What should be done with Openreach, the mechanism for competition in UK broadband? Ofcom’s announcement was a cautious ‘leave it as it is’. In this blogpost, LSE Visiting Fellow Monica Horten considers the other options. Divest Openreach from BT? Would public ownership be in the national interest?
Today the UK regulator Ofcom has unveiled its conclusions in a 10 year review of the UK telecommunications industry. At the centre of it all is Openreach, the British Telecom subsidiary company that controls competitive access to broadband customers around the country. The burning issue is whether Openreach should remain part of British Telecom, or whether Ofcom should force them to separate. It would seem that the regulator will stay more or less, with the status quo. It’s also being reported that BT is dangling a £1billion carrot in front of the regulator.
However, the policy question is about the national interest in an internationally competitive broadband infrastructure. The government’s policy vision that a 10Mbits/s broadband should be a service that the public has a right to, like water or electricity. In that context, should it be split from BT? What could we make of a more radical idea to put Openreach into public ownership?
Openreach is the strategic vehicle underpinning that vision. It is a company that is highly visible on Britain’s streets but whose business is little, if at all, understood by most ordinary people. The company was set up to enable competition in broadband services, and it is critical precisely because it controls the broadband access to homes and businesses around the country.
Openreach is the practical example of a regulatory concept known as ‘functional separation’. This means that BT is under a legal obligation to keep the functions of its local loop – the part of the network that reaches homes and businesses – separate from the backbone or ‘trunk’ network. Openreach owns and manages that local loop function. It reports to the BT board, but it must allow BT’s competitors to offer services over it. It is obligated to ensure that it treats all competitors on a fair and equitable basis. Thus, Openreach is a mechanism for competition, and it enables the likes of Sky, TalkTalk, Vodafone and even smaller providers such as Zen Internet, to offer broadband and phone services direct to households.
There is general agreement that this mechanism has worked. That’s why the UK has multiple broadband providers and the UK market is ahead of others in terms of its competitive offerings. So, that’s a good thing.
But there is considerable controversy over how much BT controls and influences Openreach and whether it does so in ways that are anti-competitive or discriminatory. BT’s competitors, including Vodafone, have been calling for change.
Meanwhile, BT’s chief executive has revealed an offer of £1 billion additional investment – which would seem to be a ploy to avoid change.
Openreach owns the part of the telecoms network that requires the greatest investment. The old copper wires that go into people’s homes are not sufficient for the higher speed broadband, and new fibre cable is needed. Some areas, notably rural places, still do not have broadband at all. Government policy is calling for new investment to upgrade the broadband infrastructure and increase the coverage of the broadband network into rural areas.
The point is that Openreach is critical to achieving that policy, but the source of the funding for investment is a key issue. BT is reluctant to invest unless it sees a revenue stream. Hence, it only installs the new fibre cable to street cabinets and not right up to homes and businesses. And only in urban areas. The government has been subsidising the rural upgrade to the tune of £1.7 billion.
At the same time, Openreach has recorded a profit of £1.282 billion for 2015, reflecting a margin of 10.4%. That’s a margin that many businesses would envy. If claims from rivals are true, that BT is indeed loading up the costs, then the true profit could be even greater.
The government is patting itself on the back that its broadband policy has worked. It claims that something called ‘superfast’ broadband is ‘available’ to some 80 per cent of UK homes and businesses. However, this claim is basically meaningless. ‘Available’ means that the fibre cable which is essential to deliver super-fast broadband, is somewhere in the vicinity. Usually that means the fibre goes to the street cabinet, which may be several hundred metres away. It does not mean that competitors are able to connect to the street cabinet or that ‘access’ is supplied to the home. Statistics for super-fast broadband access are harder to find and seem to vary between 20% and 30%. That indicates that a large part of the investment in fibre is currently being wasted. It may also indicate slow take-up due to BT’s resistance to allow competitors onto the fibre.
Then there is the question as to how ‘superfast’ is defined. The regulator, Ofcom, defines it as above 30Mbits/s. The government defines it as more than 24Mbits/s, but at the same time says it wants universal access of 2Mbits/s which was the speed set in the 2009 EU Telecoms Package. The actual policy goal is therefore confusing.
Many users paying for superfast services will find they do not achieve the promised speeds. For example, I myself have been told that I could only get the Ofcom-defined 30Mbits/s download speed if I take a 40Mbits/s service, and even then, I would only get 16 Mbits/s upload speed. The speed depends on the distance of your property from the street cabinet where the fibre is located, and the download speed is also affected by the distance from the exchange. Having said that, these speeds would be a considerable improvement on the current 4.5Mbits/s.
There are other question marks around Openreach. The way it charges out its services to competing networks, for example. How fairly and equitably it provides access to the fibre in the street cabinets is key to the take-up of superfast broadband. In my own case, I’ve been asking my network provider, Vodafone (Demon), every year, when I am going to able to get superfast broadband (knowing that the new fibre street cabinet had been installed). Every year, I’ve been told they did not have the agreement with BT. I believe that competitors may now have it, but it has been a long time coming.
Openreach management of the existing copper-based network remains a critical outstanding issue. The UK will remain dependent on the copper local loop as long as the fibre only runs to the street cabinet. There is evidence of BT’s under-investment in the copper network, and that the regulatory benchmarks are incentivising the wrong way.
Openreach engineers speak of joints decayed by water and limescale, and problems being ignored in the interest of meeting artificially-set regulatory targets. They speak of management by numbers, whilst street cabinets are left in disrepair. If this is correct, then it signals an investment issue. The best way to check it out is to do some leg-work. I doubt that the Ofcom chief, Sharon White, has ever spent time standing in the tipping rain watching an engineer’s bum sticking out of a hole in the street while he fixes a rotten joint box. It probably is not her idea of fun. However, I do wonder whether she would benefit from doing so?
The government has a vision that Internet should be available to all citizens, in the same way as the utilities such as water and gas. It also wants to retain the policy of competitive suppliers to the end-user (a policy which was first drawn up in the early 1990s). If Openreach is critical to achieving that vision, then its place in the industry structure should be central to any new strategy. Moreover, the health of the network infrastructure should be the foundation of that strategy, because without a healthy infrastructure, the rest of the plan will crumble.
Ofcom has not dared to do much more than tinker around the edges of the existing structure. That is not only a shame, but perhaps a missed opportunity.
Separating the Openreach business completely from BT’s other businesses and putting it into a brand new company is one option. This is a concept known as structural separation. Several of BT’s competitors are calling for this option to be selected.
Bubbling under all the regulatory noise is the notion that a publicly-owned local loop network could be a move that is in the national interest. Such an entity, freed from the vested interests of a network operator, could act in the interests of the wider economy. It wouldn’t be an easy option, but it is an interesting one to consider.
The difficulty would be to determine where and how to transfer the existing assets and business. But surely, with an appropriate vision, that could be achieved. BT won’t like it – but then BT has resisted change ever since it was privatised in 1984.
Overall, what’s needed is an industry structure that will underpin the government policy vision for the long term future of broadband in the UK, and dare I suggest, a reformed regulator that has the teeth to enforce a fair and equitable arrangement.
Openreach is a hot potato – but is it too hot to touch?
This article originally appeared on 23 February 2016 on Iptegrity.com, and is reposted with permission and thanks. This article gives the views of the author, and does not represent the position of the LSE Media Policy Project blog, nor of the London School of Economics.