BT clings on to Openreach amid calls for spin-off

Openreach untouched by post-EE merger restructure

BT

BT has played down its control of Openreach amid calls for the subsidiary, responsible for rolling out fibre network across the UK, to be broken off from its parent company.

The telecoms firm said the fibre delivery company is "heavily regulated" and operates at "arm's length from the rest of BT", as industry regulator Ofcom seeks views on whether Openreach should be fully split from BT.

Its cables are used by BT but also leased to competitors to provide broadband and phone services, and Ofcom is considering fully separating the firms to ensure BT cannot discriminate against competitors.

However, in a company reshuffle following the acquisition of mobile provider EE, BT said Openreach would carry on as it is.

"Openreach will be unaffected by the re-organisation," BT said. "It provides all companies with equal access to BT's local access network in Great Britain and is heavily regulated with more than 90 per cent of its revenues coming from price regulated services."

Competitor TalkTalk and the Labour party supported a separation, and Ofcom is expected to make a decision next month.

If it does not instruct BT to drop its local access network, then it will likely impose tougher regulations on its dominance of the consumer broadband market.

Excluding Openreach, BT has split its business into five other branches to serve consumers, enterprise, the public sector and other industry players. Specifically, Openreach and its new Global Services division will provide wholesale services to other industry players.

Commenting on the restructure, Gavin Patterson, chief executive of BT Group, said: "The acquisition [of EE] provides us with a chance to refresh our structure and we have done that by creating a major new division that will focus on businesses and the public sector in the UK and Ireland.We want to support those sectors by offering customers the very best services whether that be dedicated private lines, network products such as fibre broadband, mobile solutions, IT services or cyber expertise to keep them safe.

"We will continue to offer many of these services to multinational companies and major overseas customers via our Global Services division. It is an important part of the company and this new structure will enable it to sharpen its focus on its key areas of strength."

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BT's restructure will take effect from April.

BT also posted its results for the three months to December 31, which showed revenue rose three per cent to 4.6 billion.

25/01/2016: BT CEO opposes Openreach spinoff

BT's CEO Gavin Patterson has hit out at suggestions Openreach should be sold off, claiming it would create uncertainty in the market.

However, he admitted on the Today Programme on Radio 4 that Openreach, BT's arm responsible for rolling out fibre networks, needs to do more to provide broadband in rural areas and improve its business performance, following the publication of a damning report by British Infrastructure Group (BIG).

"Over 90 per cent of the UK can get super fast broadband today - which means that 10 per cent today cannot. Within the next 18 months that will only be 5 per cent and we are working with the Government to find ways to address the last five per cent," Patterson said.

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"But even Department for Culture, Media and Sport and Ofcom have pointed out that we will get to 95 per cent of the UK by the end of next year."

The BIG report said that unless BT and Openreach are separated, they will "continue to paper over gaping cracks."

It added: "Whilst rural SMEs (small and medium-sized enterprises) and consumers are left with dire speeds, or even no service at all, Openreach makes vast profits and finds little reason to invest in the network, install new lines or even fix faults in a properly timely manner."

BT's operations have come under scrutiny over the last year, as part of Ofcom's Strategic Review of Digital Communications that is investigating into how the communications market is operating in the UK.

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The regulator is considering splitting BT and Openreach to remove any incentive for the provider to discriminate against rivals, who rely on Openreach's fibre network that spans the UK to offer their own services to consumers.

Splitting BT and Openreach is not the only option Ofcom is considering other possibilities include allowing rivals to build their own networks, strengthening the existing model of functional separation', or making no changes at all.

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The assessment also includes aspects such as pay TV regulation and broadband in rural areas, which has caused a great amount of controversy as BT, Virgin and Sky compete to become the leading broadband provider in the country.

19/11/2015: Ofcom lifts pay TV regulation as Sky-BT war continues

Ofcom has decided to remove the regulation requiring Sky to offer Sky Sports 1 and 2 on a wholesale basis, because the channels are available on other pay TV services on commerical terms.

Sky Sports is now available via commercial wholesale deals with various pay TV competitors, including BT, TalkTalk, and Virgin Media, as well as Sky's own NOW TV service, meaning the regulator deemed the stipuation to no longer be appropriate.

