Industry Trend Analysis - Innovation As Important As Competition For UK Broadband Market - MAY 2017


BMI View: Legal separation will not have much influence on the availability of fibre services in the UK market. While competition may be strengthened, it will be on more basic technologies, as the new regulatory framework still does not give Openreach much incentive to lay off copper and focus on fibre.

BT has agreed to the legal separation of Openreach, under pressure from regulator Ofcom. This is one step beyond the functional separation that has been in place in the market since 2005, but one step below full structural separation, as Openreach will be independent but still owned by BT (see ' Openreach Legal Separation Will Not Solve Broadband Supply Problems ' , November 29 2016). In our view, the biggest question is not so much competition, but whether the new Openreach will make the necessary investments into the most advanced technologies, such as fibre, where the UK lags behind its peers.

A Competitive Market
BT Broadband Market Share (%), 2015-2016
Source: Ofcom

BT remains the dominant player in the market, but competition has flourished since the introduction of functional separation. BT was accused of favouritism because of its close relationship with Openreach, as its rivals believed it would prioritise the interests of BT first, which led to greater regulatory involvement, and finally to legal separation. While there are some ongoing issues about maintenance and network faults, the main criticism of Openreach has been its inability to roll out fibre networks, preferring instead to focus on different copper technologies, such as vectoring and G.fast, to roll out more advanced services. Considering that BT will still set Openreach's budget, but will not decide how it is allocated, we do not expect it will lead to greater availability of fibre services within the country.

Uk Lagging Behind
Fibre Penetration (%), July 2016
Source: European Commission

To achieve greater fibre coverage, we believe that full structural separation would have been a better bet, as a fully independent company would have had greater incentives to make the necessary investments. Ofcom decided not to follow that route, because of the inherent difficulties related to legal uncertainty on the separation of assets, and multiple liabilities, such as pensions. It does remain an option, but it is important to point out that no unique regulatory framework has driven uptake of fibre services. What makes the UK unique is that BT has not looked at fibre services as a way to "premium-ise" its customer base, instead preferring to focus on content, such as exclusive sport rights. That lack of incentive still remains with the new framework, and other systems - such as infrastructure competition in Portugal and Spain, or the development of local networks in Northern Europe - will not function as well in the UK. The conundrum between content and networks is both a European and a global issue, as is the role of incumbents in rolling out fibre, as an operator looking to roll out quickly can also raise regulatory concerns (see ' Quick View: Content Vs Network: An Irreconcilable Conundrum ' , January 30 2017 & ' Incumbents' Fibre Dominance Not Just A French Issue ' , March 3 2017).