An enforced BT break-up is not the anwer

An enforced BT break-up is not the anwer

The review by the Competition and Markets Authority of BT’s proposed take-over of EE has brought clamors from rivals for the break-up of BT. Ofcom has said publicly that this as one of the options in their review of the telecoms market. They believe a structural separation between BT and Openreach could unlock value and improve customer service, innovation and competition. Here’s the argument why enforcing the break-up BT is the wrong answer.

There is ample anecdotal evidence that Openreach has been underperforming but no evidence that it has discriminated in favour of BT’s own retail arm. I don’t have to look very far for my first independent witness to BT’s scrupulous adherence to its non-discriminatory commitment. I have been a personal victim of Openreach’s poor quality of service when I signed up for a BT broadband service last year. To connect to my home required Openreach to put in a new telephone pole. It was a shambles. I was left stranded in the middle as an unpaid project manager trying to get the different parts of Openreach talking to each other. My frustration lasted for the best part of 6 months. But here’s the thing…being a customer of BT retail was of no help to me whatsoever. They were as frustrated as I was. They suffered two totally wasted visits to install the modem. I am far from the only person who has suffered in this way. The absence of evidence of any discriminatory behaviour by Openreach has not stopped BT’s competitors offering up theories and conjectures. One of BT’s competitors said that it had found nine plausible “theories of harm” from the proposed take-over of EE by BT. This statement just about sums up the case of potential discriminatory behaviour…theories….just theories.

The central issue is not discrimination by BT but the lacklustre performance of Openreach. Would a break-up of BT lead to a step change in the performance of Openreach? It is not clear why a change of ownership of a regulated private monopoly would be any different with different stock market shareholders. In fact if the divested Openreach remains a public company they are likely to have the same institutional shareholders. Openreach is performing just as one might expect from any lightly regulated private monopoly. Any organisation with captured customers with nowhere else to go becomes driven by other influences than “the customer”. The biggest influence will be shareholder pressure to improve dividends and since their prices are regulated the only route open to them is to cut costs and low service levels cost less than high service levels. Other forces drive in the same direction. The salaries of middle of the road managers can be set at less than needed to retain the best. Entrenched internal interests tend to take precedence over ceding territory in order to streamline processes. The only external pressure to cause any departure from this natural line-up of forces all heading in the direction of indifferent customers service is “the regulator”.

This leads onto the question of what Ofcom is doing or not doing as a regulator that is leading to the lacklustre performance of Openreach? Whatever this is, it is a logical to suppose that if Ofcom applies the same combination of action and inaction to another private monopoly then a comparable performance is the most probably outcome…a lacklustre customer service.

I conclude that quality of service upside of a break-up of BT is far from assured. What about the costs? These are far more predictable. Over the period of an enforced break-up everything will be put on hold. It is impossible to say quite how long this period of drift will last. A fair stab at a ball-park number will be 3-5 years. That looks an exceedingly poor regulatory prospectus for the break-up of BT.

If breaking-up BT is not the answer – what is? There are three better options than forcing BT to sell off Openreach to the highest bidder.

  • The best solution by a mile is for all BT’s competitors to group together to invest in to provide a competitive alternative infrastructure to BT’s. A credible threat of competition may actually do the job in many cases without the competitors actually having to stump up big investments (my thanks to Richard Feasey who first mentioned this to me).
  • The CEO of Vodafone, Vittorio Colao, has floated an interesting idea of Openreach being co-owned by all the competitors including BT. This solution would only be possible with BT’s support as there could be no market testing to determine a fair price for shares. The strength of this proposal is that the priority transmitted by the shareholders will be all about better quality of service and not the usual short term-ist demands of institutional shareholders for ever bigger dividends. BT might even welcome an infusion of cash in selling off a stake in Openreach. In fact it would not have to sell stakes in the whole of Openreach but just the monopoly bit outside of the Virgin cable footprint. This could be even more attractive to BT as the bit of Openreach inside the Virgin cable footprint could be re-integrated with BT Retail since the network competition from Virgin Media and others does away with the need for separation and such close regulation.
  • The third option is that Ofcom has got to skill itself up for far more effective regulation. The Openreach managers have to fear Ofcom over quality of service issues every bit as they currently fear shareholders over cost reductions. Ofcom will have to up-skill its staff to know what is best operating practice and have enough new powers to set the appropriate incentives for Openreach managers to reflect Ofcom’s priorities for improving the quality of service. The price reduction pressures then will be genuine efficiency gains and not just saving money by giving a poorer service.

The UK has had over 30 years of experience of promoting network infrastructure competition and Ofcom ought to know by now what is likely to work and what is never going to happen. If we know that much fixed network infrastructure outside of dense urban areas will always be a monopoly…surely the right things for Ofcom is to stop travelling in hope that competition might one day emerge and instead go all out to shape a “high performing” fixed network infrastructure monopoly…which do exist in some parts of the world. Why not the UK?

 

 

 

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