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Ofcom detonates tactical nuclear weapon underneath Openreach
Tuesday 26 July 2016 07:08:56 by Andrew Ferguson

Ofcom has announced how it sees Openreach operating for the next decade and onwards and it will be as a more independent entity from the BT Group. The changes are pretty radical and seem to fall one step short of Openreach becoming its own PLC on the stock market, but who knows that may eventually happen.

  • New branding to reflect a new company, i.e. no mention or hints of BT
  • Staff to be employed by Openreach, i.e. transferred totally from BT Group. Consultations will resolve issues such as pensions and other benefits
  • More consultation with customers (e.g. TalkTalk and Sky) around large investments, and this will include a 'confidentiality' phase where plans can be discussed without any disclose to BT Group.
  • Assets under Openreach control to now be owned by Openreach
  • Its own board, where the majority (including the Chair) will be non-executive members with no affiliation to BT Group. Appointment will be made by BT, but Ofcom must be consulted on appointments.
  • Openreach to be given its own 'articles of association' and its directors given a duty to promote the success of the company and work in the interests of ALL customers.

This is the model that Ofcom has put onto the table and it is significantly more radical than the changes a decade ago that took the UK broadband market to where it is now. Whether the changes will produce a positive result with much more investment in Fibre to the Premises and better customer service is a massive unknown but there is an opportunity for that to happen and the question is once a new Openreach board has formed and the dust settled whether they find themselves struggling or awash in capital and enough staff to roll-out millions of FTTH/FTTP.

For the embattled SME and consumer, today's news is promise of a better future but with no certainty as to when this will happen and this is unfortunate as much of the campaigning has been around service standards with many of the existing problems down to previous decade old Ofcom decision and staffing levels of Openreach which are being stretched to keep up with the existing VDSL2 roll-outs and meet install/fault targets.

For those who are yet to see superfast broadband rolled out to them and are now part of the 95% due to be covered by the end of 2017, we strongly believe that today's changes will mean no difference, since the most likely result of this new Openreach will be a revision of the split between G.fast technology and FTTP in the commercial roll-out that was already planning to target some 12 million premises. There is actually a very high possibility that if large providers such as Sky and TalkTalk are more interested in steering Openreach investment into their emerging IPTV ranges and competing with Virgin Media that we might see Openreach doing little in rural areas for decades unless there is Government incentive.

Ofcom seems confident that this split is not going to cause disruption and massive costs to the consumer or industry, but we believe it will introduce some uncertainty and negotiations over staff transfers (both in individual terms, pension liabilities and the number of staff) are going to be a sticky problem and we can envisage, just as with previous changes, long term BT Group staff may take this as an opportunity to take early retirement.

The previous revised pole and duct access plans announced in February continue with the aim being to give more people more choice of infrastructure into their home, and FTTH has its new rules coming into force on 31st July. It is conceivable that Openreach may morph into a custodian of the existing VDSL2 and copper networks and the ducting they exist in, and the major customers just exploiting the new duct and pole access rules to roll out their own FTTH networks. Thus allowing TalkTalk to roll-out its much talked about 10 million home network without having to dig up every pavement.

The next couple of months are now the time for TalkTalk, Sky and others to step forward and either embrace the duct access abilities or work with the new Openreach to get them to do a more FTTH heavy roll-out. If these two largest competitors to BT Retail do not step up, then these changes are wasted and all they will achieve is allow BT Retail to further exploit its market share in the retail sphere. So just as with the Brexit changes it is time for those that have campaigned for the changes for years to now step up and get on with making sure that after the champagne bottle has emptied that work starts swiftly to produce the world leading changes they promised.

A number responses are expected today from interested parties and the first is from the Government.

"Nine out of ten homes and businesses now have access to superfast broadband, but our goal is to make sure the UK builds the right infrastructure to maintain our position as a world leading digital nation.

We are clear that a more independent Openreach is needed to benefit consumers and the UK’s digital infrastructure. We are concerned that BT’s proposals do not go far enough and think it is right that full structural separation remains an option. Swift and clear action is needed to give certainty to consumers, industry and investors in the UK’s broadband infrastructure, and which delivers rapid improvements in the level of investment and service."

