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OPINION

BT has (so far) played a regulatory blinder

BT has (so far) played a regulatory blinder
May 26, 2016
BT has (so far) played a regulatory blinder

The big win regards Openreach, the division responsible for the 'last mile' of our telecom network - the fibres, wires and cables connecting some 30m customers on behalf of BT and third-party service providers. The issue here is less the copper network, where providers lease the connections at cost, but the newer fibre connections for 'superfast' broadband, where BT has pricing flexibility. Its critics accuse it of using this flexibility to squeeze their retail margins - Ofcom has in response put in place a minimum margin between Openreach's wholesale and retail charges - while using the wholesale revenue to subsidise other products in the group (such as sports rights) to grab customers, among other advantages.

Telecoms regulator Ofcom has decided, for now, against forcing BT to spin off Openreach, instead requiring it to strengthen its independence and open up its telegraph poles and underground ducts to rivals to lay their own fibre networks. In return, BT has pledged £6bn of capital expenditure across its broadband and mobile data network, and to hire 1,000 new engineers for Openreach as it delivers ultrafast broadband to 12m premises by 2020. Company and regulator can claim victories. As for customers, the lack of a fully competitive landscape on fibre broadband is clearly bad for bills. But bosses at BT and its rival network owner Virgin Media argue taking away control of Openreach would have deterred future infrastructure investment. Indeed, the main reason Ofcom allows pricing flexibility is as a reward for risky capital spending under the 'fair bet' principle.

Next up was the European competition authority's blocking of the merger of O2 and Three, which would have created the UK's largest mobile operator. For the European Commission, as for the domestic Competition and Markets Authority, the red line was the reduction of mobile operators from four to three, and the knock-on for consumer choice and prices. Of course, BT secured approval for its own takeover of EE earlier this year, enabling it to start building its future as a 'quad play' provider, offering broadband, TV, fixed-line telephones and mobile.

There were two regulatory blind spots here that BT was able to exploit, according to market experts. Firstly, regulators are not as well set up to deal with the threat to competition from 'vertical integration', being focused instead on the number of players in each market. Secondly, competition analysis is limited to a horizon of two to three years, rather than evaluation how the evolution of companies straddling multiple markets will impact on competition as technology preferences develop. 'Quad play' might not be a common method of consumption now, but that could quickly change.

The match is not yet over. A cross-party group of 121 MPs support Openreach's sale. BT's rivals, meanwhile, have seized on Ofcom's proposals for greater independence with a 10-point plan demanding a legally separate company, with a thoroughly independent board and financial autonomy. They don't want BT to be able to borrow against Openreach's revenue, or to share resources with the division.

Of course, Sky (SKY), TalkTalk (TALK), Vodafone (VOD) and the rest are unlikely to achieve all this. It is possible they are trying to make an independent Openreach so difficult to achieve, and hard for BT to accept, that full separation becomes the easier option. It seems likely that policymakers will continue to side with infrastructure investment over competition. But as the nation switches to fibre, Openreach has no business being part of BT. If you were building a telecoms sector from scratch, you wouldn't do it like this.