BT’s Openreach deal with Ofcom—in which it will retain ownership of the network assets—is good news for investors, who recently saw the company’s shares plummet after the horror of a serious accounting scandal at the Italian wing of the telecoms giant unfolded, forcing it to issue a profit warning.
The UK’s communications watchdog had said that BT agreed to implement, in full, the changes it had demanded for Openreach in a move to swiftly end what had been an escalating two-year-long spat, with Ofcom chief Sharon White threatening to take the battle to Brussels.
But BT boss Gavin Patterson said the watchdog had accepted a compromise on assets—a key sticking point for the company.
Ars asked BT’s regulatory affairs MD Mark Shurmer why the company had suddenly softened to Ofcom’s demands, after so much kickback. He said that “there has been some movement. Ofcom has changed its position on assets. That was a red line for us.”
Shurmer was parroting Patterson who, on an earlier call with analysts, said:
There was a lot of discussion around the assets. That was a red line for us because any separation of the assets would undermine the covenant and create additional pension drag, which diverts money away from investment and that doesn’t make sense for anybody.
We spent a lot of time discussing that, and I’m pleased to say that Ofcom listened to the advice of pension experts and recognised that wasn’t in anybody’s interests.
It means that, while Openreach’s 32,000 staff will be transferred over to a subsidiary that already has an independent board that will “manage and operate” its physical access network and other assets via a lease deal—those assets, alongside trading, will remain with BT.
“That’s a very important part of the solution here so the revenues and profit will flow back to the [BT] group,” Shurmer said. “We have worked hard to arrive at this solution in a way that addresses Ofcom’s competition concerns but in a way that doesn’t mean huge costs for us,” he added.
As part of the deal struck with Ofcom, new legislation will be needed to tackle BT’s pension arrangements for its thousands of Openreach staff. Under the Crown Guarantee, the government would be required to “meet BT’s obligations to the BTPS [£50 billion BT pension scheme] in the unlikely event that the company should be wound up,” Ofcom said.
Patterson said that he was “pleased” BT had struck an “enduring” voluntary deal with Ofcom, following a “tough process,” and added that the firm could now turn to “other significant regulatory challenges.”
“Snail’s paced network”
Two of Openreach’s biggest customers—Sky and TalkTalk—welcomed the agreement, having previously pushed Ofcom to impose a functional separation between BT and its infrastructure wing.
“This is a welcome step that we have long called for on behalf of our customers,” Sky said. “A more independent Openreach is a step towards delivering better service to customers and the investment that the UK needs.”
Outgoing TalkTalk boss Dido Harding, who has been a fierce critic of BT’s Openreach strategy, said: “This deal will require robust Ofcom monitoring and enforcement to ensure it delivers the improvements the regulator expects. We hope this is the start of a new deal for Britain’s broadband customers.”
But while Sky and TalkTalk adopted something of a conciliatory tone, Virgin Media—which isn’t an Openreach customer—was quick to offer up a brazen response.
“Openreach is just the same old snail’s paced network with a new shell. Call it what you like but it’s still BT, four times slower than Virgin Media,” said the cable company’s chief Tom Mockridge.