Computer Weekly Editor's Blog

Dec 19 2014   12:33PM GMT

Is BT buying EE a step towards selling off Openreach?

Bryan Glick Bryan Glick Profile: Bryan Glick

Tags:
Broadband
BT
fibre
Networking
Ofcom
Openreach

BT is changing. Under CEO Gavin Patterson, the former monopoly telecoms giant has expanded into content through BT Sport, paying heavily for broadcast rights to English Premier League matches, and now is on the verge of splashing out £12.5bn on EE to get back into the mobile market that it exited when it sold O2 (then known as BT Cellnet) in 2001.

There has also been speculation that BT wants to merge its wholesale division with Openreach, the regulated subsidiary that manages its national telephone and broadband network. BT Wholesale sells access to some Openreach network services to other telcos and ISPs.

That would be a more complicated move, given the strict Ofcom rules under which Openreach operates. But what it would effectively also do is give Openreach greater in-house sales capability, separate from the main mothership of the consumer- and business-facing BT Group.

BT continues to generate controversy and opprobrium in equal measure from rural broadband campaigners over its dominance of the government’s BDUK programme to roll out superfast broadband to areas outside the regions BT considers commercially viable for fibre to the cabinet (FTTC) broadband. Critics are equally keen to point out that BT’s copper network is an effective monopoly, is outdated and will eventually have to be replaced by an all-fibre network at some point in the future as the hungry apps and browsers of internet and mobile users need to be fed by bandwidth-heavy services such as Netflix or the BBC iPlayer.

BT, of course, argues its case equally fervently. I discussed the arguments over BT and broadband last year – you can read the article here to save repetition – but concluded then that the problem is the lack of competition in the wholesale telecoms market, which can only be solved, in my opinion, by divesting Openreach.

I just have a sneaky suspicion that Gavin Patterson is moving in that direction.

His new BT is becoming more like a modern, integrated, internet-savvy communications provider – offering high-speed broadband, landline telephony (itself a diminishing market), 4G mobile, online and broadcast content. That’s a model more like Virgin Media or Sky than a traditional telecoms infrastructure player. Do BT’s long-term shareholders really want to invest in a creaking copper network subject to heavy regulation that will inevitably need to spend billions on upgrading its core infrastructure? I suspect not.

I think Patterson can see the writing on the wall for Openreach – hence merging with Wholesale gives it an opportunity to be a standalone company, similar to National Grid in the energy sector which owns most of the UK’s electricity and gas distribution networks. National Grid has been able to expand internationally as an energy infrastructure player, using its freedom as a publicly quoted company to buy similar businesses overseas, particularly the US.

It’s a model that could offer a future for Openreach outside of BT.

FTTC-based “superfast” broadband is going to last the UK for a few years yet – as it turns out, roll-out is well ahead of consumer adoption, which lags behind several European countries – but by 2020 the cracks will start to show. Even though 5G mobile does not even exist yet, it is equally inevitable that mobile networks will in future offer connection speeds far ahead of what even FTTC broadband currently provides. No way will BT want to keep spending on a declining, heavily-regulated asset in those circumstances – hence the purchase of EE.

A BT free of Openreach and its regulatory handcuffs becomes a very different proposition – but more importantly, so does an Openreach freed from BT; free also to expand internationally and invest sensibly and prudently in all-fibre networks with its own access to capital and debt. And without the parental relationship between BT and Openreach, perhaps other telcos large and small will be more enthusiastic about setting up wholesale network competitors in the UK.

BT will deny this of course – I can already imagine the emails from its press office, similar to the reaction to my article last year. But it feels to me like the new BT knows that, in the long run, it won’t need and doesn’t want the legacy of owning Openreach. And if Gavin Patterson does go down that route, then good for him – and good for the UK’s communications infrastructure.

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  • Philip Virgo
    Only just spotted this. An interesting piece of analysis - save that Openreach appears to be generating the cash that keeps BT afloat, everything else looks like cross subsidy, in the hope that BT will emerge from the current quadplay price wars as a winner. It would unsaleable if expected to carry the burden of the £multi-billion mortgage on BT's exchanges and the pension deficit.

    It would make much more sense to integrate and upgrade Openreach with EE as the basis of an integrated ubiquitous (wifi, mobile and fibre) broadband mesh for a world of smart cities and interconnected everything - but the planned rights issue is too modest to carry the cost unless BT splits its utility and content operations as part of a peace deal with Sky to end the price war.

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