Tech

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

British consumers and businesses, frustrated by slow speeds and long waits for engineers, are being promised a bright future once the regulator overhauls BT's ownership and operation of the country's broadband network.

Relief Rally
BT shares jumped after Ofcom decided against breaking up the company
Source: Bloomberg
Intraday times are displayed in ET.

Speeds and coverage will improve, engineers will turn up on time, and rivals who have to rely on BT's wires to bring their broadband services into customers' homes will be treated more fairly, Ofcom CEO Sharon White told BBC Radio on Tuesday.

To these statements, she should have added an important caveat: "if my plan works."

Ofcom's decision to require BT to transfer the national broadband network, known as Openreach, into a legally separate company is ambitious and success isn't assured.

BT will still own Openreach, but it will have an independent board required to make decisions in the interests of all its customers, according to Ofcom. Openreach's managers will report to its own board, not BT's, and they will be able to set their own strategy.

This is a step short of a full breakup of the former state monopoly that competitors and some Parliamentarians had been pressing for. Ofcom rejected that option as too complex legally, arguing that the disruption would actually hurt investment in the network.

But if the compromise is to give consumers and businesses a better service, the regulator and rival broadband providers such as Vodafone and Sky will have to keep monitoring BT's every move in implementing these changes.

There are some potential pitfalls. Chief among them is that BT will retain control over the annual budget Openreach will have to invest in the network. 

That means there's no guarantee BT will invest more in improving its infrastructure, something that lawmakers and rivals have pressed it to do. BT's capital expenditure as a proportion of sales has historically been lower than many of European peers, according to Bloomberg data, although the company has promised more than 6 billion pounds of investments in the next three years.

Track Record
BT's capex-to-sales ratio trails some of its European peers
Source: Bloomberg
BT and VOD fiscal years ended March 31, TEF and ORA ended Dec. 31

BT will also keep full access to Openreach's considerable cash flow. The division accounted for 40 percent of Ebitda and 46 percent of free cash flow in the year through March.

It would have been unreasonable, if not legally impossible, for the regulator to force BT to give up control over Openreach and its cash flow while retaining ownership, and the corporate governance responsibilities that come with that. The company also needs the cash flow from Openreach to help plug its substantial pension deficit.

BT will have to learn to play nicely if the newly empowered Openreach is to grow into its new role as a more neutral platform. Here, some skepticism is due: over decades, the company has grown adept at conforming with the unique regulatory framework that applies to it -- while subtly undermining it.

Money in the Ground
BT has preferred to invest morein upgrading copper lines rather than installing fiber
Source: BT submission to Parliamentary report

Take BT's preference for upgrading its old copper lines over laying new fiber lines to homes. Fiber is admittedly more expensive to deploy -- but offers faster, more reliable speeds and a longer life. The choice resembles the dilemma over whether to fix an old car repeatedly rather than buy a new one, except that BT owns the car all its competitors have to rent out to get around.

Ofcom's proposals aim to improve services to customers while avoiding the legally more complex break-up of BT. The company may have escaped that damaging outcome -- but if the improvement White promised fails to materialize, expect pressure for a break-up to come back around.

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 labboud@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net