Truce in broadband battle of Britain

Here's a familiar situation. A big, dominant telecom company. Complaints by other, smaller telecom and internet providers about getting access to its network. An official review leading to a legal settlement requiring the incumbent telco to create a new division aimed at creating a level playing field for all operators.

Sound familiar? It might seem to be a description of the situation in New Zealand and what may be in store for the future, but actually it's what has happened in the UK over the past several years.

As the debate rages over what should be done to Telecom New Zealand to improve broadband uptake access, raise customer service and bring down prices, many believe the industry should take a page from Britain's recent experience.

In January, British Telecom created a new, separate arms-length division called Openreach, the product of a lengthy consultation and review that examined market competition. Openreach was set up to provide fair and equal access to BT's so-called last mile connection to consumers, not only for its own retail business but competing phone and internet providers as well.

Competitors had complained in the past that when they wanted to get access to the local loop in order to provide telephone and internet service, they weren't treated the same as BT retail was, and faced delays and other problems.

If all goes well, the company said individual consumers would benefit in the end.

"If Openreach is successful, then our customers will be successful, and if our customers are successful there will be more competition in the marketplace, and that will drive down prices," said Andrew Jones, a managing director of operations at Openreach.

The road to Openreach started at the beginning of 2004 when the Government created a new super-regulator, the Office of Communications, covering radio, TV and telecommunications. Ofcom kicked off by launching a strategic review of the telecom industry that lasted 18 months.

The review panel came up with three choices: do nothing and leave it to the market, refer BT to the Competition Commission, or create something like Openreach.

No one liked the first option and both BT and its rivals nixed the second, because of the time and resources an investigation would have taken.

So, in June last year, BT, its rivals and Ofcom reached a legal settlement that resulted in BT creating Openreach.

The new business will employ 30,000 people, 25,000 of them engineers, driving around in 22,000 vans with brand new colours and logos. The company will have £8 million ($21 million) in assets and expects to earn £4 billion in revenue annually. Under the terms of its creation, Openreach will be legally required to carry out about 250 "undertakings" designed to ensure BT retail and its competitors are getting the same products and access, and are using compatible systems.

It's too soon to say what Openreach's impact has been - some undertakings have deadlines as far away as 2010 - but the industry is hoping for the best.

"I would say we're cautiously optimistic on the delivery of the undertakings," said Christine Roberts, director of external affairs at the UK Competitive Telecommunications Association, made up of 19 BT rivals.

However, if Openreach works as planned, "we can compete with what BT is providing, we can differentiate through pricing, we can differentiate in the way the service is packaged, rather than being left out of the loop in the first place because you don't have the ability to provide the whole service," added Roberts, who happens to be a Kiwi. BT's separation of its network access division from the rest of its business is thought to be the first ever such move by a dominant telco, and many are watching with interest.

"This is very radical," said Mike Cansfield, research director at Ovum, a consulting company specialising in telecommunications. "We've had a number of inquiries from incumbents from different parts of the world who've asked us the question 'is BT mad for agreeing this?"' he said.

"To answer that question, there is a recognition in BT that the settlement is a good thing because [disputes are] hugely time consuming and disruptive, the way the past 20 years has gone on," Cansfield said.

The decision, he said, allowed BT to progress with its Next Generation Network, which will allow it to deliver faster TV and video over its network, as well as telephone-quality internet calls.

One encouraging sign about Openreach is that since the process began, the number of complaints has dropped, Cansfield said.

However, there are still bugs to be ironed out. The new division has had difficulty filling new account manager positions - apparently there aren't enough to go around, said Ian Watt, fixed line analyst at Enders Analysis.

"BT is keen to hang on to their account managers, " he said.

And although the complaints have slowed, they haven't ceased altogether. Openreach is already being investigated by Ofcom after a complaint by Carphone Warehouse, which says the method the company uses to charge for migrating customers to unbundled lines from shared lines is discriminatory.

Of course, while some in New Zealand have proposed a BT-style separation as a way to boost broadband uptake and cut prices, it should be noted that in the UK, the two aren't directly correlated.

The number of broadband users in the UK has soared in recent years, with about eight million subscribers or 13.5 for every 100 people, according to June OECD statistics. That put the UK at 13th out of 30 countries - ahead of France and just behind the United States - up from 14th six months earlier.

The latest numbers from Ofcom show there are now more than 10 million broadband subscribers, with 70,000 users signing up a week in the last quarter of 2005. And that's before Openreach even began operating.

So what was responsible for the surge? The biggest driver, Ofcom said in its 2005 annual review of the telecom market, has been BT unbundling its local loop.

Local loop unbundling is the process where BT allows, for a fee, other telephone and internet providers access to the copper connection, or loop, between the local exchange and customers' homes, so they can install their own equipment and provide their own service.

Although unbundling has been legal since August 2000, it really took off in 2004 after Ofcom forced BT to cut unbundling fees. As of January, there were 250,000 unbundled loops in the UK, and the regulator expects by the end of this year that there will be two to three million.

Ultimately, it is hoped Openreach will help this process by making it easier for ISPs to unbundle loops. The results will be apparent soon, Watt said.

"In a couple of months time we think very large numbers of customers, ISPs such as AOL and Wanadoo, will be migrated to shared unbundled lines," Watt said.

And how will Openreach, a wholly owned subsidiary of BT, ensure its staff work for the benefit of its customers rather than its corporate bosses?

Jones explained that the executive team's performance bonuses are geared towards whether Openreach's undertakings are achieved rather than BT's corporate performance.

"We're incentivised to do the right thing for customers," he said.

So will other countries, including New Zealand, follow Britain's experience? Judging from past experience, Cansfield said, this may be the case..

He said deregulation of the UK's telecom industry and BT's privatisation in the early 1980s was groundbreaking. "You could argue that what's happened in the UK now with creating Openreach is also groundbreaking, and the UK is probably a year or two ahead of the game in terms of taking deregulation and free markets on to another level," he said.

"The question is whether anyone will follow."