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    Interview – Sky’s Position on Separating BT from its UK Telecoms Network

    This is a discussion on Interview – Sky’s Position on Separating BT from its UK Telecoms Network within the Sky news and announcements forums, part of the SkyUser Announcements category; Interview - Sky's Position on Separating BT from its UK Telecoms Network - ISPreview UK In our final ISP interview ...

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      Interview – Sky’s Position on Separating BT from its UK Telecoms Network

      Interview - Sky's Position on Separating BT from its UK Telecoms Network - ISPreview UK
      In our final ISP interview of the year we’ve been able to hit up Sky’s (Sky Broadband) Chief Economist, Alan Sewell, to examine the operator’s often outspoken position on separating BT from control of their national UK phone and broadband network and what it might mean for consumers.

      The national telecoms regulator (Ofcom) is currently conducting a Strategic Review that has the arduous task of deciding whether or not BT should be separated from control of their Openreach division.

      At the outset Ofcom proposed four options: 1) Retain the current model (the regulator has already largely excluded this), 2) Strengthen the current model by applying new rules to BT, 3) Separate Openreach from BT or 4) Deregulate and promote competition between networks.

      Sky, flanked by Vodafone and TalkTalk, has been at the forefront of calls for Ofcom to split BT, although they’ve also been soft on details when it comes to answering the difficult question of what comes next. The consumer benefits would surely be easier to sell if we could first see some real investment pledges and service aims, but so far a cohesive plan has not emerged.

      Meanwhile BT hints that any attempt to split their business would tie the process up in legal battles. Questions also remain over how BT’s debt / pension pile might be apportioned in the event of a split, as well as the impact on consumer prices from all of the related changes (better services cost more money) and what kind of market model might be adopted in its place.

      In pursuit of answers we’ve been able to engage with Alan Sewell, Sky’s Chief Economist. According to Sewell, separating Openreach would help to focus investment towards making “Gigabit fibre broadband [FTTP/H] widely available to homes“, although he admits that this may not reach 100% of premises.

      Sewell further believes that such a split could be conducted quickly because the “hard work” – functional separation – is already largely done, with Openreach “having separate management, its own accounts and payroll,” although this may be a simplification of the wider challenges at hand.

      Sky certainly stands to lose very little in calling for a completely separate Openreach, after all BT are now their arch rival in the Pay TV space and as such any pain they can inflict is likely to hurt the national incumbent far more than themselves. But will the grass really end up being greener for consumers? We attempted to find out.

      The Interview


      1. Sky has previously hinted that it would ideally like the United Kingdom to deliver a widely available gigabit (1Gbps+) capable broadband network, such as through pure fibre optic FTTH/P technology like the experimental deployment that you’re involved with in York.
      However your present viewpoint seems to be that the current industry structure, which is controlled through BT’s national Openreach network, will not deliver the radical step change that would make the UK a future world leader.

      By comparison BT prefers to push the hybrid-fibre and copper (FTTC, G.fast etc.) approach, which delivers far slower and less reliable speeds, but is also significantly cheaper and more affordable / faster to deploy than FTTH/P. Some reports have suggested that FTTH/P could take over a decade to deliver and cost upwards of £20bn.


      Assuming Openreach was to be split from BT’s control then does Sky’s aspiration foresee FTTH/P networks reaching 100% of UK premises and over what timescale?

      Sky’s Answer:


      It is worth outlining in detail our view of the current situation.

      We believe that for the UK to compete with countries at the top the global connectivity table, we need to aim high. That means focusing on investing to make Gigabit fibre broadband widely available to homes, schools and businesses. This is what our competitors are doing, from Sweden to Singapore.

      But the current market structure has allowed ambitions to remain modest. Openreach’s total capital expenditure has been broadly flat for many years, while the plans BT have shared for Openreach such as ‘G.Fast’ still rely on sweating its asset, the old copper network. There’s no ambition to explore or roll-out FTTP at scale – that’s why the UK has less than 1% FTTP penetration, and doesn’t even appear on Europe’s FTTP league table.

