Legal separation of BT: A necessary incentive for investment?

Abstract

In March 2017 Ofcom and BT agreed that Openreach would be established as a legally separate subsidiary of BT Group with some behavioural requirements built into its Articles of Association. Ofcom pushed for this arrangement with the twin objectives of deterring what it termed “strategic discrimination” by BT and increasing investment in fibre to the premises. This paper argues that strategic discrimination is an unhelpful concept as a firm under an Equivalence of Input obligation, as BT was, can gain no strategic advantage for its retail business through an investment in an access product it has to make available to all wholesale customers on the same terms. Further, it argues that legal separation does not change fundamental cost and demand conditions and so has no direct effect on incentives to invest. This paper opens the possibility for further research regarding the incentives and behaviour of vertically integrated firms more generally.