A 10 Point Plan for a better Openreach 7 July 2016
Why are we here today?
Almost no-one thinks the current market structure is working “Given the concerns identified, continuing the status quo is not an option .” Ofcom Initial Conclusions 3
Almost no- one thinks the current market structure is working… The Government agrees with Ofcom’s view that the current relationship between BT and Openreach will not deliver the country’s needs for more competition, better innovation and better service. The Government believes Ofcom should be firmly focused on taking whatever action is needed to correct the competition problems identified, and to promote the growth of the digital economy, however radical a change that might be. Government response to Ofcom’s Initial Conclusions 4
The case for splitting is fairly compelling. Full structural separation of Openreach, the part of BT that builds and maintains the UK's main network of telecoms infrastructure, from the larger part of BT which serves end-users, could focus management effort on both sides. Investors might see financial results that go beyond the ho-hum numbers just reported. October 2015 5
Now we know. The report by Ofcom makes it clear that for all the special pleading and claims of billions of pounds of investment [BT’s] stewardship has neither been fair to competitors nor helpful in ensuring Britain has the quality and speed of broadband required for a digital economy. That is why the regulator is demanding ring-fencing and structural independence for Openreach. February 2016 6
MPs have called for full separation of BT's Openreach unit… the most radical of the three routes still available to Ofcom chief executive Sharon White. She has already ruled out the status quo, leaving tighter regulation under the current structure or support for new competing infrastructure as the remaining two options. January 2016 7
Beyond the politics, the numbers tell the real story. Even with BT's wishy-washy promises today, Britain would still be far behind other European countries on fiber. (Don't even look at Japan or Korea, where fiber is ubiquitous -- it's just depressing.)Europe's fiber leader is Telefonica, which spent heavily to build the network in Spain despite a deep recession. France's Orange is also no slouch.BT should do more -- capital expenditures need to rise and its obsession with G.fast abandoned. If not, regulators will have a solid argument that it's a poor steward of such a key piece of national infrastructure. BT could then lose control over the cash cow that is Openreach. May 2016 8
Gavin Patterson, BT’s chief executive, last week said he wanted to reduce the company’s reliance on Openreach cashflows. This is in part a necessity: Ofcom is already tightening the regulatory controls that have allowed BT to make excessive profits from its monopoly for the last decade. It is not too hard to imagine a point at which the headwinds get strong enough for BT shareholders – other than Deutsche Telekom, anyway – to start agitating for a voluntary separation. May 2016 9
The concern, though, is that BT may be dragging its feet on investing in Openreach’s largely copper network. Rather than fully convert the system to high-speed fibre, the company is trying to upgrade its existing network with a less efficient technology called G.fast. Ofcom, as well as rivals, believe Openreach may have an incentive to put BT's interests above those of the public. February 2016 10
The act of ring-fencing Openreach and giving it a separate board, accounting and other structures makes for an easy stepping stone for an eventual split and divestment into a separate company. Of course there are complications for a large workforce of more than 30,000 and their BT pensions which are topped up annually by the company. But this is bread and butter work for corporate financiers and pensions consultants. It is no excuse for hanging onto full control of creation of the most efficient and best fibre broadband network. February 2016 11
Four areas of concern Networ work Quality ity of Effective ective Compe mpetition tition invest nvestme ment nt servi vice ce reg egula ulation tion 12
Current market structure provides no incentive to invest in FTTP; UK is nowhere on international league tables Openreach Capital Expenditure 1,400 1,200 Capital expenditure (£ millions) 1,000 Networ work 800 invest nvestme ment nt 600 400 200 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Av. annual capex Other FTTC Roll out 13 Source: Frontier Economics, BT
Regulatory concerns over weaker competition as the market moves to superfast broadband Broadband nd market t sha hares (Dec-15, excl. l. cable) le) c.30% 30% c.50% 0% Compe mpetition tition 67% 40% All Broadband Superfast Broadband 14 Source: Sky estimates
Openreach’s quality of service is now recognised to be sub-standard Line faults “ We have concerns about Openreach’s Quality ity of capacity to manage faults…This is a servi vice ce significant cause for concern.” increase 2013 -15 faults per annum 15 Source: Ofcom
Regulation becoming ever-more complex & contentious • Regulation has to deal with horizontal issues, and BT’s vertical integration Effective ective reg egula ulation tion • Encourages Ofcom to develop new, complex & contentious regulation (e.g. VULA margin test) 16
Increased separation of Openreach addresses these issues
Structural separation is the best solution to these concerns Networ work Quality ity of Effective ective Compe mpetition tition invest nvestme ment nt servi vice ce reg egula ulation tion 18
Structural separation makes BT Retail’s business contestable • Payback on FTTH investment critically dependent on take-up Networ work • Being able to compete for BT Retail’s business makes invest nvestme ment nt alternative infrastructure investment far more viable • Real competitive pressure on Openreach to invest in more fibre and Quality ity of improve quality servi vice ce 19 Source: Sky illustrative estimates
Level playing field for competition; simpler regulation focused on Openreach • No longer any incentive for Openreach to favour BT’s retail divisions Competition • Level playing field creates tougher competition • No need for complex regulatory interventions – Undertakings etc. • Ofcom can focus on regulating Openreach Regulation • Rest of BT becomes unregulated 20
For now, Ofcom is looking at “legal separation” “We will therefore consider whether a strengthened model of functional separation could deliver the greater independence and autonomy for Openreach that we believe is necessary. If functional separation cannot be strengthened, we reserve the right to take forward structural separation .” Ofcom Initial Conclusions 21
A 10 point plan for a better Openreach
The 10 point plan is aimed at supporting Ofcom in its efforts Reforming Openreach ’s governance Giving Openreach the tools that it needs Openreach provides on an equal basis 7 Openreach consults with all its customers 8 Creating an Openreach that delivers for all Openreach is no longer the only provider BT can use 9 Openreach does not inhibit investment by others 10 23
Reforming Openreach’s governance Lega gally separate e Openre reach • Openreach becomes a company 1 • Leverages normal company law requirements to deliver transparency • Articles of Association set out Openreach’s purpose • Openreach able to contract, hire employees, own assets in its own name Indep epen enden ent Openre reac ach Board 2 • Openreach Board will be appointed via a documented, independent process in accordance with UK Corporate Governance Code • Chair should be independent of BT and Openreach • NEDs to make up majority of the Board . Indep epen enden ent ov oversi rsight ght and adjudi udica catio ion n body 3 • Draws on merger practice • Role is to oversee transition, and adjudicate on any disputed issues that arise • Takes administrative burden off Ofcom 24
Giving Openreach the tools that it needs Openre reach ach owns s its assets ets • It will no longer share infrastructure or personnel with BT Group 4 • Instead, it will have its own finance, legal, strategy, product design and system teams that operate entirely independently of BT Group. It will take responsibility for its own relationship with the regulator and other external stakeholders. Indep epen enden ent brandin ding 5 • No more ‘a BT Group Business’ on vans • Partly symbolic, but also necessary to reduce cultural interdependence Openre reach ach is financ ncially ially indepen enden ent 6 • Can borrow in its own name • Payments to BT via dividends. Dividend policy sits with Openreach • Sets its own budget 25
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