Do we need Brexit to break up BT? CEO boasts EU law means UK regulator couldn't enforce Openreach separation

Profile picture for user slauchlan By Stuart Lauchlan July 31, 2016
Last week BT hailed Ofcom's decision not to break up its relationship with Openreach and talked about increasing its independence. Over the weekend, BT CEO Gavin Patterson began the utterly predictable process of ensuring that what's been 'agreed' is far from a done deal.

Gavin Patterson

This time last week, BT’s chairman Sir Mike Rake was touring the media studios of the UK generously proclaiming that the firm was willing to consider running its Openreach arm as an independent business

It was a nakedly cynical bid by the telco to dissuade market regulator Ofcom from breaking up the toxic relationship between the two, a relationship that has been  heavily critcised by rival providers, who claim it gives BT a commercial advantage, and by legislators in the UK parliament, who say BT’s deliberate under-investment has damaged the roll-out of super-fast broadband in the UK.

A cynical Pauline conversion it may have been, but BT got the result it wanted 24 hours later when Ofcom failed to screw up the courage to break up the two firms completely, but agreed to a fudged version of what the telco had offered the day before. 

Needless to say, BT was pleased, with CEO Gavin Patterson claiming:

We have listened to Ofcom and industry and are introducing significant changes to meet their concerns. These changes will make Openreach more independent and transparent than it is today, something both Ofcom and industry have requested.

Openreach is committed to delivering better service, broader coverage and faster speeds and these changes will enable it to do just that. Our proposals can form the basis for a fair and sustainable regulatory settlement and we believe they can also enable Ofcom to bring its Review to a speedier conclusion.

But will they? Or will BT find a way round this? As TalkTalk CEO Dido Harding observed last week:

BT has proven itself expert at gaming this system.

In his own words

Well, the devil’s in the detail of course, but on a purely personal level, I wouldn’t trust BT an inch and my suspicions have been toughened by comments made by Patterson over the weekend when asked for more information on what happens now.

First there was the prepared statement:

We welcome Ofcom’s view the structural separation would be disproportionate, meaning that Openreach will remain 100% owned by BT and Ofcom also recognized the need effective corporate governance such as the BT Board seeking the financial envelop for Openreach. On the same day, we published our plans to make Openreach more independent and transparent introducing significant changes to meet their concerns. Firstly, we will establish a new Openreach board with an independent chair and the majority of independent members. Openreach will also control the deployment of capital within an overall budget agreed with BT’s board. In addition Openreach will produce an annual operating and a medium term plan underscoring its greater autonomy.

There will be a formal three stage process to consult industry in advance on substantial investment decisions and the development to new products. Finally, while Outreach will continue to have an obligation to serve all its customers equally, this obligation will be included in BT’s of association supplementing the current regulatory undertakings. We’re encouraged by how much common ground there is between Ofcom and ourselves, but there are still important issues to resolve and we will continue to engage with Ofcom over the coming months with the aim of reaching a fair proportionate and sustainable regulatory settlement.

Now the important bit there, the really important bit, is the wiggle-room that was inserted with the words:

…there are still important issues to resolve and we will continue to engage with Ofcom…

You thought this was a done deal? Think again.

Pressed by market analysts, Patterson was considerably less open about what the Ofcom decision will mean in practice, insisting:

I am not going to conduct discussions and negotiations with Ofcom in public and we’ll be very clear about that.

We were pleased that they chose not to pursue structural separation that is a very sensible decision, it would not have led to better outcomes for customers and it would have been a huge distraction over the next five, even potentially longer years.

What he did admit was that what’s on the table appears from the BT perspective to be a starting point for discussion, not an end in itself. Oh - and Ofcom, the regulator, is just asking for change here, by the way. As with the government’s pledge to empower every UK citizen to ask for super-fast broadand, you can ask; that doesn’t mean you’re going to get. Patterson said:

In terms of what they [Ofcom] ask is and what our proposal [is], I think I made it clear there is a significant overlap between what they want and what we are proposing, but there are significant differences that we need to work through before we get to an agreement. And whatever that agreement is, it needs to be completely consistent with company law and reflect the fact that we will continue to be 100% shareholder of Openreach going forward. So, there is work to be done. I think, that said, it’s [an] essential set of proposals, but we will work through the areas of difference and try to bring it to conclusion over the next couple of months.

The Brexit factor

He went further when asked what the likelihood of Ofcom forcing a legal separation would be. Ofcom chief exec Sharon White is on the record as stating that she believes that the regulator could impose this. Patterson has news for her:

The last time I looked, we’re still part of the EU and Article 50 has not been triggered in any way. And as long as we’re part of the EU, we need to respect EU regulations and indeed, depending on the type of relationship we want with EU going forward, if it is a Norway-style relationship, we will continue to need to respect European regulations.

That is significant because it certainly our understanding, having... taken a lot of legal advice on this, is that there is nothing within European framework mechanism [that] would allow a full separation of any company in telecom.

Seriously? So he’s pinning his hopes on maintaining BT’s monopolistic behavior on Brexit negotiations making it impossible for the regulator to break up BT and Openreach?

Patterson also made a pitch that enforcing a separation would be too costly for BT, a pitch that has consumer implications not far beneath the surface: 

In terms of the costs of the legal separation, there are the costs around changing contracts, changing wide lines around systems and separating systems and, of course, there will be costs associated with people if we move from 32,000 Openreach employees into a separate legal entity. So, they are quite significant. We would argue that cost benefit’s analysis needs to really justify something like that. I mean the people costs, just for clarity, will be related to the pension, the additional pension cost that we would expect the trustees to ask for at that point.

Ofcom is very clear in the document and where in all briefing that they do not want to substantially increase BT’s costs and so we feel as though there is an opportunity to really talk us through them and help them understand that the cost benefits are not just the [outcome] I am sure [they] want to provide.

Of couse, if BT finds itself burdened with extra costs, there’s not much doubt about who they’ll be passing those onto. So the paranoid among us may well choose to read that as an implicit threat.

My take

A done deal that’s in the best interests of everyone?

Not a chance. 

There will be some token tinkering and some gesture politics, but BT’s monopolistic bandwagon will keep on rolling to the detriment of rival providers, broadband customers and ultimately to the UK digital economy.

Last week was about getting a stay-of-execution from Ofcom, which co-operatively walked right into the trap. Now it’s all about avoiding having to do anything too radical or disruptive.

I found Patterson’s weasel words and his increasingly tetchy performance on the call with the analyst community hugely telling. I suspect BT knows it’s not out of the woods yet, but until Ofcom grows a spine, it’s off to a headstart.