Ofcom gives BT last chance to deal fairly with its rivals

Business Analysis: Regulator falls short of recommending break-up
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BT Group must provide rivals with equal access to its national telecoms network and make radical changes to the way it does business, Ofcom, the industry regulator, announced yesterday.

If BT fails to comply it faces an Enterprise Act investigation and a referral to the Competition Commission, with the threat of being forcibly broken up, the telecoms watchdog said.

The former state monopoly must now shake up the way it runs its business, including changes in management structures, staff incentives and business processes. It must also cut out the type of Spanish practices among its staff that have made it difficult for rivals to gain access to essential parts of its network, such as the country's local exchanges.

The proposed changes are aimed at increasing competition and consumer choice while encouraging investment in new technologies to provide better telecoms services for the UK.

Delivering his proposals for a new regulatory regime Stephen Carter, the Ofcom chief executive, said:"This is a once-in-a-generation opportunity to ensure that the fundamental network and the regulatory structures are aligned to ensure opportunities for fair competition in future."

He stopped short of recommending a break-up of BT and rejected the idea of removing the tangle of rules that govern telecoms companies, relying instead on competition law to resolve disputes over unfair practices.

Under the proposed regime BT will have to treat rival telecoms providers in the same way as it treats its own BT Retail division. It will have to prove it has reformed its ways through greater transparency and disclosure and allow rivals the same access to the same sort of information that BT Retail enjoys.

The idea is that BT Retail will become an arm's length customer of BT Wholesale, along with a host of rivals, with all able to influence the wholesale arm equally.

To some veteran industry observers, Mr Carter's plans are little more than a fancy repackaging of the old rules, which everyone agrees have failed. Tom Wheadon, telecoms partner at the lawyers Simmons & Simmons, said: "We've had this option for 20 years. Previously you would talk about 'no undue discrimination and no undue preference' imposed on BT Wholesale. In effect they are still talking about that now."

To Mr Carter they are essential to clearing "economic bottlenecks" where BT has dragged its feet in allowing rivals to hook-up to BT's network and provide new, better value-for-money services to increasingly sophisticated consumers. The most serious of these have undermined the provision of carrier pre-select services, where rivals such as One.Tel or TalkTalk provide domestic phone services in competition to BT. They have held back services that allow consumers to receive one bill from a rival provider rather than a separate bill from BT for line rental. They have held back the roll-out of broadband internet because of difficulties in rivals gaining access to local BT exchanges at an economic cost in order to install equipment. Although the bottom chart shows more than 3 million non-cable broadband connections in the UK, the rate of so-called local loop unbundling is much higher in European countries such as France.

"There is no crises in the telecoms sector, it delivers good outcomes," Mr Carter said. "However, there is fundamental change coming in infrastructures and technologies that will require substantial investment flows. The demand from the market has become considerably less plain vanilla and we are facing convergence. So, we concluded that in the fixed telecoms market we are at an unsustainable position. The market is fragmented."

In other words, the world is changing fast, technologically-speaking, but BT has exerted a dead hand on the country's essential infrastructure, which is suffocating innovation and competition, to protect its own economic interests. The bar chart shows just how tiny BT's principal competitors are in terms of their stock market value.

Francesco Caio, the chief executive of Cable & Wireless which got pretty much all it asked for from Ofcom's review, said: "This is an industry which is unstable and it is not always a case of the more the merrier."

Mr Carter's 285-page publicationconcluded: "Those who rely on BT to provide such access have experienced 20 years of slow product development, inferior quality wholesale products, poor transactional processes and a general lack of transparency."

For two decades BT has strenuously denied it has favoured BT Retail over its rivals. Yesterday, even in the face of Ofcom's findings, it was still in denial. A spokesman said: "We don't subscribe to their view. We recognise that people in the industry do. We are committed to working with Ofcom and the rest of the industry to provide the transparency and confidence they need to make sure that isn't the case going forward."

A large part of what BT will do to provide greater transparency lies in a bookcase in the office of Ian Livingstone, the finance director. There, gathering dust, are 3,000 pages of regulatory accounts. Everything about the company's numbers, including the trading relationship between BT Wholesale and BT Retail, is in them. Sooner or later Mr Livingstone must reach up, dust them and share them with rivals.

Ofcom's proposals represent a step change in approach to telecoms regulation and it is not all about punishing BT. If it can prove it has changed its ways, Ofcom will be willing to sweep away a raft of price controls.

Ofcom knows the country needs BT to invest in a central network fit for the next century and has said it will recognise the risks involved when it recalculates the price controls which govern BT's rate of return from selling access to its network.

However, it will do this only if BT plays ball on equal network access and improved operational behaviour. Yesterday's proposals are the offer of a regulatory settlement for BT that it can ill afford to spurn.