Ofcom's announcement is part of the wider narrative and background work which has been taking place between government, regulator and industry lately. Many will be encouraged to finally see a more joined-up and collaborative approach emerge. This announcement though should be seen as a directional document, the detail of which will follow in the relevant market reviews Ofcom carries out. There are things in there that BT and Openreach will be encouraged by, and others that will likely prompt a more critical response. This note considers the steps Ofcom have outlined and the subsequent reaction and follow-up by key industry stakeholders.
Evidence that relationships have evolved and the narrative is changing
What has been most striking about this package of measures, and the government’s Future Telecoms Infrastructure Review, is the change in narrative that we’ve heard from the industry. 18 months ago it was mostly in-fighting and tit-for-tat exchanges, whereas now the tone is much more conciliatory and characterised by a let’s get on and do it attitude. For both announcements to have gone down so well suggests an improved dialogue between industry, regulator and government. We also heard positive noises from Ofcom about the performance of the newly legally separated Openreach.
What’s important from this document is the recognition that Ofcom must give Openreach, and others certainty when it comes to the large scale investments they are making. So far this seems to be working. BT are encouraged that Ofcom are supportive of the investments being made and that they recognise the role of regulation in ensuring investment. Broad direction of both reports signals understanding. During their Q1 2018/19 results call BT clarified they are positive about the clarity given by Ofcom around the ‘fair bet’. They already had agreement on principles in the WLA and expect to see give greater clarity in the future.
This was best illustrated by the significant discounts Openreach announced across its wholesale superfast and ultrafast broadband networks. The discounts go beyond the pricing regulations imposed by Ofcom, and in some cases they reduce wholesale pricing by up to 40%. This can be read more than one way. In one sense it's about Openreach showing the industry and the regulator that they have changed and are implementing the further separation from BT not only to the letter, but also in the spirit of what was agreed. It's also about making commercial sense. For Openreach (and others) to invest confidently in Britain's fibre future they need to get a sense of the demand that's out there. Securing large scale orders from customers like Sky, TalkTalk and Vodafone will encourage them to go even further with the build.
Unrestricted duct and pole access likely to be the most contested issue, but is not all downside
Ofcom, and government, have both said they would like to move to unrestricted use of duct and pole networks wherever there is market power. Currently the regulation is for mixed use and only applies to Openreach. Ofcom will have to go through the usual market review process to make that possible. BT sees a risk to the business of unrestricted access given the revenue generated from other services such as leased lines. In wanting to change the usage restriction Ofcom (and government), are motivated by the desire to promote infrastructure competition. This is relevant because the result doesn’t necessarily imply a downside for BT. There is a theoretical upside because where competition is realistic or envisaged then BT would benefit from deregulation (as per Ofcom’s other intention to vary regulation by geography). The detail to be decided here is when the usage changes, and on what terms with nothing likely until 2020 at the earliest.
