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UPD IoD Join Sky, TalkTalk and Vodafone in Call for BT Competition Probe

Monday, September 21st, 2015 (8:53 am) - Score 880

The Institute of Directors (IoD), INCA and Self-Employed & Freelancer Association (IPSE) have today joined Sky (Sky Broadband), TalkTalk and Vodafone in a new open letter that calls for the telecoms regulator to subject BT to a competition probe, which could result in the operator being split up.

Only last week Sky’s Chief Strategy Officer, Mai Fyfield, criticised BT for an alleged “under-investment” in its national infrastructure and attacked their “unacceptable levels of faults and service problems” (here and here), while BT naturally denied the accusations and described them as “plain untrue“.

Sky, much like TalkTalk and Vodafone, have over the past couple of years repeatedly called for BT to be split from control of their national broadband and phone network (Openreach), which would be a radical move and one that requires Ofcom to give its support and then refer BT to the Competition and Markets Authority (CMA).

The national communications regulator is of course gearing up to publish the initial findings from their Strategic Review of the country’s Digital Communications Market (here), which is also giving “serious” consideration to the possibility of a BT split, and so naturally the operator’s rivals are piling on the pressure.

Today’s letter, which was initially hidden behind the FT’s paywall but has now been made public by the ISPs, suggests that BT delivers a “substandard experience for millions of customers” and warns that the operators “fundamental problems” (e.g. such as a perceived “conflict of interest in the role of BT, poor quality of customer service and difficulties in enforcing the existing regulatory regime“) won’t be resolved through Ofcom’s usual “tinkering“.

Meanwhile BT freely admits that it still has work to do on the customer service front, although they claim to have met the vast majority of Ofcom’s regulatory requirements and warn that separating them from Openreach would result in “huge uncertainty” and “fundamentally undermine the case for future investment“.

The Open Letter:

SIR– Every home and business in Britain deserves fast and reliable broadband access. It is essential if Britain is to fulfill its potential to be the world’s leading digital economy. Unfortunately, today’s broadband market is letting customers, businesses and Britain down. It is time we considered radical reform.

Ofcom is currently conducting the most fundamental review of the communications market in a decade, and has identified serious problems with the ownership of the national telecoms network by BT Openreach. These include a conflict of interest in the role of BT, poor quality of customer service and difficulties in enforcing the existing regulatory regime. The result is a sub-standard experience for millions of customers and diminished opportunity for alternative providers to compete effectively.

There is an urgent need for increased competition so that alternative providers are encouraged to invest and innovate to solve the challenges ahead. These include investment to deliver broadband coverage in hard to reach areas, improved service quality and reliability, fibre products suitable for Britain’s SMEs, and new ultrafast broadband services.

We do not believe that the fundamental problems identified by Ofcom can be addressed by tinkering with the existing regulatory framework. Ofcom has done a good job of delivering competition on the old copper network, but the powers given to it are insufficient for the new superfast world.

It is therefore crucial that Ofcom moves as quickly as possible to ask the Competition and Markets Authority (CMA), with its far reaching powers, to undertake a full market investigation. Only the CMA, with the support of Ofcom, can address the structural barriers to competition that will unlock the next wave of investment in communications infrastructure that the country urgently needs. We cannot afford to wait.

Yours sincerely

Chris Bryce, Chief Executive, Association of Independent Professionals and the Self Employed
Chris Pateman, Chief Executive, Federation of Communication Services
Malcolm Corbett, Chief Executive, Independent Networks Co-operative Association
Simon Walker, Director General, Institute of Directors
Jeremy Darroch, Chief Executive, Sky
Dido Harding, Chief Executive, TalkTalk
Jeroen Hoencamp, Chief Executive, Vodafone UK

Meanwhile Ofcom’s CEO, Sharon White, has previously said that she favours a “lighter approach” to regulation and it’s difficult to see how that would chime with the “radical” idea of Openreach’s separation; unless of course you perceive that a post-BT dominated market might adopt lighter regulation than today.

