Ofcom review to consider break up of BT

UK telecoms regulator Ofcom has completed the first phase of its strategic review of digital communications and revealed a major focus is whether or not to separate Openreach from BT.

The strategic review has been seized upon by BT’s competitors as an opportunity to improve their position by lobbying for Ofcom to force change upon BT. The principal player in this respect has been Sky, which is reliant on BT’s Openreach broadband wholesale division to deliver many of its services. Sky recently lobbied Ofcom to report BT to the competition authority over alleged Openreach failings.

BT recently took the fight back to Sky by calling on Ofcom to expand the remit of its review to encompass pay TV, alleging Sky’s dominance of that market is detrimental to consumers. One of Ofcom’s challenges is to make objective, constructive decisions in the face of all this increasingly shrill lobbying.

Amid much lofty talk about the importance of competition, Ofcom singled out Openreach as in need of a rethink, stating that the fibre era may require different rules to the copper one and expressing concern that Openreach has too often provided poor service to its supposed customers. It invited interested parties to present their views on what should be done, explicitly identifying the separation of Openreach from BT as one option. There was no specific reference made to pay TV, although Ofcom did say it would have a look at the competition implications of multiplay bundles.

“This review is about ensuring people get the best possible communications services, wherever they live and work,” said Ofcom Chief Exec Sharon White. “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.”

Sky was pleased and couldn’t resist labouring its consumer champion narrative. “It is welcome news that Ofcom is putting the future of Openreach at the centre of its review,” said Sky’s Chief Strategy Office Mai Fyfield. “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.”

BT, funnily enough, thinks we should stick with the status quo, except in the case of pay TV of course. “There has been huge progress this past ten years with an explosion in competition and broadband usage,” said a BT spokesperson. “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.

“The one area where consumers are getting a raw deal is pay TV. There is no reason why UK consumers should pay half a billion pounds more a year than the European average. Ofcom have said they will consider whether to make it easier for customers to switch in this area but this isn’t enough. Much tougher action is needed to address the fundamental flaws in this market.”

Paolo Pescatore, analyst at CCS Insight, doesn’t reckon Ofcom will break up BT. “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,” he said. “With this in mind, it seems that a full separation is unlikely as stated by Ofcom. Furthermore, Ofcom has acknowledged that the current system, whereby BT operates Openreach as a separate unit, has provided choice.”

That Ofcom has chosen to explicitly focus on Openreach while at the same time declining BT’s plea for a closer look at pay TV means Sky is ahead on points at the end of round one. The forced split of Openreach from the rest of BT is still far from being a foregone conclusion, but at the very least Sky must be confident of increased regulatory scrutiny over BT’s wholesale broadband activities and maybe even lower prices.