Should BT be forced to separate from Openreach?
BT, Vodafone, Virgin Media and Sky all have their say on whether BT should be separated from its network infrastructure arm
When Ofcom announced it would be working on a strategic review of digital communications - the first such review in 10 years - there was inevitably going to be griping from some who perceive the playing field within the industry to be about as flat as Tibet.
It is something we've seen before with the launch of 4G and more recently with BT's acquisition of EE, with, in the case of the latter, many of BT's competitors complaining that the deal would give BT an unfair advantage by adding yet another communications division to its portfolio.
Ten years ago, the main issue under review was the creation of BT's infrastructure arm Openreach, whereas now the focus is on whether Openreach should be structurally separated from BT.
Vodafone, Sky and TalkTalk have all publicly stated that they think BT should be separated from Openreach, while BT has hit back stating that such a move would be bad for BT shareholders and bad for the UK as whole.
The general consensus among BT's rivals is that the telecoms giant enjoys a virtual monopoly of the communications market, even more so with the acquisition of EE. And furthermore, as it also owns Openreach, it has an edge over its rivals in the broadband space - as the likes of Sky, TalkTalk and Vodafone all rely on Openreach infrastructure to provide their customers with broadband.
According to Sky's chief strategy officer, Mai Fyfield, when BT switches a customer to fibre, it just hands over a notional fee from one internal division to another, whereas other providers face a real increase in costs that makes it less attractive to invest in upgrading customers.
"This poses long-term problems for competition, with the risk that BT will recreate its former dominance in retail customers," she wrote in the Daily Telegraph.
Matthew Braovac, head of regulatory affairs and competition at Vodafone UK, suggested to Computing that over the past 10 years BT has achieved an upside of around £4bn over and above the cost of capital for the product that it sells to the rest of the industry.
"There is a very serious issue of ‘over recovery' which creates a revenue stream by BT which is unmatched by any other operator in the industry and we think that creates anti-competitive distortions in adjacent markets," he said.
He added that having Openreach inside BT "creates incentives for BT to discriminate against other operators".
"We have a set of rules, which are intended to mitigate and reduce the effect of that incentive, but I think it's always difficult to police things like that, so I think a structural separation would be a much cleaner way of dealing with that issue," Braovac said.
What Braovac was referring to is the fact that BT and Openreach are in fact functionally separated. What this means, according to BT's director of regulatory affairs, Mark Shurmer, is that there are rules regarding how Openreach interacts with BT and its external customers.
"It provides the same products and terms and conditions including price to all customers including BT and there are certain ringfences about information sharing - they have to tell everyone when a new product launches, not just BT. There are also very stringent accounting rules, and indeed it would be obvious if we were using profits from one side of the business to another - you can see from publicly available records that it's not happening," Shurmer said.
Should BT be forced to separate from Openreach?
BT, Vodafone, Virgin Media and Sky all have their say on whether BT should be separated from its network infrastructure arm
But Vodafone UK's chief executive, Jeroen Hoencamp, told the FT that the industry is paying the price for "inappropriate" expenses.
But while Vodafone has essentially accused Openreach of putting BT before its other customers, BT ponts out that none of its rivals have ever put forward a formal complaint to this effect to Ofcom. So if Vodafone is so sure, why hasn't it ever mentioned this to the regulator?
"There is already regulation in place which prevents us from doing that, with very heavy penalties if we did; Ofcom have the ability to fine you up to 10 per cent of revenues... moreover those people haven't raised an official complaint which [suggests] that this isn't happening," said Shurmer.
But BT's rivals still smell a rat. When Openreach's previous CEO, Joe Garner, suggested that a full separation would be bad for Britain, Sky's Fyfield argued that the fact Garner was commenting so forcefully for Openreach to remain a part of BT, when Openreach is intended to serve the market equally, shows that the existing system is broken.
Vodafone's Braovac said there's a telling contradiction in BT's arguments:
"They [BT] claim on the one hand there is no benefit from owning Openreach; they say they are treated like any other customer thanks to the [existing] rules, yet at the same time they argue very strongly that they couldn't possibly spin Openreach off and I think it is difficult to understand that if the first bit is true, then why is it that the second is such a big problem for them?"
When Computing put this to BT's Shurmer, he said:
"We think it's bad for BT and its shareholders and bad for the UK, we say that because it's principally for investment; the UK gets more investment by having Openreach as a part of BT Group."
But Braovac suggested that BT shareholders would benefit from a split.
"Current shareholders would receive a new BT retail share and a share of Openreach - so of course, some investors would want to be in the quite exciting, downstream, TV and mobile business which BT is, and others would be looking for a long-term stable return on their capital like infrastructure funds and pension funds," he said.
TechMarketView founder Richard Holway agrees with Braovac.
"Contrary to what BT has tried to persuade people into thinking, I think a separate organisation would be good for BT shareholders and for the industry as a whole," he said.
A separation, according to Sky, would also enable Openreach to look at potential new infrastructure projects and other areas of investment.
"The idea of Openreach seeking outside investment is unthinkable while it remains part of BT," said Fyfield.
"Although Sky is Openreach's biggest external customer, they have never brought us a proposal to invest in an infrastructure project," she added.
It would also mean that other companies, such as Vodafone, could take a stake in Openreach - something the firm has openly stated it would like to do.
Should BT be forced to separate from Openreach?
