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BT ordered to separate from Openreach over competition concerns BT under increasing pressure from Ofcom to split from Openreach
(about 3 hours later)
BT is to be ordered to legally separate its Openreach network arm after failing to address competition concerns voluntarily. Ofcom has increased pressure on BT to table stronger plans to legally separate from Openreach, which controls the UK’s broadband infrastructure, by threatening to call in European regulators after months of negotiations over a voluntary deal.
Telecoms watchdog Ofcom said it was “disappointed” with BT’s proposals since it outlined plans in July to make Openreach a “distinct company” within the BT group. The UK media regulator wants to strengthen the independence of Openreach to promote competition and boost the roll-out of superfast broadband but has failed to reach agreement with BT.
The regulator will now prepare a formal notification to the European commission to start the process of forcing a legal separation of Openreach, which develops and maintains the UK’s main telecoms network used by telephone and broadband providers such as Sky, TalkTalk, Vodafone and BT Consumer. In July, Ofcom said a full sell-off of Openreach was not necessary but ordered BT to give the division more independence by making it a legally separate company, although it would still sit within BT Group.
But it has stopped short of forcing a full break-up and sale of Openreach and added it remains “open” to further proposals from BT for a voluntary separation of the division. BT has tabled what it says are “fair and sustainable” proposals to address concerns, but Ofcom has rejected them saying they do not go far enough to guarantee improvement in the UK broadband and telephone network.
Ofcom said a more independent Openreach, which “works in the interest of all providers, not just BT” was vital to improving broad and telephone services across the UK. Since then talks have reached a stalemate, prompting Ofcom to say it is now proceeding with formal notification to the European commission to force through a legal separation of Openreach, a tactic designed to turn the heat up on BT to get a voluntary deal done.
Ofcom said: “We are disappointed that BT has not yet come forward with proposals that meet our competition concerns. San Dhillon, the executive director at Exane BNP Paribas, saidBT has been “reticent and hesitant” to offer remedies that would truly make Openreach independent.
“Some progress has been made, but this has not been enough, and action is required now to deliver better outcomes for phone and broadband users.” “I suspect that BT has been caught by surprise thinking that negotiations would be ongoing [in private],” he said. “The aim here is to hurry along what has been a protracted process by going public and filing to Europe while also pursuing the joint track of negotiations with BT. I expect that the endgame won’t be a unilateral move by Ofcom, it will be worked out with BT.”
BT has faced mounting calls from rivals for a full break-up and sale of Openreach after being criticised for poor customer service and a lack of investment. Rivals – which include Sky, TalkTalk and Vodafone – argue that BT has deliberately dragged its heels in opening up the network to their engineers, which has hampered their ability to offer homes superfast broadband access.
BT said it was putting in place measures it put forward in July to address Ofcom’s concerns and still hopes to reach a “voluntary settlement”. Ofcom said it was “disappointed” that BT had “failed to offer voluntary proposals that address our competition concerns”.
On Monday night, BT appointed the first independent chairman of its Openreach arm – hiring Mike McTighe, who was on the board of Ofcom between 2007 and 2015. “We are disappointed that BT has not yet come forward with proposals that meet our competition concerns,” said Ofcom. “Some progress has been made, but this has not been enough, and action is required now to deliver better outcomes for phone and broadband users.”
But Ofcom wants Openreach to have a board made up of a majority of non-executive directors who are independent of BT. The move is only a partial victory for BT’s rivals, which have to access to the network to provide their own services to customers, who have lobbied heavily for a full breakup of Openreach.
Ofcom is also concerned that under BT’s plans, the chief executive of Openreach would still report to BT boss Gavin Patterson. “We welcome the fact that the regulator has finally made a decision,” said Dido Harding, the chief executive at TalkTalk. “While we do not think legal separation goes far enough to deliver the broadband consumers deserve, it is at least a step in the right direction. If major changes cannot be delivered, then they should move to structurally separate Openreach once and for all.”
It also wants Openreach to have greater consultation with customers on large-scale investments, its own staff, ownership of assets that it already controls, its own strategy and control over budget allocation, as well as independent branding. Under the new proposals, Openreach will become a “distinct company” with its own board and will be “guaranteed greater independence” on decisions on strategic investments.
