Meddling Regulator Plays Havoc With BT Shares


BT shareholders have had a bit of a rollercoaster ride recently thanks to the actions of national telecoms regulator Ofcom.

The company’s share price has been in an erratic downward slide over recent weeks thanks to the regulator’s protracted review into the future of Openreach, BT’s broadband service arm.

This morning, Ofcom announced that the feared breakup of BT and Openreach would not occur, causing BT’s share price to once again rally.  However the regulator is still insisting that the Openreach business become more independent within BT.

There are a lot of problems with this kind of regulatory meddling. The consumer focus of Ofcom’s intervention is misguided, for a start. Their chief executive has established their motive as being “to make sure the market is delivering the best possible services for people and business across the UK”.

That sounds noble enough, but in many respects, a company’s first responsibility is to their shareholders, not their customers. The idea that the customer comes first is simply good business practice, not a moral principle. If a company doesn’t value its customers it will have a harder time achieving good returns for its shareholders.

Shareholders are the people who have invested directly in the company, giving it the capital it needs to operate. When the regulator intervenes and sends the share price tumbling, they’re effectively taking money out of the pockets of the people who make the business possible in the first place.

There’s a deeper problem with the mentality of Ofcom’s position though. Good broadband provision is not a right. In a free market, providers will come where there is sufficient demand to warrant investment in such a service. It is not a bad thing that some areas will end up with weaker service. Some areas have poor road provision too. Nobody expects motorways to be built to remote villages in Mid Wales.

This idea that BT, a private company, has a responsibility to provide high quality broadband infrastructure has been pervasive in government for some time. This stems largely from the fact that BT has ownership and control of the vast majority of the infrastructure that provides these services to homes across the country.

That in turn is a direct result of the fact BT used to be state-owned. It was a mistake of the government in 1984 to privatise the company as one whole, rather than splitting it into separate operations that could compete at that stage, as was done in a wide range of other privatisations.

As a result the situation where BT has a monopoly on this infrastructure is now one that must be worked with. Rather than intervening in an established business that plays a major role in the country’s overall economy, the best thing government could do would be to level the playing field and encourage other providers to install competing infrastructure.

The idea that telecoms, like transportation, utilities or postal services, has to be a natural monopoly is outdated. Technology is advancing to a point where physical infrastructure to homes is unlikely to even be necessary in the future. Even if it is, there’s nothing preventing multiple providers running separate networks in an unregulated market.

Ideally the government should not use taxpayer’s money to invest in a non-essential service in the first place, but if it must, that would be best done by putting that funding into research and development of disruptive technologies and potential competitors, not re-enforcing the existing monopoly. But even that kind of intervention disrupts the market’s natural ability to produce the most efficient outcome based on consumer demand.

Fundamentally, it is not the role of government to ‘make sure’ the market delivers the best services for consumers. The market will do that for itself if left free to do so. The problem in this situation is a legacy of nationalisation, and a return to that would only serve to replace a private monopoly with an even less accountable public one.

In short, Openreach and BT, such as they are, shouldn’t really exist, but the fact is that they do. They are the product of an outdated mindset and continuing to apply that mindset will not serve to improve the situation for either consumers or the market. It’s time that regulators stepped back and let the industry innovate and compete in response to demand, not in response to government policy.


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