An intense and sometimes confusing debate is raging in telecoms at the moment. It
centres on whether BT should be forced de-merge its Openreach division.
We’re not easily intimidated,’ was Sharon White’s bold statement at her first DCMS Select Committee appearance.
The new Ofcom CEO was responding to comments from BT CEO Gavin Patterson where he suggested that attempts to de-merge the Openreach division from BT could result in ’10 years of litigation’.
Patterson and White’s exchange was followed by TalkTalk’s Dido Harding’s statement at the MVNO’s Q1 trading update, where she made the call for ‘regulators to make the most of the opportunity to take bold, radical action, such as the separation of Openreach. It is increasingly clear that this is the only way to prevent the future of the UK’s digital infrastructure from being held to ransom.’
These comments were just the latest in a long-running debate between industry figures over Openreach. In all the excitement of the point scoring between major players, the definition of Openreach’s business and its place in the mobile industry can get lost. So Mobile decided to investigate the nature of Openreach and find out exactly what role it plays.
What is it?
Openreach is the infrastructure division of BT – it manages the network and acts as wholesaler of BT’s infrastructure assets. It was created back in 2005 when Ofcom decided that a separate business unit was required to manage other companies’ access to BT’s network and backhaul products, enabling other companies to use BT’s fixed line and broadband infrastructure. Backhaul is also used by mobile operators to enable their networks.
BT’s broadband rivals have long complained that despite Openreach being a separate division the business unit has favoured BT in its network management. This issue hadn’t really applied to mobile until now because BT was not a player in that market, it simply provided the backhaul services to it.
In its attempts to acquire EE, BT is changing this relationship and the possibility exists that the EE mobile arm of the BT business could start receiving preferential treatment. It is important to stress that BT fiercely denies its rivals claims that Openreach provides an uneven service, and that Ofcom reviews the levels of service the division is providing.
A split decision
Ofcom is once again examining Openreach in depth as part of its ‘once in a decade’ digital communications review. This review is separate from any of the EE/BT merger assessment the Competition and Markets Authority (CMA) is in the process of undertaking.
Although the two have been consistently put together, this is something EE CEO Olaf Swantee was keen to point out: ‘Clearly the Openreach debate has little to do with the EE and BT combination, and a lot of journalists have combined the two. In reality, the two are very separate; Openreach is reviewed through Ofcom’s digital review agenda and our merger is being reviewed by the competition authorities.
So they are absolutely de-linked. I do believe that clearly some of our competitors are trying to connect all of it together, which we had expected. But we believe that there are significant benefits to going ahead with the combination of EE and BT.
‘The competitors have used, and will continue to use, a lot of lawyers to attack us. But we try to use our engineers to create a better network and differentiate ourselves in the long run because that is more relevant. There are plenty of companies complaining, but it is a project that is not very controversial because we are not taking a mobile network out of the market.
'So first we don’t reduce the number of competitors in the UK, and second, it’s something that has been done everywhere, in all other markets.’
The rivals that have been most vocal about Openreach being connected to the merger have on the whole been those with either a stake in the fixed and broadband space or ambitions within it.
The fact that the two pure mobile players – O2 and Three – are looking to merge themselves could be keeping them quieter on the issue. This has resulted in the pure mobile aspects of Openreach being put behind the fixed line and broadband discussion.
For BT and EE the problem is that Ofcom will be advising the CMA on whatever decision it takes, where the issue of Openreach will surely be raised. Factor in the market consultation that the CMA is carrying out, where rivals are consistently linking the two issues, and it will be hard for the CMA to ignore.
It raises the stakes of Ofcom’s review even more. Sharon White has been clear in her reasoning for launching the initiative and how BT factors into it.
At the Select Committee hearing she laid out her plans quite clearly: ‘The reason for the review is because the market feels very different than it did 10 years ago and that is partly due to the liberation of the global environment. The question of BT’s dominance varies by market; we have been keen to see if consumers have been best served throughout. We want to see more competition in the business side. SMEs are being squeezed by the residential market and the big companies.
‘Functional separation has served the market very well; at the moment the issue of quality of service is not a discrimination against their competition. One of the issues we have seen is discrimination and we want to look into this more.
'Another issue we have picked up on is that because BT’s business and consumers use different products from TalkTalk and Sky, there could be scope for discrimination. We are keen to get more evidence on this. Would Openreach invest more if it were a separate company? Structural separation is a non-trivial change, it is a seismic change and so when we come to a decision we will be looking at practical and legal issues.
‘With regards to the separation of BT and Openreach we’re looking at other options, not just structural separation. We’re not easily intimidated and we are driven to doing what’s best for the consumer. We don’t believe that Openreach is in a broken position but we would like to have an open and constructive evidence based conversation with BT about how Openreach has worked so far and whether there are reforms we can work on.’
The games rage on
Accusations of game playing have come from both sides of the Openreach debate. Vodafone’s Group CEO Vittorio Colao has been very vocal in his opinion that BT’s defiant reaction to the suggestion of de-merging Openreach reveals an ulterior motive.
At the last investors’ call Colao said: ‘The impact of investment and threat of litigation [suggested by Gavin Patterson] are clear indicators of a vested interested. It’s important that Britain gets more fibre and not more expensive football.’ Colao’s second comment in particular demonstrates the crux of BT’s arguments against the demerger; the fact that it has built this infrastructure asset and could now be forced into relinquishing it. It’s not dissimilar from the complaints of the mobile operators when the issue of national roaming was raised.
BT’s approach to the whole debate has been very forthright, the brand has not been afraid to call out rivals directly when concerns have been raised. When Sky requested that Openreach be included in Ofcom’s digital review, BT turned the tables and suggested that Pay TV should also be examined. BT Consumer CEO, John Petter, described Sky’s actions as a ‘smokescreen’ designed to ‘obscure the real market failings in pay TV, where Sky is the dominant player’.
Gavin Patterson has also called out TalkTalk boss Dido Harding and Sky CEO Jeremy Darroch, accusing them of hypocrisy following the development of the UK’s fibre network: ‘People forget that five years ago, Dido, Jeremy and others who are now arguing that Ofcom should push for separation, said the country did not need fibre, their customers didn’t need fibre. The hypocrisy is quite staggering.’
It’s difficult to know why both sides have decided to air their grievances so publically, but undoubtedly there is an element of game playing from both sides. As the merger progresses and Ofcom’s review rolls on, the Openreach issue will keep being raised. It’s crucial that focus is maintained and that the issue is explored with clarity and decisiveness.