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Ofcom Consider a BT Break up

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Ofcom today outlined the challenges facing the UK in ensuring that consumers and businesses receive high-quality digital communications services over the next decade and beyond.

Ofcom’s Strategic Review of Digital Communications, in March 2015, is examining competition, investment, innovation and the availability of all digital communications services. These include broadband, mobile, landline and bundled services.

Sharon White, Ofcom Chief Executive, said: “This review is about ensuring people get the best possible communications services, wherever they live and work.

“Our priorities are clear. We want to promote competition, investment and innovation, so that everyone benefits from even better coverage, choice, price and quality of service in years to come.”

UK consumers and businesses have benefited from significant investment in communications services in recent years. 4G mobile broadband is now available to 42% of premises from all four operators, and 90% from at least one. Superfast broadband is now available to 83% of premises, with a range of providers competing on service and price.

Ofcom wants to see the widest possible availability of high-speed broadband at home, at work and on the move. Ofcom estimates that a broadband speed of 10Mbit/s is necessary to benefit from today’s popular online services, such as on-demand video. However, 15% of UK households cannot currently access those speeds.

Availability is a concern in more rural areas, particularly in the nations and regions,1 but also in some urban places where roll-out costs or low incomes present particular barriers. Ofcom’s review will seek possible solutions to these problems.

A major focus of the current review is how well competition is delivering benefits to consumers and businesses. Ofcom’s last strategic review began in December 2003,

It led to the creation of Openreach, through which BT is required to provide access to competing providers on equal terms, for them to offer telecoms services to consumers3.

This approach has delivered real choice, quality and value for phone and broadband customers over many years. However, some challenges remain. For example, the incentive for BT to discriminate against competing providers can be limited by regulation, but not removed entirely.

BT’s network has evolved in recent years, with fibre lines running closer to premises. This may require different models of competition than those that worked best for the traditional copper telecoms network.

In addition, Ofcom has been concerned that Openreach’s performance on behalf of providers has too often been poor, requiring the

for faster line installations and fault repairs.

The review will address these issues, and Ofcom is today seeking views and evidence on future regulatory approaches, including:

  • Retaining the current model, where Openreach operates as ‘functionally separate’ from BT, and using regular market reviews to address any concerns around competition;
  • Strengthening the current model by applying new rules to BT – such as controls on its wholesale charges with stronger incentives to improve quality of service, or tougher penalties if BT falls short;
  • Separating Openreach from BT could deliver competition or wider benefits for end users. It would remove BT’s underlying incentive to discriminate against competitors. Separation could also offer ways to simplify existing regulation. However, the process would be challenging and it may not address some concerns relating to Openreach – such as service quality, or the timing and level of investment decisions;
  • Deregulating and promoting competition between networks. Virgin Media and a variety of smaller operators own networks, which allow them to provide phone and broadband services without using BT’s network at all. This kind of ‘end to end’ competition, which sometimes involves running fibre lines directly to premises, can help incentivise Openreach to improve its infrastructure. However, it could also lead to duplication of networks and weak competition.

It will also examine converging media services – offered over different platforms, or as a ‘bundle’ by the same operator. For example, telecoms services are increasingly sold to consumers in the form of bundles, sometimes with broadcasting content; this can offer consumer benefits, but may also present risks to competition.

Paolo Pescatore, Director, Multiplay and Video at CCS Insight commented “The big news here is the proposed break-up of BT. Many of its rivals have been lobbying hard for this for some time and they’ve clearly mounted enough pressure to raise concerns. In response, BT has reacted by calling for a detailed review in the pay TV market.

The major focus of the latest strategic review of the digital communications market is all about how well competition is delivering benefits to consumers and businesses. With this in mind, it seems that a full separation is unlikely as stated by Ofcom. Furthermore, Ofcom has acknowledged that the current system, whereby BT operates Openreach as a separate unit, has provided choice.

It is especially interesting that Ofcom has chosen to conduct this review as we move towards two major acquisitions that will change the UK multiplay market. Only time will tell, but it is clear that Ofcom is sticking to its guns and we expect a formal conclusion to the review by the end of the year.”

Matthew Howett, Practice Leader, Regulation at Ovum commented “Leading up to its publication, BT and its rivals had been engaged in a bitter war of words in relation to where Ofcom should focus its priorities. Rivals to BT believe the incumbent should be further split up and the access division, Openreach, hived off. BT responded calling for PayTV to be in the spotlight. Both of these have made it into the discussion document, however neither should probably be the focus.

The strategic review seeks to ensure that the industry continues to meet the needs of end users. The last such review, a decade ago, lasted almost two years and ultimately led to the separation of BT’s access network. This review is unlikely to result in a further separation of the incumbent. While Ofcom recognises there are challenges with Openreach, in particular in relation to service quality, it heavily suggests that further separation will not address these, and could ultimately be disproportionate. That’s not to say that tweaks to the Openreach model aren’t likely.

What this review really does is present an opportunity for the regulator to properly consider the impact competing services coming from so called OTT players are having on the sector, and whether this impact warrants further deregulation of the traditional communications markets. As new, more nimble players such as Skype and WhatsApp have arrived on the scene and competed away traditional telco revenues, regulators have been somewhat constrained in their ability to react, and certainly have not responded in the way telcos might have liked. This is where Ofcom’s focus ought to be, and could even be an area where BT and its rivals find mutual agreement…”