Canadian, UK telecom markets share same problem

Policy makers in both countries lack the will to enact real solutions to competition issues.

openreach, BT, ofcom, uk telecom

UK Telecom:

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On the surface of it, the British and Canadian broadband markets are nothing alike. But dig deeper and it’s clear they share one similarity – a lack of willingness by policy makers to implement necessary fixes to their respectively big problems.

BT, the United Kingdom’s big telecom incumbent, on Friday announced it is splitting its Openreach network-owning division off into its own separate legal entity. BT will still own Openreach, but the division will now make its own decisions and have its own board of directors. Its trucks will also no longer display the BT logo.

Ofcom, the British telecom regulator, is hailing the split – which it has been requesting of BT for the past two years – as a win for consumers. A total of 120 members of parliament had backed a report calling for the separation, believing it will lead to faster and better services for subscribers.

Openreach was formed in 2006 after a government study found U.K. broadband lacking. As the country’s incumbent phone company, BT was abusing its monopoly position by delivering poor services at high prices.

MPs looked at splitting BT’s network from its retail business, but the company beat them to the punch by performing a voluntary functional separation. Openreach has since sold access to BT’s network to all manner of competitors, from fellow telecom companies such as TalkTalk and Virgin to grocery stores such as Tesco.

In turn, those companies sold services to consumers and turned the British broadband market into one of the most competitive in the world, with the low prices to match.

It worked great on the affordability front and got Britons en masse onto high-speed internet. The U.K. is ranked seventh among Organization for Co-operation and Development member countries in broadband penetration as a result. (Canada is 11th.)

It didn’t work so well in getting BT to invest in better speeds or infrastructure, however. Only 2 per cent of U.K. broadband connections are next-generation fibre, a woeful result that puts the country near the bottom of the OECD. (Canada doesn’t fare much better at 7.9 per cent, ranking well below the OECD average of 20.1 per cent.)

That result wasn’t hard to predict. Without full structural separation, BT was still in charge of deciding how much Openreach would spend on infrastructure and how much of its income it would send back to its parent as profits.

It didn’t take a rocket scientist to guess that the company would withhold spending on its network – and that’s exactly what happened.

Despite the legal split that’s now happening, rival companies that rent network access from Openreach still want to see full structural separation. Under such a scheme, BT would have to completely sell off the unit and then just become another one of Openreach’s customers.

They’re absolutely right. Openreach may now become slightly more independent and invest a little more in its network, but as long as BT owns and derives profit from it, it’s likely that it will always find ways to spend less than a fully separate company would.

So why not full structural separation?

BT looks to have used employees pensions as a defence. The company said it would not be able to safeguard them if Openreach were sold off, according to Sky News’ Ian King.

With BT’s status as a former Crown corporation, those pensions are also guaranteed by the government. Transferring them to Openreach could require an act of parliament and potentially put the government on the hook to pay them. Either way, it’d be a messy and protracted affair.

Policy makers are obviously hoping the easier-but-lesser option of a legal separation will deliver their hoped-for broadband results.

The Vegas odds on them facing the same problems years from now are probably pretty good, though. Despite the split, BT still has incentive to milk Openreach, and it’s a good bet that’ll continue.

Sooner or later, regulators and politicians won’t be able to avoid the pension disentanglement problem, at least not if they want consumers to have better internet service.

In this way, Canadian policy makers are the same. Whether it’s only slightly opening up foreign ownership restrictions on telecom companies or continuing to favour a fourth wireless carrier policy over forcing truly shared networks, the federal government and Canadian Radio-television and Telecommunications Commission have routinely tried to answer the country’s competitive problems with half measures.

The result, just as it has been in the United Kingdom, is that little has changed. Prices for both wired internet and wireless services in Canada are just as high as they were a decade ago and nobody wants to bring up the only real solution: full structural separation.

The problems aren’t going away – if anything, they’re getting worse. Sooner or later, someone is going to have to deal with them.

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