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Ofcom's review of telecoms due this week

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Analysis The UK's monster communications regulator, Ofcom, is due to publish its review of the UK's telecommunications industry on Thursday. For many, the report can't come soon enough since it should provide some certainty to an industry dominated by BT and a former telecoms watchdog (Oftel) that lacked the muscle to regulate effectively the former monopoly. While the review itself is looking at the broad scope of the industry, much of the interest has focused on broadband.

In a nutshell, the UK's telecoms industry wants Ofcom to curb BT's market dominance and introduce regulatory measures that would lead to greater competition. Suspicious of BT's cosy relationship between its retail and wholesale divisions, the industry wants equal access to BT's products. The latest buzzword is "equivalence" which means that all operators would have access to BT Wholesale products at prices and terms "equivalent" to BT Retail.

Others want to go further and are demanding more favourable terms to give them room to invest and carve out a viable alternative to BT. Indeed, concern that Ofcom might give local loop unbundling (LLU) some advantage over broadband products direct from BT has prompted ta curious side-show in recent weeks. Witness the apparent rift at the very top of BT, with the head of its consumer division suggesting he might install kit in BT exchanges to compete with rivals instead of sourcing products from BT Wholesale. This has been played down by BT. Instead, it is likely that the principle of "equivalence" is to be explored in the review.

But should "equivalence" ever fail to liberate the sector, then there are those who point to the nuclear option and the physical separation of BT into a network group and a services company. Indeed, Ofcom's review asked specifically whether there was a need for BT's wholesale and retail operations to be split. But such a measure would be devilishly difficult and complex to carry out.

Furthermore, there appears to be little appetite for a BT carve-up, right now. Earlier this year UK telecoms trade group UKCTA - comprising a host of telcos including Cable & Wireless, Colt, Energis, NTL and Thus - said it didn't "strongly support full ownership separation of BT".

But that's not to say that Ofcom will kill the idea dead. Keeping the threat of separation within easy reach so that it could be brought out if necessary would pose a useful threat to BT if it fails to comply with the new regulatory envirnomnent.

BT, meanwhile, has been gradually winding up the volume on its bid to convince the world that excessive regulation against the UK's dominant fixed line telco could seriously jeopardise the future prosperity of the UK. But it has also sought to paint a picture of optimistic progress.

The UK is now the G7 leader in broadband availability, notes BT, and by next summer DSL broadband will be available to more than 99 per cent of the UK - making it more widely available than terrestrial TV. The cost of phone calls and net access has plummeted over the last 20 years and there are scores of companies providing voice and broadband services.

BT also points to the continuing erosion of its own market share as proof that the UK's telecoms sector is competitive. If this fails to do the job, then BT adopts a more menacing demeanour. Change the regulatory environment and Oftel could open up the industry to a rush of fly-by-night companies that promise much and deliver little, it warns.

Even the current favour for LLU comes with its own risks. Sure, rival operators could install their own kit in BT's exchanges to provide a genuine alternative for companies looking to offer broadband services.

But, these operators are only ever likely to invest in highly populated urban areas where they can generate a return on their investment. Critics warn that LLU will merely create a new digital divide in the UK where vast tracts of the UK are deemed uneconomic for major investment.

And here's the killer. If BT is penalised, it may have to think twice about investing in its new all singing, all dancing 21st Century Network which is currently being rolled out nationwide.

Said the company: "Our NGN [next generation network] is central to BT's future, and is a prerequisite for future strategies, both for BT and the UK economy. It is also a very large and risky investment. BT is a private company and our shareholders will not support investments such as the NGN unless they can be confident it will not be hampered by over-regulation, and they will earn appropriate returns if their investment is successful. The new regulatory framework needs to recognise this reality if the UK is to sustain the level of investment we need to be a successful modern economy."

Only last week, BT boss Ben Verwaayen said that the UK needed sustained investment in its national broadband network to ensure that the "entrepreneurial new world that runs on digital knowledge and information" can thrive. And he warned that investment would be hit if regulator Ofcom did not enable sufficient reward from such investment when it publishes its review.

He told business leader at the CBI (Confederation of British Industry) conference in Birmingham: "At this moment Ofcom is the most powerful and significant organisation in the UK, as we wait for the next phase of the Telecommunications Strategic Review. What it decides will be profound for your businesses and organisations. If it gets it right, we will see investment in this area accelerated. Get it wrong - even if unintentionally - and the impact will be clear to see in a year or so's time, with investment cut back and the UK missing out on a leadership position."

Which touches on another tactic employed by BT - blame the regulator. For an organisation that hasn't even celebrated its first anniversary yet, Ofcom has been saddled with a difficult job. Unless it gets this review absolutely spot on, it's going to be the target for stinging criticism from either from the industry or BT. ®

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