Ofcom: Openreach to be a ‘distinct company’ but still part of BT

BT CEO Gavin Patterson

Ofcom has said that BT’s infrastructure division, Openreach, should become a distinct company, but resisted calls to separate the two entities entirely.

In a set of detailed proposals published today, the UK broadband regulator said that Openreach should be a legally separate company within BT Group, with its own board, executives and no direct lines of reporting from Openreach executives to BT Group.

“This model would provide Openreach with the greatest degree of independence from BT Group that is possible without incurring the costs and disruption – to industry and consumers – associated with separating the companies entirely,” said Ofcom.

“It is designed to ensure that Openreach acts more independently from BT Group, and takes decisions for the good of the wider telecoms industry and its customers. If it cannot achieve this, Ofcom will reconsider whether BT and Openreach should be split into two entirely separate companies, under different ownership.”

The proposal calls on Openreach to consult formally with customers such as Sky and TalkTalk on large-scale investments, with a ‘confidential phase’ to ensure customers can discuss ideas without this being disclosed to BT Group.

Openreach should also develop its own strategy and annual operating plans, within an overall budget set by BT Group, and should have its own brand, not affiliated with BT Group, according to the plans.

BT Group CEO Gavin Patterson said: “We have listened to Ofcom and industry and are introducing significant changes to meet their concerns. These changes will make Openreach more independent and transparent than it is today, something both Ofcom and industry have requested.”

Sky CEO Jeremy Darroch and TalkTalk CEO Dido Harding each described the proposal as “a step in the right direction”, but Darroch said it falls short of a “full change that would have guaranteed the world-class broadband network customers expect and the UK will need.”

“Leaving Openreach’s budget in the hands of BT Group raises significant questions as to whether this will really lead to the fibre investment Britain requires,” he said.

Harding claimed that structural separation would be “cleaner, with less red tape – and removes BT’s ability to exploit loopholes in the regulation”. She said that in taking “one cautious step forward, I fear Ofcom may in practice have taken five steps back”.

Earlier this year, Sky, TalkTalk and Vodafone teamed up to present a “10-point plan for a better Openreach, which called on Ofcom to establish Openreach as a separate legal company. This came after Ofcom published the initial conclusions of its review of digital communications.

Responding to today’s decision, Ovum analyst Matthew Howett said that the new model proposed by Ofcom is “significantly different to the one that is in place today” – even though it falls short of full separation.

“For some, only full structural separation will be enough and it is important to note that Ofcom have kept this option on the table should its proposed model not deliver,” said Howett. “In many ways, a voluntary agreement between Ofcom and Openreach, which is backed by the rest of the industry, would achieve more than years in court and a forced enhanced model of separation could.”

CCS Insight principal analyst, Kester Mann said that Ofcom’s proposals are “about as radical and stringent as they could have been without taking the ultimate step to structurally separate Openreach from BT”.

“The decision not to force BT to split Openreach comes as little surprise. It would have been the most controversial action the regulator could have taken and would still not have offered guaranteed improvements for customers,” he added.

The industry now has until October 4 to respond to Ofcom’s plan.