Ofcom Considers BT Openreach Split And Market Deregulation

Ofcom is considering splitting up BT and Openreach as part of its once-in-a-decade review of the UK communications market that will determine future policy.

The last Digital Communications Review concluded in September 2005 and resulted in the creation of Openreach, which operates BT’s network infrastructure as a separate entity and provides access to other communications providers like Sky and TalkTalk on a wholesale basis.

Ofcom says this approach has promoted competition and brought down prices for consumers and businesses, but admits the incentive for BT to discriminate against other providers has not been entirely removed by regulation and is concerned Openreach’s performance in installing lines and repairing faults has been poor.

New model for fibre

The regulator has now completed the first phase of the current review and suggests the model created to govern copper broadband might not be suitable for fibre. A number of proposals are being considered, including maintain the current model or even strengthening it with further regulation, such as price controls and stiffer penalties if Openreach misses service targets.

But the formal separation of BT and Openreach is the most eye-catching scenario and one which would be supported by BT and TalkTalk, both of whom claim BT has a dominant position in the broadband market.

“Separating Openreach from BT could deliver competition or wider benefits for end users,” said Ofcom. “It would remove BT’s underlying incentive to discriminate against competitors. Separation could also offer ways to simplify existing regulation. However, the process would be challenging and it may not address some concerns relating to Openreach – such as service quality, or the timing and level of investment decisions.”

Another possibility is for Ofcom deregulate entirely and allow other companies to create their own end-to-end network infrastructure, although Ofcom says this could lead to weak competition and the duplication of networks.

BT defence

BT has rejected calls from competitors to separate Openreach, arguing that the investments it has made in fibre infrastructure would not have been possible if the two organisations were separate entities.

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

“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 have 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.”

Breakup ‘unlikely’

Ofcom’s review is only considering the broadband, landline and mobile markets, but BT is calling for Sky’s “dominance” in the Pay TV market to be reviewed. However Sky wants Ofcom to ask the Competition and Markets Authority (CMA) for a full competition inquiry.

“It is welcome news that Ofcom is putting the future of Openreach at the centre of its review,” said Mai Fyfield, Sky’s Chief Strategy Officer. “For too long, consumers and businesses have been suffering because the existing structure does not deliver the innovation, competition and quality of service that they need.

“In a rapidly changing sector, it is vital for the UK that the national telecoms network delivers a service fit for the 21st century.”

“We are pleased that Ofcom is looking at all the options for the future of the telecoms market as part of its strategic market review,” added TalkTalk. “This is a once in a decade opportunity to make bold, radical decisions, such as the separation of Openreach.  It is vital that Ofcom places customers at the heart of their decision-making process so that we end up with a competitive market that delivers the modern digital services and infrastructure Britain desperately needs.”

However industry observers suggest a breakup of BT and Openreach is unlikely.

“Leading up to its publication, BT and its rivals had been engaged in a bitter war of words in relation to where Ofcom should focus its priorities,” commented Matthew Howett, Practice Leader, Regulation at Ovum. “Rivals to BT believe the incumbent should be further split up and the access division, Openreach, hived off. BT responded calling for PayTV to be in the spotlight. Both of these have made it into the discussion document, however neither should probably be the focus.

“The strategic review seeks to ensure that the industry continues to meet the needs of end users. The last such review, a decade ago, lasted almost two years and ultimately led to the separation of BT’s access network. 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.”

OTT focus

Elsewhere, Ofcom is looking to see how more can be done to extend superfast broadband to rural and urban areas where it is unavailable, possibly through regulation to encourage the deployment of ultrafast services.

The mobile market is not an area of concern at present, but the regulator says it will monitor the trend towards consolidation and ‘quad-play’ bundles to see if competition will be impacted.

The review will also identify areas where regulation can be simplified, removed or replaced, possibly with regards to over the top (OTT) services like WhatsApp which are not bound to the same obligations as mobile operators. Such regulation could be extended to OTT providers or removed entirely.

“This review is about ensuring people get the best possible communications services, wherever they live and work,” said Ofcom CEO Sharon White. “Our priorities are clear. We want to promote competition, investment and innovation, so that everyone benefits from even better coverage, choice, price and quality of service in years to come.”

Ofcom is inviting the industry to submit responses to the first phase of its review before October 8 and this will inform the regulator on its priorities and actions when the process is concluded in 2016.

“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,” added Howett. “As new, more nimble players such as Skype and WhatsApp have arrived on the scene and competed away traditional telco revenues, regulators have been somewhat constrained in their ability to react, and certainly have not responded in the way telcos might have liked. This is where Ofcom’s focus ought to be, and could even be an area where BT and its rivals find mutual agreement…”

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