Is it Time BT Was Stripped of Its Monopoly?

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Britain's telecoms regulator Ofcom is set to reveal whether BT should sell Openreach - the BT division charged with maintaining most of the UK's network of telephone exchanges, phone lines and telecom ducts.

BT's rivals have long claimed that BT's ownership of Openreach is problematic, with Vodafone, Sky and TalkTalk insisting Openreach should be spun off as an independent business.

Openreach serves almost every household and business in Britain, indirectly. So a structural separation from BT is likely to have significant consequences for businesses and consumers.

The decision over Openreach's future will form a key part of Ofcom's Strategic Review of Digital Communications - a long-term planning exercise that will guide the UK's regulatory framework over the next decade.

In its decision making process, Ofcom will consider the complaints of many of Openreach's largest customers - including Internet service providers Sky and TalkTalk – that have grown increasingly frustrated with Openreach's performance.

Sky is one of the most outspoken critics of Openreach, claiming underinvestment has led to an unacceptable service. Sky has pointed out between 2009 and 2012, fault rates across the Openreach network increased by 50%.

Mai Fyfield, Sky's Chief Strategy Officer, said Openreach's problems are having a knock-on effect on the economy as a whole.

“They affect competition between providers and have a direct impact on consumers and small businesses, resulting in inconvenience, dissatisfaction and loss of productivity. The UK needs to get the basics right in broadband as well as develop the networks and services of the future,” she said.

Sky – which provides around a third of Britain's broadband connections - uses Openreach's phone lines to underpin its service. It has often been disappointed by Openreach's performance.

In around 10% of cases when an Openreach engineer needs to visit to install a new line, Openreach takes over 30 days to install the line. Sky has also claimed that in a typical month, Openreach fails to complete over 4000 jobs ordered by Sky. In addition, Sky customers are inconvenienced by Openreach changing over 12,000 agreed installation dates per month.

Vodafone has added its voice to the debate, expressing concerns over what it terms to be BT's “excess profits.” Vodafone commissioned an independent report from research firm Frontier Economics. The report examined the level of profit BT generates from regulated services. Frontier found that in the period April 2005 to March 2013 BT made £4.9bn of extra profit on its regulated services, above and beyond an appropriate cost of capital, resulting in wholesale prices being 10% higher than they needed to be.

Update: In November 2014 Frontier Economics updated the figures, adding another year to the analysis. That raised the BT 'excess profits' figure to £5.5bn, for the period 2005/6 to 2013/4 .

Update: In November 2016 Frontier Economics updated its figures to reflect additional years and additional data. It's estimates of BT's 'excess profits' for this longer period rose to £9.7bn.

BT has defended its record, claiming customers of all telecom providers have enjoyed higher speeds and lower prices due to its investment in upgrading its network.

“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,” BT said.

However, many of BT's rivals are not convinced that UK consumers should be grateful to Ofcom and Openreach.

Vodafone has claimed that its fixed-line customers in Spain and Portugal are connected twice as quickly as in the UK, as in those countries Vodafone doesn't have to rely on an incumbent like Openreach. Vodafone says its Spanish and Portuguese customers experience 50% fewer service incidents than UK customers and 87% of those incidents are fixed within 24 hours.

A Vodafone spokesperson told IT news site The Register: “BT's Openreach business needs to be structurally separated from the rest of BT and provide access to its ducts and poles to encourage and enable effective multi-operator network investment.”

Fixing Openreach's performance issues may require additional investment. Would an independent Openreach be able to afford this investment without BT as a parent? It seems likely it would.

Openreach made a profit of over £1.25 billion last year and is expected to make a similar amount this year. Much of this profit could be reinvested in Openreach's network.

If Openreach needed to invest additional sums, it could raise that money from investors by selling new shares in itself. Selling a 20% stake in Openreach might raise around £2.5bn to £3.5bn, given that telecoms stocks typically trade at around 6 to 8 times earnings (EBITDA), less any corporate debt.

hSo requests thousands of quotes each year from Openreach and its rivals, looking for the best prices for hSo customers. This gives us a unique perspective on how Openreach services impact the business communications market.

Openreach quotes are seldom the cheapest hSo receives. But their quotes often have an indirect effect, allowing alternative carriers to undercut the quotes of the UK's biggest providers.

But there's a flip side to the industry dependence on Openreach – if Ofcom allows Openreach to exploit its monopoly or underinvest in its network – almost every British business and consumer will suffer.

BT's stewardship of Openreach has not been without criticism. Some critics feel that BT has been far too willing to ‘sweat the copper’ of its phone line monopoly, investing in a copper-cable/fibre-optic hybrid called fibre-to-the-cabinet (FTTC), instead of funding a faster, more-expensive option of fibre-to-the-home (FTTH).

In January, 120 Members of Parliament signed a letter to the Telegraph, expressing their concerns over BT's record:

We believe that Britain should be leading the world in digital innovation. Yet instead we have a monopoly company clinging to outdated copper technology with no proper long-term plan for the future. We need to start converting to a fully fibre network so we are not left behind other nations."

The MPs called for 'a formal separation of BT from Openreach,' implying that would go some way to addressing ‘all the delays and missed deadlines’ and ‘BT's lack of ambition and under-investment.’

BT has also been criticised for its ‘wait and see’ approach to rolling out FTTC in some areas – biding its time, in the hope that Government's Superfast Broadband Programme will pay towards the cost of upgrading Openreach's network.

So far, the Government has agreed to pay BT £1.7 billion for such upgrades.

While Ofcom's decision over the fate of Openreach will remain a mystery until February, we can be sure that this is merely the first stage in a long battle to determine who controls the UK's telecoms monopoly.

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