Ofcom demands partial separation of BT and Openreach

Ofcom has ruled that Openreach will become an independent legal entity from BT, but stopped short of the complete separation much of the industry is calling for.

The ruling is the most significant step taken so far in the protracted saga over BT’s ownership of wholesale broadband provider Openreach. Ofcom has been very vocal in its displeasure at the running of Openreach this year, with the regulator saying on multiple occasions that BT has failed to ensure quality of service to its own consumers and wholesale broadband customers. It has also repeatedly stated that BT’s ownership has led to chronic underinvestment in network infrastructure.

Earlier this month, MPs from the Culture, Media and Sport Committee too vocalised their objections to BTs management practises, saying that unless significant and immediate reform was undertaken, they would fully back Ofcom to enforce a complete separation of the two entities.

Today’s announcement is a half-step to a separation. Ofcom said Openreach now needs to become its own legal entity, with an independently-hired board to which a new CEO shall be accountable. The new-look Openreach will run independently from BT, with no associated BT branding and complete responsibility over its own balance sheet.

One of Ofcom’s biggest gripes was how profit made by Openreach was being used by BT. Ofcom went so far as to accuse BT of not reinvesting Openreach’s profits back into its network or general QoS. With the proposed revised structure put forward by Ofcom today; Openreach profit will be kept distinctly separate from the general BT profit and loss (P&L), thus further incentivising reinvestment in the network and its level of service.

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Ofcom says these steps should all add up to Openreach making decisions for the good of the wider telecoms industry and its customers. Crucially, the regulator is still threatening a complete split from Openreach if BT is incapable of achieving more genuine independence and impartiality, as well as greater investment and quality of service.

BT has appropriately taken Ofcom’s notice and responded by stating the work it is currently undertaking in shaking up Openreach. In a statement, BT referred to its £6 billion infrastructure investment, a chunk of which will be directed to Openreach’s infrastructure. The operator also said it will be working closely with Ofcom to ensure governance and compliance measures are met for the newer, more independent Openreach, as well as looking to the regulator to review its pricing structure. Lastly, and perhaps most importantly for its competitors, BT will be commencing a formal three stage process to consult with its customers on how and where investment can be made.

“We have listened to Ofcom and industry and are introducing significant changes to meet their concerns,” said BT Group Chief Executive Gavin Patterson. “These changes will make Openreach more independent and transparent than it is today, something both Ofcom and industry have requested.

“Proportionality has to underpin any regulatory solution and we believe our proposals are a bold and appropriate response to the concerns outlined by Ofcom and others. We have considered the more extreme solutions proposed by others but they would be overly complex, disproportionately costly and time consuming to implement. They would also undermine Openreach’s ability to invest and create years of uncertainty.”

Ofcom’s new plans are open to responses and views from the industry until the 4th of October; and the regulator is, for now, hesitant to enforce a full split of BT from Openreach due to the financial, legal and regulatory impact. General opinion suggests today’s announcement is a half-step to Ofcom’s ultimate aim of separating BT from Openreach. Some of BT’s most vocal rivals said the regulator didn’t go far enough and only a complete uncoupling will do, with others saying a partial separation is the only realistic step Ofcom could have taken at this stage.

Full industry reaction is below.

Matt Howett, Practice Leader, Ovum

“In many ways, a voluntary agreement between Ofcom and Openreach, which is backed by the rest of the industry, would achieve more than years in court and a forced enhanced model of separation could. Many of the things proposed by Ofcom, and that are being offered by BT, could be enacted within months. Attention and money could then turn to getting on with delivering what this review is ultimately all about – making sure Britain has the broadband infrastructure fit for the next decade.

“Nevertheless, for some, only full structural separation will be enough and it is important to note that Ofcom have kept this option on the table should its proposed model not deliver. Given the enormous costs and uncertainties, coupled with the weight of evidence, for Ofcom to proceed with structural separation now would be a disproportionate response, even if it could be practically delivered.”

