Finally! Ofcom calls BT's bluff over toxic Openreach axis

Profile picture for user slauchlan By Stuart Lauchlan November 28, 2016
Summary:
Regulator Ofcom has finally lost patience with BT's tactics and is set to enforce a legal separation with Openreach and on its own terms. The game's far from over, but it's a step in the right direction for the UK digital economy.
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Dark times for BT - good

Several people this morning have told me I must be pleased to see that Ofcom has finally taken some decisive action to break up BT’s toxic symbiosis with Openreach, a poisonous dependency that undermines the UK’s digital economy.

I am, up to a point - and only up to a point. It’s definitely a step in the right direction, but this is far from the end of the struggle. BT will fight the decision and Ofcom will have to hold its nerve and be ready to take the battle to the European Commission (EC) before we’re done here.

As the engineering arm of BT, Openreach effectively controls the UK’s national broadband infrastructure which was handed over to BT as part of the privatisation in the 1980s. Alternative broadband providers, such as Sky, TalkTalk and Vodafone, rely on access to the network to provide services to customers and have complained that BT’s effective ‘privatised monopoly’ hold on the infrastructure puts them at a competitive disadvantage and ultimately undermines the digital economy. 

Back in July, Ofcom told BT that Openreach had to become a “legally separate company” within BT Group, with a board of directors not affiliated to the parent. A suitably - and suddenly - penitent BT had made just such an offer to prevent the alternative option of full-scale forced dismantling of its cartel with Openreach. 

Of course, no sooner had the Ofcom decision aired than BT’s unrepentant corporate arrogance flared up, with CEO Gavin Patterson going so far as to issue a ‘come and have a go if you think you’re hard enough’ message to the regulator, threatening to use the EC to prevent any break-up action against BT: 

The last time I looked, we’re still part of the EU…there is nothing within European framework mechanism [that] would allow a full separation of any company in telecom.

After that, it seems to have been knuckle-dragging all the way in terms of meeting the requirements set down by Ofcom, something which finally appears to have exhausted the patience of the regulator. And rather splendidly, it’s announced that it will be going to Brussels to notify legislators and regulators there of its intention to force a legal separation of BT after the telco failed to come up with suitable proposals:

We are disappointed that BT has not yet come forward with proposals that meet our competition concerns. Some progress has been made, but this has not been enough, and action is required now to deliver better outcomes for phone and broadband users.

Token gestures

BT’s actions to meet the July ruling from Ofcom were token at best. It wouldn’t, for example, give the Openreach CEO Clive Seely full control over core strategic decisions, such as capital expenditure.

There was a last ditch attempt to stave off Ofcom earlier in the week with the appointment of Mike McTighe as the first independent chairman of Openreach. McTighe was previously on the Ofcom board for eight years.

But BT was still felt to be stacking the deck in terms of its plans for the Openreach managment, with Ofcom concerned about:

the level of influence that BT Group executives could exert over the management of Openreach.

Ofcom wants the new Openreach board to have a majority of board directors who are clearly independent, as well as a chairman with no affiliation, past or present, with BT. It also wants that board of directors to have some genuine decision-making powers that matter.

Any Openreach CEO would report to that Openreach board, not to the BT Group, while overall Openreach would not directly report to BT Group unless Ofcom agreed to this. Openreach employees would be employed by  Openreach, not by BT Group. Finally, Openreach would be able to consult with rivals, such as Sky and TalkTalk, without having to clear or disclose this to BT Group.

So what’s not to like? Well, it’s still not the structural separation of BT and Ofcom that is really required to make a difference. That would, as critics note, be costly, complicated and difficult to execute, but it's the endgame in all this that will ultimately be reached. 

In addition, although the regulator has been aware all along that going to the EC is going to be necessary, this isn’t going happen immediately. Instead, we’re going to have another public consultation early next year on what the submission to the Commission ought to be, which will then result in a formal plan, which will then be sent to Brussels, where it will then be discussed etc etc. All this, of course, while Brexit negotiations are underway.

And BT’s going to fight all this, of course. Its formal statement today is short:

We will continue to work with Ofcom to reach a voluntary settlement. We are in discussions with Ofcom on two outstanding issues, the reporting line of the Openreach CEO and the form of legal incorporation.

Meanwhile it’s some kind of victory for rival providers, such as TalkTalk, whose CEO Dido Harding comments:

We welcome the fact that the regulator has finally made a decision, and while we do not think legal separation goes far enough to deliver the broadband consumers deserve, they are at least a step in the right direction…We will continue to push Ofcom to ensure the plans deliver real, meaningful improvements quickly, and if major changes cannot be delivered, then they should move to structurally separate Openreach once and for all.

That last point is one that Ofcom itself makes, when it states bluntly:

If Ofcom's monitoring suggests that legal separation is not delivering sufficient benefits for the wider telecoms industry and its customers, we will return to the question of structural separation - fully breaking up the companies.

My take

As TalkTalk’s Harding says, it’s a step in the right direction. It goes nowhere near far enough and where it is going, it’s not going fast enough, but it is a step in the right direction.

BT’s somewhat truculent statement today is indicative that it knows that its bluff is finally being called. Let’s see what swaggering CEO Gavin Patterson comes out with next in terms of his bullish comments, which have become increasingly tetchy in recent months when questioned by analysts.

(And indeed what the Minister of State for Digital Matt Hancock has to say, given his adopted role as ‘apologiser-in-chief’ for BT in recent times. As of mid-morning, his normally active Twitter feed has no mention of the Ofcom decision. Most curious.)

This is far from over. But at last, there’s the semblance of a spine showing at Ofcom.

Now, game on and let’s finish off this toxic, digitally-disabling BT-Openreach axis once and for all.