A split would also raise the possibility of significant legal challenges, difficulties over apportioning BT’s debt pile and pensions (would tax payers shoulder the burden or rival ISPs?), the impact on the price we all pay (improvements usually cost extra) and questions about how much future investment and commitment BT’s rivals would actually be willing to make. The grass might not be greener on the other side and things could even get worse, depending upon Ofcom’s approach.

As we said last week, consumers need to be given more thought and engagement in this debate. BT’s rivals are clearly serious about delivering an alternative, but they need to spell out precisely what they’d do and how much investment they’d stump up, then maybe it would be easier to judge whether Openreach is truly going to be better off in their hands. Otherwise business is business and we are all just numbers to be bargained over.

The first preliminary proposals from Ofcom’s review should surface by around the very end of this year. A snap poll conducted by ISPreview.co.uk last week revealed that 46% of respondents expected the regulator to only make small changes to the market, while 35% anticipated full separation and only 16% though that they’d make some modest regulation and other tweaks to improve competition.

UPDATE 1:14pm

The CEO of TalkTalk, Dido Harding, has also given her own personal opinion and naturally it echoes the above letter.

Dido Harding said:

For some time now I’ve been arguing that the broadband market is letting customers and businesses down. There are always ways TalkTalk can be better, but many of the problems are caused by the way the market is structured. Over 500 telecoms companies exist in the UK, but most depend on a shared set of wires that connect individual homes to our networks. When BT was privatised, it was allowed to keep control of this network on behalf of the whole industry, and it is managed today by Openreach, a BT company. It’s like one gas supplier owning the national grid, or one airline owning Heathrow.

Unfortunately, that system isn’t working because BT has used its sole control over the network to its advantage, rather than to benefit the network or customers. Openreach makes a lot of money, but it hasn’t invested enough in maintaining the network, leaving customers suffering from poor quality of service and facing long waits to repair faults or install new lines. It allows BT to abuse its control to restrict choice for customers. It also makes it harder for the regulator to enforce the rules and be a powerful consumer champion. Put simply, it’s a tired model not fit for a superfast future.

Openreach is TalkTalk’s biggest supplier; we couldn’t operate as a business without it. So naturally, I’ve got a vested interest in this debate. But what matters about today’s letter is the breadth of the coalition calling for change. It includes some of the biggest companies in the industry who have tried – and failed – for years to improve the system, as well as smaller players battling to bring innovation and choice to the market, but let down by Openreach.

Most importantly it’s not just the industry calling for change, it’s customers too. Today’s letter is signed by organisations representing 100,000 customers, including tens of thousands of small businesses and home workers who depend on broadband for their living but who feel let down. That’s more people than will fill Twickenham for the rugby world cup final!

There is an alternative. Ofcom is currently conducting the most fundamental review of the market in a decade. One of the options being considered is whether customers would be better served by separating Openreach as an independent company. I firmly believe that they would.

A separate Openreach would be able to focus exclusively on investing in improving the network, rather than struggling to get the attention and money it needs as a small part of a much bigger company. That means people’s broadband would break less often, and when it did, it would be fixed quicker. Separation would allow other companies to compete more effectively, giving customers more choice to find better deals. It would also create a level playing field for others to invest in world-leading technology, such as the ultrafast network we’re trialing in York.

Before we get that far though, Ofcom first needs to refer the issue to the Competition and Markets Authority (CMA), which has the power to investigate the issue and force through the changes needed. Once referred, the CMA would then run a thorough, independent process, assessing the evidence and deciding whether there is a better way of serving Britain’s broadband customers. Today’s letter has a simple ask; that Ofcom refers the issue and allows the CMA to start work. There will be different views about the best way to improve the market, but it’s too important not to ask the CMA to consider the issue.

Customers are telling us loud and clear that they want change. Ofcom has the power to kick-start that process. Today I’m asking that they seize it.”

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By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on Twitter, , Facebook and Linkedin.
Leave a Comment
17 Responses
  1. TheFacts says:

    What do they actually want to happen?

