Openreach to stay in BT group, says Ofcom

By:
Alan Burkitt-Gray
Published on:

BT escapes carve-up as regulator tells group to make Openreach a separate company

The UK’s regulator is to make BT move last-mile access division Openreach into a legally separate company – but still within the group – after expressing disappointment that BT had “not yet come forward with proposals that meet our competition concerns”.

The decision comes far short of calls by BT’s competitors, which have long been campaigning for Openreach to become a completely independent company, no longer owned by BT.

Dido Harding, CEO of TalkTalk, was first off the mark to react to the news. “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, it is at least a step in the right direction,” she said.

Vodafone UK’s director of external affairs, Helen Lamprell, said: “We, along with broadband customers across the country, share Ofcom’s disappointment at BT’s performance and at its reluctance to undertake the transformation necessary to ensure the UK has the competitive fibre networks it needs for the future. We will analyse the detail of what Ofcom proposes – and BT’s response to those details – very carefully.”

Sky put out a comment attributed to an unnamed spokesperson. “Let’s not forget why we are here – BT Openreach has continued to fail consumers. This is why we have always said that we want a solution that is clear and executable and in the best interests of consumers and industry. We will now watch closely as to how Ofcom executes its proposals.”

Ofcom said: “We are now preparing to notify the European Commission of our intention to implement these plans, requiring the legal separation of Openreach to make it more independent. Throughout this process, we remain open to BT bridging the gap between its proposal and what is required to address our strong competition concerns.”

The regulator said its proposal “requires Openreach to become a distinct company with its own board. This would comprise a majority of non-executive directors, including the chair, who are not affiliated with BT. Openreach would be guaranteed greater independence to make decisions on strategic investments, with a duty to treat all of its customers equally.”

BT slightly forestalled the Ofcom announcement, at 07:00 UK time on Tuesday morning, by announcing a new chair for Openreach. At 20:14 on Monday night it announced that it had appointed Mike McTighe as the first chairman of Openreach.

McTighe was a board member of Ofcom for eight years until December 2015. He has also chaired set-top box maker Pace and controversial sports goods maker JJB Sports – and according his LinkIn entry still chairs mortgage lender Jerrold Holdings and Gortmullan Holdings, which several years ago took over some of the assets of bankrupt Irish businessman Seán Quinn.

BT chairman B Sir Michael Rake said of McTighe: “We promised in July to create an Openreach board and we are delivering on that promise. I remain hopeful this significant move by BT can help to underpin a sustainable, proportionate and fair regulatory settlement that is in the interests of the whole country.”

Ofcom said that it had decided not to go for an entirely separate Openreach, with different shareholders from BT, because of the extra cost.

“Structural separation could generate materially greater costs and risks compared to models based on legal separation,” said Ofcom. “This includes the costs of physically separating the two businesses, and effects on the BT pension scheme. Structural separation is the most intrusive form of regulatory intervention available.”

On pension costs, Ofcom said: “BT told us that our proposed model [total separation] would trigger substantial costs, and highlighted the impact of our proposals on the BT pension scheme trustees. The trustees of the scheme echoed this concern, as did the unions who represent most BT employees. However, most stakeholders who responded to our consultation took the view that the concerns raised by BT, the unions and trustees relating to the BT pension scheme have been overstated.”

Ofcom concluded that “Openreach as a wholly-owned subsidiary of BT is likely to achieve the greatest improvements for everyone in the shortest amount of time”, but – perhaps significantly – headed that section of its announcement “our current view”.

It added: “Our model will include proposals to publicly scrutinise and monitor its effectiveness against several measures of success. 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.”

Mark Skilton, a professor of practice at Warwick Business School, said that “the internet of things, superfast broadband, 5G and other types of networks may be better delivered and served with having multiple large scale companies in a more devolved network”.

He added: “Separating the BT and Openreach monopoly will in my view help this move towards a faster network of providers and hence one that is not driven at the speed of one large operator’s priorities. This has counter arguments of reliability and avoiding vested interests in zoning in on specific cities and regions for preferential treatment.”

Andy Hollingworth, former director of wholesale at TalkTalk, said the decision was “long overdue” and added: “It will give transparency for infrastructure investment, R&D and a cost base equitable to all service providers.”

Kester Mann, principle analyst at CCS Insight, said there were “clear flaws in the existing Openreach model”, and added: “Steering clear of a structural split is unsurprising. This would have been the most controversial and costly action Ofcom could have taken, but would still not have offered guaranteed improvements for customers.”