BT, Vodafone, Virgin Media and Sky all have their say on whether BT should be separated from its network infrastructure arm
An unlikely allay
Virgin Media, one of Sky's fiercest rivals, doesn't believe a separation is necessary as it would provide "little if any benefit" compared to the existing arrangement. In response to Vodafone's idea that it could own a part of Openreach, along with other Openreach customers, Virgin Media said this would cause several big issues such as working out whether all customers would have the same number of shares, or whether shares would be owned in proportion to the size of the customer, which case BT would retain substantial control over the separated company.
The root of the problem
As well as the strong feeling that Openreach gives BT favourable treatment, the other main issue driving those called for the two firms to be separated concerns levels of investment in fibre and delays in fixing faults and installing new lines.
According to Vodafone's Braovac, BT "dictates the technology choices that are made by the entire industry", and by choosing to invest in fibre-to-the-cabinet (FTTC) broadband, it is "squeezing a bit more life out of an old copper network".
Essentially, BT's rivals believe BT's strategy is leading the UK's digital economy down a technology cul-de-sac.
But BT is adamant that it's fibre deployment is fit for purpose, arguing that widescale demand for fibre-to-the-home (FTTH) is "isn't there".
"One of the decisions that BT and indeed the UK has to take is what does it want to achieve because there is clearly a cost difference between the two and a time difference between the two," said Shurmer.
He said that independent estimates show that covering the nation with FTTH would cost between five to 10 times more than covering the country with FTTC.
"Where is that money coming from? Are people willing to pay the extra for it," asked Shurmer.
"It's a much bigger civil engineering exercise and we would have nowhere near the broadband coverage that we have today if we went down the FTTH route," he added.
"Where there is a demand for FTTH, we'll do that as well but actually for most people, for as long in the future that we can see, we think FTTC gives enough speed and capability and is far more cost effective," he said, pointing out that BT's FTTC product can deliver speeds of up to 80Mbps and that there are plans to roll out ultra-fast broadband of up to 300Mbps to 500Mbps in certain areas too - again over FTTC.
Indeed, Ovum analyst Matthew Howett believes that the argument from Vodafone, TalkTalk and Sky around investment in fibre doesn't add up.
"I don't think anyone has any conclusive evidence where investment in fibre was higher if you had a structurally separated division," he said.
Should BT be forced to separate from Openreach?
BT, Vodafone, Virgin Media and Sky all have their say on whether BT should be separated from its network infrastructure arm
Conversely, BT's Shurmer believes that there is evidence that a structural separation would make matters worse.
"There are less than a handful of markets that have gone through structural separation: Australia, New Zealand and Singapore are some of the examples. What you find in those markets is that structural separation was the price of government investment in a FTTH rollout and prices are higher in those markets, rollout is much slower and take-up is lower," he said.
Shurmer told Computing that only BT would "put its hands in its pockets" to invest in fibre, but Sky believes that the £2.5bn it has invested in its fibre rollout has been funded in part by cutting spending on other critical parts of the network - with service quality and reliability suffering as a result.
But BT counters by asking, if FTTH is the right long-term fast broadband solution, why aren't the likes of Sky, TalkTalk and Vodafone investing in it themselves.
"Given our modern economy being so reliant on the internet, it is time to stop being held back by BT's lack of ambition and under-investment," the report states.
As for the issue regarding delays to fixing faults and slow installation times, Ovum's Howett believes that BT has the same complaints against Openreach as its rivals - showing that there is no discrimination in favour of their own retail division.
So what is likely to happen?
BT's Shurmer is unsure whether Ofcom's document will be categoric or whether it will keep a number of options in relation to BT-Openreach on the table.
Howett suggested that Ofcom is unlikely to have a say in the fibre investment area, stating that the communications regulator does not like getting involved in those discussions even though the government has given it a duty to be mindful of investment.
He did, however, suggest that Ofcom's push to ensure there is a minimum of 10Mbps across the UK could be included within the review.
Howett believes that there will certainly be some change from what the current situation is.
"My view is that Ofcom have always been reluctant to call for the full structural separation. And the discussions I've had with them suggest that they probably think it's a disproportionate response to the problems there are with the current model so I'd be surprised if we saw a full structural separation of Openreach," he said.
However, he believes that there will be a "strengthened" functional separation with a greater emphasis on quality of service for Openreach and in particular better repair and fault times.
If Ofcom's review does in fact conclude that there should be a structural separation of BT, then the case would have to be referred to the Competition and Markets Authority (CMA), which would have to establish whether there is an "adverse effect on competition" if BT did continue to own Openreach.
If the CMA then decided to press ahead with a structural separation of BT and Openreach, then there is the question how long such a split would take.
TechMarketView's Holway believes it could be a couple of years before anything is likely to happen.
But Vodafone's Braovac said there was no reason why it would have to take a long time.
"BT managed to spin off its [former] mobile arm (Cellnet) in less than a year, if BT chose to do it, it could do it extremely quickly," he said.
BT's chief executive, Gavin Patterson, has warned Ofcom that if it did take that path it would incur 10 years of litigation - a threat that Ofcom chief Sharon White has said she isn't scared of.
"The only reason people seem to think it will take a long time is because they think BT has an army of lawyers that they would deploy to prevent it from happening," said Braovac.
"If the rules that exist today are effective in ensuring that Openreach treated everyone exactly the same, including the downstream part of BT, why would they want to fight it for 10 years and spend millions of pounds on litigation," he asks.
Ofcom's review document is likely to come out later this month. The communications regulator said it could not reveal any further details about the review.