A Department for Culture, Media and Sport spokesperson

"Today's proposal to create a legally separate Openreach is a step in the right direction, although falls short of the full change that would have guaranteed the world-class broadband network customers expect and the UK will need. 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."

Jeremy Darroch, Group Chief Executive, Sky

"Fundamentally, today’s proposals do not address Ofcom’s key objectives of reducing the country’s dependence on Openreach and encouraging essential investment in fibre. Whilst correctly identifying Openreach as the principal source of the industry’s dysfunction, it is hypocritical of Ofcom to focus on a restructured Openreach as a panacea.

Further debate and navel-gazing as to the appropriate structure of BT will continue to create a period of uncertainty at a time when the industry needs clarity, direction and competitive investment. Openreach has a critical role to play, but it is not prudent to entrust them with sole responsibility for our digital future.

CityFibre has proven its commitment to delivering future-proof digital infrastructure across the UK through its significant investment in dark fibre assets. Unconstrained by the ongoing regulatory debate, CityFibre has the financial flexibility and independence to rapidly deliver the fibre infrastructure, innovation and challenger ethos essential to meet the UK’s future digital needs."

Mark Collins, Director Strategy & Policy at CityFibre

"Anything which brings the UK closer to a full fibre to the premise rollout is a step in the right direction. Industry will be supportive of Ofcom’s focus on outcomes, particularly the focus on increasing fibre connections ‘to the doorstep’. Separating BT Openreach functionally within BT Group, should allow BT Openreach to invest in the infrastructure required to ensure the UK has digital infrastructure which is fit for the future.

What is needed now is a rigorous focus on how fibre rollout in the UK can be speeded up. The Government has a clear roll to play in setting out a robust Digital Economy Strategy to give confidence to industry that the UK will not be left behind in this crucial area."

Chris Richards, Senior Business Environment Policy Adviser at EEF, the manufacturers’ organisation

Comments

Posted by Gadget 4 months ago
So Jeremy that would be the same fibre investment that your company has already seceded not to make itself?
Posted by TheEulerID 4 months ago
Precisely none of this makes the slightest difference to the economic case for investment in expensive to reach areas. Absolutely nothing.

In the meantime there will be a huge amount of expense and confusion in shuffling round notional liabilities, like the pension deficit, borrowings and so on.

A bluff may be called.
Posted by AndrueC 4 months ago
@TheEulerID: Oh it makes a change. As noted in the article it allows for a greater digital divide. Talk Talk, Sky et al are not interested in low RoI rural customers. They will push openreach to target cities and large towns. Expect any FTTP roll-out to follow the LLU pattern but due to greater cost it'll peter out sooner.
Posted by ValueforMoney 4 months ago
Concur on rural, but Para 3.27 ..Would Openreach on its own have made a different weighted decision on G.Fast v FTTP. I think it would and here you can make the case that there will be less room for BT Group to sacrifice engineering for other projects.
Posted by chilting 4 months ago
This all looks like window dressing to me.
All PLC's are answerable first and foremost to their shareholders - still BT.
The main thing is that is doesn't do anything to kick start competition in the wholesale broadband market.
Posted by TheEulerID 4 months ago
@AndrueC

Any FTTP investment by OR will surely still (like the majority of the world) be based on GPON which doesn't lend itself to full LLU (there is an Ofcom funded report on unbundling GPON). So, the future will be VULA services, whether VFSL, G.Fast or FTTP.

The competitive pressure to OR in the mass consumer market will always be what VM & (maybe) some metro fibre providers produce.
Posted by gsmlnx 4 months ago
And now BT plc will detonate the pensions timebomb that will kill this off. Openreach to "own" the pensions for their workers past/present and future?

