Ofcom shies away from the break up of BT

Ofcom has backed away from the break up of BT in its Strategic Review of Telecoms instead it is proposing a new `regulatory contract` which will provide a proper framework for competition in the future.

Under the latest Phase 2 of its strategic review of telecoms, the regulator admits that 20 years of regulation has not provided the healthy and dynamic market in fixed line telecoms that the architects of privatisation envisaged. Instead, it catalogues a history of slow product development, inferior wholesale products, poor transactional processes and lack of transparency. Despite, or perhaps because of, these failings Ofcom admits that BT remains by far the biggest player in fixed line rental with potential rivals reluctant to make the investment necessary to compete.

Ofcom identifies two major barriers to effective competition in fixed telecoms. Firstly is BT’s sheer size compared to other companies in that market and its ownership of the huge infrastructure that rivals need to access. Secondly, 20 years of regulation designed to produce a level playing field for all has failed. BT is still the dominant player and rival telecom companies are reluctant to invest the kind of sums need to dislodge it from its position.

The feeling among potential competitors in the key retail market is that BT has been able to drag its feet or manipulate the rules so that it always remains in the driving seat; a pattern that persisted through the development of broadband, local loop unbundling and carrier pre-select.

Whilst admitting that the strategy of regulation of a single dominant player has failed Ofcom has chosen not to recommend the break up of BT to the Competition Commission – although it says it still retains that option as a final resort.

Instead, the regulator has proposed a new ‘regulatory contract’ which, it says, will force BT to change the way it manages its wholesale and retail businesses. This would not only mean an organisational change but also a cultural one in which BT Wholesale genuinely offers equality of access.

The Wholesale division will be compelled not only to offer the same products and prices to everyone but will also ensure that payments and services – the so-called transactional processes – are delivered as swiftly and efficiently to competitors as it they are to its own divisions.

Ofcom believes that if the right structural environment can be put in place, regulation can be dismantled in favour of rigorous competition in the retail market.

The regulator has also noted a lack of awareness amongst consumers of the deals on offer in fixed telecoms. As a result, there has been far less switching of supplier in the retail telecoms market than there has been amongst similar ex-state monopolies such as gas and electricity. Ofcom is therefore also proposing that there should be much more transparency and accurate information published about possible alternatives to BT.

BT, unsurprisingly is happy that it survives to fight another day. In a statement the company says `BT welcomes Ofcom’s proposal for a `settlement` between the Regulator and the industry.. A move away from the micro regulation which Ofcom agrees has been bad for consumers and the industry will benefit everyone.`

An Ofcom spokesperson told us `our new approach is to really focus on those areas where we think regulation is really necessary. BT has to come up with a plan to answer the issues we have identified as part of the consulation period and to convince us that its proposals are the kind of thing we would expect. If we aren’t convinced we may have to look again..[at breaking up BT]”