Breaking up isn’t hard to do, says BT

How does Telecom's transformation compare to the one BT underwent last year?

Telecom has just announced the voluntary separation of its wholesale and retail businesses, but how does this compare to what’s happening in the UK, where BT underwent a similar transformation less than a year ago?

The vice president and chief counsel for BT, Gordon Moir, was in town recently to talk about the challenges the UK incumbent faced.

As with Telecom, BT was subjected to a strategic review.

This was similar to Cunliffe’s industry stocktake that led to new regulations being introduced in May this year. The UK regulator, Ofcom, found that there was restricted competition in the wholesale market when it came to access, and that BT held substantial power in these areas.

BT was also deemed to be a vertically integrated provider, very much like Telecom New Zealand, and had a presence in directly related downstream retail markets.

Moir says that, as a result of Ofcom’s review, BT made a series of voluntary commitments to improve on the competitive situation, including the voluntary structural separation of its wholesale and retail business units.

These undertakings were accepted in September last year and are legally binding, with a rapid implementation of them being the key here.

As part of BT’s undertakings, the OpenReach business unit was established as an independent entity and put in charge of the network wholesale business.

Moir says OpenReach manages the ducts, and fibre, copper and other non-electronic assets of the BT network. These were identified as the access bottlenecks in Ofcom’s strategic review.

With separate financial accounts, its own headquarters and a distinct brand identity, BT Openreach is very much an independent operation. Some 30,000 people are employed by OpenReach. Most of these are field engineers, and the company runs the largest fleet of service vehicles in Britain.

OpenReach’s independence is enforced with a “big stick” by regulator Ofcom. BT risks fines of up to 10% of its relevant turnover should it be found discriminating against access seekers.

Moir says “equivalence of input”, or EoI, is the term used. It means all services that fall within the scope of OpenReach must be offered to all comers on equal terms.

To ensure this happens, Moir says the first thing Ofcom looked at was management incentives. OpenReach’s salespeople and senior managers are only offered incentives to sell its products and not other BT products.

Problems identified early on included so-called “soggy middle management” that would pay lip service to the new regulations, but would then go back to behaving as it did before, says Moir. He cautioned against similar organisational inertia in New Zealand.

In the UK, BT’s 21CN, an IP-based network similar to Telecom’s Next-Generation Network, is also subject to regulation. Moir says OpenReach is working on creating new products for this network as it is rolled out.

The rapid implementation of structural separation at BT, combined with regulatory certainty, meant OpenReach quickly became a success story for BT.

Shares rose some 10%, says Moir, as the market saw there was clear future direction.

Another reason for OpenReach’s success was the extensive industry consultation, says Moir, with ten working groups that are chaired by both BT and industry executives.

Transparency of proceedings is achieved through publication of proceedings online. Ofcom also monitors the industry steering board.

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