Ofcom has been looking at the pay TV market in the UK as part of the Strategic Review of Digital Communications, the first formal assessment of the sector for 10 years.

18/09/2015: Sky and BT have come to blows over the future of Openreach as Ofcom holds a 10-year review of the communications market in the UK.

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In an opinion piece in the Telegraph, Mai Fyfield, Sky's chief strategy officer, accused BT of holding back the broadband market in the UK.

"BT's case for the status quo is built on unfounded or exaggerated claims about the benefits of vertical integration and the risks of separation," she said.

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"Underinvestment by BT has led to unacceptable levels of faults and service problems that continue to affect consumers and businesses."

She added that creating Openreach as a separate division would be the only practical way of making sure the UK had proper investment in its broadband network.

"An independent Openreach would be a new, highly investable, FTSE 100 company that could catalyse the transformation of Britain's broadband infrastructure," she said.

"BT constantly emphasises that Openreach is entirely functionally separate, with its own assets, employees and accounts. So it is contradictory to argue that the next step of full separation is impracticable."

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Her op-ed came hot on the heels of Openreach chief executive Joe Garner's article in the Telegraph, dated 13 September, in which he said that hiving off Openreach would be a "hugh mistake".

"Britain has gained, and will continue to gain, from Openreach as a part of BT benefiting from more investment, more coverage and more speed," he said.

"On investment, BT provides us with ready access to capital. BT's capital allowed us to meet the rapidly rising demand for internet services by rolling out superfast broadband which is, incidentally, 20 times faster than in 2005 and half the price."

24/08/2015: Labour has called for Ofcom to fully split BT from its fibre arm, Openreach, claiming the telecom giant is failing in its duty to bring high-quality broadband to UK homes.

The telecoms regulator is currently reviewing the state of the market amid concerns raised by BT's rivals that their access to the telco giant's vast fibre network suffers from poor service.

As a consequence, the watchdog is considering splitting BT from its fibre roll-out arm, Openreach, to remove the ability for BT to discriminate against competitors.

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Writing today in the Telegraph, shadow culture secretary Chris Bryant urged Ofcom to pursue this option, claiming that under BT the UK's broadband rollout has been "too slow, too late".

He wrote: "The situation is now so bad that Ofcom's review should work on the presumption that Openreach should be split from the rest of BT unless their review produces conclusive evidence to the contrary."

Bryant's article comes after Ofcom launched a Strategic Review of Digital Communications, its first formal assessment of the sector for 10 years, which criticised Openreach for delays in providing superfast broadband to homes.

Under a government scheme called Broadband Delivery UK (BDUK), BT is aiming to deliver superfast broadband to 95 per cent of the UK by 2017.

But Bryant claimed the telco giant fears it won't reach the target until 2018 and also criticised the quality of broadband it is providing.

"What are Openreach and the Government delivering? Broadband that is too slow, too late," he said.

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BT became the sole contractor for the BDUK project after Fujitsu dropped out and Bryant claimed this monopoly is not helped by BT owning Openreach, the arm responsible for delivering new fibre to homes and workplaces across the country.

Splitting BT and Openreach is not the only option Ofcom is considering other possibilities include allowing rivals to build their own networks, strengthening the existing model of functional separation', or making no changes at all.

However, Bryant said separating the telco giant from its division is the only one that would deliver benefits, while Ofcom believes it could lead to more focus on network investment and performance issues.

Bryant wrote: "It is right that Ofcom is now considering whether this provides an unfair advantage to BT and whether it should be split off in the interests of transparency and fair competition."

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Ofcom itself needs to be "brought into focus", he argued, saying its ability to make big decisions is undermined by an "overly burdensome appeals process" that leaves its rulings vulnerable to companies with lots of money to spend on lawsuits.

BT has declined to comment on the matter and IT Pro was still waiting to hear from Ofcom at the time of publication.

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A consultation period in which people can respond to the proposals put forward in Ofcom's review continues until 8 October.

Ofcom won't be intimidated by BT, says CEO

The news comes after Ofcom's CEO Sharon White told the House of Commons Culture, Media and Sport Committee in July that she has not come to a decision regarding whether BT should hive off Openreach.

