BT and Its Rivals Battle over the UK’s Broadband Infrastructure
The future of broadband access in the UK and the role of BT’s Openreach unit have become hot topics as regulator Ofcom readies to publish its review of digital communications in the UK. The review is likely to shape the UK telecom over the next 10 years, and every interested party has been lobbying hard to ensure it’s not left behind in one of Europe’s most vibrant markets.
Regulators and competitive authorities are duty-bound to listen to the comments of all providers. BT’s rivals have been pushing for some time for Openreach to be separated from its parent. They’ve mounted enough pressure to raise concerns about how competing companies gain access to a shared infrastructure.
As part of its response, BT has called for a detailed review of the pay-TV market, an area in which it has great aspirations, despite being a relative newcomer. BT has acknowledged some of its shortcomings and is seeking to address them. In September 2015, it pledged to increase investment and improve service quality.
The major focus of Ofcom’s review is how well competition creates benefits for consumers and businesses. With this in mind, we believe a full separation of Openreach is unlikely. Ofcom has acknowledged that the current system, in which Openreach operates as separate unit, has provided choice. The retail broadband market is thriving, with heavy promotional activity to the point that selected ADSL and fibre packages are being given away for free.
A principal argument against structural separation is that the existing model has created a leading network of “superfast” broadband with access speeds of 30 Mbps and above. UK consumers have also benefitted from some of the most competitive prices in Europe. According to the European Commission’s digital agenda scorecard, the UK has the highest share of superfast broadband among the leading five European markets. One could question whether the UK’s leading position would have been achieved had Openreach been split from BT when it was created a decade ago.
Ofcom will be evaluating the extent to which a structurally separate Openreach would improve broadband performance for UK consumers. Despite evidence from some competitors, including Sky, highlighting the success of similar schemes in other markets, creating a new entity offers no guarantee of improved service or greater investment. Indeed, the time taken to establish a new body could disrupt network deployment in the short term.
CCS Insight believes that addressing the challenges of the existing model would be Ofcom’s least risky recommendation. Controls on charges, new incentives based on the quality of service and tougher penalties for poor performance could push Openreach to perform better while ensuring continuity and stability in the UK telecom market. A co-investment model could also be an option. This would see companies such as Sky and TalkTalk working with Openreach to enhance the network to the benefit of their own customers, possibly boosting differentiation and competition. However, co-operative models are rarely free from conflict and power struggles.
In our view, the most likely is retention of the existing structure. This is a model that has helped create a highly competitive UK broadband market, facilitating new entrants and a leading superfast network. The regulator’s starting point has always been that Openreach is not a broken model. We believe changes to address customer service and other problems would be straightforward to implement while maintaining continuity at a crucial time for the sector.
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