Ofcom to publish conclusions on market review
Later this morning, we expect Ofcom to publish its conclusions following a seven-month review of the digital communications market it announced in July 2015, including asking the big question about whether Openreach (the BT division responsible for the 'last mile' of cable from the telephone exchange to the street cabinet and then into your home) should be restructured to make it independent from BT Plc. BT Retail competitors including Sky and TalkTalk have submitted their views calling for more regulation to help them influence Openreach's product roadmap and roll out more fibre-to-the-home (FTTH) services.
Ofcom is considering options ranging from the current 'functional separation' model where Openreach remains part of BT Group but its dealings with BT are regulated to ensure fair access to its services to BT Retail's competitors, to complete separation of Openreach into its own company, independent of BT Group. It is worth noting that Ofcom has no formal powers to require such action, however they can refer BT/Openreach to the Competition & Markets Authority and its views will likely carry significant weight in any CMA investigation.
Options Ofcom is likely to consider include:
- Retain status quo - we believe this is unlikely and at the very least Ofcom would seek to put in place some additional protections to promote competition;
- Additional monitoring/regulation - a possible option where it would seek further undertakings from BT Group/Openreach about investment and competition;
- Further separation & independent oversight - a possible option which could involve giving Openreach a separate governance framework including an independent board and more influence for Openreach customers such as Sky, TalkTalk and smaller operators;
- Full divestment - create Openreach Plc as a separate organisation from which BT would be required to divest a majority stake which would act entirely independently of BT Group and raise funds on the open market. We think this option is unlikely to be the recommended path at this stage;
What BT and companies such as Sky cannot agree on, is whether full separation of the businesses would lead to more or less investment within Openreach. Two days ago, Gavin Patterson, chief executive of BT Group announced at Mobile Word Congress that BT was planning to spend a further £1bn into upgrading infrastructure.
The BT offer suggests a possible middle ground and may signal Ofcom may not go after full separation, however we would not be surprised to see one of the less radical solutions of additional monitoring/regulation or some further safeguards and separation of governance roles being recommended with a monitoring provision to re-evaluate its effectiveness within a reasonable timeframe, before a decision is taken on whether this intervention was sufficient to satisfy the regulator that the market was operating effectively, or whether full divestment was required.
There is no question the 'last mile' infrastructure is the major challenge especially, but not exclusively, in rural areas which presents a natural monopoly situation. Many smaller operators have expressed concerns about planning investment into areas, only to find Openreach coming in soon after eroding their margins.
As we near the magic '90% superfast' target the UK government has set (using its '24Mbps or faster' definition which stands at 89.4% at present), the debate will be moving both to address the Universal Service Obligation speed of 10Mbps as well as rollout of faster-than-superfast through G.FAST, GPON and FTTH technologies.
If Ofcom were to recommend to change nothing or completely separate Openreach from BT, we would expect to see legal challenges in the coming months and years from either BT or its major competitors, which in itself could present a significant hurdle to additional investment amidst uncertainty on returns, overshadowing the negotiations on USO coverage later this year.