      We believe that separating Openreach would make investment in FTTP networks covering a substantial part of the UK far more likely. In part, the ability to compete to deliver Gigabit services to BT Consumer would create the scope for other operators to invest – operators like Gigaclear, Hyperoptic and City Fibre, who are already delivering fibre networks in the UK today. Such competition is likely to be a key catalyst for investment by Openreach itself.

      It is improbable that FTTH/P networks will reach 100% of UK premises. For example, in New Zealand their current target is 80% of premises by 2022, with the remaining premises served by other high-speed broadband technologies. We believe this is the sort of outcome the UK should be aspiring to.

      2. Following on from above. Sky has previously criticised BT for “under-investment” in their Openreach division. As an independent company some have suggested that Openreach may still struggle to afford the investment required to deliver a national (FTTH/P) network, especially given all of its other commitments.


      Would Sky be willing to join with others in making a significant investment into Openreach in order to help carry such an ambition forward or do you perceive this funding as coming from other sources?

      Sky’s Answer:


      We don’t agree that an independent Openreach would struggle to fund investment in delivering FTTP. As a standalone FTSE 100 company, Openreach would be highly attractive to long-term investors. Its key focus would be on investing in the network, and delivering high-quality services to its users – no longer subject to all the other investment and management priorities of BT Group.

      BT today is a portfolio of projects with very different risk characteristics. This makes it difficult for investors with very long-term perspectives – typical utility investors like pension funds and sovereign wealth funds – to invest. But an independent Openreach could attract these investors seeking stable, long-term returns.

      A real benefit of structural separation would be an ability for an independent Openreach to negotiate with all its customers to help support major new investments. For instance, we have helped Astra, the satellite operator, fund the substantial cost of launching satellites, by entering into long-term capacity commitments – and even contributing to launch costs in return for lower capacity charges. It is very difficult for Openreach to enter into these types of agreements with its customers today.

      In terms of Sky’s own capital, we have always shown ourselves willing to make major investments. However, our experience indicates that under the current market structure, where BT’s business is not contestable, it is difficult to make a good case for significant investment in fibre networks.

      3. What kind of control and organisational structure should an independent Openreach adopt? Particularly in reference to the influence that ISPs like Sky and TalkTalk may wish to exert over its decision making, especially if they make an investment into the company.

      Sky’s Answer:


      It would be an independent company, listed on the Stock Exchange with a board of directors. A good example would be National Grid. An independent Openreach would mean the CEO doesn’t have to report to the Head of BT but like any other quoted company reports directly to the Board and shareholders.

      We are not proposing any of its customers have stakes in the company. It should respond to the needs of its users like any business.
      4. Sky has recently echoed many consumer frustrations by criticising Openreach’s record on service delivery, fault fixing and general performance or lack thereof (here).

      Similarly we often cover reports where consumers have been forced to wait months for a new service to be provisioned, as well as delayed repair work or problems with a shortage of broadband capacity that can slow local speeds. How do you envisage an independent Openreach being able to practically solve these things (e.g. hiring more engineers)?

      Sky’s Answer:


      Various factors have contributed to Openreach’s poor quality of service. Openreach is not prioritised by BT Group management in terms of internal resource, management time and effort – and this situation will only worsen with the addition of mobile following the acquisition of EE. Additionally, Openreach operates as a cash cow for BT. This has led to underinvestment in the copper network on which all broadband is still reliant, with a rise in faults as a result.

      A separate Openreach would solve these issues. It would have dedicated management focus and the ability to take investment decisions independently in pursuit of a customer-orientated 21st century network utility business. We believe that an independent Openreach focused entirely on the operation of its network, and with a desire to establish a reputation for excellence, would have a very different culture and ethos than it does as part of a large BT Group.