  2. TheManStan says:

    It looks like that instead of investing directly themselves, they want a divested Openreach to be their vehicle to invest in to deliver infrastructure.

    But, this is something that should have been done ages ago as a National Broadband Strategy…

    Or via a communal approach, i.e. ISPs pooling their resources.

    Which they could have done as a competitor to BT.

    This is looking more like a virtual takeover via a regulator approval.

    A divested OR will be ripe for some other telco/ISP to acquire… unless afforded some regulatory protection…

    1. TheFacts says:

      How many ISPs have significant resources to pool, and for what? To provide a second infrastructure to every UK property?

    2. Steve Jones says:

      There is, of course, the work going on in York. However, I even if they extend the approach it will only be to cherry-pick areas.

      Of the major customers of OpenReach, those with serious resources are Vodafone and Sky (although the latter is heavily stretchedon media costs).

      In any event, the ability of OR to invest much more than is currently the case would be predicated on finding new revenue streams which can only come from their wholesale customers.

  3. The Sheep Pimp says:

    Openreach should be nationalised.

    1. Steve Jones says:

      So you are prepared for the government to pay out perhaps £25-30bn to nationalise Openreach (about half of BT’s market capital)? Good luck with that.

    2. tonyp says:

      Nationalisation without compensation? Well that wouldn’t be the British way would it? Still I suppose pension funds would be hit….

    3. Steve Jones says:

      Nationalisation without compensation would not be legal under EU law (and would probably contravene the ECHR). Of course if OR were to be manoeuvred into bankruptcy, then you could see the sort of thing that was done with Network Rail. However, that might not be such a good example as Network Rail have £38bn of debt on their books (rapidly increasing) and the government is liable for its pension scheme too.

      Another really important point is that a state owned Openreach would, of course, be in direct competition with other network infrastructure providers. Most importantly, Virgin Media of course, but there are a significant number of other business network providers plus the smaller scale fibre operators. A state-owned Openreach would still be subject to EU rules on state assistance. That would mean not competing unfairly with private operators and would probably be a cause of considerable friction in some areas.

      In short, the whole idea of a state owned Openreach solving any problems at all is probably illusory. The government might have to nationalise all the infrastructure networks. If you want an example of that, look at the Australian NBN as that’s essentially what they have done (albeit that there was nothing like the diversity of infratructure network operators).

    4. DTMark says:

      The key to moving forward with infrastructure was always for the government to buy or at least hold a majority share in the ductwork and poles – i.e. the last mile delivery, though not necessarily – and not preferably – the actual cabling.

      This would enable, and indeed compel, all players to actually finance the necessary infrastructure neatly solving the status-quo that prohibits investment now and giving customers in many areas a choice of infrastructure, neatly solving other issues.

      It would actually create some semblance of an actual “market” beyond retail level similar to that which exists in cabled streets.

      The kingpin for this would have been the involvement of Virgin Media. Without them, it would not work on any scale.

  4. Steve Jones says:

    One interesting point is that (unlike the regulator for the privatised energy and water utilities), Ofcom does not allow that portion of the pension deficit incurred before privatisation to be recovered through wholesale pricing.

    To put the costs in perspective, in the next three years BT is to subscribe £2bn to the pension fund as part of paying down the £7bn pension deficit. That’s around £700m a year compared to OR’s capex of about £1bn. It’s unclear on what basis the pension deficit would be divided up, but if its on past make up of the workforce, then that’s likely to be disproportionately down to OR as the great majority of staff were employed in the local network. It may also be the case that, ultimately, the constituent business might have to carry the whole burden alone should one of them fail.

    Debts are an even more fraught area. When O2 was separated the decision was made to launch it debt free. However, that was an internal decision made following pressure from institutional shareholders and to try and establish the business as viable on its own. I can’t imagine the regulator (and stakeholders) would not want a large say in that area.

