Media regulator Ofcom has decided that Openreach has to be a legally separate company within BT Group, with its own board and branding.
Initial plans to make Openreach - the wing of BT that develops and maintains the UK's main telecoms network - a separate entity were announced in February, with the official announcement coming today.
The Openreach board will be required to make decisions in the interests of all Openreach customers, including BT competitors Sky, TalkTalk and Vodafone.
The decision came about because Openreach had an obligation to offer the same products to all customers on the same terms, but BT had retained influence over "significant" Openreach decisions, Ofcom stated
Competitors had called for BT to completely sell Openreach, but Ofcom's chief executive, Sharon White, told BBC Radio 4 that this was a more practical plan "that can be implemented within months, unlike a sell-off of Openreach which would take years".
The separation of the companies is expected to improve access to Openreach's telegraph poles and underground tunnels which carry telecoms cables. Ofcom hopes this will increase investments in fibre networks.
John Carter, managing director at DMSL, a BT partner, said he sees it as the best outcome for the UK telecoms market.
He said: "It's a realistic outcome. At the end of the day, it is about the competitiveness of the UK against the rest of the world. We have got one of the best networks in the world but we need it to be quicker. It needed to be a lot more transparent. I think the decision they have come to is good for the country. Otherwise it would just go into a long legal battle with no investment, and we would fall behind [other countries].
"All of the other vendors get a lot more input now; itis not just BT telling everyone what is happening. As far as we are concerned, it is a great thing for the channel."
The Internet Telephony Service Providers Association (ITSPA), which claims to speak for the "next-generation' comms industry in the UK, also welcomed today's ruling.
"In ITSPA's opinion, full separation would have been unlikely to address our key concerns around performance and could have created more difficulties than it would have solved," it said.
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