ANALYSIS & OPINION

BT agrees on Openreach split but rivals continue to complain

Openreach, owner of the UK’s access network infrastructure, will become a separate company with its own staff, management and strategy after BT Group reached an agreement with the regulator Ofcom, announced last Friday.

Calling it “the biggest reform of Openreach in its history”, Ofcom said BT has agreed to all the changes necessary to address its competition concerns, avoiding the need for more regulation.

Critics point out, however, that the measures cannot ensure that more money will be invested in broadband infrastructure and fibre to the home – which the government hopes will reach millions more homes by 2020 (see Policy shift sees the UK start on a full fibre diet).

The agreement ends a protracted period of uncertainty (see BT avoids breakup following Ofcom digital review).

“This has been a long and challenging review where we have been balancing a number of competing interests. We have listened to criticism of our business and as a result are willing to make fundamental changes to the way Openreach will work in the future,” said Gavin Patterson, BT's chief executive.

Sharon White, Ofcom chief executive, added: “This is a significant day for phone and broadband users. The new Openreach will be built to serve all its customers equally, working truly independently and taking investment decisions on behalf of the whole industry – not just BT. We welcome BT’s decision to make these reforms, which means they can be implemented much more quickly. We will carefully monitor how the new Openreach performs.”

The reforms, which should begin later this year, mean that Openreach will be incorporated as a legally separate company within BT Group, with its own ‘Articles of Association’ and an independent Openreach Board to run the company.

The company will create its own, separate strategy – with an obligation to consult formally with customers such as Sky, TalkTalk and Vodafone on large-scale investments – and control over budget allocation, although the overall budget will be set by BT Group.

Openreach will have control of the physical assets – such as the access network – and make decisions on building and maintaining these assets. BT will hand these powers to Openreach, while retaining a title of ownership.

The Openreach Board that BT has already established, with a majority of directors independent of BT, will become the board of the new company (see BT takes baby steps towards Openreach independence). Executives will be accountable to the new board and staff will work directly for Openreach. The transfer of 32,000 staff from BT to Openreach under TUPE regulations will be the largest such transfer in UK history. New legislation will be required in relation to the pension liabilities for the new company; therefore it isn’t possible to put a deadline on when the reform will conclude.

Ofcom plans to monitor the new model to ensure it is effective, and will require additional transparency on the nature of interactions between the new Openreach and the rest of BT Group.

Structural separation was thought to be too complex, according to Ofcom, which stated that “the new Openreach will have the greatest degree of independence from BT Group possible without incurring the delays and disruption – to industry, consumers and investment plans – associated with structural separation or the sell-off of Openreach to new shareholders.”

However, Openreach’s competitors maintain that nothing but full structural separation will bring about the desired improvements to the UK’s broadband infrastructure. The UK is currently the only major European economy where FTTH adoption lies below one per cent (see Full speed ahead for FTTH as subscribers pass 44 million).

Mark Collins, director strategy and policy at CityFibre, commented: “The real story here is the UK’s shocking ‘fibre gap’. Whilst it is welcome that these time-consuming negotiations seem to be at an end, there is nothing in this announcement to suggest Openreach will now start to build the fibre infrastructure this country needs.”

In its call for reform of Openreach last year, Vodafone pointed out that the excess profit of £1.078 billion made by BT in the financial year ended March 2016 equals the amount the UK Chancellor set aside in the Autumn Statement for ‘full-fibre’ broadband and trials of 5G mobile communications.

Alternative service and network providers, especially those in the business-to-business market, say Ofcom should not rely on Openreach to make the necessary investments in infrastructure, but instead provide stronger measures to encourage competing networks.

“We are supportive of the direction of Openreach since the appointment of Clive Selley and continue to work closely with them, but feel that this move does not go far enough to create confidence that the internet infrastructure in the UK will be significantly improved as a result of this first step,” said Lee Perkins, CEO of Metronet UK, a provider of business connectivity services.

The Federation of Communication Services, a trade association for communications providers, also believes that Ofcom’s agreement with BT does not go far enough. “We believe it is the first step is in the right direction,” said FCS CEO Chris Pateman. “However, we remain convinced that – as both Ofcom and the DCMS Select Committee independently concluded – the only sustainable and truly customer-responsive Openreach is an Openreach which is fully master of its own destiny, structured and managed as a utility company and completely structurally separate from BT.”

Matthew Howett, practice leader of Ovum’s regulation and policy advisory service, acknowledged that not everyone would be satisfied, but said the agreement was “tough but fair”.

“Although, from Ofcom's point of view, BT have complied with everything the regulator asked for, some of BT's largest competitors were still holding out hope for a full structural separation of Openreach from BT Group,” he said. “Throughout the process, Ofcom has reiterated that a structural separation is off the agenda. Only if Ofcom's monitoring suggests that a legal separation is not delivering sufficient benefits for the wider telecoms industry and its customers, will it return to the question.”

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