Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Whether or not regulators take the bold step this week of calling for BT Group to spin off its national broadband network, the company will lose out as new rules weaken its cash cow. 

Political and media attention (and competitors' very loud lobbying) has focused on whether the U.K. telecom regulator's review of the industry will result in a recommendation for a full separation of Openreach, BT's unit that owns and operates the country's Internet infrastructure. While that prospect is waning -- Ofcom's announcement on Thursday is likely to stop short of calling for a split at this stage -- the regulator has other ways to hurt BT's bottom-line.

Openreach is supposed to rent out access to the likes of Vodafone, Talk Talk, and Sky on the same terms as to its own retail arm, and is tasked with ensuring the quality of Britain's connectivity. Think of it as a utility sitting inside BT: much of what Openreach can do and how much it charges competitors is determined by the government. 

The setup is a holdover from when BT -- then British Telecom -- was a national monopoly operating the phone lines for the country. Government telecom policy since then explains why its key rivals don't have their own fixed networks and must rent capacity from BT instead. 

Lion's share
BT takes in 56 percent of UK telecoms operating free cash flow; Openreach is a big chunk
Source: Redburn

So to a large extent, BT's financial health and profitability is driven by regulators. Openreach brought in 54 percent of free cash flow in BT's last full fiscal year ended March 31. (Those figures don't take into account BT's recent takeover of EE, Britain's biggest mobile operator.)

Ofcom's own analysis shows that Openreach has earned excess returns on its investments of around 4 billion pounds in the past 9 years. Some of excess is to be expected, as the government wanted to ensure BT makes enough to pay for upgrades. And it shows -- Britain has climbed up the global league tables in broadband speed and prices since Openreach was formed in 2006.

But the question asked pointedly by competitors, and some politicians, is why Openreach should be allowed to keep making so much money, and whether it's investing enough in faster fiber broadband to justify such returns. 

Reaching out
Openreach, BT's utility-like national network arm, is actually its biggest driver of sales and profit
Source: Company annual report

Ofcom's answers to all this will become clearer on Thursday. It is expected to call for stricter regulation of Openreach so as to offer competitors fairer terms and better service, and could also tweak the unit's governance and structure to ensure its independence from the BT business side. Some analysts think it may leave the threat of the split on the table so as to continue to have sway over BT.

These changes, along with important regulations on fiber pricing terms and the business leased-line rental market later this year, could end up costing more than many investors realize.

Outperforming for now
BT's premium to peers could be tested by regulatory pressure on Openreach
Source: Bloomberg

Analysts at Redburn say probably 500 million pounds of Openreach Ebitda is at risk from the regulatory changes. Their worst case is for a 700 million pound hit in the next two years. Analysts expectations for Openreach Ebitda to be flat next year could be optimistic given the regulatory risks.

Whatever Ofcom rules, the voices criticizing Openreach are unlikely to go away. Vodafone boss Vittorio Colao and pay-TV leader Sky have been shouting from the rooftops that Openreach isn’t investing enough in the network and doesn't treat competitors as well as its own retail business. Colao cheekily said last week he'd be happy to buy a piece of Openreach if it were spun out. BT thinks that would be a nightmare outcome, but it might not be so bad in the end if it meant a clean break with regulatory uncertainty.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at

To contact the editor responsible for this story:
Jennifer Ryan at