BT must turn its Openreach infrastructure division into a distinct company, but does not have to split it from the business entirely, Ofcom has proposed.
This is the conclusion of Ofcom's investigation into the company, following a report in February, which the regulator claims will "provide Openreach with the greatest degree of independence from BT Group that is possible without incurring the costs and disruption".
Under the plans, Openreach will become a legally separate company within BT Group, with its own Articles of Association and a separate board of directors who will be required to make decisions in the interest of Openreach customers.
The board would also be obliged to consult formally with wholesale customers, such as Sky, TalkTalk and Zen, on large-scale investments, including a confidential phase in which Openreach will not be allowed to disclose its investment ideas to BT Group.
Staff will be employees of the independent Openreach, rather than BT Group, and the company will also formally own the assets under its control. And, finally, in addition to independent branding, Openreach will develop its own business strategy and annual operating plans, but "within an overall budget set by BT Group".
The model "is designed to ensure that Openreach acts more independently from BT Group, and takes decisions for the good of the wider telecoms industry and its customers. If it cannot achieve this, Ofcom will reconsider whether BT and Openreach should be split into two entirely separate companies, under different ownership," said Ofcom.
BT made its own proposals to Ofcom for giving Openreach greater independence, but the regulator does not believe they go far enough. A last-ditch plea by BT to hold on to Openreach followed calls from MPs to split the company and enable Openreach to invest more in its network.
The regulator is now consulting on its plans in a process that will last until 4 October.
However, one element of Ofcom's new regime will come into force on Sunday, when rivals to BT will acquire new rights to access Openreach's infrastructure so that they can install and run their own equipment alongside BT's.
BT Group chief executive Gavin Patterson claimed that the company is fully behind the changes, which will create a more transparent Openreach.
“We have listened to Ofcom and industry and are introducing significant changes to meet their concerns. These changes will make Openreach more independent and transparent than it is today, something Ofcom and industry have requested," he said.
“Openreach is committed to delivering better service, broader coverage and faster speeds, and these changes will enable it to do just that."
Not all were so pleased with Ofcom's decision. Mark Collins, director of strategy and policy at CityFibre, insisted that the proposals do not go far enough and stop short of doing something that would deliver real benefits.
“While correctly identifying Openreach as the principal source of the industry’s dysfunction, it is hypocritical of Ofcom to focus on a restructured Openreach as a panacea," he said.
"Further debate and navel-gazing as to the appropriate structure of BT will continue to create a period of uncertainty at a time when the industry needs clarity, direction and competitive investment.
"Openreach has a critical role to play, but it is not prudent to entrust it with sole responsibility for our digital future."
TalkTalk CEO Dido Harding warned that Ofcom's decision is "taking one cautious step forward and five steps back", and that only a full break-up will suffice.
“Legal separation still means a highly complex web of regulation, and BT has proved itself expert at gaming this system," she said.
"There is nothing to suggest they will not continue to do so in the new system. Structural separation is cleaner, with less red tape, and removes BT's ability to exploit loopholes in the regulation."
Telecoms analysts took a more measured approach to Ofcom's decision. Kester Mann, principal analyst at CCS Insight, suggested that the proposals go about as far as is possible without causing instability, and that the threat of a split remains.
"Although BT will breathe a sigh of relief that Openreach will remain a part of the group, Ofcom’s strongly worded statement should leave BT under no illusions that it needs to up its game. Indeed, the threat to hive off Openreach still remains if the unit is unable to act more independently from the BT group," he said.
Matthew Howett, practice leader at Ovum, agreed that a split could be a step too far just now, and that a deal between Ofcom, Openreach and the wider industry would be the best outcome.
"A voluntary agreement between Ofcom and Openreach, which is backed by the rest of the industry, would achieve more than years in court and a forced enhanced model of separation," he said.
"Many of the things proposed by Ofcom, and that are being offered by BT, could be enacted within months. Attention and money could then turn to getting on with delivering what this review is ultimately all about: making sure Britain has the broadband infrastructure fit for the next decade."
Mobile operators were unhappy with the decision. Three maintained that it showed once against that the regulator is scared to take on BT.
“We are disappointed that Ofcom has fallen short of structurally separating BT, the only measure that would have delivered genuine competition and prevented BT favouring itself," the firm said.
"This is yet another example of UK regulators failing to stand up to BT after the Competition and Markets Authority waved through its purchase of EE without any action following advice from Ofcom."
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