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LONDON (Alliance News) - UK telecoms regulator Ofcom on Thursday said BT Group PLC's Openreach division must be reformed to better serve customers and businesses, and that BT "must open up" its network.
Importantly though, the regulator did not enforce a structural separation of the division for the time being, although it did say it is necessary to overhaul Openreach's governance. It will make further proposals on this overhaul later in the year, but said a new model might require it to become a ring-fenced 'wholly-owned' subsidiary of BT, with its own purpose and board members.
Whilst BT has escaped separation for now, Ofcom kept the door open for the measure in the future, saying it reserves the right to require BT to spin off Openreach as an entirely separate legal entity with its own shareholders "if necessary".
The comments were made as part of Ofcom's initial findings from its extensive review of the UK digital communications market, and said that it is announcing a new strategy to promote the large-scale rollout of new ultrafast broadband networks, based on cable and fibre lines, as an alternative to the partly copper-based technologies currently being planned by BT.
Supporting investment by rival providers will reduce the country's reliance on Openreach, which installs and upkeeps much of the UK's broadband connections at present, and increase competitive pressure on its network, Ofcom said.
Openreach will be required to open up its telegraph poles and 'ducts' - meaning the underground tunnels that carry telecoms lines - to allow rival providers to build their own fibre networks. Additionally, Openreach must make it easier for competitors to access the network, and provide "comprehensive data" on the nature and location of ducts and poles.
The regulator said that Openreach has delivered benefits such as stronger competition in its current form as part of BT, but evidence from its review showed Openreach "still has an incentive to make decisions in the interests of BT, rather than BT's competitors, which can lead to competition problems."
In particular, Ofcom noted that Openreach's governance "lacks independence from BT Group", and therefore it is necessary to overhaul Openreach's governance and strengthen that independence.
"People across the UK today need affordable, reliable phone and broadband services. Coverage and quality are improving, but not fast enough to meet the growing expectations of consumers and businesses," said Chief Executive of Ofcom Sharon White in a statement.
"So today we've announced fundamental reform of the telecoms market - more competition, a new structure for Openreach, tougher performance targets, and a range of measures to boost service quality. Together, this means a better deal for telecoms users, which will improve the services and networks that underpin how we live and work," White added.
BT Chief Executive Officer Gavin Patterson welcomed comments from Ofcom explaining why breaking up BT would not lead to a better service or more investment, and that structural separation would be a "last resort".
In a statement, Patterson said that the focus "now needs to be on a strengthened but proportionate form of the current model, and we have put forward a positive proposal that we believe can form the basis for further discussions with both Ofcom and the wider industry."
"Our proposal includes a new governance structure for Openreach as well a clear commitment on investment. Openreach is already one of the most heavily regulated businesses in the world, but we have volunteered to accept tighter regulation to bring matters to a clear and speedy conclusion," Patterson added.
Patterson also noted the calls for BT to open up its network, saying it is happy to let other companies use its ducts and poles "if they are genuinely keen to invest very large sums as we have done".
"Our ducts and poles have been open to competitors since 2009, but there has been little very interest to date. We will see if that now changes," Patterson said.
Rival Sky PLC said it welcomed Ofcom's recognition that the current Openreach model is not working, but reiterated its belief that Openreach should be "completely independent". In a statement, a Sky spokesperson said that it was "pleased to see that separation is still on the table".
"Ofcom's actions today are not the end of the debate but a staging post towards delivering the network and service that Britain needs," Sky said. "We will work with Ofcom to deliver change at Openreach and we look forward to playing a positive role in helping make Britain a digital world leader."
TalkTalk Telecom Group PLC Chief Executive Dido Harding said Ofcom had done well to identify "many of the worst problems", including recognising that BT's control of Openreach creates a "fundamental conflict of interest which hurts customers".
However, Harding was critical of the actions detailed by the report. "But having accepted all this, Ofcom has produced 100 pages of consultation with little concrete action behind it. The risk is that we end up with 10 more years of debate and delays, rather than facing into the problems and delivering improvements for frustrated customers now," Harding said in a statement.
Vodafone Group PLC welcomed the move by Ofcom to tighten governance on BT Openreach and keep separation on the table, as well as its move to open up BT's ducts and poles, but said BT "still remains a monopoly provider with a regulated business running at a 28% profit margin".
"Therefore, we urge Ofcom to ensure BT reinvests the GBP4 billion in excess profits Openreach has generated over the last decade in bringing fibre to millions of premises across the country, and not just make half-promises to spend an unsubstantiated amount on more old copper cable: we agree with Ofcom that fibre is the future," Vodafone said in a statement.
CityFibre Infrastructure Holdings PLC, with whom Sky and TalkTalk are working on a joint venture to roll-out a fibre network in York, hailed Ofcom's plans to promote investment and competition as creating a "unique opportunity" for alternative providers such as itself to accelerate and extend their roll-outs of new fibre networks.
Additionally, CityFibre noted Ofcom's recognition that BT's reliance and investment in its copper-based infrastructure is "inadequate to meet the soaring demand driven by new services and increased usage habits that the market continues to observe".
"We welcome Ofcom's decision to broaden and simplify third party access to Openreach's duct and pole assets, in order to speed up deployment and lower costs. This should greatly accelerate the pace of true fibre deployment across the UK, with cost benefits for alternative investors, potentially also including CityFibre if we determine it is advantageous to make use of these inputs," said CityFibre Chief Executive Greg Mesch.
Haitong Research said it thinks the initial conclusions from Ofcom are "much ado about nothing" outside of the company's decision not to separate Openreach.
"Our first reaction is that all other major suggestions are either a rehash of past proposals that came to very little (access to BT's ducts and poles) or no meaningful change from the status quo (tight governance of Openreach; it is already tight, otherwise rivals would have complained very loudly long before now)," Haitong said.
Shares in BT were up 4.1% at 477.50 pence Thursday. Meanwhile, Sky was up 0.7%, Vodafone up 3.0%, and TalkTalk up 0.1%, while CityFibre was trading flat.
By Hana Stewart-Smith; hanassmith@alliancenews.com; @HanaSSAllNews
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