Good luck with that one. Last published figures in May 2016 show pensions deficit for the group was £10bn up from £7bn, 2 years earlier. And Openreach is the majority employer of UK staff.

http://www.telegraph.co.uk/business/2016/05/28/bt-pension-black-hole-risks-dividends/
Posted by Bob_s2 4 months ago
It was preditable that this was the way OFCOM would go. They had dropped plenty of hints. It is probaby a sensible first step. If they then wanted Openreach sold off it makes it a lot simplier to do
Posted by AndrueC 4 months ago
@TheEulerID. I don't mean in terms of technology. I mean in terms of areas reached. openreach has historically had a stronger interest in pushing upgrades to lower RoI areas. Okay so it might not have pushed as far as some would like but it has upgraded more exchanges and properties than any other CP.
Posted by AndrueC 4 months ago
(cont'd) What I'm saying (and the news article is saying) is that by giving the LLUOs more control that might change. openreach may prefer to roll out The Next Big Thing(TM) to cities rather than finishing off The Last Big Thing(TM) in rural areas.
Posted by Bob_s2 4 months ago
Quote "In the meantime there will be a huge amount of expense and confusion in shuffling round notional liabilities, like the pension deficit, borrowings and so on"

Not realy . THey would just cease to be memners of the BT group Pension scheme. They could leave any existing accrued rights in the BT scheme ofr transfer to a new Openreach pension scheme
Posted by 961a 4 months ago
The toothless regulator gnashes its gums once again.
What is urgently needed is directives (and money) for the last 5% ad for SME business parks etc
The government needs to direct the timetable for this
Posted by andrew (Favicon staff member) 4 months ago
@bob_s2 Staff and unions would not likely take well to transferring to a new pension scheme given that older schemes often have better terms - so while what you propose might happen it would meet opposition and increase chance of long term experienced engineering staff leaving. Of course new staff may be cheaper but will have a longer period to reach full potential.
Posted by TheEulerID 4 months ago
@AndrueC

We are in agreement. That investment would be to the cities/towns to compete with VM, and not the rural areas.
Posted by TheEulerID 4 months ago
@Bob_s2

OR will have a responsibility for at least part of the existing pension scheme, and arguably the majority of it given past employment practices. If you think OR can be floated off without responsibilities for past employees, you are living in a dreamland which the courts will demonstrate.
Posted by TheEulerID 4 months ago
@andrew

It's not just the existing employees. The (legally) more intractable issue is the responsibility for the deficit for accrued benefits (some are forecasting this will grow to £12bn given falls in bond returns). There are many more BT pensioners than there are BT employees.
Posted by Bob_s2 4 months ago
The Pension scheme does not transfer. The.BT Group Scheme is the BT group scheme so there would be no liabilities for Openreach. They would set up their own pension scheme. Acrueed rights in the BT scheme would be retained

Openreach would have no liability for another companies pension scheme. THe acrueed deficit for pensionable servie under BT remains with BT
Posted by rtho782 4 months ago
Lol, so the best thing for BT Group to do now, is let OR cease any future investment, and BT Wholesale or Retail can use OFCOM duct sharing arrangements to install it's own FTTP in OR's ducts, which it does not have to share with Sky/TT/etc?
Posted by TheEulerID 4 months ago
@Bob_s2

I suggest you go read the Ofcom proposal which very explicitly does cover the pension issue, the access that BT Group will have to have to OR cashflows on the new arrangement and what the pension trustees might insist on (which could including an immediate and large charge against the company).
It would have a massive effect on OR's finances.
Posted by AndrueC 4 months ago
@Bob_s2: I'm not sure that would be possible. It would be a TUPE issue and being forced to move to a less valuable pension scheme would probably be a violation.

https://en.wikipedia.org/wiki/Transfer_of_Undertakings_(Protection_of_Employment)_Regulations_2006

"* employees' most important terms and conditions of contracts are not worsened"

And moving to a new scheme would be worse or else very expensive for the new business.
Posted by AndrueC 4 months ago
It's not that TUPE prevents it per se but you can't just transfer everyone to <insert random pension scheme here>.

http://www.pensionsadvisoryservice.org.uk/about-pensions/when-things-change/leaving-your-pension-scheme/tupe
Posted by chilting 4 months ago
The BT pension deficit, recorded at £10.6bn in June 2015 and likely to be much higher after Brexit, will have a very negative effect on BT investment and dividends over the coming years.
This makes it even more important that OFCOM stimulate investment from other private companies. BT will not have the cash needed and broadband development in the UK will suffer badly.
Posted by jimwillsher 4 months ago
All well and good.

But for me, on an EO line, in Scotland, attached to a 137 customer exchange, and where the 100-pair cable runs along the grass verge as there are no ducts or poles, it's going to make absolutely b***** all difference. And I would imagine that's a similar story for the "other 5%" of the country.

