Ofcom Notifies EC Of Plans To Legally Split BT & Openreach


Talks between BT and Ofcom fail to result in agreement over Openreach future

Ofcom is to notify the European Commission (EC) of the intention to force BT to make Openreach a fully independent subsidiary after talks to find a voluntary compromise failed to alleviate the regulator’s competition concerns.

In July, Ofcom declared Openreach should be a separate company from BT with its own board, brand and CEO, appointed independently of its parent, capable of making investment decisions for the benefit of the 500 hundred communication providers (CPs) that use the network – not just BT’s retail unit.

The plans fell short of rivals’ calls for Openreach to be made a fully separate legal entity but Ofcom has made clear that this course of action has not been taken off the table.

BT broadband


Openreach independence

BT has submitted voluntary proposals, and attempted to pre-empt Ofcom’s announcement with the appointment of Mike McTighe as the first ever independent chairman of Openreach. McTighe served on the Ofcom board for eight years leadng up to 2015 and has held positions at Cable and Wireless, Philips, Motorola, and GE.

However this has not been enough to persuade Ofcom, which has concerns about BT’s proposals for the transfer of people and assets as well as the level of influence BT executives would have in the company’s vision of ‘structural separation’.

“We are disappointed that BT has not yet come forward with proposals that meet our competition concerns,” said the regulator. “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.

“We remain open to BT bridging the gap between its proposal and what is required to address our strong competition concerns.”

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All options on the table

Ofcom maintains this approach is the most effective way to achieve its goals in the shortest amount of time but is adamant that if Openreach is not seen to be acting in its own interests, then it will move to separate the companies entirely.

“Our model will include proposals to publicly scrutinise and monitor its effectiveness against several measures of success,” added Ofcom. “The most direct will be whether Openreach Board decisions are taken independently, without undue influence from BT Group.

“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.”

BT has continually opposed full separation, arguing that Openreach benefits from the capital and research capabilities of the wider group. It rejects accusations that it is sweating its copper assets rather than investing in full fibre networks and claims it makes decisions for all the providers that use its network – including TalkTalk and Sky.

It indicated in July that it had volunteered some of the changes and told Silicon it believed its proposals were fair.

“We put forward proposals in July that we believe are fair and sustainable, and that meet Ofcom’s objectives without disproportionate costs,” said a spokesperson. “We are implementing these proposals, and have just appointed Mike McTighe to be the first chairman of Openreach.

“We are in discussions with Ofcom on two outstanding issues, the reporting line of the Openreach CEO and the form of legal incorporation. We will continue to work with Ofcom to reach a voluntary settlement that is good for customers, shareholders, employees, pensioners and investment in the UK’s digital future.”


Expert view

Experts have suggested Ofcom’s engagement with the EC is designed to spur BT into action rather than an indication of a desire for full structural separation – something which could disappoint opponents.

“This is a last-minute warning shot to BT to improve its offer on how legal separation would work,” said Richard Neudegg, head of regulation at uSwitch.” It would appear Ofcom is still open to BT proposing a better voluntary deal.

“Ofcom isn’t changing its position at all. The regulator is still gunning for legal separation rather than full structural separation and is using a potential notification to Brussels in an attempt to ensure it can get this over the line.

“Ofcom is clearly seeking to strike a balance.”

“Steering clear of a structural split is unsurprising,” added Kester Mann, an analyst at CCS Insight. “This would have been the most controversial and costly action Ofcom could have taken, but would still not have offered guaranteed improvements for customers.

“No doubt, BT’s rivals will criticise Ofcom for not being brave enough to push for structural separation. But after many months of campaigning, they should see the regulator’s efforts to engage with Brussels as a partial victory. The move toward legal separation and greater independence will bring important benefits to companies like Sky and TalkTalk in the long-term.

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