Wednesday, July 27, 2016

BT and Openreach

Declaration of interest - I have worked for the BT group for more than 30 years. For the last two years I have been a manager within the Openreach division.

However, the opinions expressed in this post are my own and not necessarily anyone else's - not those of BT or Openreach, or the Conservative Party.

The communications regulator OFCOM has been reviewing the functioning of Britain's digital economy and yesterday published a number of proposals which they described as " plans to make digital communications work for everyone "

Some of OFCOM's proposals are logical and sensible. All ought to be carefully considered And it is right that there has been and will continue to be debate about them.

What is tragic is that most of the debate about what Britain's policy towards broadband should be has been based on seriously sloppy thinking, and in particular too many journalists and politicians have uncritically repeated the self-serving arguments of certain commercial interests, arguments which may be in the interests of the companies which put them forward but not those of the customer or of the country.

It is important to point out that the Telecommunications framework in Britain already allows a higher degree of competition, both in terms of what is legally allowed and in terms of what happens in practice, than the vast majority of other countries. Britain has allowed competition among landline telephone suppliers since the 1980s and in both mobile phone and broadband supply since those services have existed. Previous British governments bent over backwards to give rival operators incentives to set up new telecommunications networks in competition to the privatised former state monopoly, BT, and many did.

According to OFCOM the market shares of fixed broadband provision at the end of 2014 were

BT 32%
Virgin Media 20%
TalkTalk 14%
Sky 22%
EE 4%
Others 8%

In other words, although BT is the largest supplier of broadband services the company has just under a third of the market, compared with nearly 60% between them for BT's three main rivals. BT does not owe its position in the supply of broadband services to any government restrictions on other suppliers offering broadband services. The main reason BT has held on to the position of being the largest supplier is because the company has put more resources into the supply of broadband than anyone else.

BT is a vertically integrated company - that is, it is an end-to-end supplier which competes at every stage in the supply of Telecoms services - but there are VERY strong rules in place to ensure that the company cannot use a strong position in one stage of that supply to compete unfairly against competitors in other aspects of the market. BT divisions such as Openreach are legally required to treat other telecommunications suppliers such as Virgin or Sky on an equal basis to other BT divisions which they are competing against.

For example - and this is a matter of public record - if another Telecommunications company such as Virgin orders some infrastructure from BT's Openreach division, then Openreach is only allowed to share that information with employees of other parts of BT if those people have a legitimate need to know in order to help Openreach supply that infrastructure and is prohibited from sharing the information with any BT operation competing against Virgin or another customer in a way which gives them an unfair advantage.   

The undertakings to apply these rules are taken very seriously indeed by all concerned.

I would not for one moment argue that either BT or any of the other companies which supply broadband services is perfect. I know that BT and Openreach are making enormous efforts to improve their service and I believe it would be in the interests of the customer and of Great Britain PLC if such efforts by ALL suppliers were redoubled.

What would NOT be in the interest of anyone except BT'S competitors would be to break up BT.

Obviously some people would argue that I have a vested interest as a BT and Openreach employee in arguing against this, which is why in the interests of transparency I declared my interest at the very start of this article - though actually if Openreach becomes a completely separate company which needs a full panoply of corporate HQ functions it is at least as likely that I might benefit from increased promotion opportunities as that I personally might lose out.

However there is a far stronger vested interest for BT's rivals in the supply of broadband services to try to persuade the government to kneecap their main competitor so as to gain through state interference what they have been unable to gain in the commercial marketplace.

The arguments for splitting off Openreach from BT which some of those rival companies, and their cheerleaders in parliament and the press, have put forward have been economically illiterate.

Some of them have talked about the need for extra competition. But splitting up the different stages of a vertically integrated company does nothing whatsoever to increase competition at any particular stage of the supply chain. Openreach and the rest of BT would, at least at first, each retain exactly the same market share at the point of breakup in the respective parts of the market in which they operate that they had before.

Others have put forward the argument that the British economy is being held back by inadequate investment in advanced broadband. More investment in superfast broadband would indeed be of benefit to the British economy but it is utterly ludicrous for BT's competitors who, between them, have two thirds of the market to argue either that a lack of such investment is all BT's fault or that splitting off BT from Openreach would solve the problem.

It is far more likely that cutting Openreach off entirely from BT would make it harder, not easier for Openreach to obtain funds to invest in broadband infrastructure which the country needs. 

And if it did, cui bono?

(This blog not being a government website, I am not affected by the ban on latin, but for those who don't know "cui bono?" means "who benefits?" And the answer is "BT's competitors.")

Nothing in this article is meant to encourage complacency or suggest that there is nothing which can be done. I think anyone with an interest in the telecommunications industry should  study and respond to OFCOM's proposals.

Ofcom’s proposed model, announced yesterday, is for:
  • Openreach to become a distinct company. Openreach should be a legally separate company within BT Group, with its own ‘Articles of Association’. Openreach - and its directors - would be required to make decisions in the interests of all Openreach’s customers, and to promote the success of the company.
  • Openreach to have its own Board. The new Board should have a majority of non-executive directors, including the Chair. These non-executives should not be affiliated to BT Group in any way, but would be both appointed and removed by BT in consultation with Ofcom.
  • Executives accountable to the new Board. Openreach’s Chief Executive should be appointed by, and accountable to, the Openreach Board - not BT Group. The Chief Executive would then be responsible for other executive appointments. There should be no direct lines of reporting from Openreach executives to BT Group, unless agreed by exception with Ofcom.
  • Greater consultation with customers. Openreach would be obliged to consult formally with customers such as Sky and TalkTalk on large-scale investments. There should be a ‘confidential’ phase during which customers can discuss ideas without this being disclosed to BT Group.
  • Staff to work for Openreach. Ofcom’s principle for the new model is that people who work for Openreach should be employees of the new company, rather than BT Group. This would prevent any real or perceived conflict of interest, and allow Openreach to develop its own distinct organisational culture.
  • Openreach to own assets that it already controls. Openreach should own its physical network. This would allow the Openreach Board to make decisions that depend on investing in, and looking after, Openreach’s assets. There may be costs in transferring assets or people to Openreach, which would need to be mitigated.
  • A separate strategy and control over budget allocation. Openreach should develop its own strategy and annual operating plans, within an overall budget set by BT Group.
  • Independent branding. Openreach should have its own brand, not affiliated with BT Group, to help embed the organisational culture of a distinct company.
OFCOM describes this model as providing Openreach with the greatest degree of independence from BT Group that is possible without incurring the costs and disruption - to industry and consumers - associated with separating the companies entirely.

OFCOM is seeking views on the plans outlined yesterday by 4 October. The responses may be interesting!

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