UK's BT Openreach settlement highlights wider issues of 5G convergence

Comment There will be far tighter integration between fixed and wireless connectivity in 5G than ever before. Dense virtualized networks will require huge numbers of high-capacity fixed links; fixed broadband will be delivered over wireless as well as wireline; fixed/mobile convergence for content and service delivery will become table stakes; edge computing and the Internet of Things will be supported by a mish-mash of connection technologies (even ETSI’s Mobile Edge Computing has now been renamed Multi-access Edge Computing).

This development will inform government policies on 5G. On the one hand, authorities will have to rethink M&A and antitrust policies. Consolidation, often to achieve a combined fixed and mobile infrastructure and multiplay service portfolio, will be the only way to survive for some operators in competitive markets. That will drive some regulators to take a more relaxed view to mergers, as long as they consider the entire telecoms and media services landscape, rather than focusing on MNOs and fixed telcos in their separate siloes.

New regulations needed in converged era

But they will also have to be on stronger guard against over-powerful quad play operators. The fact that UK incumbent BT was allowed to acquire the country’s largest MNO, EE – creating a powerful fixed/mobile leader – while Hutchison was not allowed to combine its 3UK unit with Telefonica’s O2 UK, showed that telecoms regulation has not kept pace with the converged world. That has left the UK, as it takes steps to formulate its 5G spectrum and funding positions, with the burden of an over-powerful BT, which threatens to distort all its efforts to create an open, innovative and competitive road to 5G.

The more it becomes economically logical to allow fixed and mobile operators to combine, the more governments need to safeguard against one of these converged players being too dominant. In most cases, especially in Europe, the converged market leaders are also the former state telcos, and have the largest infrastructures, which support wholesaling to the other providers. Increasingly, the price of being allowed to provide a full quad play, will be to sacrifice the wholesale business – eventually leading to the likely end point, in which retail and wholesale operators are entirely separated, and the wholesale infrastructure supports a large number and variety of retail providers via emerging mechanisms like virtualization and network slicing.

So in the UK, baby steps in this direction were taken last week when regulator Ofcom imposed new conditions on BT’s wholesale arm, Openreach. This was the subject of a review last year, which took place largely in parallel with the consultation on the EE acquisition. BT/EE competitors voiced fears that the company would give its new mobile arm preferential treatment when it came to providing fixed lines for multiplay access or for backhaul; and claimed that they did not receive the same standards of service, in areas like maintenance, as BT’s own retail arm (which the telco denied of course).

BT finally bows to inevitable of halfhearted Openreach separation

Ofcom stopped short of forcing a sell-off or complete separation of Openreach in response to these complaints, but did put BT on notice to make certain improvements, or face another review. In December, BT was told it had to turn Openreach into a subsidiary with its own chairman, but was still able to keep it entirely within the BT group. BT has agreed to this ‘legal separation’ approach, which stops well short of the fully independent wholesale operator other companies have demanded.

Last summer, Ofcom said Openreach had to become an independent legal entity, though this would still be entirely within the BT group. The telco made slow progress towards this, to the extent that, last December, Ofcom threatened to refer the issue to the European Union if there were not more effort made.

Last week, BT’s official agreement to meet all Ofcom’s demands showed that the operator had finally accepted it could not postpone the evil day any longer.

There are still many issues which are unclear or ignored - whether or not cash supply can be wrested away from the BT cashflow; whether or not the parent board can intervene in its business; and how far management of the subsidiary will be free to make its own decisions independently of the group, when it is owned by BT, and BT appoints most of its board.

All those, in turn, feed into the greater concern, that in this halfhearted separation, BT may still be able to use its wireline assets to improve its own position against that of its customers, which are also its competitors – those reliant on Openreach for fibre to support broadband services or mobile backhaul. This concern has acted as a boost for independent fibre providers like City Fibre, while Virgin Media is an alternative source of backhaul resource too, but BT’s extensive network is hard to work around.