      5. Many of the potential improvements that have been hinted at above, such as in regards to better broadband and engineering performance, would of course come at a cost. At the same time investors will want a return. Isn’t there a danger that consumers might end up having to suffer even sharper price rises in order to help pay for such enhancements?

      Sky’s Answer:


      There is no doubt that an independent Openreach would continue to need to be regulated by Ofcom, including the setting of charge controls to ensure that its charges were reasonable. Structural separation would enable the removal of regulation of BT’s vertical integration – for example the 2005 Undertakings could be removed. However, regulation of its market power as the operator of the UK’s only ubiquitous fixed line telecoms network would continue to be required.

      The experience with LLU demonstrates clearly that tough competition at both the network and retail levels in fact drives prices down over time.

      6. Does Sky support the position that an independent Openreach should continue to deliver modern broadband and phone services to smaller ISPs on a broadly fair and non-discriminatory wholesale basis (i.e. maintaining the status quo or even improving upon it)?

      Sky’s Answer:


      As we say above, there would still be a need for targeted regulation on an independent Openreach, on issues specifically associated with the natural monopoly. But establishing Openreach as an independent company would enable regulation to be simplified significantly.


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      Re: Interview – Sky’s Position on Separating BT from its UK Telecoms Network

      Part 2:
      7. It has been suggested that the process of splitting Openreach, if approved, could take many years to complete. What is Sky’s view on the likely time-scales involved in the split itself. How quickly could it realistically be done, given that such separation is likely to be very complex and BT has threated to tie the process up in legal battles?

      Sky’s Answer:


      The idea it would take years is nonsense. The hard work – functional separation – is already done, with Openreach having separate management, its own accounts and payroll. BT has split out business divisions before – for example in 2002 it spun out its mobile business, BT Cellnet, apparently with ease. Such spin-outs happen all the time. And the recent structural separation of Telecom NZ demonstrates that the argument that it would take many years is just wrong.

      While BT opposes separation currently, in the long-run it is likely to be in shareholder’s interests. It’s notable that in New Zealand, aggregate value of the two entities which voluntarily separated has increased since separation.

      It is certainly true that BT could do everything it could to prevent separation, including devoting huge amounts of resources to litigation. In our view, the fact that BT has made such threats is again indicative of the problem. A long, expensive legal battle would not be in either the interests of shareholders or the country.

      8. The BT Group carries some big debts and burdens, not least in terms of their pension deficit. What in your view would be an amicable solution to this issue?

      Sky’s Answer:


      It is not really that an amicable solution is required. When companies split there are standard procedures for working out which assets and which debts belong to each of the new entities. These issues are not novel – companies choose to split themselves all the time. Determining what goes where is not a major hurdle, despite BT’s claims to the contrary.

      9. The Government’s Digital Economy Minister, Ed Vaizey, recently said that he was a “sceptic” of the proposal to split BT and warned that it has “lots of potential to backfire.” What is Sky’s view of this position and are you concerned that it may influence Ofcom’s decision making process?

      Sky’s Answer:


      The decision Ofcom needs to make is whether the market meets the test to make a referral to the CMA for a market investigation reference. John Fingleton, the former head of the OFT, recently said that the test was ‘passed in spades’. We have no doubt that Ofcom will take an independent, considered view on that issue.

      End.

      ISPreview would like to thank Sky for their willingness to engage with us on this most complicated of topic’s. The question of Openreach’s separation, away from the unavoidable simplification of mass media coverage, is a minefield of complication and one that Sky has been willing to debate. We are most grateful for that and their input through Alan Sewell.

      Equally we’re aware that not all of our questions have been given a clear answer, which leaves plenty of aspects left to be resolved and for that we’ll have to wait and see what Ofcom ultimately decides next year. If history proves any measure then the regulator will likely pick a half-way solution over full separation, but Ofcom still has the option to surprise us.
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