She also said she would not be intimidated by any opposition by the provider or threats of litigation should Ofcom decide to separate the core BT operations and its Openreach internet offshoot.

"I can't say I'm easily intimidated, our drive is what's going to be the best possible deal for the consumer?" she said. "We don't start with a position that the Openreach separation is broken because if you look at how the market over the last ten years in which regulation has been a part of it, although most if it has been through the companies themselves, it's not a broken position."

She said she is happy to consider leaving the situation as is, splitting the company up into two and deregulating the current model.

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"I would like to have an evidence-based conversation with BT and the other players about how we, for the next ten years, work towards a settlement that's best for the consumer," White added.

The fact BT owns Openreach means "it still has the incentive to discriminate against competing providers", according to the regulator.

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It is now considering four different proposals under the Strategic Review of Digital Communications, one of which is to split BT and Openreach apart.

"This has the potential to deliver benefits, since it would address BT's underlying incentive to discriminate against competitors, and enable a simplified regulatory framework," said Ofcom in the report published in July.

"It may also increase Openreach's management focus on, and control over, network investment decisions and performance issues."

But such a decision would also be an intrusive and complex step for the industry as a whole, Ofcom admitted, with "substantial implementation challenges".

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Other moves mooted include making no changes to the current regulations, strengthening the existing model of "functional separation", or allowing rivals to build their own networks.

Some operators, like Virgin Media, already do this, but Ofcom warned it would result in duplicated infrastructure.

White said in a statement: "This review is about ensuring people get the best possible communications services, wherever they live and work.

"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."

BT believes Openreach separation would harm broadband investment

This is the first strategic review since 2005, which resulted in BT creating Openreach to separate itself from its network access division, and BT has warned that further separation would harm broadband investment in the UK.

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However, Sky has called for Ofcom to pursue greater separation, with chief strategy officer Mai Fyfield today repeating a call for a full competition enquiry.

She said: "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. We believe Ofcom should now move quickly to ask the Competition and Markets Authority (CMA) to undertake a full competition inquiry."

However, analysts do not believe the regulator will separate BT and Openreach, with such a move not necessarily the best one to deliver competition benefits to consumers.

Analyst Paolo Pescatore, director of multiplay and video at CCS Insight, said: "The big news here is the proposed break-up of BT. Many of its rivals have been lobbying hard for this for some time and they've clearly mounted enough pressure to raise concerns. 

"The major focus of the latest strategic review of the digital communications market is all about how well competition is delivering benefits to consumers and businesses. With this in mind, it seems that a full separation is unlikely as stated by Ofcom."

Ovum's regulation analyst, Matthew Howlett, added that additional separation wouldn't necessarily solve competition issues.

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"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," he said. "That's not to say that tweaks to the Openreach model aren't likely."

Pay TV

The review is taking place as the CMA considers BT's proposed 12.5 billion takeover of mobile operator EE, with BT set to offer landline, mobile, broadband and pay TV services if it is passed.

While rivals are trying to separate BT and Openreach, BT has responded by calling for a detailed review of the pay TV market.

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Ofcom then announced in November 2015 that the regulation requiring Sky to offer Sky Sports 1 and 2 on a wholesale basis will be removed, due to the channels being available on other pay TV services on commerical terms.

Sky Sports is available through various pay TV competitors, including BT, TalkTalk and Virgin Media, as well as Sky's own NOW TV service, and the regulation was thus deemed to no longer be appropriate.

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The pay TV market as a whole is being reviewed by Ofcom, with BT claiming the UK pays half a billion pounds more a year than the European average for such services.

However, Ofcom conducted an inquiry into pay TV just five years ago, when it forced Sky to provide certain channels to rivals, and is currently investigating its agreement with BT on this sharing set-up.

Still, a BT spokesman told IT Pro pay TV remains its focus, adding that Ofcom would find the broadband market to be "vibrant and healthy".

He also said: "There has been huge progress this past ten years with an explosion in competition and broadband usage. 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."

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The watchdog's consultation is open to comments until 8 October 2015, before it publishes its initial findings in January next year.

This article was originally published on 16 July 2015 but has since been updated to reflect developments in the story, most recently on 25 January 2016.

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