Ofcom confirms legal separation of BT Group and Openreach

Ofcom announced this morning that it was going to force Openreach to legally separate from BT Group.

Following up its conclusion to the Digital Communications Review in July, it has today decided to pursue the option to force legal separation having failed to agree a suitable compromise agreement with BT Group. Ofcom believes that it needs to strengthen the independence of Openreach – the infrastructure arm of BT – in order to deliver better quality of service and increase investment, particularly in fibre-to-the-premise.

According to Ofcom: “Our proposal requires Openreach to become a distinct company with its own Board. This would comprise a majority of non-executive directors, including the Chair, who are not affiliated with BT. Openreach would be guaranteed greater independence to make decisions on strategic investments, with a duty to treat all of its customers equally.???

Ofcom is now having to notify the European Commission of its intention to implement these plans. This is unlikely to be a swift process with Ofcom indicating that it will need to consult on its submission to the Commission early next year.

There are a number of interesting aspects to this.

Firstly, it does not go as far as some industry members wanted. They preferred full (structural) separation with a fully independent Openreach. It is still though unprecedented in terms of a regulator forcing separation onto an incumbent. In New Zealand and other examples, it has been undertaken voluntarily. Thirdly, and no doubt because of this, Ofcom made clear that whilst it is consulting with the Commission, it remains open to a voluntary agreement with BT.

Fourthly, and most importantly, it is hard to predict what the medium and even short term effect of this intervention will be. Ofcom has rightly identified three measures against which it will judge if its intervention has been a success:

• a more responsive Openreach,
• increased levels of competition, investment and innovation,
• and better consumer and business outcomes.

Hopefully these objectives can be met but ensuring that the UK has a great standard of connectivity will require other operators, as well as Openreach, to continue to invest.