Oh, and I've had no phone line since the grass verge was cut. Wonder why that is.
Posted by Blackmamba 4 months ago
Hi Broadband Watchers.
I feel S White has taken the responsibility of BT and placed it on all ISP,s but the down side will be higher charges to the customers as Openreach extendes it coverage of fibre plus G/fast and other services.
Posted by TheEulerID 4 months ago
@jimwillsher

I for one have never seen a telephone cable just laid atop a grass verge. Is there some planning band in your area of telegraph poles and there's no money to bury the cable? It seems astonishing. Has anybody else see a telephone cable just left to lay on a grass verge?
Posted by Bob_s2 4 months ago
Quote Posted by AndrueC about 4 hours ago
@Bob_s2: I'm not sure that would be possible. It would be a TUPE issue and being forced to move to a less valuable pension scheme would probably be a violation.

Pensions schemes as such do not come under TUPE. There is some requirement's with regard to protecting existing pension rights but the new company does not have to offer an equivalent scheme
Posted by Bob_s2 4 months ago
Quote "Posted by TheEulerID about 5 hours ago
@Bob_s2

I suggest you go read the Ofcom proposal which very explicitly does cover the pension issue, the access that BT Group will have to have to OR cashflows on the new arrangement and what the pension trustees might insist on (which could including an immediate and large charge against the company).
It would have a massive effect on OR's finances.

They are suggestions by OFCOM not proposals. You are into complex areas of company law and pensions regulation and I think a lot of what OFCOM are suggesting would breach those regulations

Posted by 961a 4 months ago
TheEulerID re Jim Willsher
Yes, I've seen a cable left lying on the verge (and across the tarmac of a passing place) for a good six months. When the wind blows the poles down in the Scottish Borders it's common practice to get things up and running (or down and dirty) by stringing the copper along the verge. How soon it gets buried depends on how soon the next lot of poles blow down!
This is why I'm concerned about Ofcom mandating the timescale for the last 5% rather than nattering on about pensions
Posted by TheEulerID 4 months ago
None of this changes your position at all. It certainly doesn't change the economic case at all as the current infrastructure will already be a loss maker. Unless something was done to change the economics, I can't see how OR, separated or not, would priorities expenditure in the last 5%. It would require ways of funding it.
Posted by TheEulerID 4 months ago
@Bob_s2

So now you are saying the pension issue is complec, involves company law and the pensions regulator yet earlier on you were breezily dismissing it as OR employees could simply be moved to a new scheme an all the old liabilities would disappear. You can't have it both ways.

In any event, the pension fund issue cannot be ignored. It's a legal imperative.
Posted by jimwillsher 4 months ago
@TheEulerID

We've lived here for five years and the cable pre-dates us, so I don't see it getting buried any time soon. It's visible for about 1 KM, occasionally looping above the grass to cross over a tree root, before return to the murky world of the weeds. I'm amazed it hasn't been nicked - 1Km of 100 pair copper that could be bundled into a car simply by coiling it up.
Posted by ValueforMoney 4 months ago
@Eular why not secure 'investment' by making it a direct proportion of the costs recovered. Costs recovered include replacement costs so why not tie it that way. This includes rural and copper components can be replaced with alternatives.
The proposal is disappointing as it does not illustrate how investment is increased.
Posted by 961a 4 months ago
"I can't see how OR would prioritise expenditure in the last 5%. It would require ways of funding it"

Agreed. But that is exactly what the regulator is supposed to be doing. Inserting money from the industry and government to enable the last 5% to be constructed. In just the same way as the Royal Mail is required to provide 6 day service to the last bits of its network which can never be profitable

And here's another thing the regulator needs to get its head around. "The customer" is the person who picks up the phone or switches on the computer. Not SKY or Dido
Posted by gah789 4 months ago
This is just a rerun of the lead up to the split of British Gas in the 1990s. Both Ofcom and BT know that. The only question is why BT has been resisting the inevitable - probably because they want to preserve access to OR's cash flows when other divisions are in bad shape. The pension problem is complex but soluble as many utilities and other companies have split in the past.