Mark Collins, Director Strategy & Policy, CityFibre

“Fundamentally, today’s proposals do not address Ofcom’s key objectives of reducing the country’s dependence on Openreach and encouraging essential investment in fibre. Whilst correctly identifying Openreach as the principal source of the industry’s dysfunction, it is hypocritical of Ofcom to focus on a restructured Openreach as a panacea.

“Further debate and navel-gazing as to the appropriate structure of BT will continue to create a period of uncertainty at a time when the industry needs clarity, direction and competitive investment. Openreach has a critical role to play, but it is not prudent to entrust them with sole responsibility for our digital future.”

Jeremy Darroch, Group Chief Executive, Sky

“Today’s proposal to create a legally separate Openreach is a step in the right direction, although falls short of the full change that would have guaranteed the world-class broadband network customers expect and the UK will need. In particular, leaving Openreach’s budget in the hands of BT Group raises significant questions as to whether this will really lead to the fibre investment Britain requires.”

Dan Howdle, Telecoms Expert, Cable.co.uk

“This move is clearly the first in a multi-stage process toward severing Openreach from the BT Group completely. If permanent separation were to happen, existing staff would need to be reassigned, a new board appointed, budgets allotted, and it would need to become discreet owner of its existing infrastructural assets – all of which is exactly what is happening today. Full separation is now inevitable.”

Kester Mann, Principal Analyst, Operators at CCS Insight

“Ofcom’s proposals are about as radical and stringent as they could have been without taking the ultimate step to structurally separate Openreach from BT. They show clear focus to address flaws within the current model and a desire to bolster broadband infrastructure service and deployment in the UK.

“The decision not to force BT to split Openreach comes as little surprise. It would have been the most controversial action the regulator could have taken and would still not have offered guaranteed improvements for customers. Indeed, the time to implement, associated costs and market disruption – potentially leading to years of legal battles – would have threatened short-term infrastructure investment.

“Although BT will breathe a sigh of relief that Openreach will remain a part of the group, Ofcom’s strongly-worded statement should leave it under no illusions that it needs to up its game. Indeed, the threat to hive off Openreach still remains if it is unable to act more independently from the BT group.

“Inevitably, BT’s rivals will criticise Ofcom for being too lenient. But although they campaigned hard for formal independence, today’s outcome still represents a partial victory. Structural separation was always a long-shot and companies such as Sky and TalkTalk will stand to benefit from greater infrastructure investment, customer service and independence.

“Today’s announcement doesn’t draw a line under this controversial and protracted issue. Ofcom is now opening a consultation on its proposals and by inviting further comments from interested parties, so expect the next round of lobbying to soon commence. In the interest of stability and market certainty, the sooner final plans can be drawn up and implementation gets underway the better.”

Jaime Fink, Co-Founder at Mimosa

“BT has come under increasing pressure from politicians and the industry to divest its broadband infrastructure division. Its competitors claim BT Openreach provides the UK incumbent with an unfair advantage and that it hasn’t been investing enough to improve the quality of its service. This has led to Ofcom granting Openreach greater independence and autonomy, giving the company more control over its future investment and direction.

“Despite today’s ruling, the infrastructure problems facing the UK market that prevent the rollout of a nationwide next-generation broadband network still remain. The DSL (cable) foundations that underpin much of the UK’s broadband network simply do not offer the bandwidth to support today’s internet applications and meet the demands of tomorrow’s increasingly data rich services. The roll-out of fibre also continues to present challenges in rural and dense urban areas, where the cost and disruption of digging trenches to lay fibre-optic cabling has left many areas to contend with legacy, low-performance broadband solutions.

“Openreach must look at new technologies that can enable it to profitably deliver a sustainable broadband network. The company will have its eyes on the U.S., where new market challengers, such as Google and Facebook, are selecting alternative broadband solutions like fixed wireless, to better connect their customers. The technology can deliver fibre-like broadband connectivity in any environment, without the cost or disruption of its cabled alternatives. Today’s ruling presents a fantastic opportunity for new broadband solution providers to make their voices heard, and ensure that Openreach takes its strategies in new bold directions for the benefit of the UK marketplace.”