Welcome pat on the head for watchdog

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Ofcom was basking in a glow of widespread approval on Thursday after its pronouncement on how it plans to tackle the dominant force in UK telecoms that is BT.

The publication of its strategic telecoms review was greeted with unanimous approval among the rival operators and service providers more used to moaning about their lot.

Relief was registered in the City too where BT's shares rose 4 per cent to 226½p as investors celebrated the lifting of the regulatory uncertainty around the company, which had faced the outside possibility of a break-up if the telecoms watchdog had referred it to the Competition Commission instead.

The only discernible voice of dissent came from consumer groups who had lobbied the hardest for a break-up of the group, but even that reaction came with a slight positive spin. Georgia Klein, senior policy officer at the National Consumer Council, gave a cautious welcome to the new framework, adding: “NCC would have preferred immediate referral to the Competition Commission, but we acknowledge that Ofcom has gone for the speedier, pragmatic option.”

Ben Verwaayen, chief executive of BT, looked satisfied as he addressed journalist, refering to a “feeling of accomplishment that this is a good settlement” and hailed the new regime as much better than the tangle of micro-regulation built up over the last two decades that it replaces.

“We had an overhang from a regulatory past of random situations managed by random solutions. This [Ofcom's new framework] is a fantastic opportunity for the industry,” Mr Verwaayen said.

His opposite number at BT's next largest competitor, Francesco Caio at Cable and Wireless, agreed: “This is a very important day in the evolution of regulation of the telecoms industry.” This is all music to the ears of Stephen Carter, chief executive of Ofcom, who will look to C&W to roll out its Bulldog broadband products in local exchanges via “local loop unbundling”, which gives a rival control over the so-called “final mile.”

The feeling among lawyers and executives was that Ofcom had gone about as far as it could in bringing BT to heel short of the nuclear option of referral. “The party is over for BT here, it is the end of play-time,” Mr Caio said, referring to concern that the former monopoly operator has deployed smoke and mirrors to avoid compliance with the former regulatory regime.

On the whole City analysts were in agreement that Ofcom has not let BT off the hook, ascribing the share price rise yesterday to the lifting of the regulatory uncertainty.

“There was relief in the way the BT share price reacted today, but I wouldn't agree that BT has been let off lightly,” said Stuart Gordon at ABN Amro.

On balance, others saw a near-term net benefit for BT in the price changes that Ofcom had allowed across a range of products but highlighted the threat of increased competition that the new regime is designed to foster.

“What Ofcom has created is a framework that could potentially create quite a lot more competition for BT in the consumer market. The question is whether the wider industry can exploit the opportunity it has been given,” said Matthew Bloxham at Goldman Sachs.

Hanif Lalani, group finance director at BT, said he was not changing short-term guidance and analysts agreed by pointing to the longer-term impact of increased competition.

“More competition creates potential downside pressures for BT's financial performance but it is a question of wait and see,” said Mr Bloxham. While UK rivals, such as C&W, Easynet, Centrica and Carphone Warehouse will all be weighing up their options, the most significant potential competitive response could come from across the Channel.

Morgan Stanley identified France Telecom as the key player in the market. The French domestic incumbent is already present in the UK fixed line market with Wanadoo, its internet service provider, and has previously signalled its intention to become a player in local loop unbundling. Mr Carter at Ofcom believes it will take between six to 12 months before it will be possible to discern if the work of his team, which started in earnest last April, will bear fruit once industry has had a change to look at the detailed commitments made by BT, due to be published next week.

The statutory consultation process will end in September when the new regulatory framework will come into force.

“As in most cases it will be about delivery, delivery and delivery,” Mr Carter said. “That won't get done on the day of the announcement; that takes weeks or months of painstaking implementation.”

Additional reporting by Maija Pesola

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