Three Forms of BT Separation: Objectives, Solutions and Effects

Abstract

Following its latest strategic review of the digital communications sector, Ofcom has proposed that BT’s access services division, Openreach, becomes a subsidiary of BT plc. More recently, Ofcom announced that it was proceeding with formal notification to require BT to legally separate the Openreach division as a separate legal entity within the BT Group. BT has put forward a counter proposal it terms Enhanced Functional Separation. This paper reviews the two proposals and compares them with the current situation, known as “Functional Separation”. It finds that the differences between BT’s and Ofcom’s proposals are less substantive that might appear at first sight. The paper presents a simple model that analyses whether the incentives for BT to invest in taking fibre access networks closer to the customer are likely to be any different under the two proposals. The paper is sceptical that the legal separation proposed by Ofcom would result in greater incentives than would occur under Enhanced Functional Separation.

Keywords: Vertical Integration, Seperation, Telecoms, Investment, Discrimination

JEL Classification: D43, K23, L50, L96