But while the deal is, in many respects, a compromise, that does not mean BT will not have to make significant changes to the balance of its business. It is likely, as the growth and margins in consumer mobile and broadband access dry up, that the wholesale arm will enjoy the best growth and profit opportunities as the world moves towards 5G, next generation fiber, distributed cloud services and network slicing.

Will content compensate for BT’s restructure?

So BT’s retail business will need to compensate for being able to tap into those positives only indirectly, at group level. The biggest compensations for the decline in conventional access services will be in enterprise, vertical and IoT services – but arguably many of those will be supported by a wholesale network, sliced between large numbers of specialized service providers.

That means BT may have to increase its recent emphasis on video content still further. Many operators are turning to content control as a way to offset the decline in their traditional consumer revenue streams and to increase their share of customers’ total media spend by moving up the stack from access. Verizon and AT&T have been buying TV and media companies while BT has invested heavily in its sports and other TV offerings.

However, history has not been kind to telcos which venture into content. As Chris Lewis of Lewis Insights said in an interview: “I suspect that the content market is actually lower margin than the access market is today, and it’s certainly more risky. TV is a harder business than I think many people think it is.”

Nonetheless, EE is enhancing its content strategy, separately and together with that of its parent. Marc Allera, CEO of EE, told Mobile World Congress: “We are very keen on content. We have been collaborating with BT and we are here to search for more opportunities to bring more content to our customers.”

And he pointed to the benefits of convergence, adding: “There is the opportunity to bring both our networks together – fixed and mobile – for a converged future, and that is very real.”

BT CEO Gavin Hasselhoff Patterson said the Openreach deal would “end a period of uncertainty for our people and support further investment in the UK’s digital infrastructure”, adding: “This has been a long and challenging review where we have been balancing a number of competing interests. We have listened to criticism of our business and as a result are willing to make fundamental changes to the way Openreach will work in the future.”

BT says around 32,000 employees will transfer to the new Openreach Limited following consultations with the unions, especially over the huge pension liability – one reason why ownership of assets remained with BT.

There will certainly be greater scrutiny of Openreach than ever before, which will please competitors, and there will be no excuse for BT to hold back from supporting the government's universal service obligation for broadband – it had committed to that, provided it could reach settlement with Ofcom over Openreach.

“This is a significant day for phone and broadband users,” said Ofcom boss Sharon White. “The new Openreach will be built to serve all its customers equally, working truly independently and taking investment decisions on behalf of the whole industry – not just BT. We welcome BT’s decision to make these reforms, which means they can be implemented much more quickly. We will carefully monitor how the new Openreach performs, while continuing our work to improve the quality of service offered by all telecoms companies.”

Mexican regulator tries to clip America Movil’s wings some more

The UK settlement will be watched carefully by other regulators with dominant former state operators to bring under control in a converged world. An extreme example is Mexico, where the authorities have been trying to clip the wings of America Movil and its parent Telmex, to boost competition. Regulator IFT is now demanding that the operator separate its fixed infrastructure from its mobile activities.

IFT has been reviewing the impact of various reforms which were imposed on Movil in 2014 to reduce its dominance. These have not gone far enough, it seems, despite the entry of new challengers into Mexico, notably AT&T. IFT figures show that Movil and Telmex still have about 65 per cent share of both the fixed and mobile markets.

Now the regulator has ordered a “functional separation” of the fixed line unit, which would require a new separate entity from its Telmex operation, which would “exclusively provide wholesale services” and offer competitors access to infrastructure.

The regulator is also calling for Movil to be more open to support MVNOs on its mobile networks.

The operator said in a statement: “America Movil believes that the IFT resolution is not based on an integral evaluation in terms of competition, nor does it consider the profound changes in the Mexican telecoms sector within three years from the imposition of the asymmetric regulations and the effective competition that exists in mobile and fixed services, which is clearly shown, among others, by the significant growth in the consumption of telecommunication services, mainly data.”

Copyright © 2016, Wireless Watch

Wireless Watch is published by Rethink Research, a London-based IT publishing and consulting firm. This weekly newsletter delivers in-depth analysis and market research of mobile and wireless for business. Subscription details are here.