While comments here focus on consumer broadband, a much more pressing issue is OR's dismal performance in installing leased lines in areas where it has an effective monopoly.
Posted by gah789 4 months ago
@961a. Wrong. OR is a wholesale infrastructure business - and will remain that in future. Its customers are communication providers - of many sizes - and its service to them varies from poor to awful. Trying to deal with millions of retail customers would merely make the situation worse.

If we want to subsidise the final 5% why do this through OR charges, which exempts VM and other from any responsibility, rather than through a levy on all broadband services?
Posted by TheEulerID 4 months ago
@VFM

So you want capital investment to be a part of "cost recovered", however you define that (surely turnover is easier). OR is a £5bn a year company without much prospect of a significant increase in turnover. Of that, around £2.5bn is wholesale line rental, maybe £0.5bn is VULA and the rest private circuits.

SO what percentage are you proposing of turnover? Bear in mind, if capex exceeds depreciation it means costs will increase which requires future funding.
Posted by TheEulerID 4 months ago
@961a

The USO funding issue is, of course, out for consultation, but historically this has been financed through monopoly coverage. Excess profits from urban areas subsidising rural (as happens with phones, electricity distribution). However, there is no monopoly in urban areas. Shortly VM will have 60% coverage including the most profitable areas and absolutely no USO or wholesaling requirements.
Posted by 961a 4 months ago
gah789.OR arrived when BT reorganised its engineering bits.Customers remain folk at end of the line paying bills. Sky etc are separate corporate entities, trying to latch on to bits of infrastructure rather than construct their own.
I'd go further.Customers of Sky etc are also customers of OR via a third party.Time the regulator gave all retail customers the right to contact OR direct when they had a complaint.THAT would stir OR into improving service!
Funding for development has come from government Too convenient to kick final 5% down the road rather than fund work required
Posted by andrew (Favicon staff member) 4 months ago
@961a While retail customers having access to OR would help for faults around the local loop, look at the example of the recent core network issues, OR would have been fielding very high volumes of calls for something it does not operate.

End result public may end up as the ball being passed around and some providers may under resource its own support.
Posted by JNeuhoff 4 months ago
@TheEulerID: Steve, you are one of the most pessimistic posters here, permanently telling others that things can't be done with BT. Do you have any financial interests with that business? At any case, what would you do to solve the areas Ofcom is trying to address here?
Posted by TheEulerID 4 months ago
@TheEulerID

I have a modest number of shares (about 5,000), and what you describe as being pessimistic is what I would all realistic. If you wish to challenge my figures using realistic assumptions and numbers then fine. I'm very open to see financial projects (my background is very much statistical and quantitative), but what I constantly see is wishful thinking and not estimations.
So as far as that USO is concerned, I repeat. How is it to be funded and who will have responsibility to deliver it? Government, OR, local authorities? By a levy? If so on what?
Posted by TheEulerID 4 months ago
That should have been @JNeuhoff of course. Not that I don't talk to myself of course, but that's a different matter...

Incidentally, I have proposed on other threads a levy to be charged on all BB connections to be allocated to regional bodies whose job it would be to fulfill the USO where it's not deemed cost-effective. The bodies would issue tenders to potential suppliers as with BDUK.
Posted by JNeuhoff 4 months ago
@TheEulerID: That would explain your pessimistic attitude. I am glad you are not working for Ofcom whose proposals are on the right track.

Do you have a better solution to offer than Ofcom, other than this constant corporate whining?
Posted by 961a 4 months ago
Quite clear that it is the government that must decree financing of the final 5% and that it will never happen otherwise.
Posted by themanstan 4 months ago
The Phrase "Works in the Interest of ALL customers" is somewhat challenging, as there is the potential to severely limit what can be done. As this limitation if interpreted strictly means that if OR provided a service that was detrimental to any of their customers then they would be in breach, even if it were to the benefit of the vast majority... such that OR becomes risk averse... even worse if this limitation is not carefully worded statutory isntrument, OR by simply competing in a particular market segment is not in the interest of their some of those customers...
Posted by ValueforMoney 4 months ago
@Euliar Openreach is now using gross capex which includes subsidies but Openreach has £2.7bn EBITDA from £5.1bn Turnover.
That gross capex number reported of £1.5bn for 15/16 if converted to net capex might well include a 1m fttp passed. Expressing that as a proportion of the required cost recovery would allow the ambition to be discussed.
Posted by TheEulerID 4 months ago
@VFM

EBITDA is NOT profit. It's a misleading financial metric designed to persuade investors in high growth companies that it will (eventually) be profitable.

