LONDON (Alliance News) - UK telecoms regulator Ofcom on Thursday put on the table for discussion a number of potential reforms in the UK communications market, including the separation of BT Group PLC's infrastructure division, Openreach, as it has completed the first phase of its Strategic Review of Digital Communications.
BT was formerly a state-owned monopoly that controlled all of the UK's telephone network and was the only provider of services. However, BT was later privatised, and after Ofcom's last strategic review, concluded in late 2005, BT was made to form Openreach as part of measures to allow rival operators access to BT's network.
Whilst the formation of Openreach has "delivered real choice, quality and value" for customers, Ofcom said Thursday, the regulator highlighted some challenges that remain. "The incentive for BT to discriminate against competing providers can be limited by regulation, but not removed entirely," Ofcom said.
The regulator highlighted changes to BT's network over the year, and suggested that it has been concerned that Openreach's performance on behalf of providers has "too often been poor".
Competitors have called for Openreach to be separated from BT in the past over concerns surrounding the fairness of BT both running services and controlling the infrastructure on which services are run. In its submission to Ofcom's strategic review, Sky PLC renewed its call for Openreach to be separated, suggesting there would likely be "significant net benefits from establishing Openreach as an independent company."
Ofcomon Thursday outlined a number of approaches to address Openreach.
These would include retaining the current model, whereby BT's Openreach infrastructure business is required to provide access to the network to competing providers, or strengthening the current regulatory model, which would impose new rules on BT, including controls on its wholesale charges with stronger incentives to improve quality of services and tougher penalties should it fail to meet targets.
Ofcom also posited separating the Openreach business from BT, which Ofcom argues "could deliver competition or wider benefits for end users" and would "remove BT's underlying incentive to discriminate against competitors". However Ofcom added that the "process would be challenging and it may not address some concerns relating to Openreach."
As a standalone business, Openreach would have GBP5.01 billion in revenue, based on BT's most recently completed financial year. It is the second largest segment for BT after BT Global Services in terms of revenue.
Finally, the other option tabled by Ofcom would be deregulating the market and promoting competition between networks. The regulator highlighted Virgin Media PLC and a variety of smaller operators owning networks that allow them to provide services without going through BT at all, and said this kind of competition can help incentivise Openreach to improve its infrastructure. However it warned this could lead to a "duplication of networks and weak competition".
Sky Chief Strategy Officer Mai Fyfield said it was "welcome news that Ofcom is putting the future of Openreach at the centre of its review".
"For too long, consumers and businesses have been suffering because the existing structure does not deliver the innovation, competition and quality of service that they need," Fyfield added.
Meanwhile, a spokesperson for BT said in a statement: "We welcome this review and are confident it will find the UK broadband market to be both vibrant and healthy."
The BT spokesperson said that much of the progress in the UK market "is down to BT investing billions of pounds in fibre at the height of the recession.
That investment wouldn't have occurred had BT been split in two a decade ago and our ambitious plans for ultrafast broadband also depend on BT remaining intact."
"Ofcom have overseen a regime that has balanced investment with competition, and we hope they will once again put the needs of the UK and its consumers ahead of those who have tried to keep the UK in the digital dark ages," the BT spokesperon added.
Ovum analyst Matthew Howett said he believes the 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," Howett added.
Elsewhere, Ofcom said it is examining how regulation can enable the commercial development of future ultrafast broadband, what further options might be available to improve mobile services, and what it called 'bundled' telecoms services.
Ofcom noted that telecoms services are increasingly sold to consumers in the form of bundles, sometimes with broadcasting content, and whilst "this can offer consumer benefits" it "may also present risks to competition."
Telecommunications providers are increasingly moving towards 'quad play' offerings, meaning they provide fixed line, mobile, broadband, and television services. This has also resulted in increasing consolidation in the market, with BT moving to acquire peer EE Ltd, Hutchison Whampoa, which runs the 3 network, agreeing to acquire 02 UK from Telefónica, and Vodafone Group PLC recently confirming it is in talks with US cable company Liberty Global over a potential asset exchange.
The rivalry between BT and Sky has heated up over the past two years following the launch of BT's new BT Sport channels, challenging Sky in its dominant area of paid sports television. The competition between the two led to a significant jump in the costs at the most recent auction for the broadcasting rights to the English Premier League. The rights were sold for a total of GBP5.13 billion, jumping from GBP3 billion at the previous auction.
"The one area where consumers are getting a raw deal is Pay TV. There is no reason why UK consumers should pay half a billion pounds more a year than the European average. Ofcom have said they will consider whether to make it easier for customers to switch in this area, but this isn?t enough. Much tougher action is needed to address the fundamental flaws in this market," said a BT spokesperson in a statement.
Additionally, the regulator said it will also look to identify areas where its existing regulation may be simplified, removed or replaced, as the "rules that govern the communications sector must evolve to keep pace with developments in technology, consumer needs and expectations." In particular it highlighted the rise of 'over the top' internet communications services such instant messaging, which it said may create a case for less regulation on mobile operators or extending existing rules for internet-based services.
Ofcom will now move the review forward to a second phase and will be accepting evidence and responses from stakeholders by October 8 with a decision likely "at the turn of the year".
BT shares were down 0.1% to 468.83 pence Thursday morning, while Sky shares were up 0.8% to 1,134.00p.
By Sam Unsted; samunsted@alliancenews.com; @SamUAtAlliance and Hana Stewart-Smith; hanassmith@alliancenews.com; @HanaSSAllNews
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