UK broadband giant BT agrees to legal separation from pipes-controller, Openreach

Startups in the U.K. will be hoping for better performance from the local broadband market after telecoms regulator Ofcom agreed to a deal with the country’s largest broadband provider, BT, to legally separate Openreach: aka the division of BT that builds and maintains the broadband infrastructure.

It’s not a full structural separation — as some have called for — but is a step further than the functional separation imposed by the regulator just over 10 years ago. Under the new deal, Openreach will still be owned by BT but will be more independent, gaining its own management staff, an independent board and directly employing its circa 32,000 staff.

Ofcom believes this legal separation will allow Openreach to develop “its own distinct organisational culture” as a BT-owned company versus just being a division of the telco giant. And although BT will still be setting Openreach’s overall budget, the decisions on how the money is allocated will be taken independently of the telco.

The main hoped-for outcome is increased investment in broadband infrastructure and better access for rivals to BT’s networks. Competitors (and consumers) have long complained the telco has dragged its feet about investing in the network in order to protect its own bottom line — leaving U.K. broadband consumers to suffer slower speeds and higher prices than they might otherwise.

BT does not own and operate the only broadband network in the U.K., but, given its long history and former status as a monopoly supplier of the national telephone service, it does have the largest network. Meanwhile rivals that have built their own broadband networks — such as cable provider Virgin Media — have tended to concentrate on more densely populated regions, leaving large areas of the country where the only choice for broadband is to use BT’s pipes.

There’s added significance to the separation because BT does not just control fixed-line broadband either; just over a year ago its $19 billion acquisition of a major U.K. mobile operator, EE, was cleared by the U.K.’s Competition and Markets Authority — bringing the telco back into the mobile market as a dominant player.

In a statement commenting on today’s deal, Ofcom’s CEO Sharon White said: “This is a significant day for phone and broadband users. The new Openreach will be built to serve all its customers equally, working truly independently and taking investment decisions on behalf of the whole industry — not just BT.”

How significant the arrangement will prove remains to be seen, of course. And despite the regulator’s upbeat sentiments, the very large expense of laying full fiber to the home/premise — aka the fixed-line broadband installation that supports the highest broadband speeds, versus alternatives such as fiber to the cabinet (which BT has preferred) — means the telco will, in practice, still exert considerable control on Openreach’s ability to ramp up broadband investment, given its continued hold on the purse strings.

Without the ability to significantly increase investment, Openreach will be unable to significantly expand access to the fastest fixed-line broadband speeds — so it’s not clear that a legally independent Openreach will be as radically transformative for the national broadband landscape as some might wish. (As of last August, fewer than 780,000 U.K. homes were estimated to have access to BT’s full fiber to the premise broadband product, which supports speeds of around 300Mbps and is slated to rise to 1Gbps.)

The deal with Ofcom does mean Openreach will be obliged to consult formally with customers such as Sky, TalkTalk and Vodafone on large-scale investments. So rivals should be able to exert more influence on the direction of infrastructure travel.

Ofcom also notes there will be “a ‘confidential’ phase during which customers can discuss ideas without this being disclosed to BT Group, as well as further protections for confidential customer information” — but again, it remains to be seen how that works in practice.

The regulator adds that it will also be monitoring the new model “to ensure it is effective.” So there’s always the chance that BT will face further action in the future — albeit regulatory intervention timescales to date in this space suggest BT will have a fair amount of breathing space before having to worry about further intervention.

Ofcom had previously threatened to resort to EU regulators if BT would not agree to changes to how Openreach operates — but securing a voluntary deal with BT is by far the faster route to achieving at least some change. (Not least given the added complication of Brexit.)

The U.K. government also finally put out its long-awaited digital strategy last month — which includes a commitment for a universal service obligation for broadband (with a floor of 10Mbps connection). BT has previously said it is ready to fund the USO itself, although it wanted an agreement to be reached with Ofcom before starting work — so today’s deal paves the way for movement on that front.

A basic floor of 10Mbps by 2020 isn’t going to excite the cutting edge of U.K. tech. But closing some broadband blackspots should at least raise the overall addressable market for most digital services.