    It’s difficult to escape the conclusion that, if this future separate Openreach was to be created, there would have to be a review of wholesale charges and the ability to maintain (let alone increase) investment. OR would no longer have an anchor business and we have yet to see what the other major customers would be prepared to do to increase it. Direct equity investment would provide cash of course, but that still requires either increased revenue or a reduction in cost to justify it (and increasing investment will not least to reduced costs in the short/medium term, but the reverse).

    In any event this will be a very complex matter which could easily end up in the courts as there are many interests at stake. Employees, pensioners, shareholders not to mention OR customers. The government too will have a fiscal interest due to the Crown guarantee. Having been stung for the Royal Mail’s pension deficit, I doubt they’ll want to pick up another liability. The sustainability of the BT pension fund may not be an Ofcom consideration, but it’s most certainly a government one.

    In addition, nobody seems to have given much consideration to the regulatory position of BTW in all this.

  5. DTMark says:

    A vertical monopoly cannot work in this area. This much was obvious from the outset.

    Ignoring this and “regulating” specific things like the wholesale price does not fix this because the retail player that is part of the same company as the infra provider does not pay the wholesale price, they pay the cost price. There will always be a form of “margin squeeze” whether deliberate or not, to give one example.

    This is so blindingly obvious that I wonder why it has taken this long for this to come to the fore.

    While VDSL may have been the quickest way to “speed up the broadband a bit”, around here, there have now been, what, 16 engineer visits for *two* VDSL lines so far, REIN and/or poor quality line plant seem to be the culprits.

    The profit continues to evaporate and the scale of the inefficiency is staggering. Multiply that up over, say, five years, and all those engineers might well have been more efficiently used deploying fibre.

    Unless, of course, BT charges the ISPs to rectify their ancient line plant issues. Which, I suspect, comes to the crux of other ISPs’ complaints.

    1. Gadget says:

      I thought we’d been over the misconception that BTWholesale somehow gets things cheaper several times before.

      Under the Ofcom Undertakings http://media.ofcom.org.uk/news/2005/a-new-regulatory-approach-for-fixed-telecommunications/ it is very clear about “equivalence of input”

      “Product equivalence . The new business unit will be required, through a set of formal rules on governance and separation, to support all providers’ retail activities (including those of BT Retail) on a precisely equivalent basis, which Ofcom terms “Equivalence of Input”. Equivalence of Input will mean that all providers will benefit from: ◦the same products, with equal opportunity to contribute to the development of new products;
      ◦the same prices, offered to all providers equally; and
      ◦the same processes, to ensure all providers are able to order, install, maintain and migrate connections for their customers on equal terms. ”

      Unless there is evidence to the contrary…..

    2. DTMark says:

      There is no such company as BT Retail.

    3. Gadget says:

      So what’s your point? Openreach sells its products at the same price to everyone, so whatever happens downstream is nothing to do with the argument that Openreach should be split off from the rest.

    4. DTMark says:

      It has everything to do with it.

      When the infra provider is also a retail player, that retail player gets the product at cost price.

      Other players do not have the same option of moving things from one balance sheet to another. They cannot pay the cost price.

      This is not a form of fraud, rather it is built into the vertical monopoly model.

  6. Neil says:

    LOL I see more news on this investigation has driven the BT fan club into meltdown again. Still good news is we should never have to listen to their false assertions that BT Sport and Line rental does not fund Openreach. Mr Williams has confirmed the divisions do.

  7. tonyp says:

    I do not understand why people reacted to my ‘tongue in cheek’ message earlier? It wasn’t meant seriously and at that time I hadn’t read today’s Telegraph piece. Still if England (from a dis-United Kingdom) were to leave the EU and the then government were reactionary enough, nationalisation of ALL the communications infrastructure and media might follow. Then we could all celebrate Big Brother’s Hate Week. Wouldn’t that be fun! Deutschlandsender and Volksradio come to mind as does the fate of the Anglo-American Oil Company and the Suez Canal company.

    Be careful what OFCOM wish for.

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