Introduction

In March 2015, Ofcom initiated an overarching review of the UK’s digital communications markets (the "Strategic Review"). Ofcom carried out a similar strategic review ten years ago in 2005 which focused on the question of separating British Telecom's ("BT") upstream access network, Openreach, from the rest of its commercial operations. 

On 25 February, Ofcom published its initial conclusions on the Strategic Review in a comprehensive Statement. Set out below is an overview of the Strategic Review and developments to date, together with a summary of Ofcom's initial conclusions and next steps.  

The Strategic Review and recent developments

The Strategic Review is aimed at examining changes in the ways consumers use digital communications. It comes at a time when that UK electronic communications sector is going through a period of unprecedented change. Market consolidation, together with BT's push into the pay TV market, is reshaping the industry. In addition, the growing dominance of alternative communication via over-the-top ("OTT") services, such as WhatsApp and Facebook, is challenging traditional business models.

The Strategic Review was intended to address the following broad issues:

  • Efficient investment: Ofcom is seeking to ensure that efficient private sector investment and innovation is maintained and strengthened;
  • Competition: Ofcom is exploring what should be the focus of competition policy in future networks; and
  • Deregulation: Ofcom is investigating whether there is scope for deregulating networks and services downstream of any "enduring bottlenecks".

As part of the second phase of the Strategic Review, Ofcom published a discussion document for consultation on 16 July 2015. This discussion document addressed a number of important issues for the sector, including: (1.) whether

Openreach should be made structurally separate to BT; (2.) mobile sector consolidation (the European Commission is currently reviewing a proposed (four-to-three) merger between UK mobile operators H3G and O2); and (3.) the impact of technical and service convergence on the competitive process. 

Ofcom's initial conclusions

Ofcom's initial conclusions published today set out the following key proposals for regulating the UK communications market for the next decade.

  1. A strategic shift to large-scale investment in more fibre: According to Ofcom, a major strategic shift will encourage the roll-out of new "fibre to the premise" networks to homes and businesses that will serve as an alternative to BT’s planned innovation in copper-based technologies. The value of large-scale fibre investment in creating more choice for customers and businesses is underlined by Ofcom, as is the fact that this initiative will reduce reliance on Openreach. According to Ofcom, this strategic goal will also require BT to open up its network, allowing easier access for rivals to lay their own fibre cables along BT’s telegraph poles and in its underground ducts.
  2. A step change in quality of service: Ofcom will publish service quality performance data on all operators, and look to introduce automatic compensation for consumers and small businesses when things go wrong. It also intends to introduce tougher minimum standards for Openreach later in 2016 together with rigorous enforcement and fines for underperformance. 
  3. Reforming Openreach: Ofcom intends to reform Openreach’s governance and strengthen its independence from BT which, it claims, retains control over the company's decision-making, budget and strategy. According to Ofcom, Openreach should, in future, be governed at arm’s length from the BT Group. Ofcom suggests that greater independence could be achieved by "ring-fencing" Openreach; for example, Openreach would become a wholly owned subsidiary with its own purpose and board members. Ofcom will prepare detailed proposals later this year to implement these changes. While this is not structural separation, Ofcom does state that full structural separation "remains an option".
  4. The right to broadband: Ofcom will work with the UK Government to make 10Mbit/s broadband access a universal right for every home and small business in the UK. Ofcom will also improve mobile coverage by including new obligations on operators seeking new licences for spectrum.
  5. Empowering consumers to make informed choices: Ofcom states that it will increase consumer choice and switching power by making information on services "much more accessible and engaging".
  6. Continued deregulation: Ofcom intends to continue to step back from regulation where people and businesses no longer need it, including when there is a real prospect of competition. 

Next steps

Ofcom states that most of these proposals will be delivered through its normal process of regular significant market power ("SMP") reviews. Where Ofcom's proposals do not fall within a specific SMP review, it will take forward implementation through a series of dedicated projects over the next 12 to 18 months.