Update from OFCOM Phase 2 analyst conference call

The call has just ended, the slides are here.

Here are the interesting statements I noted, paraphrased by me as faithfull as possible:

If next year we are not convinced that there is a structure in place to achieve the equivalence of access principle, we will "more out of sorrow than anger" be left with no other route than to address the structural issue via an investigation under the Enterprise Act.

We have high expectations of BT's cultural and behavioral changes, and will be working with them closely "at some speed" during the consultation period to effect change.

Equality of access is not merely a regulatory concept. If it does not become a practicable reality, we have a major problem. BT must understand this is not about "noodling at the edges."

We would be surprised if the outcome of this process did not result in a change in the structure and ownership of some of the assets in the business.

We did not disclose our weighted average cost of capital (WACC) today because there are questions involving the equity risk premium (previously 5%) and also how the WACC may be calculated or applied in different parts of BT's business.

Two areas of prioritization for us are local loop unbundling (Stephen Carter stopped himself and restated this as "full unbundling") and wholesale line rental (WLR). We expect a fit-for-purpose WLR product ready for testing in early 2005. We think WLR has been an attractive option for the business markets, but there remain significant questions about margins in WLR for the residential market. There is a strong incentive for BT to deliver in these areas, because the reward is relaxation of retail call charge regulation.

The approach is likely to differ by region, as it probably only makes economic sense to fully unbundle in certain areas. We may see some regional differentiation of BT pricing to reflect the local competitive environment.

(In response to a question on possible unbundling within BT) - To date we have received no application from BT regarding potential unbundling at BT Retail.

(In response to a question on naked DSL) - We cannot envisage a time when BT would not be remunerated for its copper.

(In response to a question on 21CN) - We think it's important to discuss 21st Century Networks and we stress the plural. This project should not confer any unfair advantage to BT.

21CN is a separate matter from next generation access networks, and in this area no one (Stephen Carter emphasized "none of the fixed line players, anyway") are talking about expending large sums. For next generation access, we explore in our document the concept of regulatory forbearance in this area. We also contemplate an open access model, where a utility would be established for providing and managing the ducting for FTTH.

We see no rationale at this time for a Universal Service Obligation in broadband. It would be stifling of investment.

(In response to a question about vertical integration in the pay TV market and the implications for telecom, in which the analyst asked if OFCOM would be re-opening its investigation of Sky, Stephen Carter said this was a tangential issue and in any event it would not be appropriate to comment.)

My initial impressions of this are that:

OFCOM sounds deadly serious, and BT will need to move earnestly and quickly to avoid more extreme measures.

The structural changes in BT itself and the disclosures and presentation necessary should add to the pain of analysts trying to cover the company, particularly as they will coincide with the adoption of IFRS reporting (which applies across the whole sector).

Behind the governmental veneer there is almost palpable sense of enthusiasm for unbundling, wholesale line rental, alternative access structures, and by implication, wireless, in wresting dominance in access from BT.

The lawyers and accountants are going to get rich in this process.

Surely the EU must be looking at this situation and pondering where to move next. BT is the only telco in Europe to even bother trying to present the wholesale and retail functions as two separate business units operating at arm's length. Swisscom used to do so, but now reports its Fixed unit as one entity, and there is some segmentation in the way KPN reports, but these are almost certainly purely presentational. In the case of BT we are talking about functional change. If the industry believes BT lacks transparency, then what should we make of the integrated fixed line units on the Continent? This process may raise some uncomfortable questions for Brussels.