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OPINION

Playing monopoly

Playing monopoly
November 25, 2015
Playing monopoly

The truth is that investors are always looking for companies with some element of legal monopoly power, whether in the form of a patent, a brand, or a regulated network such as that owned by BT's Openreach division. On inspection, however, BT's competitive position in the UK is less strong than Mr Colao would like Ofcom, the telecoms regulator, or the Competition and Markets Authority (CMA), the monopoly watchdog, to believe.

The obvious way in which BT is tightening its grip on UK telecoms is by buying the country's largest mobile provider, EE, from Orange and Deutsche Telekom. The CMA gave the deal provisional clearance in late October, reasoning that since BT did not already own a mobile network - having sold BT Cellnet, subsequently rebranded O2, in 2002 - the deal would not alter the competitive dynamics of the mobile market (the same cannot be said for the merger of O2 and Three, which reduces the number of spectrum-owning players from four to three, but that is another story).

But the BT-EE story is something of a distraction from the real re-monopolisation debate, which concerns broadband. Openreach owns the very costly 'last mile' of Britain's national telecoms network - the lines leading from the country's 5,600 local telephone exchanges to individual buildings. To provide their broadband packages, Sky and TalkTalk lease these lines on identical terms to BT's consumer division. So does Vodafone, which started to offer broadband this summer only to receive "delays, delays, delays" from Openreach, according to Mr Colao.

This arrangement, whereby Openreach is a 'functionally separate' division of BT, is the result of a strategic review of the telecoms sector published by Ofcom in 2005. A decade later, the regulator is conducting another review to consider, among other things, whether Openreach should be formally split from BT to form a private but closely regulated utility such as National Grid or Severn Trent.

BT's rivals claim its control of Openreach gives it a strengthening competitive advantage as consumers turn to next-generation broadband. In its submission to the Ofcom review last month, Sky (SKY) claimed that BT's consumer division operates roughly three-quarters of all 'superfast broadband' connections - those that use the latest fibre-optic technology - on the Openreach network. That compares with a 40 per cent share of the total broadband market. The implication is that BT is using its proximity to Openreach to re-establish a monopoly as households transition to fibre. Sky wants the situation put to the CMA.

The problem with Sky's argument is that it ignores Virgin Media, which is now owned by US telecoms giant Liberty Global. One of the more useful legacies of the dot-com boom was a second fast broadband network, covering about half the UK, that was eventually consolidated under the ownership of Virgin Media. In February, Liberty announced 'Project Lightning', a £3bn project to connect a further 4m homes and businesses to Virgin's network. So, even if BT is finding ways to muscle Sky, TalkTalk and now Vodafone out of Openreach fibre business, it still has a formidable competitor in Liberty and Virgin.

Further ahead, Openreach also faces a threat from mobile. I have few problems speaking to my brother in Norway via Skype. He has no fixed telephone line, relying instead on mobile broadband. So improving mobile signals could offer another source of serious competition to Openreach. This may be another reason BT wants to buy EE, alongside the much-hyped desire to bundle mobile, broadband, fixed-line telephone and TV together as a 'quad-play'.

Jonathan Dann, an analyst at Royal Bank of Canada, authored a report in 2006 arguing that BT needed to sell Openreach. But he now sees a split as unlikely, not least because the review process has already forced BT to hire engineers and commit to investments. "The threat of separation worked brilliantly for Ofcom in 2005 and it is working again in 2015," he points out.

Sadly for BT investors, Openreach looks less and less like a regulated monopoly delivering utility-like returns. Massive investment is required not just to keep Ofcom happy, but also to stay ahead of Virgin and next-generation mobile telephony. There are reasons to own BT, but ownership of ageing copper telephone lines is not foremost among them.