Ofcom: BT's Openreach must be a separate company

Ethernet plug with fiber optic wire

Openreach should be run as a separate company from BT, industry regulator Ofcom recommended today.

BT's fibre rollout division would not be fully separated from BT under the watchdog's proposed model, but would be run as a distinct company with its own board and employees.

It would also own the physical network it operates, allowing the board to make decisions around investing in the UK's broadband network and other Openreach assets.

Ofcom stopped just shy of recommending full separation between BT and Openreach, but said: "This model would provide Openreach with the greatest degree of independence from BT Group that is possible without incurring the costs and disruption - to industry and consumers - associated with separating the companies entirely."

Part of BT Group, Openreach comprises the UK's main broadband network whose lines are used by BT rivals like Sky and TalkTalk, and Ofcom has expressed concerns that BT's ownership of the network can lead to competition problems.

The latest proposals, which would come under the Communications (Access to Infrastructure) Regulations 2016, seek to make Openreach more independent from its owner.

Ofcom did not rule out separation if the proposed model does not work, however, saying: "If it cannot achieve this, Ofcom will reconsider whether BT and Openreach should be split into two entirely separate companies, under different ownership."

Research house CCS Insight's director of media, Paolo Pescatore, told IT Pro: "Fundamentally, BT will always be under pressure to perform and, ultimately, the threat of functional separation will remain. Therefore, we suspect the topic of separation will likely return in the future should this proposed new model not work."

Ofcom's recommendations build on its 10-year review of the digital communications market in February, when it ruled out separation but demanded BT open up more access to its ducts and poles to competitors, which BT has since started to do.

The regulator also recommended letting Openreach take its own decisions on budgets, investment and strategy, something today's proposals are designed to effect.

BT has responded by giving its rivals more access to the fibre network. Yesterday, it made a series of concessions ahead of Ofcom's proposals, including appointing an independent chairman, a majority of independent directors, and giving Openreach more autonomy over investment.

A spokeswoman for the telco today said: ""We welcome Ofcom's recognition that structural separation would be a disproportionate move. Our proposals provide Ofcom with every benefit they're seeking but without any of the substantial and unavoidable costs associated with legal incorporation. We will continue to engage with them over the coming months."

The proposals are subject to a public consultation, and people can have their say on the plans until 4 October.

Rivals' reactions

However, the measures outlined by Ofcom do not go far enough for BT's competitors.

"BT has gone the extra mile to appease Ofcom but rivals will still not be happy," said CCS Insight's Pescatore. "We firmly believe that it is now time for all parties to work together to ensure an efficient and speedy outcome in the interests of consumers. And more importantly regulatory certainty."

Sky's group CEO, Jeremy Darroch, said the proposal of a legally separate Openreach "falls short of the full change that would have guaranteed the world-class broadband network customers expect and the UK will need".

He added: "In particular, leaving Openreach's budget in the hands of BT Group raises significant questions as to whether this will really lead to the fibre investment Britain requires.

"At the end of the day, Ofcom's changes will only work if they deliver better outcomes for customers. It's now important that the changes Ofcom have mandated today are implemented rapidly, fully and without dilution. We are encouraged by Ofcom's stated commitment and willingness to use its powers to hold BT's feet to the fire."

Dido Harding, CEO of TalkTalk Group, said a legally separate Openreach "is a step in the right direction".

But she added: "The intention ten years ago was to create a functionally separate division that served all customers equally, but that is far from what happened. The lack of clear rules and responsibilities meant that BT was (according to Ofcom) able to make 4 billion in excess returns in a decade, and I fear we're repeating the mistakes of the past.

"Legal separation still means that a highly complex web of regulation, and BT has proven itself expert at gaming this system. There is nothing to suggest they will not continue to do so in the new system. Structural separation is cleaner, with less red tape - and removes BT's ability to exploit loopholes in the regulation. In taking one cautious step forward, I fear Ofcom may in practice have taken five steps back."

However, Dan Howdle, editor-in-chief of broadband comparison site Cable.co.uk, told IT Pro separation is inevitable.

"In terms of full amputation of Openreach from BT, the leg is now half off," he said. "A separate board, staff becoming Openreach employees, separate and more transparent budgets and strategies - these are the things you would do when preparing for a full split."

He added: "With pressure applied by government, consumers and competitors unlikely to let up any time soon, I can't read this any other way: Separation is now is case of when, not if."

What's next?

Today's recommendations regarding Openreach form just part of Ofcom's proposals resulting from its 10-year review, with the plans open to public consultation until early October.

The regulator plans to build on the review by setting out stricter minimum requirements on Openreach to repair problems and install new lines more quickly later this year.

Performance tables will also chart communication providers' quality of service on a number of metrics from next year, and interactive maps will show broadband coverage for individual addresses.

CEO of Ofcom, Sharon White, said: "We're pressing ahead with the biggest shake-up of telecoms in a decade, to make sure the market is delivering the best possible services for people and business across the UK."

Plans to make it easier to switch providers, and for telcos to automatically compensate customers for poor service, are also underway.