For inherently low-growth, capital intensive outfits like OR you simply can't ignore depreciation and financing costs. The operational profit for OR in 2016 was £1,363.
Posted by TheEulerID 4 months ago
@VFM

Also, operating profit does not including interest charges and those aren't attributed to individual divisions but stood at £712m at the group level. There were also specific payments at group level such as retrospective regulatory issues (it's unclear to what extent they are attributable to divisions).

So the actual net figure is nothing like you claim.
Posted by TheEulerID 4 months ago
@VFM

I also suggest you read this (there are other articles on similar lines)

http://www.investopedia.com/articles/06/ebitda.asp

"Furthermore, while capital expenditures are a critical, ongoing cash outlay for almost every company, EBITDA neglects capital expenditures."
Posted by ValueforMoney 4 months ago
@EulerID Thanks, though your helping make the case for Separation with above posts. Even the calculation of depreciation can be scrutinised as your in effect depreciating what was largely a capitalised labour cost. Depreciation often matches the capital, it looks more financially engineered than calculated.
Capital to cost recovered as a ratio could still be a means of introducing some control here.
Posted by TheEulerID 4 months ago
@VFM

What the hell are you talking about? There is nothing wrong with capitalising labour costs where it relates directly to setting up a capital asset. Plannint, installing and configuring a fibre cabinet is a capital cost, but enabling each connection is current account. Costs of contracted roadworks, which are mostly labour costs, are capitalised, so where's the difference? The alternative would be to charge all that to current account (which just reduces profits that year rather than being amortised over years).
Posted by TheEulerID 4 months ago
@VFM

In addition, a (rough) balance of depreciation/amortisation and capex is exactly what you'd expect over the long run when a company has fairly flat revenues. If capex increases rapidly without future increases in revenues what will happen is that borrowings go up and costs increase (financing costs & depreciation). Unless there is a reduction in other costs from the investment that depresses future profits.
Posted by ValueforMoney 4 months ago
@Euler you miss the point. Of course there is nothing wrong, but the financial engineering needs to be understood. The capitalisation level is subjective as is the depreciation level. The capitalisation levels have a profound influence on cost recovery and cash generation over the life of project.

Posted by fastman 4 months ago
VFM no idea what you are on about - especially the phrase The capitalisation level is subjective
Posted by TheEulerID 4 months ago
@VFM

Could you please explain what you mean that "the capitalisation level is subjective" and "the financial engineering needs to be understood"? Generally speaking, rules for what can and cannot be included as capital expenditure are defined in accounting standards (not to mention taxation rules).

There are always some grey areas in the attribution of costs in accountancy, but I doubt there's some huge scale of bending the rules. Worldcom famously did it to the tune of $3.8bn of operating cost being capitalised, but that was essentially a fraud perpetrated on investors.
Posted by TheEulerID 4 months ago
@VFM

This is an Article from the Telegraph with respect to the (misallocation) of capitalised labour costs in the telecoms industry and references Worldcom (in particular) and compares it to the UK position

http://www.telegraph.co.uk/finance/2766732/Could-WorldCom-happen-here.html

This BT response to the PAC gives the breakdown on BDUK capex, including capitalised field workforce and project/planning costs (towards the end).

http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/474/474vw06.htm
Posted by Kebabselector 4 months ago
I can't work out if this makes my uneconomically viable cabinet closer or further away from an upgrade.
Posted by andrew (Favicon staff member) 4 months ago
@kebabselector Impossible to say and even while Ofcom is talking of just months to resolve and new rules in place, we believe it will be a year and then another year for changes to be discussed by all interested parties, thus business as usual for another 2 years at least.
Posted by Kebabselector 4 months ago
Oh well, I'll keep trying. Not sure what to try at the moment!
Posted by galacticz00 4 months ago
As one of the 5% it's really galling to find my broadband speeds and quality of service deteriorating month on month with much greater number of dropouts / loss of service than at any time before (well for the last 14 years that I have lived here and that includes dial - up). Yet Plusnet are to increase my charges and claim that service has improved. At this rate I'll soon be back to dial up speeds.
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