Is Structural Separation in the UK really that risky?

I rarely disagree with the excellent Martyn Warwick, but sometimes there are exceptions. In an article in Telecom TV entitled BT Threatens Decades of Litigation Over Forced Sale of Openreach, Martin concludes that:

An ill-considered and badly executed sale of Openreach with no guarantees as to its future performance by a new owner would be a recipe for disaster with the buyer breaking promises and failing to make the investments necessary to make Broadband Britain a reality outside the major cities. Meanwhile, Virgin Media goes from strength-to-strength.

This misses, in my opinion, two major points that I wanted to reiterate here:

  • first, a sale is definitely not the way to go for structural separation. A spin-off, as implemented by Telecom NZ is the right approach for a number of reasons: first, it means that the shareholder structure only changes if the shareholders themselves want to sell their shares in the new vessel, so it’s not really a story of a single (and potentially evil according to Martin) buyer acquiring the crown jewels.
  • second, a structurally separated entity lives only on wholesale revenues. As a consequence it has every incentive to deploy better infrastructure, especially in a competitive environment where someone like Virgin is doing the same.

As Thomas Langer and myself discovered when we released our report late last year entitled Can Structural Separation via Spin-Offs Help Europe Achieve its Broadband Ambitions, there’s a lot of half-truths and outright lies that have been patiently spun by incumbent lobbyists about Structural Separation. In fact, Martin quotes BT’s CEO Gavin Patterson in his article in a way that is very telling:

“This is a commercial enterprise and if there’s uncertainty we will defend the rights of our shareholders, undoubtedly. It puts that investment very much at risk. At the end of it, and if we’re meant to be looking at the next ten years, what do you want to look back on? Do you want to look back at 10 years of litigation and arguments?”

The threat here is clear: a US style ‘litigate ’til they give up’ approach. But what about the shareholders?

As we demonstrate clearly in our report, there is every chance that a well executed structural separation via spin-off will result in two major achievements: increase value for shareholders and allow Openreach to extract enough cash-flow to envisage long-term infrastructure investment instead of the (at best) mid-term solutions currently put in place with VDSL and its upcoming life support.

The fact that this would be done by an entity with no financial ties to any market player and therefore would put every market player on a level playing field is, in many ways, the cherry on the cake. Indeed, it’s been seen to work very well for New Zealand, and the Czech Republic’s O2 is currently undergoing the same process. This is neither new nor rocket science.

The fact is that, if Gavin Patterson truly works for the shareholders, he should be considering Structural Separation very seriously instead of threatening the UK government.

Image Credit: 3D Judges Gavel (cc) Chris Potter