Ofcom mulls future of Openreach

Ofcom has called for expressions of views to feed into its strategic review of digital communications, which will consider among other things whether BT’s Openreach division, responsible for maintaining the national broadband network, should be split from BT’s other businesses.

Ofcom’s review, the discussion document for which is published today, will cover requirements to encourage investment and innovation, sustainable competition, the empowerment of consumers and businesses and areas where targeted regulation may be necessary.

Addressing the contentious question of Openreach, Ofcom said that there were shortcomings in the existing set-up.

“The current ownership structure of BT means that it still has the incentive to discriminate against competing providers. Although regulation limits its ability to do so, opportunities may remain. For example, BT’s downstream business makes use of different wholesale products to its competitors, which raises the possibility of differential quality of service or pricing of products,” the regulator said.

It noted that existing rules are  “focused on unbundling individual local loops”, which may be out of date in an age when fibre is being taken closer to the home.

The regulator accepted some of the criticism that have been laid at BT’s door, and said that Openrreach “must treat all competing providers equally”, noting that “the quality of their service has, too often, been equally poor for everyone”.

Ofcom has proposed four options – continuing with the current approach, strengthening the current model of functional separation by varying BT’s undertakings or setting new regulatory conditions, considering structural separation and looking to deregulation and more end-to-end competition.

Regarding separation – the model favoured by BT’s rivals – Ofcom noted that this could “address BT’s underlying incentive to discriminate against competitors” but added that separation may not improve matters because it would in effect create a new network monopolist. “It would be an intrusive and complex intervention both for BT and the rest of industry, with substantial implementation challenges. It would also require ongoing regulation to guard against excess returns by the structurally separate upstream ‘monopolist’,” the regulator said.

Instead, Ofcom appears to be leaning to a “package of passive remedies”, ensuring greater access to network infrastructure such as ducts and dark fibre to encourage more competition.

Sky, which has been heavily critical of BT and has called for Openreach to be separated, welcomed the review but reiterated its position that Openreach was failing its customers and called for a full competition inquiry.

“It is 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.  We believe Ofcom should now move quickly to ask the Competition and Markets Authority (CMA) to undertake a full competition inquiry.  In a rapidly changing sector, it is vital for the UK that the national telecoms network delivers a service fit for the 21st century,” said Mai Fyfield, Sky’s chief strategy officer.

BT noted that strong progress has been made in ‘superfast’ broadband, with 95% of households expected to be covered by 2017, but that coverage of small and medium businesses needs to be improved. It also noted that strong progress had been made with 500Mbps and above ‘ultrafast’ broadband, with both BT and Virgin Media making firm commitments.

“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,” said Matthew Howett, practice leader, regulation at research outfit Ovum, which owned by DTVE Daily’s publisher Informa.