U.K. Lets BT Keep Broadband Unit, If Held at Arm’s Length

  • Regulator says telecom should set up separate board for unit
  • Competitors call Ofcom plan a step in the right direction

U.K. regulators rejected calls for a breakup of BT Group Plc, saying the telecommunications carrier should keep ownership of its broadband network as long as it opens up further to rivals and invests more in upgrades.

Ofcom proposed setting up a legally separate but wholly owned entity for BT’s Openreach network, overseen by an independent board, according to a statement Tuesday. Sky Plc, TalkTalk Telecom Group Plc and Vodafone Group Plc have called for greater separation of Openreach, saying BT’s control restricts investment and hampers their ability to serve customers. 

“This model achieves the maximum level of separation within the current structure,” Ofcom Chief Executive Officer Sharon White said at a press conference.

The regulator’s proposal attempts to bridge the conflict between BT and its rivals as competition intensifies in a market where telecommunications and entertainment are converging. BT this year squared off against wireless giant Vodafone by acquiring mobile operator EE and last year stepped up its challenge to pay-TV provider Sky by increasing its investment in Premier League soccer television rights.

Shares of BT advanced 4.7 percent to 405.60 pence at 12:08 p.m. in London.

Copper, Fiber

Rivals say BT is starving its network of investment, relying too much on old-fashioned copper wires rather than lightning-fast fiber links, in order to fund its new ventures. Under Ofcom’s proposal, BT would retain control over the Openreach budget, allowing it to determine levels of investment in faster broadband connections, along with how much money is sent to the parent in dividends.

A parliamentary report last week supported the rivals’ view, saying the current BT structure “allows it to use Openreach’s utility-type assets to cross-subsidize riskier activities elsewhere in the group, while significantly under-investing in the access infrastructure and services on which a large part of the public rely.”

The proposed changes are incremental, given that Openreach has already been effectively separated from BT’s other operations for more than a decade, following previous action by Ofcom, said Peter Boyland, an analyst at IHS Technology.

“The latest statement from Ofcom will be a disappointment to BT’s rivals, since the regulator has once again stopped short of calling for a complete separation of Openreach,” he said by e-mail.

Ofcom said the more radical step of breaking up BT was complicated by factors such as BT’s pension fund, which would lose access to Openreach revenue under such a plan.

“We welcome Ofcom’s recognition that structural separation would be a disproportionate move,” BT said in an e-mailed statement. “Our proposals provide Ofcom with every benefit they’re seeking but without any of the substantial and unavoidable costs associated with legal incorporation. We will continue to engage with them over the coming months.”

Digital Review

The regulator’s recommendation, the latest stage in a review of digital communications in the U.K., builds on a decision in February. At that time, Ofcom ordered BT to give competitors physical access to its telephone poles and underground tunnels and to let rivals take direct control of connections.

In a statement Tuesday, Sky said Ofcom’s proposal “is a step in the right direction,” though it falls short of the more complete separation Sky and other rivals were seeking.

“In particular, leaving Openreach’s budget in the hands of BT Group raises significant questions as to whether this will really lead to the fiber investment Britain requires,” Sky said.

Vodafone, in a separate statement, described Ofcom’s plan as “a pragmatic approach to try to rectify the flawed priorities and muddled compromises of the past,” but said it was concerned that BT would still be able to control investment levels in the network.

In May, BT proposed spending as much as 6 billion pounds ($7.9 billion) on network upgrades, on condition of receiving assurances from regulators that it will be able to make a profit from Openreach.

BT CEO Gavin Patterson said Openreach is already highly regulated, with access prices and other conditions set by Ofcom. He said the company would resist efforts to control how Openreach’s dividends to BT are used.

“We’ve certainly not gamed the system,” he said on BBC radio.

BT said it has found some common ground with the regulator, including creating a new board to oversee Openreach, but White said differences remained over the level of independence in the two proposals.

Ofcom, which is seeking responses to its proposal by Oct. 4, said BT must make digital maps of its network available to rivals and create a streamlined process for granting them access to the physical infrastructure. Rivals should gain increased access to the network starting this Sunday, the regulator said.

“We will continue to keep our boot on BT’s neck,” said Jonathan Oxley, Ofcom group director for competition.

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