It had all been going so well for BT. Profits were on the up, its £12bn takeover of EE appeared to be going swimmingly and its position as quad-player par excellence seemed assured. How quickly things can change. Not only is the Competition and Markets Authority (CMA) yet to approve the EE deal, but now Ofcom is seriously considering breaking the company in two. Regulators, eh?
Ofcom today opened a three month consultation to prepare for its strategic review of the telecoms sector, which could lead to the spinning off of BT’s fixed line infrastructure division, Openreach.
BT was forced to create Openreach as a semi-independent business by the last strategic review in 2005. It is required to provide wholesale access to its broadband cable network on equal terms to other service providers like Sky and TalkTalk, but these and others have complained that Openreach discriminates against them, through such things as late installations and repairs.
Ofcom appears to agree. It said BT still has ‘the incentive to discriminate against current providers’ and the opportunities to do so. Enforcing BT’s voluntary undertakings to treat its rivals equally has been ‘difficult from a practical perspective’, while ‘the quality of their service has too often been equally poor for everyone’. Ouch.
It identified four possible fixes:
1) Spin off Openreach
What Ofcom – and disgruntled internet users everywhere – really wants is investment in the infrastructure. Sky et al argue that the lack of competition causes BT to under-invest, to the detriment of consumers. It’s hard to see how creating a new company out of Openreach that would not have access to BT's coffers would solve that problem, but at least it would create a level playing field.
2) Tighten the regulatory screw
A softer option would be to keep Openreach under BT’s control, but increase Ofcom’s oversight. Micromanagement isn’t really what the regulator wants to get involved with, but by being stricter in monitoring and enforcing equality rules, it could reduce any unfair advantage. Again, not really beneficial for overall investment.
3) Open up the market
Ofcom is considering encouraging end-to-end provision from multiple parties. So, instead of the current model of providers paying Openreach for access to customers, they would each install their own cables and do it themselves. This has the advantage of encouraging competition in service and investment, but could produce a more chaotic, less efficient system that might be difficult to implement. At some point technology might eliminate the need to lay cable to everyone's doorstep, but we're not there yet.
4) Keep everything the same
Not really fixing the problem, so much as recognising that the other choices aren’t much better. BT (unsurprisingly) favours this option. Its argument is that multiple providers, or indeed a separate Openreach, wouldn’t have the resources or the easy credit that it has. They simply couldn’t invest as much as BT, even if they tried harder, so everyone would lose if the system changed.
Of course, there is an argument that whatever model is selected, firms will never invest enough in infrastructure because the returns are too slow and low to justify the expense. Short of returning to state ownership under a spendthrift government, that doesn’t seem likely to change.
Unfortunately for BT, this doesn’t mean Ofcom won’t decide to shake up the industry, after the consultation closes in October, by lopping part of the company off. Expect a noisy few months from all parties.
Read the MT Interview with Gavin Patterson.