Ofcom to force BT to legally separate Openreach

BT OpenreachOfcom is to formally notify BT to legally separate Openreach, the infrastructure arm that supplies the network used by rival service providers including Sky, TalkTalk and Vodafone, after it said BT had failed to come forwards with proposals that met its competition concerns.

Ofcom said it was “disappointed” that BT had yet to make proposals to fully address the concerns raised in July. Ofcom at that time expressed its concern that BT has the incentive and ability to favour its own retail business when making strategic decisions about new network investments by Openreach.

The regulator will now require Openreach to become a distinct company with its own board, with a majority of non-executive directors, including the chair, who are not affiliated with BT. Ofcom said it would notify the European Commission of its intention to move ahead and require the legal separation.

Ofcom has fallen short of requiring BT to separate from Openreach entirely. The regulator said that its consultation found that structural separation could generate materially greater costs and risks compared to models based on legal separation.

Ofcom said that breaking up BT could still be on the cards if its monitoring suggests that legal separation is not delivering sufficient benefits for the wider telecoms industry and its customers.

Pay TV and broadband provider Sky, which has claimed that the current structure has held back the development of next-generation broadband in the UK and has lobbied hard for structural separation, issued a terse statement in response to the latest move by the regulator.

“Let’s not forget why we are here – BT Openreach has continued to fail consumers. This is why we have always said that we want a solution that is clear and executable and in the best interests of consumers and industry. We will now watch closely as to how Ofcom executes its proposals,” the pay TV operator said.

Other observers believe that Ofcom’s move represents the strongest position that it could realistically consider, given the likely costs of structural separation, and should therefore be considered as a victory by rivals.

“Today’s news shows that Ofcom remains hugely concerned over BT’s ability to satisfy its competition concerns. It again highlights clear flaws in the existing Openreach model and a worry that UK broadband deployment could be restricted without serious change.

Steering clear of a structural split is unsurprising. This would have been the most controversial and costly action Ofcom could have taken, but would still not have offered guaranteed improvements for customers,” said Kester Mann, principle analyst, operators, at CCS Insight.

“No doubt, BT’s rivals will criticise Ofcom for not being brave enough to push for structural separation. But after many months of campaigning, they should see the regulator’s efforts to engage with Brussels as a partial victory. The move toward legal separation and greater independence will bring important benefits to companies like Sky and TalkTalk in the long-term. Today’s announcement represents just the next stage in a long and protracted issue. Expect further lobbying from all parties and old arguments to be recycled. In the interest of stability and market certainty, the sooner a final outcome can be reached the better.”

Fiona Keenan, strategic insight director at Kantar Worldpanel, said that BT’s rivals would now have fewer excuses for their own shortcomings in the broadband market.

“Today’s decision from Ofcom is certainly a step change for the UK telecoms market.  The proposed reforms should go far in fostering a more consultative, transparent approach to infrastructure development, as well as increasing investment.  It should also suppress concerns from other providers who have always felt that BT’s control over Openreach has stymied their growth,” said Keenan.

“The likes of Sky and TalkTalk have long been using the problematic status of Openreach as a free pass to explain their own shortcomings, but that’s not the whole story.  Whether ultimately we’ll see cheaper and faster broadband for the general public remains to be seen.”

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