Once legal separation is in place, Ofcom will regularly monitor Openreach and could still force a sell-off if it believes it is not being run as a truly distinct company. Ofcom added that an independent Openreach would have a “duty to treat all customers equally”.
BT said: “We are in discussions with Ofcom on two outstanding issues, the reporting line of the Openreach chief executive and the form of legal incorporation. “A more independent Openreach would be well placed to invest in ‘full fibre’ broadband for everyone,” the regulator said.
“We will continue to work with Ofcom to reach a voluntary settlement that is good for customers, shareholders, employees, pensioners and investment in the UK’s digital future.” A BT spokesman said: “We put forward proposals in July that we believe are fair and sustainable, and that meet Ofcom’s objectives without disproportionate costs. We are implementing these proposals … [and] we are in discussions with Ofcom on two outstanding issues, the reporting line of the Openreach chief executive and the form of legal incorporation. We will continue to work with Ofcom to reach a voluntary settlement that is good for customers, shareholders, employees, pensioners and investment in the UK’s digital future.”
Rival firms have welcomed action to address shortfalls at Openreach, but said the plans do not go far enough. Hours before Ofcom’s announcement on Tuesday, BT said Mike McTighe, the former Ofcom director and City veteran, would be Openreach’s first independent chairman.
TalkTalk chief executive Dido Harding said: “While we do not think legal separation goes far enough to deliver the broadband consumers deserve, it is at least a step in the right direction.” Ofcom has left the door open for BT to beef up its own Openreach plans, with the appointment of McTighe likely to be seen as a positive move.
She added: “We will continue to push Ofcom to ensure the plans deliver real, meaningful improvements quickly, and if major changes cannot be delivered, then they should move to structurally separate Openreach once and for all.” “We have continued to discuss with BT potential changes to its voluntary proposal,” said Ofcom. “We are now preparing to notify the European commission of our intention to implement these plans, requiring the legal separation of Openreach to make it more independent. Throughout this process, we remain open to BT bridging the gap between its proposal and what is required to address our strong competition concerns.”
A spokesman for Sky said: “We have always said that we want a solution that is clear and executable and in the best interests of consumers and industry. The regulator wants Openreach to have a board made up of a majority of directors who are independent of BT, and remains concerned at the “level of influence” that BT Group executives could exert on its subsidiary’s management.
“We will now watch closely as to how Ofcom executes its proposals.” Ofcom also moved to explain why it had rejected rivals’ calls for a complete structural separation of Openreach and BT that would have made them two entirely separate companies.
A spokesman for the Department for Culture, Media and Sport said: “We’ve been clear that we need a more independent Openreach. “Our current view is still that an effective and robust form of legal separation, with Openreach as a wholly owned subsidiary of BT, is likely to achieve the greatest improvements for everyone in the shortest amount of time,” said Ofcom.
“It needs to offer genuinely fair and equal access to the country’s telecoms infrastructure to BT’s competitors. This is the best way to ensure consumers get the service they need, and the country gets the digital infrastructure it needs.” Ofcom said its model for Openreach includes proposals to “publicly scrutinise and monitor its effectiveness” with the most direct method looking at whether its decisions are taken independently “without undue influence from BT”.
Labour also gave its support to Ofcom’s plans, but called for better standards across the entire telecoms sector. “If Ofcom’s monitoring suggests that legal separation is not delivering sufficient benefits for the wider telecoms industry and its customers, we will return to the question of structural separation – fully breaking up the companies,” the regulator said.
Tom Watson, deputy leader of the Labour party and shadow culture, media and sport secretary, said: “It is right that Ofcom are ordering BT to strengthen Openreach’s independence from BT, introducing more ambitious service standards for Openreach and injecting a greater degree of competition into the market. BT has repeatedly warned that separating Openreach from its business could have a major impact on its pension scheme, which has a deficit of £9.5bn, a concern echoed by the scheme’s trustees.
“It is clear there must be better standards of service across the telecommunications industry as a whole. The Government cannot afford to waste any more time and must now get on with delivering the broadband infrastructure that UK homes and businesses so badly need.” “Most stakeholders who responded to our consultation took the view that the concerns raised by BT, the unions and trustees relating to the BT pension scheme have been overstated,” said Ofcom.