Ovum Comment Matthew Howett, Practice Leader, Regulation

Openreach review: refreshed governance framework more likely than structural separation

This week Ofcom will publish the initial conclusions of its once-in-a-decade strategic review of digital communications. The last time the regulator engaged in such a review it resulted in the operational separation of BT’s access network. When Ofcom launched this review almost a year ago, it said it wanted it to be less about BT this time round. It has been anything but. The biggest question has been whether Ofcom will recommend that Openreach should now be structurally separated from the rest of BT.

On balance, the case for structural separation and how to make it happen in practice probably has not been made and we are likely to see a strengthening of the current model. The emphasis will be on improving the quality of service that Openreach delivers to its wholesale customers and creating a reformed governance model that enhances Openreach’s independence of objectives and delivery.

Of the options available, a refreshed and energized governance framework for a more tightly managed Openreach would be both good for the industry and be workable for BT.

A year ago Ofcom presented four options for the future of Openreach, ranging from doing nothing on one hand to full deregulation and a reliance on end-to-end competition on the other. At this point we can safely disregard those two extremes, and instead focus on the options for a strengthened model of functional separation or the full structural separation of Openreach. The debate surrounding which one of these options Ofcom will prefer has largely been about three things: fibre investment, quality of service for wholesale customers, and discrimination in favour of BT’s own retail customers.

On balance, the evidence from the few examples of where structural separation is already in place suggests two things. First, investment in fibre on a comparable basis would not be significantly different; second, quality of service would not necessarily be any better and would likely degrade during a significant period of upheaval. Only in the event of proven discrimination or favoring of BT’s retail customers would structural separation be useful and BT’s own consumer division seems to have been complaining to the same extent as other communications providers about problems such as lead times for installations and repairs. To proceed with structural separation given the weight of the evidence would therefore be a disproportionate response, even if it could be practically delivered.

The challenge for Ofcom is to devise an approach that is both workable and has ambition. Stephen Carter, the CEO of Informa (Ovum’s parent company), and who was also the founding Chief Executive of Ofcom and one of the co-authors of the existing structure says:

A decade on from the creation of Openreach and the operational separation from BT Group, it seems clear that the reforms introduced then have broadly worked and the structure created has done the job asked of it. It seems entirely appropriate, however, to review that framework, not least because we are now living and working in a different digital age.

The key question, it seems to me, is how do you adapt and improve the current model to accelerate investment, produce faster connectivity, and improve the quality of customer service. There is, I believe, a clear common, commercial, and national interest here and I am sure that the new generation of regulatory and business leadership at Ofcom and BT can find a working solution for the industry and the country.

Ofcom must act to address the concerns that have been raised, perhaps including those levied against it

Barely a week has gone by without a study, letter, or infographic lending weight to the case for or the case against structural separation. The challenge for Ofcom will have been assessing the merits of the two cases. Separating fact from fiction will have been tough, especially when many arguments have been built on old or anecdotal data. However, certain themes have appeared more than once and, although imposing structural separation would be disproportionate now, it is something Ofcom will want to keep in mind as it seeks to improve the governance of Openreach. It is entirely appropriate that Ofcom keep its options open in case the strengthened model fails to deliver improvements or the revised governance is not sufficient.

It will also be interesting to see if Ofcom concedes that the quality standards it imposed on Openreach through the fixed access market review could have been more rigorous. Furthermore, a number of respondents to the review argued that, although benchmarking the UK’s broadband infrastructure against those of France, Germany, Italy, and Spain has made some sense, the list could be expanded to include more European states, or even countries further afield. Doing so would not necessarily lead to the UK’s situation appearing dire, but it might reduce the number of instances where the country comes out on top. Ofcom presumably chose a European peer group because it follows the European regulatory framework. However, citizens, businesses, and communications providers increasingly operate in a multitude of countries around the world and it is important that the UK’s ambitions continue to grow.

Once Openreach’s future is secure, the review must return toother aspects of digital communications

Rarely have regulatory issues been played out quite so publicly and with so much interest. Ofcom should be congratulated on starting a new era of engagement with the industry and end users. The telecoms sector is moving at such a pace that a review of this kind once every 10 years is probably too infrequent. At a practical level, the debate needs to continue. The starting point should be the impact that competing services from so-called OTT players are having on the sector and whether this could trigger further deregulation of the traditional communications markets – or even regulation of new ones.

As new and nimbler players such as Skype and WhatsApp have emerged and competed away traditional telecoms revenues, many telcos have felt constrained in their ability to react. Considering that the review looks ahead for a decade or more, this is where the focus of public debate and opinion now needs to turn – it might even be an area where BT and its rivals could find some common ground.