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By | Simon Rockman 8th October 2015 12:06

Vodafone joins calls to pry Openreach from BT's hands

Sky and TalkTalk also expected to beg for spin-out

+Comment The political ding-dong over prising broadband biz Openreach out of BT’s hands entered another round today with the release of a Vodafone-commissioned report on the £6.5bn in “excessive profits” BT has been making from the UK broadband market.

The blows and counterblows come during Ofcom's once-a-decade Strategic Review of Digital Communications. In 2005, Ofcom decided that BT and Openreach should live in separate rooms, but now the rest of the market is gunning for a full-blown divorce.

Vodafone’s commission of the report from respected consultancy Frontier Economics comes before it is expected to make a submission to Ofcom about what it terms to be Openreach's "excessive" profits.

It comes hot on the heels of an interview in the FT with minister of State for the Department for Culture, Media and Sport and the Department for Business, Innovation and Skills Ed Vaizey, in which he stated that he’s yet to be convinced of the benefits of separating BT and Openreach. Vaizey called himself a "sceptic" on the matter. Similarly, just two days ago, Jesse Norman, the chair of the parliamentary culture, media and sport select committee, told The Guardian that it would have to be done carefully because the UK is bigger than New Zealand (where something similar was done).

The report has the catchy title of “Assessment of BT’s regulated profitability between FY 2006 and 2015”, and it puts numbers on BT Openreach profits. As one might expect, the report says “lots”.

A Vodafone spokesperson told The Register: “BT’s Openreach business needs to be structurally separated from the rest of BT and provide access to its ducts and poles to encourage and enable effective multi-operator network investment.

"Only then will UK consumers and businesses have easier access to fibre, which will stimulate the innovation which will not be possible if the UK remains stuck with today’s elderly copper network. If BT is so adamant that Openreach does not provide it with advantages over alternative providers, then why is it so opposed to structural separation?”

The report claims:

Our analysis shows that over the period April 2006 to March 2015 reported returns on BT’s regulated services overall were consistently above the rate required to compensate investors, as determined by Ofcom. More specifically, in the past 10 years BT made c. £18.9bn profit from regulated services, of this £6.5bn was over and above the determined cost of capital.

Vodafone claims that the while Ofcom has moved to contain BT prices, it hasn’t worked and that the "excessive" returns particularly come from the areas where Openreach is serving BT rivals.

It continues:

For example, for 2013/14 Ofcom suggests that approximately £262m costs were misattributed to regulated services. If BT’s costs were reduced to reflect this misattribution, it would further increase BT’s return on capital employed from 17% to 19% in 2013/14.

+Comment

Vodafone isn’t the only company lobbying for Openreach to be hived off. Sky and TalkTalk are also expected to make submissions to Ofcom calling for BT'S breakup. Off the record and in quiet corridors Openreach customers drop hints that while Openreach might be obligated to give the same level of service to all customers and not favour BT, that doesn’t always happen. It is impossible to confirm or refute this.

What the report doesn’t do is suggest a remedy. It’s a mix of accountancy and regulation. It’s not about strategy. It’s entirely possible that someone, somewhere in government might decide that having the likes of Sky, TalkTalk and Vodafone spend more with BT to build a strong national carrier is the right thing for the nation, but with BT buying EE, it would be an odd thing for a strongly right of centre Conservative government to do. ®

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