As a national monopoly that is vertically integrated into by far the largest telecoms company, BT, Openreach is chronically inefficient. It is heavily unionised, has a captive market in the form of BT’s customer base, and uses cable laying methods that are more expensive than the methods of its smaller rivals. The result is weak fibre rollout and weak competition. BT also has an enormous lobbying team and budget, and a very close relationship with Ofcom that may border on regulatory capture. All of this contributes to a broadband network that is badly lagging behind: in Ofcom’s 2017 rankings with similar countries, the UK was 18th out of 18th in terms of fibre-to-the-premises rollout.
But nationalisation, as Labour has proposed this week, will make many of these problems worse. It will make Openreach even less vulnerable to competition from Virgin Media and altnets like CityFibre, and so weaken the incentives it has to lower its costs and improve its service.
Judging by the UK’s historical experience of nationalised telecoms monopolies, quality of service is likely to be very poor and people are likely to be waiting for months. But because it will be “free” – that is, paid for by taxpayers, instead of its customers – Openreach’s rivals will find it extremely difficult to compete, and may go out of business altogether.
The status quo should not be the Conservatives’ alternative. Rather, the Tories should embrace competition and new entry in fibre rollout.
To do this, Openreach should be broken apart into eleven regional companies that are separate from BT. Each of these could then expand outside their region and compete with each other, taking advantage of each others’ inefficiencies to profit themselves.
This would create more competition in fibre rollout between these new businesses and other, more efficient ISPs. The fact that there would be no automatic relationship with BT would mean that these new regional companies would have to compete with other ISPs to supply BT customers, and would not be doing so as a national monopoly.
This would drive faster fibre rollout in cities and towns, especially if broadband companies were given the same rights to build infrastructure that the energy and water sectors enjoy, without the need for planning permission that currently holds back rollout. It should also boost rural broadband rollout, with more active searching for profit opportunities by smaller players that can now access BT customers, compared to OpenReach’s current weak incentives and high costs.
This is turning into the Santa Claus election, with each party vying to promise the best set of presents under the tree. Nationalising Openreach may well be popular, because it is (rightly) an unpopular company, and “free” broadband will sound attractive to many. The Conservative response should not be to panic or try to one-up Labour with even more goodies they can’t afford, but to think seriously about what is going wrong in the fibre market in the first place, and how competition can fix it.
Sam Bowman is a Principal at Fingleton and a Senior Fellow of the Adam Smith Institute
