Last week, Ofcom, the UK’s communication regulator (and British answer to the FCC) proposed the break-up of BT, into two companies. This would involve spinning of its Openreach wholesale arm as a separate company, with BT retaining its retail arm.
To understand the importance of this, and how we got here, let’s go back in time a little.
Once upon a time, all of the UK’s telephony infrastructure was owned by the General Post Office. In the 1980s, this was spun-out as a separate government-owned company called British Telecommunications, but it was later privatised in 1984. This also allowed rival companies to operate telephony services, but BT retained ownership of all of the cabling and exchanges. Consumers are free to switch from BT to other providers like Sky and TalkTalk, and vice versa, but whilst they may pay money to someone other than BT, BT still owns the cable that runs into their homes. Ultimately, this is the situation that persists today.
In 2006, BT was forced to segregate its retail and wholesale businesses. BT Retail sells telephone, internet and TV packages to consumers and business. Meanwhile, Openreach, the wholesale division, operates the infrastructure, including the cables and telephone exchanges. Other companies can install their equipment in BT’s exchanges, but the connection from the exchange to consumers’ homes is still owned by Openreach.
Ofcom is now launching a consultation regarding Openreach, arguing that it should be completely spun out of BT and operate as a separate entity. Sky has reacted positively to this, as it has grievances with the level of service that Openreach has offered. I’m also in favour – though we’re currently BT customers at home, I think it makes sense for there to be separation between the infrastructure and service. Although Openreach is heavily regulated, its close links with the retail division of BT means that there’s a conflict of interest between supplying its own retail customers and the customers of rival services.
In other industries, the infrastructure and retail companies are separate. The electricity cables and gas pipes are owned by National Grid, and other regional companies, but consumers pay their bills to separate companies. It’s the same on the railways – the track is owned by Network Rail, but the trains are operated by Train Operating Companies, or TOCs. And the UK’s domain name system is similar – .uk domains are managed by a non-profit organisation called Nominet, but consumers and business buy from intermediary companies that can compete with each other.
Openreach has very limited competition. The only other major telephony infrastructure provider in the UK is Virgin Media, whose predecessors spent millions of pounds installing their own cables under the streets directly to British households. But whereas Openreach serves just about every household in the UK (apart from in Hull), Virgin Media can only reach half. For this reason, there’s currently no requirement for Virgin Media to open its networks to rivals, or be split in the same way that BT could be.
Ofcom’s consultation began on Thursday but it’ll be many months before it reports. Any split will almost certainly need the approval of the Competition and Markets Authority and this could take a year or two. If Openreach is spun out, then it will almost certainly be as another company with shareholders, but it would be great if it was also nationalised as well. I doubt that will ever happen though.