meeting service targets.
For more information on this topic, or if you want to learn more about IDC’s Mobility Research, please contact John Delaney.